CPI CARD GROUP INC., 10-Q filed on 8/12/2021
Quarterly Report
v3.21.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2021
Jul. 31, 2021
Cover Abstract    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2021  
Document Transition Report false  
Entity File Number 001-37584  
Entity Registrant Name CPI Card Group Inc.  
Entity Central Index Key 0001641614  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 26-0344657  
Entity Address, Address Line One 10368 W. Centennial Road  
Entity Address, City or Town Littleton  
Entity Address, State or Province CO  
Entity Address, Postal Zip Code 80127  
City Area Code 720  
Local Phone Number 681-6304  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Title of 12(b) Security Common Stock, $0.001 par value  
Trading Symbol PMTS  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Non-accelerated Filer  
Entity Small Business true  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   11,238,994
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q2  
v3.21.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Jun. 30, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 30,667 $ 57,603
Accounts receivable, net of allowances of $237 and $289, respectively 55,979 54,592
Inventories 40,273 24,796
Prepaid expenses and other current assets 6,036 5,032
Income taxes receivable 2,522 10,511
Total current assets 135,477 152,534
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net 39,257 39,403
Intangible assets, net 23,909 26,207
Goodwill 47,150 47,150
Other assets 2,575 857
Total assets 248,368 266,151
Current liabilities:    
Accounts payable 20,778 18,883
Accrued expenses 31,809 28,149
Current portion of long-term debt   8,027
Deferred revenue and customer deposits 1,157 1,868
Total current liabilities 53,744 56,927
Long-term debt 302,877 328,681
Deferred income taxes 7,447 7,409
Other long-term liabilities 13,563 11,171
Total liabilities 377,631 404,188
Commitments and contingencies (Note 14)
Series A Preferred Stock; $0.001 par value-100,000 shares authorized; 0 shares issued and outstanding at June 30, 2021 and December 31, 2020
Stockholders' deficit:    
Common stock; $0.001 par value-100,000,000 shares authorized; 11,237,056 and 11,230,482 shares issued and outstanding at June 30, 2021 and December 31, 2020 11 11
Capital deficiency (111,726) (111,858)
Accumulated loss (17,548) (26,190)
Total stockholders' deficit (129,263) (138,037)
Total liabilities and stockholders' deficit $ 248,368 $ 266,151
v3.21.2
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2021
Dec. 31, 2020
Condensed Consolidated Balance Sheets    
Allowance on accounts receivable $ 237 $ 289
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) 11,237,056 11,230,482
Common shares, outstanding shares (in shares) 11,237,056 11,230,482
v3.21.2
Condensed Consolidated Statements of Operations and Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2021
Jun. 30, 2020
Jun. 30, 2021
Jun. 30, 2020
Net sales:        
Net Sales $ 93,219 $ 71,378 $ 182,311 $ 145,347
Cost of sales:        
Depreciation and amortization 2,264 2,711 4,680 5,466
Total cost of sales 56,131 48,288 109,502 96,609
Gross profit 37,088 23,090 72,809 48,738
Operating expenses:        
Selling, general and administrative (exclusive of depreciation and amortization shown below) 19,748 16,613 35,894 33,276
Depreciation and amortization 1,553 1,505 3,359 2,990
Total operating expenses 21,301 18,118 39,253 36,266
Income from operations 15,787 4,972 33,556 12,472
Other expense, net:        
Interest, net (7,037) (6,772) (16,013) (12,860)
Other income (expense), net 4 (32) 29 (35)
Loss on debt extinguishment     (5,048) (92)
Total other expense, net (7,033) (6,804) (21,032) (12,987)
Income (loss) from continuing operations before income taxes 8,754 (1,832) 12,524 (515)
Income tax (expense) benefit (2,522) 3,115 (3,882) 3,580
Net income from continuing operations 6,232 1,283 8,642 3,065
Net loss from discontinued operations, net of tax (Note 1)   (4)   (30)
Net income $ 6,232 $ 1,279 $ 8,642 $ 3,035
Basic earnings per share from continuing operations: (in dollar per share) $ 0.55 $ 0.11 $ 0.77 $ 0.27
Diluted earnings per share from continuing operations: (in dollar per share) 0.53 0.11 0.74 0.27
Basic earnings per share: (in dollar per share) 0.55 0.11 0.77 0.27
Diluted earnings per share: (in dollar per share) $ 0.53 $ 0.11 $ 0.74 $ 0.27
Basic weighted-average shares outstanding (in shares) 11,233,002 11,229,819 11,231,742 11,227,160
Diluted weighted-average shares outstanding (in shares) 11,762,481 11,233,852 11,720,148 11,242,272
Comprehensive income:        
Net income $ 6,232 $ 1,279 $ 8,642 $ 3,035
Total comprehensive income 6,232 1,279 8,642 3,035
Products        
Net sales:        
Net Sales 47,156 39,077 94,169 81,578
Cost of sales:        
Products and Services (exclusive of depreciation and amortization shown below) 27,928 25,911 55,215 52,290
