CPI CARD GROUP INC., 10-Q filed on 11/3/2020
Quarterly Report
v3.20.2
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2020
Oct. 22, 2020
Cover Abstract    
Entity Registrant Name CPI Card Group Inc.  
Entity Central Index Key 0001641614  
Document Type 10-Q  
Document Period End Date Sep. 30, 2020  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Interactive Data Current Yes  
Entity Current Reporting Status Yes  
Title of 12(b) Security Common Stock, $0.001 par value  
Trading Symbol PMTS  
Entity Filer Category Non-accelerated Filer  
Entity Common Stock, Shares Outstanding   11,230,482
Entity Small Business true  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Shell Company false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 50,349 $ 18,682
Accounts receivable, net of allowances of $291 and $395, respectively 59,093 42,832
Inventories 20,166 20,192
Prepaid expenses and other current assets 4,267 6,345
Income taxes receivable 7,795 4,164
Total current assets 141,670 92,215
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net 35,473 41,612
Intangible assets, net 27,355 30,802
Goodwill 47,150 47,150
Other assets 2,040 1,232
Total assets 253,688 213,011
Current liabilities:    
Accounts payable 17,223 16,482
Accrued expenses 29,527 24,735
Deferred revenue and customer deposits 885 468
Total current liabilities 47,635 41,685
Long-term debt 335,759 307,778
Deferred income taxes 6,656 6,366
Other long-term liabilities 9,012 11,478
Total liabilities 399,062 367,307
Commitments and contingencies (Note 15)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at September 30, 2020 and December 31, 2019
Stockholders’ deficit:    
Common stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 and 11,224,191 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively 11 11
Capital deficiency (111,910) (111,988)
Accumulated loss (33,475) (42,319)
Total stockholders’ deficit (145,374) (154,296)
Total liabilities and stockholders’ deficit $ 253,688 $ 213,011
v3.20.2
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
Condensed Consolidated Balance Sheets    
Allowance on accounts receivable $ 291 $ 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) 11,230,482 11,224,191
Common shares, outstanding shares (in shares) 11,230,482 11,224,191
v3.20.2
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Net sales:        
Net Sales $ 82,702 $ 71,681 $ 228,049 $ 205,448
Cost of sales:        
Depreciation and amortization 2,472 2,813 7,938 8,403
Total cost of sales 52,095 46,324 148,704 136,314
Gross profit 30,607 25,357 79,345 69,134
Operating expenses, net:        
Selling, general and administrative (exclusive of depreciation and amortization shown below) 15,617 16,104 48,893 49,541
Depreciation and amortization 1,508 1,513 4,498 4,539
Litigation settlement gain       (6,000)
Total operating expenses, net 17,125 17,617 53,391 48,080
Income from operations 13,482 7,740 25,954 21,054
Other expense, net:        
Interest, net (6,298) (6,085) (19,158) (18,847)
Foreign currency gain (loss) 23 (40) (10) (1,320)
Other income (expense), net 4 14 (90) 25
Total other expense, net (6,271) (6,111) (19,258) (20,142)
Income from continuing operations before income taxes 7,211 1,629 6,696 912
Income tax (expense) benefit (1,402) (2,258) 2,178 (3,618)
Net income (loss) from continuing operations 5,809 (629) 8,874 (2,706)
Net (loss) income from discontinued operation, net of tax (Note 3)   (28) (30) (16)
Net income (loss) $ 5,809 $ (657) $ 8,844 $ (2,722)
Basic and Diluted net income (loss) per share from continuing operations (in dollar per share) $ 0.52 $ (0.06) $ 0.79 $ (0.24)
Basic and Diluted net income (loss) per share (in dollars per share) $ 0.52 $ (0.06) $ 0.79 $ (0.24)
Basic weighted-average shares outstanding (in shares) 11,230,028 11,223,715 11,228,116 11,187,550
Diluted weighted-average shares outstanding (in shares) 11,231,821 11,223,715 11,235,098 11,187,550
Comprehensive income (loss):        
Net income (loss) $ 5,809 $ (657) $ 8,844 $ (2,722)
Currency translation adjustment       31
Reclassification adjustment to foreign currency loss       1,329
Total comprehensive income (loss) 5,809 (657) 8,844 (1,362)
Products        
Net sales:        
Net Sales 43,462 33,963 125,040 99,845
Cost of sales:        
Products and Services (exclusive of depreciation and amortization shown below) 27,490 22,182 79,780 65,769
Services        
Net sales:        
Net Sales 39,240 37,718 103,009 105,603
Cost of sales:        
Products and Services (exclusive of depreciation and amortization shown below) $ 22,133 $ 21,329 $ 60,986 $ 62,142
v3.20.2
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) $ (37,202) $ (1,360) $ (150,774)
Beginning balance (in shares) at Dec. 31, 2018 11,160,377        
Shares issued under stock-based compensation plans (in shares) 63,814        
Stock-based compensation   293     293
Components of comprehensive (loss) income:          
Net income (loss)     (2,722)   (2,722)
Reclassification adjustment to foreign currency loss       1,329 1,329
Currency translation adjustment       $ 31 31
Ending balance at Sep. 30, 2019 $ 11 (111,930) (39,924)   (151,843)
Ending balance (in shares) at Sep. 30, 2019 11,224,191        
Beginning balance at Jun. 30, 2019 $ 11 (111,939) (39,267)   (151,195)
