| Business
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||
1. Business
CPI Card Group Inc., formerly known as CPI Holdings I, Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States and Canada. The Company also is engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards (primarily in Europe and Canada).
As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by 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.
The Company’s business consists of the following reportable segments: U.S. Debit and Credit, U.S. Prepaid Debit and U.K. Limited.
|
· |
U.S. Debit and Credit Segment. The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, Private Label Credit Cards, defined as credit cards that an individual merchant issues for exclusive use in its own stores, and that are not issued on the networks of the Payment Cards Brands, and instant issuance systems. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands, and where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. |
|
· |
U.S. Prepaid Debit Segment. The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging and card personalization and fulfillment and CPI on Demand services, where the Company is able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand, basis for its customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council. |
|
· |
U.K. Limited Segment. The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. Neither of the Company’s operations in this segment is certified by any of the Payment Card Brands or to be in compliance with the standards of the PCI Security Standards Council, but are certified to be in compliance with International Organization for Standardization (“ISO”) 27001 standards. |
The Company also has an operation in Ontario, Canada that provides EMV and Prepaid Debit Cards and card services, which is reflected in “Other”. See Note 16 “Segment Reporting”.
The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) under an asset purchase agreement for $5,000 in cash. The Nevada operation primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s Consolidated Balance Sheet as of December 31, 2015, and Statements of Operations and Comprehensive Income for the year ended December 31, 2015 has been reclassified to present the Nevada operation as a discontinued operation. See Note 3 “Discontinued Operation and Disposition”.
In August 2015, the Company completed the shut-down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on networks of the Payment Card Brands. In connection with the shut-down and closure of the Petersfield, United Kingdom operation, the Company accrued facility contract termination costs of $681 during the year ended December 31, 2015.
On August 17, 2015, the Company entered into a first lien credit agreement ("First Lien Credit Facility") with a syndicate of lenders providing for a $435,000 first lien term loan facility ("First Lien Term Loan") and a $40,000 revolving credit facility ("Revolving Credit Facility"). The Company used proceeds from the First Lien Credit Facility to pay off the outstanding balance on our previous credit facility of $158,420, and to redeem 62,140 shares of Series A Preferred Stock for an aggregate price of $276,688. See Note 8 “Long-Term Debt and Credit Facility” and Note 10 “Series A Preferred Stock”.
On October 15, 2015, the Company completed its initial public offering (“IPO”) issuing 3,000,000 shares of common stock at a price of $50.00 per share (as adjusted for the one-for-five reverse stock split of our common stock discussed in “Basis of Presentation” below). The net proceeds from the IPO, after issuance costs, were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877, (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan (as defined herein), and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan (as defined herein) of $13,268. The proceeds of the IPO were net of deferred offering expenses of $7,196 and are reflected in “Capital deficiency” in the Company’s Consolidated Balance Sheet and Consolidated Statement of Stockholders’ Deficit.
|
|||
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
On December 18, 2017, the Company filed a Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a one-for-five reverse stock split of the Company’s common stock. The reverse stock split became effective on December 20, 2017, at which time each lot of five shares of common stock issued and outstanding automatically and without any further action on the part of our stockholders, converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented throughout the accompanying consolidated financial statements and notes thereto.
Revenue Recognition
Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured.
In certain cases, at the customer’s request, the Company enters into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured.
The company includes gross shipping and handling revenue and costs in net sales and cost of sales respectively.
Multiple-Element Arrangements
The Company enters into warehouse, fulfillment and distribution service agreements where customers engage the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and packages are shipped to the Company’s warehouses or secure vaults, the product is billed and the revenue is recognized in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in the manner specified by the customer for a unit or handling fee.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value.
Trade Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2017 and 2016 is summarized as follows:
|
Balance as of December 31, 2015 |
|
$ |
212 |
|
|
Bad debt expense |
|
|
12 |
|
|
Write-off of uncollectible accounts |
|
|
(90) |
|
|
Currency translation adjustments |
|
|
(8) |
|
|
Balance as of December 31, 2016 |
|
$ |
126 |
|
|
Bad debt expense |
|
|
(51) |
|
|
Write-off of uncollectible accounts |
|
|
(26) |
|
|
Currency translation adjustments |
|
|
4 |
|
|
Balance as of December 31, 2017 |
|
$ |
53 |
|
For the year ended December 31, 2017 one customer represented 12.4% of the Company’s consolidated net sales. For the years ended December 31, 2016 and 2015, the Company did not have sales to a single customer that exceeded 10% of consolidated net sales.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory—Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows.
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred.
Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required.
Goodwill and Intangible Assets
Goodwill is not amortized, but instead 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. For impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value.
The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
The Company recorded goodwill impairment charges of $19,074 during the year ended December 31, 2017. Refer to Note 6 “Goodwill and Other Intangible Assets” for information.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 15 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.
