CPI CARD GROUP INC., 10-Q filed on 5/11/2021
Quarterly Report
v3.21.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2021
Apr. 22, 2021
Cover Abstract    
Document Type 10-Q  
Document Period End Date Mar. 31, 2021  
Entity Registrant Name CPI Card Group Inc.  
Entity Central Index Key 0001641614  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
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   11,230,482
Document Fiscal Year Focus 2021  
Document Fiscal Period Focus Q1  
v3.21.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2021
Dec. 31, 2020
Current assets:    
Cash and cash equivalents $ 24,884 $ 57,603
Accounts receivable, net of allowances of $237 and $289, respectively 60,479 54,592
Inventories 33,490 24,796
Prepaid expenses and other current assets 5,193 5,032
Income taxes receivable 9,152 10,511
Total current assets 133,198 152,534
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net 38,188 39,403
Intangible assets, net 25,058 26,207
Goodwill 47,150 47,150
Other assets 2,700 857
Total assets 246,294 266,151
Current liabilities:    
Accounts payable 21,792 18,883
Accrued expenses 22,618 28,149
Current portion of long-term debt   8,027
Deferred revenue and customer deposits 1,316 1,868
Total current liabilities 45,726 56,927
Long-term debt 317,503 328,681
Deferred income taxes 7,232 7,409
Other long-term liabilities 11,409 11,171
Total liabilities 381,870 404,188
Commitments and contingencies (Note 14)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at March 31, 2021 and December 31, 2020
Stockholders’ deficit:    
Common stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 shares issued and outstanding at March 31, 2021 and December 31, 2020 11 11
Capital deficiency (111,807) (111,858)
Accumulated loss (23,780) (26,190)
Total stockholders’ deficit (135,576) (138,037)
Total liabilities and stockholders’ deficit $ 246,294 $ 266,151
v3.21.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 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) 11,230,482 11,230,482
Common shares, outstanding shares (in shares) 11,230,482 11,230,482
v3.21.1
Condensed Consolidated Statements of Operations and Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Net sales:    
Net Sales $ 89,092 $ 73,969
Cost of sales:    
Depreciation and amortization 2,416 2,755
Total cost of sales 53,371 48,321
Gross profit 35,721 25,648
Operating expenses:    
Selling, general and administrative (exclusive of depreciation and amortization shown below) 16,146 16,663
Depreciation and amortization 1,806 1,485
Total operating expenses 17,952 18,148
Income from operations 17,769 7,500
Other expense, net:    
Interest, net (8,976) (6,088)
Other income (expense), net 25 (3)
Loss on debt extinguishment (5,048) (92)
Total other expense, net (13,999) (6,183)
Income from continuing operations before income taxes 3,770 1,317
Income tax (expense) benefit (1,360) 465
Net income from continuing operations 2,410 1,782
Net loss from discontinued operations, net of tax (Note 1)   (26)
Net income $ 2,410 $ 1,756
Earnings per share from continuing operations - Basic and Diluted: (in dollar per share) $ 0.21 $ 0.16
Earnings per share - Basic and Diluted: (in dollars per share) $ 0.21 $ 0.16
Basic weighted-average shares outstanding (in shares) 11,230,482 11,224,500
Diluted weighted-average shares outstanding (in shares) 11,639,015 11,262,359
Comprehensive income:    
Net income $ 2,410 $ 1,756
Total comprehensive income 2,410 1,756
Products    
Net sales:    
Net Sales 47,013 42,501
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) 27,287 26,379
Services    
Net sales:    
Net Sales 42,079 31,468
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) $ 23,668 $ 19,187
v3.21.1
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   35   35
Components of comprehensive income:        
Net income     1,756 1,756
Ending balance at Mar. 31, 2020 $ 11 (111,953) (40,563) (152,505)
Ending balance (in shares) at Mar. 31, 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   51   $ 51
Components of comprehensive income:        
Net income     2,410 2,410
Ending balance at Mar. 31, 2021 $ 11 $ (111,807) $ (23,780) $ (135,576)
Ending balance (in shares) at Mar. 31, 2021 11,230,482     11,230,482
v3.21.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2021
Mar. 31, 2020
Operating activities    
Net income $ 2,410 $ 1,756
Adjustments to reconcile net income to net cash provided by operating activities:    
Loss from discontinued operations   26
Depreciation and amortization expense 4,222 4,240
Stock-based compensation expense 51 41
Amortization of debt issuance costs and debt discount 887 634
Loss on debt extinguishment 5,048 92
Deferred income taxes (177) 537
Other, net 200 488
Changes in operating assets and liabilities:    
Accounts receivable (5,884) (911)
Inventories (8,885) 521
Prepaid expenses and other assets 107 1,138
Income taxes receivable, net 1,359 (846)
Accounts payable 3,705 (2,747)
Accrued expenses (2,790) (1,856)
Deferred revenue and customer deposits (556) 177
Other liabilities 447 (86)
Cash provided by operating activities - continuing operations 144 3,204
Cash used in operating activities - discontinued operations 0 (26)
Investing activities    
Capital expenditures for plant, equipment and leasehold improvements (2,524) (938)
Other 155  
Cash used in investing activities (2,369) (938)
Financing activities    
Principal payments on First Lien Term loan (312,500)  
Principal payments on Senior Credit Facility (30,000)  
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
Debt issuance costs (9,452) (2,507)
Payments on debt extinguishment (2,685)  
Payments on finance lease obligations (610) (593)
Cash (used in) provided by financing activities (30,497) 26,000
Effect of exchange rates on cash 3 (18)
Net (decrease) increase in cash and cash equivalents (32,719) 28,222
Cash and cash equivalents, beginning of period 57,603 18,682
Cash and cash equivalents, end of period 24,884 46,904
Supplemental disclosures of cash flow information    
Cash paid (refunded) during the period for: Interest 8,382 5,538
Cash paid (refunded) during the period for: Income taxes 1 (232)
Right-of-use assets obtained in exchange for lease obligations- Operating leases 432 141
Right-of-use assets obtained in exchange for lease obligations- Financing leases 526 251
Accounts payable, and accrued expenses for capital expenditures for plant, equipment and leasehold improvements $ 256 $ 345
v3.21.1
Business Overview and Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 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.  The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain including access to, and higher pricing of, certain raw materials which may 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 affected the available labor pool in the areas in which the Company operates which may result in increased labor cost and turnover in our facilities. The Company will continue to monitor and respond as the situation evolves. All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry.  See Item 1A, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (the “SEC”) for further discussion of the possible impact of the COVID-19 pandemic on our business.