Beginning balance (in shares) at Jun. 30, 2019 11,223,528        
Shares issued under stock-based compensation plans (in shares) 663        
Stock-based compensation   9     9
Components of comprehensive (loss) income:          
Net income (loss)     (657)   (657)
Ending balance at Sep. 30, 2019 $ 11 (111,930) (39,924)   (151,843)
Ending balance (in shares) at Sep. 30, 2019 11,224,191        
Beginning balance at Dec. 31, 2019 $ 11 (111,988) (42,319)   $ (154,296)
Beginning balance (in shares) at Dec. 31, 2019 11,224,191       11,224,191
Shares issued under stock-based compensation plans (in shares) 6,291        
Stock-based compensation   78     $ 78
Components of comprehensive (loss) income:          
Net income (loss)     8,844   8,844
Ending balance at Sep. 30, 2020 $ 11 (111,910) (33,475)   $ (145,374)
Ending balance (in shares) at Sep. 30, 2020 11,230,482       11,230,482
Beginning balance at Jun. 30, 2020 $ 11 (111,935) (39,284)   $ (151,208)
Beginning balance (in shares) at Jun. 30, 2020 11,229,819        
Shares issued under stock-based compensation plans (in shares) 663        
Stock-based compensation   25     25
Components of comprehensive (loss) income:          
Net income (loss)     5,809   5,809
Ending balance at Sep. 30, 2020 $ 11 $ (111,910) $ (33,475)   $ (145,374)
Ending balance (in shares) at Sep. 30, 2020 11,230,482       11,230,482
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Operating activities    
Net income (loss) $ 8,844 $ (2,722)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Loss from discontinued operation 30 16
Depreciation and amortization expense 12,436 12,942
Stock-based compensation expense 84 316
Amortization of debt issuance costs and debt discount 2,503 1,469
Deferred income taxes 290 2,531
Reclassification adjustment to foreign currency loss   1,329
Other, net 1,345 (6)
Changes in operating assets and liabilities:    
Accounts receivable (16,165) (2,605)
Inventories (1,109) (12,279)
Prepaid expenses and other assets 49 1,659
Income taxes receivable, net (3,630) 331
Accounts payable 921 (358)
Accrued expenses 4,112 (5,167)
Deferred revenue and customer deposits 417 (472)
Other liabilities 81 17
Cash provided by (used in) operating activities - continuing operations 10,208 (2,999)
Cash used in operating activities - discontinued operation (30) (16)
Investing activities    
Acquisitions of plant, equipment and leasehold improvements (3,320) (3,298)
Cash received from sale of Canadian subsidiary   1,451
Cash used in investing activities (3,320) (1,847)
Financing activities    
Proceeds from Senior Credit Facility, net of discount 29,100  
Debt issuance costs (2,507)  
Proceeds from Revolving Credit Facility   11,500
Payments on Revolving Credit Facility   (11,500)
Payments on finance lease obligations (1,782) (1,175)
Cash provided by (used in) financing activities 24,811 (1,175)
Effect of exchange rates on cash (2) 36
Net increase (decrease) in cash and cash equivalents 31,667 (6,001)
Cash and cash equivalents, beginning of period 18,682 20,291
Cash and cash equivalents, end of period 50,349 14,290
Supplemental disclosures of cash flow information    
Cash paid during the period for: Interest 17,454 17,315
Cash paid during the period for: Income taxes 946 675
Right-of-use assets obtained in exchange for lease obligations- Operating leases 141 8,533
Right-of-use assets obtained in exchange for lease obligations- Financing leases 1,618 5,196
Accounts payable, and accrued expenses for acquisitions of plant, equipment and leasehold improvements $ 127 $ 159
v3.20.2
Business Overview and Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 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). 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. 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 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 was recorded.  In connection with the disposition of the Canadian subsidiary, the Company released the related cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the nine months ended September 30, 2019.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization (“WHO”) characterized the novel coronavirus disease (“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 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 remain open and continue to provide direct and essential support to the financial services industry.  The Company may experience constrained supply, curtailed customer demand or impacts on CPI’s workforce that could materially adversely impact the business, results of operations and overall financial performance in future periods. While CPI’s net sales in the third quarter and first nine months of 2020 increased over the prior year, the Company experienced lower customer demand than expected (which CPI believes is primarily attributable to the COVID-19 pandemic), and the Company may experience further effects in the Company’s results of operations and overall financial performance in future periods. There can be no assurance that the Company’s strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 pandemic on the business and operating results.  See Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 for further discussion of the possible impact of the COVID-19 pandemic on the business.  