As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) as of January 1, 2017, the Company accounts for forfeitures when they occur. The cumulative-effect adjustment to “Accumulated earnings” and “Capital deficiency” in the Company’s Consolidated Balance Sheet was immaterial. In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company elected to present excess tax benefits as an operating activity prospectively in the Consolidated Statement of Cash Flows for the year ended December 31, 2017. As required by ASU 2016-09, the Company classifies payments to tax authorities for shares withheld to satisfy employer income tax obligations in relation to the vesting of stock-based compensation awards as a financing activity in the Consolidated Statement of Cash Flows.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2017, 2016 and 2015 were $783, $801, and $764, respectively.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for inventories and deferred taxes, debt, uncertain tax positions and stock-based compensation expense. Actual results could differ from those estimates.
Foreign Currency Translation
Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for revenue, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements.
Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income. For the years ended December 31, 2017, 2016 and 2015 there were $560, $(417), and $59 of such foreign currency gains (losses), respectively.
Recently Issued Accounting Pronouncements
The FASB issued ASU 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018 using the modified retrospective transition method, with the cumulative effect of initial adoption recognized at the date of initial application.
The Company is finalizing the analysis of the effects of ASU 2014-09 on the consolidated financial statements, and subject to completion of this analysis, the Company expects to record a cumulative effective of adoption adjustment as of January 1, 2018 to increase accumulated earnings by a range of $3,000 to $4,000, reflecting the earnings the Company would have recognized under ASU 2014-09 if applied as of December 31, 2017. The Company does not expect the application of ASU 2014-09 will have a material effect on the Consolidated Statement of Operations. Under the new guidance, the Company expects to recognize certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and the Company has the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. In addition to accelerating the timing of recording revenue, the Company expects corresponding decreases in deferred revenue, work in process and finished goods inventories, and an increase to accounts receivable. The Company is in the process of implementing and refining the required changes to its business and accounting processes, and internal controls to support recognition and disclosures under the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases, 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. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.
|
|||
3. Discontinued Operation and Disposition
On January 12, 2015, the Company sold its Nevada non-secure operation under an asset purchase agreement for $5,000 in cash. The Nevada operation was primarily engaged in the design, production, data personalization, packaging and daily fulfillment of retail gift and loyalty cards for customers in the United States and was not certified by any of the Payment Card Brands. At the date of sale, the net carrying values of the assets classified as a discontinued operation included inventory and plant, equipment and leasehold improvements of $3,129 and $2,910, respectively. For the year ended December 31, 2015, the Company recognized a gain on the sale of the discontinued operation of $208, which is included in “Gain on sale of a discontinued operation”, net of an income tax benefit of $1,247, in the Company’s Consolidated Statement of Operations and Comprehensive (Loss) Income.
During the year ended December 31, 2015, the Nevada operation recognized a loss of $606 as included in “Loss from a discontinued operation, net of taxes” in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income. This amount is net of an income tax benefit of $404 for the year ended December 31, 2015. There was no financial impact related to Nevada for the years ended December 31, 2017 and 2016.
After the Nevada Sale, CPI retained no continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company made a tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations, of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the year ended December 31, 2015.
|
|||
4. Inventories
Inventories are summarized below:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Raw materials |
|
$ |
6,498 |
|
$ |
8,206 |
|
|
Work-in-process |
|
|
6,557 |
|
|
6,340 |
|
|
Finished goods |
|
|
3,182 |
|
|
4,823 |
|
|
|
|
$ |
16,237 |
|
$ |
19,369 |
|
|
|||
5. Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements consist of the following:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Buildings |
|
$ |
2,318 |
|
$ |
2,077 |
|
|
Machinery and equipment |
|
|
62,318 |
|
|
59,464 |
|
|
Furniture, fixtures and computer equipment |
|
|
7,585 |
|
|
6,634 |
|
|
Leasehold improvements |
|
|
19,754 |
|
|
18,655 |
|
|
Construction in progress |
|
|
1,980 |
|
|
1,136 |
|
|
|
|
|
93,955 |
|
|
87,966 |
|
|
Less accumulated depreciation and amortization |
|
|
(44,655) |
|
|
(34,547) |
|
|
|
|
$ |
49,300 |
|
$ |
53,419 |
|
Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $13,112, $12,295, and $11,389 for the years ended December 31, 2017, 2016 and 2015, respectively.
There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years ended December 31, 2017, 2016, and 2015.
|
|||
6. Goodwill and Other Intangible Assets
The Company’s goodwill by reportable segment at December 31, 2017 and 2016 is as follows:
|
|
|
December 31, |
||||
|
|
|
2017 |
|
2016 |
||
|
U.S. Debit and Credit |
|
$ |
47,150 |
|
$ |
64,330 |
|
U.K. Limited |
|
|
6,461 |
|
|
5,908 |
|
Other |
|
|
— |
|
|
1,758 |
|
|
|
$ |
53,611 |
|
$ |
71,996 |
Goodwill activity is summarized as follows:
|
Balance as of January 1, 2016 |
|
$ |
73,123 |
|
|
Currency translation |
|
|
(1,127) |
|
|
Balance as of December 31, 2016 |
|
$ |
71,996 |
|
|
Currency translation |
|
|
689 |
|
|
Impairments |
|
|
(19,074) |
|
|
Balance as of December 31, 2017 |
|
$ |
53,611 |
|
The Company completed its goodwill impairment testing as of October 1, 2017, and recorded impairment charges of $19,074, of which $17,181 related to U.S. Debit and Credit resulting from continued market softness in demand for EMV cards, including price erosion and loss of market share in the United States. The other impairment for $1,893 relates to Other which resulted from declines in net sales and operating losses incurred in our Canadian business. The Company determined the fair value of the reporting units primarily based on an income approach, using the present value of future discounted cash flows of the reporting unit. This approach includes significant estimates of the reporting unit’s weighted average cost of capital, financial forecasts developed by management, and long-term rate of growth and profitability. The market approach was also considered, with fair value determined by applying pricing multiplies derived from publicly-traded companies that are comparable to the reporting unit. There were no goodwill impairments recognized during the years ended December 31, 2016 and 2015.