 

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.  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 months ended March 31, 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 March 31, 2020, the total impact of the prior period adjustment was an increase to “Selling, General and Administrative expenses” (“SG&A”) of $121 for estimated sales tax expense and an increase to “Cost of sales” of $62 for depreciation expense.  The total impact on prior fiscal years 2017 to 2019 was an increase to SG&A for estimated sales tax expense of $1,907 and an increase to “Cost of sales” for depreciation expense of $476. 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.    

 

v3.21.1
Net Sales
3 Months Ended
Mar. 31, 2021
Net Sales.  
Net Sales

2. Net Sales

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2021

 

 

 

Products

 

Services

 

Total

 

Debit and Credit

 

$

47,179

 

$

22,638

 

$

69,817

 

Prepaid Debit

 

 

 —

 

 

19,458

 

 

19,458

 

Intersegment eliminations

 

 

(166)

 

 

(17)

 

 

(183)

 

Total

 

$

47,013

 

$

42,079

 

$

89,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

 

 

Products

 

Services

 

Total

 

Debit and Credit

 

$

42,911

 

$

16,928

 

$

59,839

 

Prepaid Debit

 

 

 —

 

 

14,540

 

 

14,540

 

Intersegment eliminations

 

 

(410)

 

 

 —

 

 

(410)

 

Total

 

$

42,501

 

$

31,468

 

$

73,969

 

 

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 “high content” upcycled plastic cards, 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.

v3.21.1
Accounts Receivable
3 Months Ended
Mar. 31, 2021
Accounts Receivable  
Accounts Receivable

3. Accounts Receivable

 

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2021

    

December 31, 2020

 

 

 

 

 

 

    

Trade accounts receivable

 

$

49,708

 

$

44,305

Unbilled accounts receivable

 

 

11,008

 

 

10,576

 

 

 

60,716

 

 

54,881

Less allowance for doubtful accounts

 

 

(237)

 

 

(289)

 

 

$

60,479

 

$

54,592

 

v3.21.1
Inventories
3 Months Ended
Mar. 31, 2021
Inventories  
Inventories

4.  Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2021

    

December 31, 2020

 

 

 

 

 

 

 

Raw materials

 

$

31,802

 

$

23,009

Finished goods

 

 

4,727

 

 

4,635

Inventory reserve

 

 

(3,039)

 

 

(2,848)

 

 

$

33,490

 

$

24,796

 

v3.21.1
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets
3 Months Ended
Mar. 31, 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:

 

 

 

 

 

 

 

 

 

    

March 31, 2021

    

December 31, 2020

 

 

 

 

 

 

 

Machinery and equipment

 

$

57,714

 

$

55,459

Machinery and equipment under financing leases

 

 

9,858

 

 

9,974

Furniture, fixtures and computer equipment

 

 

4,331

 

 

4,410

Leasehold improvements

 

 

13,896

 

 

15,083

Construction in progress

 

 

1,381

 

 

2,386

 

 

 

87,180

 

 

87,312

Less accumulated depreciation and amortization

 

 

(55,925)

 

 

(55,092)

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

 

 

6,933

 

 

7,183

 

 

$

38,188

 

$

39,403

 

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,073 and $3,091 for the three months ended March 31, 2021 and 2020, respectively.