 

              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 continuing to evaluate and apply certain provisions of the CARES Act that may benefit the Company.  Refer to Note 12, Income Taxes – Continuing Operations, for a discussion of the CARES Act income tax impacts.  In addition, the Company has deferred employer side social security payments starting with the second quarter of 2020.  While the Company is participating in certain programs under the CARES Act, the 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, 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 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 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 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 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.

 

Adjustment of Prior Period Financial Statements for Immaterial Items

 

In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in ASC 250, Presentation of Financial Statements, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense for all prior periods presented by revising the condensed consolidated financial statements and other financial information included herein.  The total impact on prior years for estimated sales tax expense was $1,907 and depreciation expense was $476.  These adjustments represent the expenses pertaining to the period of 2017 to 2020, including an increase to estimated sales tax expense recorded in Selling, General and Administrative expenses (“SG&A”) of $168 and $396, and depreciation expense in Cost of sales of $62 and $187, for the three and nine months ended September 30, 2019, respectively.  In addition, the Company recorded sales tax expense in SG&A of $293 and depreciation expense of $124 for the nine months ended September 30, 2020.  The estimated sales tax expense determined during the quarter ended June 30, 2020 was $2,700, and the estimate reduced primarily due to probable customer collections of $500, resulting in $2,200 estimated expense recorded to the prior periods of 2017 to 2020.

v3.20.2
Net Sales
9 Months Ended
Sep. 30, 2020
Net Sales.  
Net Sales

2. Net Sales

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

44,056

 

$

18,654

 

$

62,710

Prepaid Debit

 

 

 —

 

 

20,604

 

 

20,604

Intersegment eliminations

 

 

(594)

 

 

(18)

 

 

(612)

Total

 

$

43,462

 

$

39,240

 

$

82,702

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

126,507

 

$

54,348

 

$

180,855

Prepaid Debit

 

 

 —

 

 

48,680

 

 

48,680

Intersegment eliminations

 

 

(1,467)

 

 

(19)

 

 

(1,486)