During the year ended December 31, 2016, the Company recognized an intangible asset impairment charge of $2,700 related to a trademark acquired in the EFT Source acquisition. The impairment was a result of the Company’s plans to discontinue its use of the trademark in its sales, marketing and other business practices. Accordingly, the trademark was written down to its fair value of zero. Refer to Note 7 “Fair Value of Financial Instruments” for further definition of valuation inputs. The impaired asset is included in the U.S. Debit and Credit reportable segment. Subsequent to this impairment, the Company evaluated the future utilization of its trademarks and updated its estimate to amortize these assets over lives ranging from 7.5 to 10 years. As a result, the Company has no remaining indefinite lived intangible assets as of December 31, 2017. There was no impairment of indefinite-lived intangible assets for the year ended December 31, 2015.
CPI’s amortizable intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Total intangible assets are being amortized over a weighted-average useful life of 15.6 years. Intangible amortization expense totaled $4,902, $4,632, and $4,577, for the years ended December 31, 2017, 2016 and 2015, respectively. During the years ended December 31, 2017, 2016 and 2015, there were no material impairments of the Company’s amortizable intangible assets.
Intangible assets consist of the following:
|
|
|
|
|
December 31, 2017 |
|
December 31, 2016 |
|
||||||||||||||
|
|
|
Average |
|
|
|
Accumulated |
|
Net Book |
|
|
|
Accumulated |
|
Net Book |
|
||||||
|
|
|
Life (Years) |
|
Cost |
|
Amortization |
|
Value |
|
Cost |
|
Amortization |
|
Value |
|
||||||
|
Customer relationships |
|
12 to 20 |
|
$ |
58,895 |
|
|
(24,373) |
|
|
34,522 |
|
$ |
58,994 |
|
$ |
(20,972) |
|
$ |
38,022 |
|
|
Technology and software |
|
7 to 10 |
|
|
7,101 |
|
|
(3,095) |
|
|
4,006 |
|
|
7,101 |
|
|
(2,167) |
|
|
4,934 |
|
|
Trademarks |
|
7.5 to 10 |
|
|
3,330 |
|
|
(487) |
|
|
2,843 |
|
|
3,330 |
|
|
(98) |
|
|
3,232 |
|
|
Noncompete agreements |
|
5 to 8 |
|
|
491 |
|
|
(390) |
|
|
101 |
|
|
491 |
|
|
(331) |
|
|
160 |
|
|
Intangible assets subject to amortization |
|
|
|
$ |
69,817 |
|
$ |
(28,345) |
|
$ |
41,472 |
|
$ |
69,916 |
|
$ |
(23,568) |
|
$ |
46,348 |
|
The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of December 31, 2017 is as follows:
|
2018 |
|
$ |
4,880 |
|
2019 |
|
|
4,860 |
|
2020 |
|
|
4,820 |
|
2021 |
|
|
4,577 |
|
2022 |
|
|
4,091 |
|
Thereafter |
|
|
18,244 |
|
|
|
$ |
41,472 |
|
|||
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—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
|
· |
Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
|
· |
Level 3—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 remeasured at fair value in the Consolidated Balance Sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Carrying |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
|
Value as of |
|
Fair Value as of |
|
December 31, 2017 |
|
|||||||||
|
|
|
December 31, |
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
|
2017 |
|
2017 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
228,125 |
|
$ |
— |
|
$ |
228,125 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Carrying |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
|
Value as of |
|
Fair Value as of |
|
December 31, 2016 |
|
|||||||||
|
|
|
December 31, |
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
|
2016 |
|
2016 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
290,625 |
|
$ |
— |
|
$ |
290,625 |
|
$ |
— |
|
The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 8, “Long-Term Debt and Credit Facility,” was based on bank quotes.
The carrying amounts for cash and cash equivalents approximate fair value due to their short maturities.