Services        
Net sales:        
Net Sales 46,063 32,301 88,142 63,769
Cost of sales:        
Products and Services (exclusive of depreciation and amortization shown below) $ 25,939 $ 19,666 $ 49,607 $ 38,853
v3.21.2
Condensed Consolidated Statements of Stockholders' Deficit - USD ($)
$ in Thousands
Common Stock
Capital deficiency
Accumulated earnings (loss)
Total
Beginning balance at Dec. 31, 2019 $ 11 $ (111,988) $ (42,319) $ (154,296)
Beginning balance (in shares) at Dec. 31, 2019 11,224,191      
Shares issued under stock-based compensation plans (in shares) 5,628      
Stock-based compensation   53   53
Components of comprehensive income:        
Net income     3,035 3,035
Ending balance at Jun. 30, 2020 $ 11 (111,935) (39,284) (151,208)
Ending balance (in shares) at Jun. 30, 2020 11,229,819      
Beginning balance at Mar. 31, 2020 $ 11 (111,953) (40,563) (152,505)
Beginning balance (in shares) at Mar. 31, 2020 11,229,819      
Stock-based compensation   18   18
Components of comprehensive income:        
Net income     1,279 1,279
Ending balance at Jun. 30, 2020 $ 11 (111,935) (39,284) (151,208)
Ending balance (in shares) at Jun. 30, 2020 11,229,819      
Beginning balance at Dec. 31, 2020 $ 11 (111,858) (26,190) $ (138,037)
Beginning balance (in shares) at Dec. 31, 2020 11,230,482     11,230,482
Stock-based compensation   98   $ 98
Stock option exercises   34   34
Stock option exercises (in shares) 6,574      
Components of comprehensive income:        
Net income     8,642 8,642
Ending balance at Jun. 30, 2021 $ 11 (111,726) (17,548) $ (129,263)
Ending balance (in shares) at Jun. 30, 2021 11,237,056     11,237,056
Beginning balance at Mar. 31, 2021 $ 11 (111,807) (23,780) $ (135,576)
Beginning balance (in shares) at Mar. 31, 2021 11,230,482      
Stock-based compensation   47   47
Stock option exercises   34   34
Stock option exercises (in shares) 6,574      
Components of comprehensive income:        
Net income     6,232 6,232
Ending balance at Jun. 30, 2021 $ 11 $ (111,726) $ (17,548) $ (129,263)
Ending balance (in shares) at Jun. 30, 2021 11,237,056     11,237,056
v3.21.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2021
Jun. 30, 2020
Operating activities    
Net income $ 8,642 $ 3,035
Adjustments to reconcile net income to net cash provided by operating activities:    
Loss from discontinued operations   30
Depreciation and amortization expense 8,039 8,457
Stock-based compensation expense 98 59
Amortization of debt issuance costs and debt discount 1,393 1,565
Loss on debt extinguishment 5,048 92
Deferred income taxes 38 255
Other, net 142 1,199
Changes in operating assets and liabilities:    
Accounts receivable (1,384) (2,381)
Inventories (15,600) 259
Prepaid expenses and other assets (752) 1,136
Income taxes receivable, net 7,989 (3,799)
Accounts payable 2,548 (1,660)
Accrued expenses 6,530 3,275
Deferred revenue and customer deposits (715) 629
Other liabilities 730 (105)
Cash provided by operating activities - continuing operations 22,746 12,046
Cash used in operating activities - discontinued operations 0 (30)
Investing activities    
Capital expenditures for plant, equipment and leasehold improvements (3,703) (1,644)
Other 156  
Cash used in investing activities (3,547) (1,644)
Financing activities    
Principal payments on First Lien Term loan (312,500)  
Principal payments on Senior Credit Facility (30,000)  
Principal payments on ABL Revolver (15,000)  
Proceeds from Senior Notes 310,000  
Proceeds from ABL Revolver, net of discount 14,750  
Proceeds from Senior Credit Facility, net of discount   29,100
Proceeds from exercise of stock options 34  
Debt issuance costs (9,452) (2,507)
Payments on debt extinguishment (2,685)  
Payments on finance lease obligations (1,287) (1,181)
Cash (used in) provided by financing activities (46,140) 25,412
Effect of exchange rates on cash 5 (21)
Net (decrease) increase in cash and cash equivalents (26,936) 35,763
Cash and cash equivalents, beginning of period 57,603 18,682
Cash and cash equivalents, end of period 30,667 54,445
Supplemental disclosures of cash flow information    
Cash paid (refunded) during the period for: Interest 8,604 11,519
Cash paid (refunded) during the period for: Income taxes paid 2,284 275
Cash paid (refunded) during the period for: Income taxes (refunded) (6,003) (259)
Right-of-use assets obtained in exchange for lease obligations- Operating leases 3,363 141
Right-of-use assets obtained in exchange for lease obligations- Financing leases 484 763
Accounts payable, and accrued expenses for capital expenditures for plant, equipment and leasehold improvements $ 399 $ 528
v3.21.2
Business Overview and Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2021
Business Overview and Summary of Significant Accounting Policies  
Business Overview and Summary of Significant Accounting Policies