Total

 

$

125,040

 

$

103,009

 

$

228,049

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

34,218

 

$

17,284

 

$

51,502

Prepaid Debit

 

 

 —

 

 

20,452

 

 

20,452

Intersegment eliminations

 

 

(255)

 

 

(18)

 

 

(273)

Total

 

$

33,963

 

$

37,718

 

$

71,681

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

100,338

 

$

51,179

 

$

151,517

Prepaid Debit

 

 

 —

 

 

53,162

 

 

53,162

Other

 

 

397

 

 

1,282

 

 

1,679

Intersegment eliminations

 

 

(890)

 

 

(20)

 

 

(910)

Total

 

$

99,845

 

$

105,603

 

$

205,448

 

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 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, 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.

v3.20.2
Discontinued Operation
9 Months Ended
Sep. 30, 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 and nine months ended September 30, 2020 and 2019.

 

v3.20.2
Accounts Receivable
9 Months Ended
Sep. 30, 2020
Accounts Receivable  
Accounts Receivable

4. Accounts Receivable

 

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

 

    

September 30, 2020

    

December 31, 2019

 

 

 

 

 

 

    

Trade accounts receivable

 

$

50,971

 

$

39,004

Unbilled accounts receivable

 

 

8,413

 

 

4,223

 

 

 

59,384

 

 

43,227

Less allowance for doubtful accounts

 

 

(291)

 

 

(395)

 

 

$

59,093

 

$

42,832

 

v3.20.2
Inventories
9 Months Ended
Sep. 30, 2020
Inventories  
Inventories

5.  Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

    

September 30, 2020

    

December 31, 2019

 

 

 

 

 

 

 

Raw materials

 

$

18,025

 

$

16,492

Finished goods

 

 

4,623

 

 

5,047

Inventory reserve

 

 

(2,482)

 

 

(1,347)

 

 

$

20,166

 

$

20,192

 

v3.20.2
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets
9 Months Ended
Sep. 30, 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:

 

 

 

 

 

 

 

 

 

    

September 30, 2020

    

December 31, 2019

 

 

 

 

 

 

 

Machinery and equipment

 

$

53,224

 

$

52,212

Machinery and equipment under financing leases

 

 

9,874

 

 

8,256

Furniture, fixtures and computer equipment

 

 

4,171

 

 

4,749

Leasehold improvements

 

 

14,941

 

 

14,905

Construction in progress

 

 

658

 

 

455

 

 

 

82,868

 

 

80,577

Less accumulated depreciation and amortization

 

 

(52,054)

 

 

(45,277)

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

 

 

4,659

 

 

6,312

 

 

$

35,473

 

$

41,612

 

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $2,831 and $3,167 for the three months ended September 30, 2020 and 2019, respectively, and $8,989 and $9,455 for the nine months ended September 30, 2020 and 2019, respectively.

 

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

v3.20.2
Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 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 the Debit and Credit segment at September 30, 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 September 30, 2020.     

 

Intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Intangible amortization expense was $1,149 and $1,159 for the three months ended September 30, 2020 and 2019, respectively, and $3,447 and $3,487 for the nine months ended September 30, 2020 and 2019. 

 

At September 30, 2020 and December 31, 2019, intangible assets, excluding goodwill, were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

 

December 31, 2019

 

Weighted Average

    

Gross Book

    

Accumulated

    

Net Book

    

Gross Book

    

Accumulated

    

Net Book

 

Life (Years)

    

Value

    

Amortization

    

Value

    

Value

    

Amortization

    

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

17.2

 

$

55,454

 

$

(31,323)

 

$

24,131

 

$

55,454

 

 

(28,865)

 

$

26,589

Technology and software

 8

 

 

7,101

 

 

(5,649)

 

 

1,452

 

 

7,101

 

 

(4,952)

 

 

2,149

Trademarks

8.7

 

 

3,330

 

 

(1,558)

 

 

1,772

 

 

3,330

 

 

(1,266)

 

 

2,064

Non-compete agreements

 5

 