Nonrecurring fair value measurements include the Company’s goodwill and intangible asset impairments recognized during the year ended December 31, 2017 and the trademark intangible asset impairment recognized during the year ended December 31, 2016 as determined based on unobservable Level 3 inputs. Refer to Note 6, “Goodwill and Other Intangible Assets.”
|
|||
8. Long-Term Debt and Credit Facility
Long-term debt consists of the following:
|
|
|
|
|
|||||||
|
|
|
Interest |
|
December 31, |
|
December 31, |
|
|||
|
|
|
Rate |
|
2017 |
|
2016 |
|
|||
|
First Lien Term Loan (a) |
|
|
5.96% |
|
$ |
312,500 |
|
$ |
312,500 |
|
|
Unamortized discount |
|
|
|
|
|
(3,122) |
|
|
(3,795) |
|
|
Unamortized deferred financing costs |
|
|
|
|
|
(5,509) |
|
|
(6,783) |
|
|
Total long-term debt |
|
|
|
|
|
303,869 |
|
|
301,922 |
|
|
Less current maturities |
|
|
|
|
|
- |
|
|
- |
|
|
Long-term debt, net of current maturities |
|
|
|
|
$ |
303,869 |
|
$ |
301,922 |
|
|
(a) |
Interest rate on December 31, 2017 |
First Lien Credit Facility
On August 17, 2015, the Company entered into the First Lien Credit Facility with a syndicate of lenders providing for the $435,000 First Lien Term Loan and the $40,000 Revolving Credit Facility. The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.
The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company's assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.
Interest rates under the First Lien 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 4.50% or a base rate plus a margin of 3.50%.
The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company's assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.0 times Adjusted EBITDA, as defined in the agreement. As of December 31, 2017, the Company was in compliance with all covenants under the First Lien Credit Facility.
The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company does not have a required excess cash flow payment related to 2017.
In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering, and an additional $10,000 during the fourth quarter of 2015. See Note 1 “Business”. The Company recognized additional interest expense of $4,687 during the year ended December 31, 2015 related to accelerated amortization of deferred financing costs and discount in connection with these repayments.
As of December 31, 2017, the Company did not have any outstanding amounts under the Revolving Credit Facility, and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.5% as of December 31, 2017 and December 31, 2016, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines. The Company has accrued interest of $4,296 and $3,858, recorded within “Accrued expenses” on the Consolidated Balance Sheets as of December 31, 2017, and 2016, respectively.
Sellers Note
The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition, which was fully repaid on September 2, 2016. Interest on the Sellers Note accrued at 5.0% per annum and was paid quarterly.
Deferred Financing Costs
Certain costs 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.
|
|||
9. Income Taxes
Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(7,376) |
|
$ |
4,944 |
|
$ |
16,036 |
|
|
Foreign |
|
|
99 |
|
|
27 |
|
|
254 |
|
|
|
|
|
(7,277) |
|
|
4,971 |
|
|
16,290 |
|
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(9,161) |
|
|
(1,830) |
|
|
1,656 |
|
|
Foreign |
|
|
66 |
|
|
1 |
|
|
(100) |
|
|
|
|
|
(9,095) |
|
|
(1,829) |
|
|
1,556 |
|
|
Income tax (benefit) expense |
|
$ |
(16,372) |
|
$ |
3,142 |
|
$ |
17,846 |
|
|
(Loss) income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(36,646) |
|
$ |
7,437 |
|
$ |
50,692 |
|
|
Foreign |
|
|
(1,736) |
|
|
1,104 |
|
|
(1,585) |
|
|
Total |
|
$ |
(38,382) |
|
$ |
8,541 |
|
$ |
49,107 |
|
|
Effective income tax rate |
|
|
42.7 |
% |
|
36.8 |
% |
|
36.3 |
% |
The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|
Tax at federal statutory rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
|
State income taxes |
|
0.5 |
|
6.3 |
|
2.0 |
|
|
Foreign taxes |
|
0.3 |
|
(1.9) |
|
0.3 |
|
|
Deferred tax impact of enacted tax rate and law changes |
|
18.4 |
|
— |
|
— |
|
|
Goodwill impairments |
|
(17.4) |
|
— |
|
— |
|
|
Tax credits |
|
10.8 |
|
— |
|
— |
|
|
Unrecognized tax benefits |
|
(3.2) |
|
— |
|
— |
|
|
Other |
|
(1.7) |
|
(2.6) |
|
(1.0) |
|
|
Effective income tax rate |
|
42.7 |
% |
36.8 |
% |
36.3 |
% |
The components of the deferred tax assets and liabilities are as follows:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expense |
|
$ |
744 |
|
$ |
1,089 |
|
|
Unrealized foreign exchange loss |
|
|
647 |
|
|
1,426 |
|
|
Net operating loss carryforward |
|
|
2,227 |
|
|
3,066 |
|
|
Deferred financing costs |
|
|
707 |
|
|
1,355 |
|
|
Stock compensation |
|
|
679 |
|
|
1,166 |
|
|
Tax credit carryforward |
|
|
420 |
|
|
— |
|
|
Other |
|
|
868 |
|
|
555 |
|
|
Total gross deferred tax assets |
|
|
6,292 |
|
|
8,657 |
|
|
Valuation allowance |
|
|
(4,688) |
|
|
(4,930) |
|
|
Net deferred tax assets |
|
|
1,604 |
|
|
3,727 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Plant, equipment and leasehold improvements |
|
|
(2,819) |
|
|
(6,393) |
|
|
Intangible assets |
|
|
(10,144) |
|
|
(17,159) |
|
|
Prepaid expenses |
|
|
(927) |
|
|
(1,436) |
|
|
Total gross deferred tax liabilities |
|
|
(13,890) |
|
|
(24,988) |
|
|
Net deferred tax liabilities |
|
$ |
(12,286) |
|
$ |
(21,261) |
|
The net deferred tax liabilities are reflected in the consolidated balance sheets as follows:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Long-term deferred tax liabilities |
|
$ |
(12,286) |
|
$ |
(21,261) |
|
The net change in the valuation allowance during the year ended December 31, 2017 was a decrease of $242 and related to foreign currency exchange rate fluctuations, changes in net operating losses of foreign locations and state research and development credits carried forward.