 

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

v3.21.1
Goodwill and Other Intangible Assets
3 Months Ended
Mar. 31, 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 March 31, 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 indicates the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of March 31, 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 March 31, 2021 and 2020, respectively. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

(32,961)

 

$

22,493

 

$

55,454

 

 

(32,141)

 

$

23,313

Technology and software

 8

 

 

7,101

 

 

(6,113)

 

 

988

 

 

7,101

 

 

(5,881)

 

 

1,220

Trademarks

8.7

 

 

3,330

 

 

(1,753)

 

 

1,577

 

 

3,330

 

 

(1,656)

 

 

1,674

Intangible assets subject to amortization

 

 

$

65,885

 

$

(40,827)

 

$

25,058

 

$

65,885

 

$

(39,678)

 

$

26,207

 

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of March 31, 2021 was as follows:

 

 

 

 

 

2021 (excluding the three months ended March 31, 2021)

 

$

3,203

2022

    

 

3,867

2023

 

 

3,867

2024

 

 

3,630

2025

 

 

3,440

Thereafter

 

 

7,051

 

 

$

25,058

 

v3.21.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 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 March 31, 2021

 

 

March 31, 

 

March 31, 

 

 (Using Fair Value Hierarchy)

 

 

2021

 

2021

 

Level 1

 

Level 2

 

Level 3

Liabilities:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

Senior Notes

 

$

310,000

 

$

324,725

 

$

 —

 

$

324,725

 

$

ABL Revolver

 

$

15,000

 

$

15,000

 

$

 

$

15,000

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 fair value measurement associated with the ABL Revolver (as defined in Note 10, Long-Term Debt) approximates its carrying value as of March 31, 2021, given the close proximity to the date the Company entered into the credit facility on March 15, 2021, and the applicable interest rates and nature of the security interest in Company assets. 

 

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

v3.21.1
Accrued Expenses
3 Months Ended
Mar. 31, 2021
Accrued Expenses.  
Accrued Expenses

8. Accrued Expenses

 

Accrued expenses consisted of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 2021

    

December 31, 2020

 

 

 

 

 

 

    

Accrued payroll and related employee expenses

 

$

5,007

 

$

4,938

Accrued employee performance bonus

 

 

2,117

 

 

4,873

Employer payroll tax, including social security deferral

 

 

2,794

 

 

3,034

Accrued rebates

 

 

1,668

 

 

1,178

Sales tax liability

 

 

1,805

 

 

1,696

Accrued interest

 

 

1,262

 

 

4,145

Operating and financing lease liability (current portion)

 

 

4,016

 

 

4,407

Other

 

 

3,949

 

 

3,878

Total accrued expenses

 

$

22,618

 

$

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.

v3.21.1
Financing and Operating Leases
3 Months Ended
Mar. 31, 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

 

March 31, 2021

    

March 31, 2020

Operating lease costs

$

509

 

$

671

Variable lease costs

 

164

 

 

173

Short-term operating lease costs

 

172

 

 

 -

Total expense from operating leases

$

845

 

$

844

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Right-of-use amortization expense

 

293

 

 

327

  Interest on lease liabilities

 

213

 

 

129

  Total financing lease costs

$

506

 

$

456

 

The following table reflects balances for operating and financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

    

December 31, 2020

Operating leases

 

 

 

 

 

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

$

6,933

 

$

7,183

 

 

 

 

 

 

   Operating lease liability (current)

$

1,958

 

$

2,267

   Long-term operating liability

 

5,540

 

 

5,491

     Total operating lease liabilities   

$

7,498

 

$

7,758

 

 

 

 

 

 

Financing leases

 

 

 

 

 

   Property, equipment and leasehold improvements

$

9,858

 

$

9,974

   Accumulated depreciation

 

(2,086)

 

 

(2,422)

     Total property, equipment and leasehold improvements, net 

$

7,772

 

$

7,552

 

 

 

 

 

 

  Financing lease liability (current)

$

2,058

 

$

2,140

  Long-term financing liability

 

3,050

 

 

3,052

     Total financing lease liabilities

$

5,108

 

$

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 March 31, 2021 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Financing

 

 

 

Lease

 

 

Leases

 

 

 

 

 

 

 

2021 (excluding the three months ended March 31, 2021)

 

 

2,022

 

 

1,856

2022

 

 

1,782

 

 

2,112

2023

 

 

1,643

 

 

1,176

2024

 

 

1,442

 

 

366

2025

 

 

862

 

 

107

Thereafter

 

 