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

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. CPI is engaged in the design, production, data personalization, packaging and fulfillment of “Financial Payment Cards,” which the Company defines 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). The Company defines “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands but not linked to a traditional bank account. CPI also offers an instant card issuance solution, which provides banks the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. CPI’s leading network of high-security production facilities allows the Company to optimize its solutions offerings and effectively meet customers’ needs.

COVID-19 Update

 

The COVID-19 pandemic has impacted economies and societies globally.  The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain.  The health and safety of CPI employees remain paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry.

The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs for, certain raw materials and components, as well as a global chip shortage, which are expected to continue in the future.  CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate potential supply chain constraints. The current economic environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays.

The Company believes the related cost impacts of all of the foregoing will increase through the second half of 2021 and beyond. The Company may not be able to pass some or all of these costs through to its customers.  The Company has also experienced increased demand for its products and services. The Company is experiencing increased production lead times, which is likely to continue through the second half of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers.  The Company will continue to monitor and respond as the situation evolves.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 11, Income Taxes for a discussion of the CARES Act income tax impacts on the Company. In addition, CPI deferred employer social security payments in 2020 in accordance with the CARES Act, which are required to be paid in 2021 and 2022. While the Company is participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to change.  

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 8 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, 2020 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, 2020.

Discontinued Operations

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 in accordance with GAAP. The Company did not retain significant continuing involvement with the discontinued operations subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2021 and 2020.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures in the 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, liability for sales tax, 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 Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“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. Since CPI is a smaller reporting company, 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 2021. 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.

Adjustment of Prior Period Financial Statements for Immaterial Items

In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, during the year ended December 31, 2020, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense for prior periods presented by revising the condensed consolidated financial statements and other financial information included herein. For the quarter ended June 30, 2020, the total impact of the prior period adjustment was a decrease to “Selling, General and Administrative expenses” (“SG&A”) of $2,528 for estimated sales tax expense as this balance related to periods prior to 2020, and an increase to “Cost of sales” of $62 for depreciation expense. For the six months ended June 30, 2020, the total impact of the prior period adjustment was a decrease to SG&A of $2,406 for estimated sales tax expense as this balance related to periods prior to 2020, and an increase to “Cost of sales” of $124 for

depreciation expense. Refer to Note 14, Commitments and Contingencies for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the condensed consolidated balance sheet.

v3.21.2
Net Sales
6 Months Ended
Jun. 30, 2021
Net Sales.  
Net Sales

2. Net Sales

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

Three Months Ended June 30, 2021

Products

Services

Total

Debit and Credit

$

47,180

$

25,680

$

72,860

Prepaid Debit

20,383

20,383

Intersegment eliminations

(24)

 

 