The Company has potential tax benefits associated with $8,089 of gross foreign operating loss carryforwards, which expire at various dates from 2024 through 2032. Due to the uncertainty of being able to recognize these loss carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit.
The Company has potential tax benefits associated with state research and development tax credit carryforwards as of December 31, 2017 of $584, which will expire at various dates between 2029 and 2032. Due to the uncertainty of being able to recognize these credit carryforwards, the Company has provided a valuation allowance of 100% of the tax benefit.
At December 31, 2017, no provision has been made for U.S. federal and state taxes on cumulative foreign earnings from CPI Card Group-Europe Limited operations of approximately $4,800, which are expected to be indefinitely reinvested outside of the U.S. The U.S. deferred tax liability associated with indefinitely reinvested earnings and profits is not material.
2017 Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation that includes significant changes to taxation of business entities. These changes include, among others, (i) a permanent reduction to the corporate income tax rate, (ii) a partial limitation on the deductibility of business interest expense, (iii) elimination of deduction for income attributable to domestic production activities and (iv) a partial shift of the U.S. taxation of multinational corporations from a tax on worldwide income to a territorial system (along with a transitional rule that taxes certain historic foreign accumulated earnings and certain rules that aim to prevent erosion of U.S. income tax base). In conjunction with the Tax Act’s reduction of the U.S. federal tax rate from 35.0% to 21.0%, the Company accrued a $7,057 tax benefit during the year ended December 31, 2017 related to the net change in deferred tax liabilities.
Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118, requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Accordingly, the Company is currently estimating a zero tax liability on foreign unremitted earnings due to a net earnings and profits (“E&P”) deficit on accumulated post-1986 deferred foreign income. Therefore, the Company has not accrued any amount of tax expense for the Tax Act’s one-time transition tax on the foreign subsidiaries’ accumulated, unremitted earnings going back to 1986 for the year ended December 31, 2017. The Company will continue to analyze historical E&P on accumulated post-1986 deferred foreign income and will record any resulting tax adjustment during 2018. All other accounting as required by the Tax Act as of December 31, 2017 is complete.
Unrecognized Tax Benefits
Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Income taxes receivable” and “Deferred income taxes” in the Company’s consolidated balance sheets. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon examination.
|
|
|
|
|
|
Balance as of December 31, 2016 |
|
$ |
— |
|
Increase related to current year tax position |
|
|
154 |
|
Increase related to prior year tax position |
|
|
1,058 |
|
Decrease related to settlements with tax authorities |
|
|
— |
|
Lapse of statute of limitations |
|
|
— |
|
Balance as of December 31, 2017 |
|
$ |
1,212 |
As of December 31, 2017, the total amount of tax contingency reserves was $1,212, that if recognized, would impact the Company’s effective tax rate, prior to the impact of any related valuation allowance. The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits as of and for the year ended December 31, 2017 was not material. The Company had no uncertain tax positions as of December 31, 2016 and 2015. Amounts recorded for unrecognized tax benefits represent management estimates, and actual results could differ which would impact the Company’s effective tax rate.
It is reasonably possible that $723 of the Company’s unrecognized tax benefits and associated interest and penalties, related to state income tax matters, will be paid or favorably settled in the next twelve months.
The Company is generally subject to potential federal and state examinations for the tax years after December 31, 2013 for federal purposes and December 31, 2012 for state purposes. The Company’s locations in the United Kingdom and Canada are subject to examinations for tax years after December 31, 2014 and December 31, 2012, respectively.
|
|||
10. Series A Preferred Stock
There were no outstanding shares of Series A Preferred Stock as of December 31, 2017 and 2016.
During the year ended December 31, 2015, the Company redeemed a total of 64,809 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,610.68 per share, including the redemption of 62,140 shares of the Series A Preferred Stock for $276,688, or $4,446.70 per share, on August 17, 2015 with proceeds from the Company’s First Lien Credit Facility (see Note 8 “Long-Term Debt and Credit Facility”), and the redemption of 2,576 shares of the Series A Preferred Stock for $11,877, or $4,610.68 per share, using proceeds from the Company’s IPO (see Note 1 “Business”). Of the $288,565 redemption amount during the year ended December 31, 2015, $58,250 was treated as a return of capital and $230,315 was treated as a dividend.
|
|||
11. Stockholders’ Equity
Common Stock
Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share.
On December 20, 2017, the Company effected a one-for-five reverse stock split of its common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented in this Annual Report on Form 10-K, including the accompanying Consolidated Financial Statements and these notes.
On September 3, 2015, the Company approved a 22-for-1 stock split of its common stock and increased the number of authorized shares of common stock to 100,000,000. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the Option Plan (as hereinafter defined) were increased accordingly.