1,808

 

 

26

  Total lease payments

 

 

9,559

 

 

5,643

Less imputed interest

 

 

(2,061)

 

 

(535)

  Total 

 

$

7,498

 

$

5,108

 

 

 

 

 

 

 

 

v3.21.1
Long-Term Debt
3 Months Ended
Mar. 31, 2021
Long-Term Debt.  
Long-Term Debt

10. Long-Term Debt

 

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

 

 

 

 

 

 

 

 

 

 

 

 

    

Interest

    

 

March 31, 

    

December 31, 

 

 

Rate (1)

 

 

2021

 

2020

Senior Notes

 

8.625

%  

 

$

310,000

 

$

 —

ABL Revolver

 

1.356

%  

 

 

15,000

 

 

 —

First Lien Term Loan

 

5.500

%  

 

 

 —

 

 

312,500

Senior Credit Facility

 

9.500

%  

 

 

 —

 

 

30,000

Unamortized deferred financing costs

 

 

 

 

 

(7,497)

 

 

(3,804)

Unamortized discount

 

 

 

 

 

 —

 

 

(1,988)

Total long-term debt

 

 

 

 

$

317,503

 

$

336,708

Less current maturities

 

 

 

 

 

 —

 

 

(8,027)

Long-term debt, net of current maturities

 

 

 

 

$

317,503

 

$

328,681


(1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the ABL Revolver was 1.356% as of March 31, 2021.  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 (the “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

 

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 three months ended March 31, 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, 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 in the quarter ended March 31, 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 March 31, 2021.

 

During the three months ended March 31, 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. 

v3.21.1
Income Taxes
3 Months Ended
Mar. 31, 2021
Income Taxes  
Income Taxes

11. Income Taxes 

 

During the three months ended March 31, 2021, the Company recognized an income tax expense of $1,360  on a pre-tax income of $3,770, representing an effective income tax rate of 36.1%.  For the three months ended March 31, 2020, the Company recognized an income tax benefit of $465 on a pre-tax income of $1,317, representing an effective income tax rate of (35.3)%.

 

For the three months ended March 31, 2021 and 2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

2021

    

2020

 

Tax at federal statutory rate

 

21.0

%

21.0

%

State taxes, net

 

11.8

 

46.0

 

Valuation allowance

 

0.0

 

100.6

 

Permanent items

 

3.9

 

47.9

 

Tax benefit CARES Act

 

0.0

 

(250.9)

 

Other

 

(0.6)

 

0.1

 

Effective income tax rate

 

36.1

%

(35.3)

%

 

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 three months ended March 31, 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 250.9%. 

 

The Company’s income tax receivable on the condensed consolidated balance sheet as of March 31, 2021, 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. 

The Company believes that it is reasonably possible that approximately $852 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 March 31, 2021.

v3.21.1
Stockholders' Deficit
3 Months Ended
Mar. 31, 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. 

 

v3.21.1
Earnings per Share
3 Months Ended
Mar. 31, 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

 

 

March 31, 

 

    

2021

    

2020

Numerator:

 

 

 

 

 

 

Net income from continuing operations

 

 

2,410

 

 

1,782

Net loss from discontinued operations

 

 

 —

 

 

(26)

Net income

 

$

2,410

 

$

1,756

 

 

 

 

 

 

 

Denominator: 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

11,230,482

 

 

11,224,500

Dilutive shares

 

 

408,533

 

 

37,859

Diluted weighted-average common shares outstanding

 

 

11,639,015

 

 

11,262,359

 

 

 

 

 

 

 

Earnings per share from continuing operations - Basic and Diluted:

 

 

0.21

 

 

0.16

Earnings (loss) per share from discontinued operations - Basic and Diluted:

 

 

 —

 

 

(0.00)

Earnings per share - Basic and Diluted:

 

$

0.21

 

$

0.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

v3.21.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 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 March 31, 2021 or December 31, 2020.

 

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 is evaluating a state sales tax liability analysis for states in which it has economic nexus and collecting 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 March 31, 2021 and December 31, 2020 was $1,805 and $1,696, respectively, and is recorded in accrued expenses in the condensed consolidated balance sheets. The liability increased from the estimate recorded in the prior period due to ongoing activity. In addition, as the Company remits cash to the applicable state tax authorities for historical sales tax and interest, the liability balance will decrease. 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 “Selling, general, and administrative expenses.”

 

v3.21.1
Stock Based Compensation
3 Months Ended
Mar. 31, 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. The Company had reserved 1,200,000 shares of common stock for issuance under the Omnibus Plan. As of March 31, 2021, there were 185,113 shares available for grant under the Omnibus Plan. 

During the three months ended March 31, 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

Forfeited

 

 —

 

 

-

 

-

Outstanding as of March 31, 2021

 

706,372

 

$

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