(24)

Total

$

47,156

$

46,063

$

93,219

Six Months Ended June 30, 2021

Products

Services

Total

Debit and Credit

94,359

48,318

142,677

Prepaid Debit

39,841

39,841

Intersegment eliminations

(190)

(17)

(207)

Total

$

94,169

$

88,142

$

182,311

Three Months Ended June 30, 2020

Products

Services

Total

Debit and Credit

$

39,541

$

18,765

$

58,306

Prepaid Debit

13,536

13,536

Intersegment eliminations

(464)

 

 

(464)

Total

$

39,077

$

32,301

$

71,378

Six Months Ended June 30, 2020

Products

Services

Total

Debit and Credit

$

82,452

$

35,693

$

118,145

Prepaid Debit

28,076

28,076

Intersegment eliminations

(874)

 

 

(874)

Total

$

81,578

$

63,769

$

145,347

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®, contactless dual-interface EMV, contactless and magnetic stripe cards, our eco-focused solutions, including Second Wave® and EarthwiseTM cards made with upcycled plastic, metal cards, 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 EMV Co, 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, including CPI On-Demand® personalization, 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 MYCATM, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. As applicable, 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.

v3.21.2
Accounts Receivable
6 Months Ended
Jun. 30, 2021
Accounts Receivable  
Accounts Receivable

3. Accounts Receivable

Accounts receivable consisted of the following:

    

June 30, 2021

    

December 31, 2020

    

Trade accounts receivable

 

$

46,802

 

$

44,305

Unbilled accounts receivable

 

9,414

 

10,576

 

56,216

 

54,881

Less allowance for doubtful accounts

(237)

(289)

$

55,979

$

54,592

v3.21.2
Inventories
6 Months Ended
Jun. 30, 2021
Inventories  
Inventories

4. Inventories

Inventories consisted of the following:

    

June 30, 2021

    

December 31, 2020

Raw materials

 

$

38,021

 

$

23,009

Finished goods

 

5,223

 

4,635

Inventory reserve

(2,971)

(2,848)

 

$

40,273

 

$

24,796

v3.21.2
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets
6 Months Ended
Jun. 30, 2021
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets  
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets

5. 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:

    

June 30, 2021

    

December 31, 2020

Machinery and equipment

 

$

60,555

 

$

55,459

Machinery and equipment under financing leases

7,676

9,974

Furniture, fixtures and computer equipment

 

4,420

 

4,410

Leasehold improvements

 

13,879

 

15,083

Construction in progress

 

1,523

 

2,386

88,053

87,312

Less accumulated depreciation and amortization

 

(58,206)

 

(55,092)

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

 

9,410

 

7,183

 

$

39,257

 

$

39,403

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $2,668 and $3,067 for the three months ended June 30, 2021 and 2020, respectively, and $5,741 and $6,158 for the six months ended June 30, 2021 and 2020, respectively.

Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, Financing and Operating Leases.

v3.21.2
Goodwill and Other Intangible Assets
6 Months Ended
Jun. 30, 2021
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

6. Goodwill and Other Intangible Assets

The Company reports all of its goodwill in the Debit and Credit segment at June 30, 2021 and December 31, 2020. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of June 30, 2021.

Intangible assets consist of customer relationships, technology and software, and trademarks. Intangible amortization expense was $1,149 and $1,149 for the three months ended June 30, 2021 and 2020, respectively, and $2,298 and $2,298 for the six months ended June 30, 2021 and 2020, respectively.

At June 30, 2021 and December 31, 2020, intangible assets, excluding goodwill, were comprised of the following:

June 30, 2021

December 31, 2020

Weighted Average

Accumulated

Net Book

Accumulated

Net Book

Life (Years)

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

Customer relationships

17.2

$

55,454

$

(33,780)

$

21,674

$

55,454

(32,141)

$

23,313

Technology and software

8

 

7,101

(6,345)

 

756

 

7,101

(5,881)

1,220

Trademarks

8.7

 

3,330

 

(1,851)

 

1,479

 

3,330

(1,656)

1,674

Intangible assets subject to amortization

$

65,885

$

(41,976)

$

23,909

$

65,885

$

(39,678)

$

26,207

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2021 was as follows:

2021 (excluding the six months ended June 30, 2021)

$

2,054

2022

    

 