During the year ended December 31, 2017, the Company paid dividends of $7,540, representing $0.675 per share. During August 2017, the Company discontinued its quarterly dividend of $0.225 per share. During the year ended December 31, 2016, the Company paid dividends of $7,519, representing $0.675 per share. Additionally, on November 9, 2016, the Board of Directors approved a dividend of $0.225 per share, payable on January 12, 2017 to stockholders of record as of the close of business on December 16, 2016. The accrued dividend of $2,491 is reflected in “Accrued expenses” in the Consolidated Balance Sheet as of December 31, 2016. For the year ended December 31, 2016, the Company declared aggregate dividends of $0.90 per share.
On May 11, 2016, the Board of Directors approved a stock repurchase program that authorized repurchases of the Company’s common stock up to $20,000. The stock repurchase program expired by its terms during May 2017. During the year ended December 31, 2017, there were no common shares repurchased. During the year ended December 31, 2016, there were 287,883 common shares repurchased for $6,008, at an average cost of $20.85 per share. The repurchases have been accounted for as a share retirement.
|
|||
13. Commitments and Contingencies
Commitments
The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2018 and 2024 and contain various provisions for rental adjustments and renewals. All of these leases require the Company to pay property taxes, insurance and normal maintenance costs.
During the normal course of business, the Company also enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The 2019 purchase obligation in the table below relates to a single contract for the purchase of materials.
Future cash payments with respect to operating leases and purchase obligations as of December 31, 2017 are as follows:
|
|
|
Operating |
|
Purchase |
|
||
|
|
|
Leases |
|
Obligations |
|
||
|
2018 |
|
$ |
3,613 |
|
|
4,793 |
|
|
2019 |
|
|
2,823 |
|
|
9,720 |
|
|
2020 |
|
|
2,568 |
|
|
|
|
|
2021 |
|
|
2,291 |
|
|
|
|
|
2022 |
|
|
1,008 |
|
|
|
|
|
Thereafter |
|
|
1,059 |
|
|
|
|
|
Total |
|
$ |
13,362 |
|
$ |
14,513 |
|
The Company incurred rent expense under non-cancellable operating leases during the years ended December 31, 2017, 2016 and 2015, totaling $3,803, 3,467, and $3,518, respectively.
Asset retirement obligations relate to legal obligations associated with the removal of all leasehold improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate to “make-good” clauses in operating leases, for its leased property containing leasehold improvements. The liability is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. The Company’s accretion expense incurred during the years ended December 31, 2017, 2016 and 2015 was immaterial. As of December 31, 2017 and 2016, the Company’s asset retirement obligations included in “Other long-term liabilities” in the Consolidated Balance Sheets were $620 and $602, respectively.
Contingencies
In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.)
On June 15, 2016, two purported CPI stockholders filed putative class action lawsuits captioned Vance, et al. v. CPI Card Group Inc., et al. and Chipman, et al. v. CPI Card Group Inc.,in the United States District Court for the Southern District of New York against CPI, certain of its former officers and current and former directors, along with the sponsors of and the financial institutions who served as underwriters for CPI’s October 2015 initial public offering (“IPO”). The complaints, purportedly brought on behalf of all purchasers of CPI common stock pursuant to the October 8, 2015 Registration Statement filed in connection with the IPO, assert claims under §§11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and seek, among other things, damages and costs. In particular, the complaints allege that the Registration Statement contained false or misleading statements or omissions regarding CPI’s customers’ (i) purchases of Europay, MasterCard, and VISA chip cards (collectively, “EMV cards”) during the first half of fiscal year 2015 and resulting EMV card inventory levels, and (ii) capacity to purchase additional EMV cards in the fourth quarter of fiscal year 2015, and the remainder of the fiscal year ended December 31, 2015. The complaints allege that these actions artificially inflated the price of CPI common stock issued pursuant to the IPO.
On August 30, 2016, the Court consolidated the Vance and Chipman actions and appointed lead plaintiff and lead counsel pursuant to the Private Securities Litigation Reform Act (the “PSLRA”). On October 17, 2016, lead plaintiff filed a consolidated amended complaint, asserting the same claims for violations of §§11 and 15 of the Securities Act. The amended complaint is based principally on the same theories as the original complaints, but adds allegations that the Registration Statement contained inadequate risk disclosures and failed to disclose (i) small and mid-size issuers’ slower-than-anticipated conversion to EMV technology and (ii) increased pricing pressure and competition CPI faced in the EMV market.
On November 16, 2016, the Company filed a motion to dismiss the amended complaint, which was denied by the court on October 30, 2017.
The Company believes these claims are without merit and intends to defend the actions vigorously. Given the current stage of these matters, the range of any potential loss is not probable or estimable and no accrual has been recognized as of December 31, 2017.
Heckermann v. Montross, et al., Case No. 1:17-CV-01673 (D. Del.)