 

491

 

 

(491)

 

 

 —

 

 

491

 

 

(491)

 

 

 —

Intangible assets subject to amortization

 

 

$

66,376

 

$

(39,021)

 

$

27,355

 

$

66,376

 

$

(35,574)

 

$

30,802

 

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2020 was as follows:

 

 

 

 

 

2020 (excluding the nine months ended September 30, 2020)

 

$

1,148

2021

    

 

4,352

2022

 

 

3,867

2023

 

 

3,867

2024

 

 

3,530

Thereafter

 

 

10,591

 

 

$

27,355

 

v3.20.2
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 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 September 30, 2020

 

 

September 30, 

 

September 30, 

 

 (Using Fair Value Hierarchy)

 

 

2020

 

2020

 

Level 1

 

Level 2

 

Level 3

Liabilities:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

First Lien Term Loan

 

$

312,500

 

$

275,391

 

$

 —

 

$

275,391

 

$

 —

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 (as defined in Note 11, Long-Term Debt) is based on significant unobservable Level 3 inputs, which require management judgment and estimation.  The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, and was valued using market data from companies with similar credit ratings. 

 

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

v3.20.2
Accrued Liabilities
9 Months Ended
Sep. 30, 2020
Accrued Liabilities  
Accrued Liabilities

9. Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

    

September 30, 2020

    

December 31, 2019

 

 

 

 

 

 

    

Accrued payroll and related employee expenses

 

$

5,152

 

$

3,954

Accrued employee performance bonus

 

 

3,717

 

 

3,920

Employer payroll tax, including social security deferral

 

 

2,008

 

 

368

Accrued rebates

 

 

3,931

 

 

1,573

Sales tax liability

 

 

2,100

 

 

1,907

Accrued interest

 

 

4,137

 

 

4,951

Operating and financing lease liability (current portion)

 

 

4,901

 

 

4,494

Other

 

 

3,581

 

 

3,568

Total accrued expenses

 

$

29,527

 

$

24,735

 

The estimated sales tax liability is further described in Note 15, Commitments and Contingencies and Note 1, Business Overview and Summary of Significant Accounting Policies.

v3.20.2
Financing and Operating Leases
9 Months Ended
Sep. 30, 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

 

September 30, 2020

    

September 30, 2019

Total operating lease costs

$

664

 

$

659

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Right-of-use amortization expense

$

326

 

$

273

Interest on lease liabilities

 

110

 

 

98

Total financing lease costs

$

436

 

$

371

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

September 30, 2020

    

September 30, 2019

Total operating lease costs

$

2,006

 

$

1,967

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Right-of-use amortization expense

$

982

 

$

574

Interest on lease liabilities

 

356

 

 

160

Total financing lease costs

$

1,338

 

$

734

 

The following table reflects balances for operating and financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

    

December 31, 2019

Operating leases

 

 

 

 

 

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

$

4,659

 

$

6,312

 

 

 

 

 

 

Operating lease liability (current)

$

2,489

 

$

2,283

Long-term operating liability

 

2,773

 

 

5,067

Total operating lease liabilities   

$

5,262

 

$

7,350

 

 

 

 

 

 

Financing leases

 

 

 

 

 

Property, equipment and leasehold improvements

$

9,874

 

$

8,256

Accumulated depreciation

 

(2,072)

 

 

(1,094)

Total property, equipment and leasehold improvements, net 

$

7,802

 

$

7,162

 

 

 

 

 

 

Financing lease liability (current)

$

2,412

 

$

2,211

Long-term financing liability

 

3,500

 

 

3,886

Total financing lease liabilities

$

5,912

 

$

6,097

 

 

 

 

 

 

 

 

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 September 30, 2020 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Financing

 

    

 

Lease

    

 

Leases

2020 (excluding nine months ended September 30, 2020)

 

$

744

 

$

711

2021

 

 

2,632

 

 

2,470

2022

 

 

1,150

 

 

1,983

2023

 

 

823

 

 

1,032

2024

 