3,867

2023

3,867

2024

3,630

2025

3,440

Thereafter

7,051

 

$

23,909

v3.21.2
Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2021
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

7. 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 the 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

Estimated

Value as of 

Fair Value as of 

Fair Value Measurement at June 30, 2021

June 30, 

June 30, 

 (Using Fair Value Hierarchy)

2021

2021

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

Senior Notes

$

310,000

$

329,375

$

$

329,375

$

Carrying

Estimated

 Value as of

Fair Value as of

Fair Value Measurement at December 31, 2020

December 31, 

December 31, 

 (Using Fair Value Hierarchy)

2020

2020

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

First Lien Term Loan

$

312,500

 

$

287,500

$

 

$

287,500

$

Senior Credit Facility

30,000

30,000

$

$

$

30,000

The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, Long-Term Debt) was based on bank quotes. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value.

v3.21.2
Accrued Expenses
6 Months Ended
Jun. 30, 2021
Accrued Expenses.  
Accrued Expenses

8. Accrued Expenses

Accrued expenses consisted of the following:

    

June 30, 2021

    

December 31, 2020

    

Accrued payroll and related employee expenses

 

$

5,132

 

$

4,938

Accrued employee performance bonus

 

5,543

 

4,873

Employer payroll tax, including social security deferral

 

2,959

 

3,034

Accrued rebates

1,730

1,178

Sales tax liability

1,549

1,696

Accrued interest

7,824

4,145

Operating and financing lease liability (current portion)

3,506

4,407

Other

3,566

3,878

Total accrued expenses

$

31,809

$

28,149

The estimated sales tax liability is further described in Note 14, Commitments and Contingencies and Note 1, Business Overview and Summary of Significant Accounting Policies.

v3.21.2
Financing and Operating Leases
6 Months Ended
Jun. 30, 2021
Financing and Operating Leases  
Financing and Operating Leases

9. Financing and Operating Leases

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.

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

Three Months Ended

Three Months Ended

June 30, 2021

    

June 30, 2020

Operating lease costs

$

532

$

671

Variable lease costs

165

176

Short-term operating lease costs

122

-

Total expense from operating leases

$

819

$

847

Finance lease cost:

Right-of-use amortization expense

309

329

Interest on lease liabilities

99

117

Total financing lease costs

$

408

$

446

Six Months Ended

Six Months Ended

June 30, 2021

    

June 30, 2020

Operating lease costs

$

1,041

$

1,342

Variable lease costs

329

349

Short-term operating lease costs

294

-

Total expense from operating leases

$

1,664

$

1,691

Finance lease cost:

Right-of-use amortization expense

602

656

Interest on lease liabilities

205

246

Total financing lease costs

$

807

$

902

The following table reflects balances for operating and financing leases:

June 30, 2021

    

December 31, 2020

Operating leases

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

$

9,410

$

7,183

Operating lease liability (current)

$

1,742

$

2,267

Long-term operating liability

8,205

5,491

Total operating lease liabilities

$

9,947

$

7,758

Financing leases

Property, equipment and leasehold improvements

$

7,676

$

9,974

Accumulated depreciation

(1,931)

(2,422)

Total property, equipment and leasehold improvements, net

$

5,745

$

7,552

Financing lease liability (current)

$

1,764

$

2,140

Long-term financing liability

2,615

3,052

Total financing lease liabilities

$

4,379

$

5,192

Finance and operating lease ROU 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 June 30, 2021 were as follows:

Operating

Financing

Lease

Leases

2021 (excluding the six months ended June 30, 2021)

1,357

1,058

2022

2,344

2,136

2023

2,216

1,191

2024

2,014

390

2025

1,442

132

Thereafter

3,615

32

Total lease payments

12,988

4,939

Less imputed interest

(3,041)

(560)

Total

$

9,947

$

4,379

v3.21.2
Long-Term Debt
6 Months Ended
Jun. 30, 2021
Long-Term Debt.  
Long-Term Debt

10. Long-Term Debt

At June 30, 2021 and December 31, 2020, long-term debt consisted of the following:

    

Interest

    

June 30, 

    

December 31, 

Rate (1)

2021

2020

Senior Notes

8.625

%  

$

310,000

$

ABL Revolver

%  

First Lien Term Loan

 

5.500

%  

312,500

Senior Credit Facility

9.500

%  

30,000

Unamortized deferred financing costs

 

(7,123)

 

(3,804)

Unamortized discount

(1,988)

Total long-term debt

$

302,877

$

336,708

Less current maturities

(8,027)

Long-term debt, net of current maturities

$

302,877

$

328,681

(1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the First Lien Term Loan and Senior Credit Facility was 5.5% and 9.5%, respectively, as of December 31, 2020.