On November 20, 2017, a purported CPI stockholder filed a shareholder derivative complaint in the United States District Court for the District of Delaware against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 IPO (with CPI named as the nominal defendant). The derivative complaint is based principally on the same set of factual allegations underlying In Re CPI Card Group Inc. Securities Litigation, and asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder, and for, inter alia, purported breaches of fiduciary duties, unjust enrichment and waste of corporate assets. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements and seeks, among other things, injunctive relief, damages and costs.
The Company believes these claims are without merit and intends to defend the action vigorously. Given the current stage of this matter, the range of any potential loss is not probable or estimable and no accrual has been recognized as of December 31, 2017.
Gemalto S.A. v. CPI Card Group Inc. (2 cases)
First case. This suit was initially filed by Gemalto S.A. (“Gemalto”) against the Company in the United States District Court for the Western District of Texas in October 2015. The complaint alleged that the Company infringed a now-expired Gemalto patent by incorporating into the Company’s products microchips that allegedly practice the EMV standard. The Company successfully moved to transfer the lawsuit to the District of Colorado, answered the complaint, and filed counterclaims that the asserted patent was invalid and unenforceable, and that Gemalto’s lawsuit was a “sham” intended to interfere with the Company’s IPO and business relationships. Gemalto answered the Company’s counterclaims in February 2016. In March 2016, Gemalto provided specific infringement contentions, which named CPI products that incorporate microchips supplied by two specific vendors.
On May 31, 2016, the Company filed an Inter Partes Review ("IPR") petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”), seeking re-examination of Gemalto’s asserted patent. On July 11, 2016, the United States District Court for the District of Colorado granted the Company’s motion to stay the litigation pending the PTAB’s consideration of the Company’s challenge to the patentability of asserted claims. The petition was granted as to all of the independent claims of Gemalto’s patent on November 9, 2016. The PTAB also granted the Company’s petition as to certain dependent claims, which are claims that rely upon and incorporate an independent claim. The PTAB heard oral argument on the IPR on August 4, 2017.
Second case. On May 3, 2016, Gemalto filed a second patent infringement action against CPI in the United States District Court for the District of Colorado. The complaint alleged that the Company infringed a Gemalto patent on networked smartcard printing by way of the Company’s Card@Once offering. Gemalto provided initial infringement contentions to the Company in July 2016, and amended its contentions in October 2016. During May 2017, the Company filed an IPR petition with the PTAB, seeking re-examination of Gemalto’s asserted patent.
On September 28, 2017, the Company reached a settlement with Gemalto to resolve both lawsuits. Under the terms of the settlement, the Company made a one-time payment of $750 in the fourth quarter of 2017, which is recorded in “Selling, General and Administrative” expenses in the Consolidated Statement of Operations during the during year ended December 31, 2017. The settlement resulted in the dismissal of both lawsuits with prejudice, and also includes a mutual covenant not to sue for a period of 18 months.
In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of such matters will not have a material adverse effect on our business, financial condition or results of operations.
|
|||
14. Employee Benefit Plan
The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the contributions among various investment accounts. The Company matches 100% of the participant’s first 3% of deferrals and 50% matching on each of the 4th and 5th percent contributed by the participant. The Company’s portion is 100% vested at the time of the match.
The aggregate amounts charged to expense in connection with the plan were $1,236, $1,382, and $1,049, for the years ended December 31, 2017, 2016 and 2015, respectively.
|
|||
15. Stock Based Compensation
CPI Card Group Inc. Omnibus Incentive Plan
On December 20, 2017, the Company effected a one-for-five reverse stock split of its common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was converted into and became one share of common stock. Share and per share amounts below reflect the one-for-five reverse stock split for all periods presented.
During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company had reserved 800,000 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of December 31, 2017, there were 175,134 shares available for grant under the Omnibus Plan.
During the year ended December 31, 2017, the Company granted awards of non-qualified stock options for 713,075 shares of common stock. During the third quarter of 2017, the Company granted stock option awards in lieu of the regular cycle of Omnibus Plan awards that the Company would have otherwise made in the first quarter of 2018, and also in conjunction with the appointment of the Company’s President and Chief Executive Officer. All stock option grants have a 10-year term, and will generally vest ratably over a three-year period beginning on the first anniversary of the grant date.