 

582

 

 

258

Thereafter

 

 

 -

 

 

 2

Total lease payments

 

 

5,931

 

 

6,456

Less imputed interest

 

 

(669)

 

 

(544)

Total 

 

$

5,262

 

$

5,912

 

v3.20.2
Long-Term Debt
9 Months Ended
Sep. 30, 2020
Long-Term Debt.  
Long-Term Debt

11. Long-Term Debt

 

At September 30, 2020 and December 31, 2019, long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

    

Interest

    

 

September 30, 

    

December 31, 

 

    

Rate (1)

 

    

2020

    

2019

First Lien Term Loan

 

5.50

%  

 

$

312,500

 

$

312,500

Senior Credit Facility

 

9.50

%  

 

 

30,000

 

 

 —

Unamortized discount

 

 

 

 

 

(2,312)

 

 

(1,770)

Unamortized deferred financing costs

 

 

 

 

 

(4,429)

 

 

(2,952)

Total Long-term debt

 

 

 

 

$

335,759

 

$

307,778

Less current maturities

 

 

 

 

 

 —

 

 

 —

Long-term debt, net of current maturities

 

 

 

 

 

335,759

 

 

307,778


(1)  The interest rate on the First Lien Term Loan was 5.5%, and 6.71% as of September 30, 2020, and December 31, 2019, respectively. The interest rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.5% as of September 30, 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 on 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. (now known as CPI CG Inc.) (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P., 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,  and ranks senior in priority to the Company’s First Lien Term Loan.

 

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 have adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, at the end of each quarterly period ending on or after March 31, 2020.    

 

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 respective 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%.  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 4.5%, or a base rate plus a margin of 3.5%. 

 

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 both 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 nine months ended September 30, 2020.

v3.20.2
Income Taxes - Continuing Operations
9 Months Ended
Sep. 30, 2020
Income Taxes - Continuing Operations  
Income Taxes - Continuing Operations

12. Income Taxes – Continuing Operations

 

During the three months ended September 30, 2020, the Company recognized an income tax expense of $1,402 on a pre-tax income of $7,211, compared to an income tax expense of $2,258 on a pre-tax income of $1,629 for the prior year period. During the nine months ended September 30, 2020, the Company recognized an income tax benefit of $2,178 on a pre-tax income of $6,696, representing an effective income tax rate of (32.5%).  For the nine months ended September 30, 2019, the Company recognized an income tax expense of $3,618 on a pre-tax income of $912, representing an effective income tax rate of 396.7%.

For the nine months ended September 30, 2020 and 2019, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

 

 

 

 

 

 

 

 

 

September 30,

 

 

 

2020

    

2019

 

Tax at federal statutory rate

 

21.0

%

21.0

%

State taxes, net

 

7.4

 

62.3

 

Valuation allowance

 

(18.1)

 

290.2

 

Permanent items

 

7.2

 

6.5

 

Tax benefit CARES Act

 

(54.7)

 

 —

 

Other

 

4.7

 

16.7

 

Effective income tax rate

 

(32.5)

%

396.7

%

 

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 nine months ended September 30, 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 54.7%.  In addition, the Company has adjusted the partial valuation allowance due to the limitation on the deductibility of interest expense with an income tax rate benefit during for the nine months ended September 30, 2020.  The Company’s income tax receivable on the condensed consolidated balance sheet as of September 30, 2020, relates primarily to U.S. federal income tax receivables relating to prior tax years, including NOL carrybacks relating to the CARES Act income tax refund.  Additionally, the income tax receivable relates to tax benefits based on our pre-tax income and income tax provision through September 30, 2020.  In the nine months ended September 30, 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.

v3.20.2
Stockholders' Deficit
9 Months Ended
Sep. 30, 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 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. 

 

v3.20.2
Income (Loss) per Share
9 Months Ended
Sep. 30, 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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2020

    

2019

 

2020

 

2019

Numerator:

 

 

 

 

 

 

    

 

    

    

 

    

Net income (loss) from continuing operations