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $310,000 aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. In addition, the Company and CPI CG Inc. as borrower entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $50,000 (the “ABL Revolver”).

In connection with the issuance of the Senior Notes and entry into the ABL Revolver, the Company terminated its existing credit facilities consisting of a $30,000 senior credit agreement, dated as of March 6, 2020, among the Company, CPI CG Inc., as borrower, the lenders party thereto and Guggenheim Credit Services, LLC as administrative agent and collateral agent (the “Senior Credit Facility”), and a $435,000 first lien term loan, dated as of August 17, 2015 as amended, among the Company, the borrower, the lenders party thereto, GLAS USA LLC, as administrative agent and GLAS Americas LLC, as collateral agent (the “First Lien Term Loan”).

Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15,000 under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company had outstanding borrowings of $30,000, plus accrued and unpaid interest, under the Senior Credit Facility, and $304,746, plus accrued and unpaid interest, under the First Lien Term Loan. In addition, early termination of the Senior Credit Facility required payment of a “make-whole” premium of $2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as

interest expense on the condensed consolidated statement of comprehensive income for the six months ended June 30, 2021.

During the second quarter of 2021, the Company used $15,000 of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of June 30, 2021.

The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Company may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than the Issuer) that guarantee the ABL Revolver, and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than the Issuer and excluded subsidiaries), and is secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. 

The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements.

The Company may have obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among Issuer, the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements.

As of December 31, 2020, $8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan. The Company offered to prepay the balance, pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, which resulted in a required principal prepayment of $7,754 to the First Lien Term Loan lenders on March 4, 2021, plus accrued interest thereon.

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 debt issuance costs recorded on the Senior Notes were $7,558 and are reported as a reduction to the long-term debt balance as of June 30, 2021. The net discount and debt issuance costs on the ABL Revolver were $2,144 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of June 30, 2021.

During the six months ended June 30, 2021, the Company recorded a $5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan.

v3.21.2
Income Taxes
6 Months Ended
Jun. 30, 2021
Income Taxes  
Income Taxes

11. Income Taxes

During the three months ended June 30, 2021, the Company recognized an income tax expense of $2,522 on a pre-tax income of $8,754, compared to an income tax benefit of $3,115 on a pre-tax loss from continuing operations of $1,832 for the prior year period. During the six months ended June 30, 2021, the Company recognized an income tax expense of $3,882 on pre-tax income of $12,524, representing an effective income tax rate of 31.0%.  For the six months ended June 30, 2020, the Company recognized an income tax benefit of $3,580 on a pre-tax loss from continuing operations of $515, representing an effective income tax rate of 695.1%.

For the six months ended June 30, 2021 and 2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

June 30,

2021

    

2020

Tax at federal statutory rate

21.0

%

21.0

%

State taxes, net

6.0

10.4

Valuation allowance

0.0

11.4

Permanent items

2.8

10.8

Tax benefit CARES Act

0.0

643.0

Other

1.2

(1.5)

Effective income tax rate

31.0

%

695.1

%

During the six months ended June 30, 2021, the Company received cash income tax refunds of $6,003 related primarily to U.S. federal income taxes for prior tax years, including net operating loss (“NOL”) carrybacks relating to the CARES Act. As of June 30, 2021, the Company has an income tax receivable on the condensed consolidated balance sheet relating to certain remaining U.S. federal income tax receivables including CARES Act income tax refunds, net of current income tax provisional amounts due.

The Company believes that it is reasonably possible that $317 of its unrecognized tax benefits may be recognized in the next one year period as a result of settlement with the taxing authorities. As such, this balance is reflected in “Accrued expenses” in the Company’s condensed consolidated balance sheet as of June 30, 2021.

In March 2020, the CARES Act was signed into law. The CARES Act allowed companies with NOLs originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminated the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increased the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allowed for the acceleration of refunds of alternative minimum tax credits. For the six months ended June 30, 2020, the Company recorded an estimated 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 643.0%.

v3.21.2
Stockholders' Deficit
6 Months Ended
Jun. 30, 2021
Stockholders' Deficit  
Stockholders' Deficit

12. 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 may 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. 

v3.21.2
Earnings per Share
6 Months Ended
Jun. 30, 2021
Earnings per Share  
Earnings per Share

13. Earnings per Share

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

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

2021

2020

Numerator:

    

    

    

Net income from continuing operations

6,232

1,283

8,642

3,065

Net loss from discontinued operations

(4)

(30)

Net income

$

6,232

$

1,279

$

8,642

$

3,035

Denominator:

Basic weighted-average common shares outstanding

 

11,233,002

 

11,229,819

 

11,231,742

 

11,227,160

Dilutive shares

529,479

4,033

488,406

15,112

Diluted weighted-average common shares outstanding

11,762,481

11,233,852

11,720,148

11,242,272

Basic earnings per share from continuing operations:

0.55

0.11

0.77

0.27

Basic earnings per share from discontinued operations:

(0.00)

(0.00)

Basic earnings per share:

$

0.55

$

0.11

$

0.77

$

0.27

Diluted earnings per share from continuing operations:

0.53

0.11

0.74

0.27

Diluted earnings per share from discontinued operations:

(0.00)

(0.00)

Diluted earnings per share:

$

0.53

$

0.11

$

0.74

$

0.27

v3.21.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2021
Commitments and Contingencies  
Commitments and Contingencies

14. Commitments and Contingencies

Commitments

Refer to Note 9, Financing and Operating Leases for details on the Company’s future cash payments with respect to financing and operating leases. During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2022 and 2028 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs.

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 expense. The Company expenses professional fees associated with litigation claims and assessments as incurred.

Smart Packaging Solutions SA v. CPI Card Group Inc.

On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company

incorporates the patented technology into its products that use contactless communication. The Company does not manufacture antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company has not been formally served with the complaint and thus has not yet filed an answer. The Company intends to investigate and pursue its rights relating to the claims and to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Accordingly, it is not yet possible to reliably determine any potential liability that could result from this matter in the event of an adverse determination, and no liability has been recorded as of June 30, 2021.

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

Estimated Sales Tax Liability

The Company has continued to evaluate a state sales tax liability analysis for states in which it has economic nexus and to collect exemption documentation from its customers. It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. The estimated liability for sales tax as of June 30, 2021 and December 31, 2020 was $1,549 and $1,696, respectively, and is recorded in accrued expenses in the condensed consolidated balance sheets. The liability decreased from the estimate recorded in the prior period due to ongoing activity. As the Company remits cash to the applicable state tax authorities for historical sales tax and interest, the liability balance decreases. Due to the estimates involved in the analysis, the Company expects that the estimated liability will change in the future, and may exceed the current estimate. The Company also may be subject to examination by the relevant state tax authorities. Sales tax recovered from customers reduces the estimated expense when it is received or probable of collection. Future changes to the liability that impact the condensed consolidated statements of operations will be recorded within SG&A. During the six months ended June 30, 2021, the Company recorded a sales tax benefit of $465 within SG&A for current activity relating to sales tax recovered from customers and net changes to the estimated liability.

v3.21.2
Stock Based Compensation
6 Months Ended
Jun. 30, 2021
Stock Based Compensation  
Stock Based Compensation

15. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

In 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. On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan. As of June 30, 2021, there were 1,185,113 shares of Common Stock available for grant under the Omnibus Plan. 

During the six months ended June 30, 2021, and during the fiscal year ended December 31, 2020, 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, 2020

 

706,372

$

15.20

6.44

Exercised

(6,574)

5.25

-

Forfeited

-

-

Outstanding as of June 30, 2021

699,798

$

15.29

5.91

Options vested and exercisable as of June 30, 2021

666,498

$

15.95

5.85

Options vested and expected to vest as of June 30, 2021

699,798

$

15.29

5.91

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, 2020

 

45,319

 

$

1.10

Vested

 

(12,019)

 

1.70

Unvested as of June 30, 2021

 

33,300

$

0.98

Unvested stock options of 33,300 as of June 30, 2021 are expected to vest entirely in the second half of 2021.

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