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, 2016 |
|
287,500 |
|
$ |
42.86 |
|
|
|
|
|
Granted |
|
713,075 |
|
|
8.85 |
|
|
|
|
|
Forfeited |
|
(63,265) |
|
|
40.96 |
|
|
|
|
|
Outstanding as of December 31, 2017 |
|
937,310 |
|
$ |
17.11 |
|
|
9.20 |
|
|
Options vested and exercisable as of December 31, 2017 |
|
60,407 |
|
|
47.91 |
|
|
7.89 |
|
|
Options vested and expected to vest as of December 31, 2017 |
|
937,310 |
|
|
17.11 |
|
|
9.20 |
|
The following is a summary of the activity in non-vested stock options under the Omnibus Plan:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Number |
|
Fair Value |
|
|
Non-vested as of December 31, 2016 |
|
287,500 |
|
$ |
11.77 |
|
Granted |
|
713,075 |
|
|
2.43 |
|
Forfeited |
|
(63,265) |
|
|
11.55 |
|
Vested |
|
(60,407) |
|
|
13.35 |
|
Non-vested as of December 31, 2017 |
|
876,903 |
|
$ |
4.08 |
|
|
|
|
|
|
|
Unvested options as of December 31, 2017 vest as follows:
|
2018 |
|
313,818 |
|
2019 |
|
307,637 |
|
2020 |
|
253,022 |
|
2021 |
|
2,426 |
|
Total unvested options as of December 31, 2017 |
|
876,903 |
Stock options were granted under the Omnibus Plan at various times during the years ended December 31, 2017, 2016, and 2015. The fair value of stock option awards was determined at the date of grant using either a Black-Scholes option-pricing model, or a Monte Carlo simulation, with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|||
|
Expected term in years |
|
6.0 |
|
|
6.3 |
|
|
6.5 |
|
|
Volatility |
|
31.9 |
% |
|
35.4 |
% |
|
36.7 |
% |
|
Risk-free interest rate |
|
2.0 |
% |
|
1.5 |
% |
|
1.8 |
% |
|
Dividend yield(1) |
|
0.9 |
% |
|
3.3 |
% |
|
1.3 |
% |
|
(1) |
Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The Company discontinued its quarterly dividend program during August 2017. |
Expected term –For option grants valued using a Black-Scholes option-pricing model, the Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. Certain stock option awards granted in 2016 with an exercise price of $50 per share were valued using a Monte Carlo simulation. The Monte Carlo model simulates many future stock price paths, and assumes the exercise of vested options will occur uniformly once the options are projected to be in-the money.
Volatility – The expected volatility percentage was based on a peer group average historical volatility over the expected option term. The peer group was based on financial technology companies that completed an initial public offering of common stock within the last 10 years.
Risk-free interest rate – The risk-free interest rate was determined by using the United States Treasury rate for the period that coincided with the expected option term.
Dividend yield – The estimated dividend yield is based on the Company’s recent historical dividend practice and the market value of its common stock.
The weighted average grant date fair value of options granted is as follows:
|
|
|
Year Ended December 31, |
|||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
Weighted Average Grant Date Fair Value of Options Granted |
$ |
2.43 |
|
$ |
7.12 |
|
$ |
17.03 |
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in the number of outstanding restricted stock units for the year ended December 31, 2017 under the Omnibus Plan:
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding as of December 31, 2016 |
|
54,075 |
|
$ |
35.67 |
|
Granted |
|
47,870 |
|
|
15.55 |
|
Vested |
|
(50,604) |
|
|
36.21 |
|
Forfeited |
|
(1,664) |
|
|
21.75 |
|
Outstanding as of December 31, 2017 |
|
49,677 |
|
$ |
16.20 |
During the year ended December 31, 2017, the Company granted awards of restricted stock units for 47,870 shares of common stock. During the year ended December 31, 2016, the Company granted awards of restricted stock units for 61,046 shares of common stock at a weighted-average grant-date fair value of $36.10. There were no awards of restricted stock units granted in 2015. The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest one year from the date of grant. On the vesting dates, shares of common stock will be issued to the award recipients.
The following table summarizes the changes in the number of outstanding cash performance units for the year ended December 31, 2017:
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding as of December 31, 2016 |
|
— |
|
$ |
— |
|
Granted |
|
932,837 |
|
|
0.71 |
|
Vested |
|
— |
|
|
|
|
Forfeited |
|
(109,922) |
|
|
0.71 |
|
Outstanding as of December 31, 2017 |
|
822,915 |
|
$ |
0.71 |
|
|
|
|
|
|
|
During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant date fair value of $663. These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The cash performance units were valued using a Monte Carlo simulation. The Monte Carlo model used the following valuation assumptions based on the 3-year term of the awards: leverage adjusted peer volatility of 48%, risk free rate of 1.5%, and a dividend yield of 4.0%, which was based on the Company’s dividend practice in March 2017 when the awards were granted. The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and remeasured to fair value at the end of each reporting period. As of December 31, 2017, the Company recognized a liability of $106 in “Accrued expenses” and $89 in “Other long-term liabilities” in the Consolidated Balance Sheet for unsettled cash performance units.
Compensation expense for the Omnibus Plan for the years ended December 31, 2017, 2016, and 2015 was $2,360, $2,770, and $239, respectively. As of December 31, 2017, the total unrecognized compensation expense related to unvested options, restricted stock units, and cash performance unit awards under the Omnibus Plan was $2,211, which the Company expects to recognize over an estimated weighted average period of 1.7 years.
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan
In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted.
As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of December 31, 2017.
The following table summarizes the changes in the number of outstanding stock options under the Option Plan for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Weighted- Average |
|
Contractual Term |
|
|
|
|
|
Options |
|
Exercise Price |
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable as of December 31, 2016 |
|
43,266 |
|
$ |
0.002 |
|
|
|
|
Granted |
|
— |
|
|
— |
|
|
|
|
Exercised |
(36,666) |
0.002 |
||||||
|
Forfeited |
|
— |
|
|
— |
|
|
|
|
Outstanding and Exercisable as of December 31, 2017 |
|
6,600 |
|
$ |
0.002 |
|
5.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the years ended December 31, 2017, 2016 and 2015, were de minimis.
Other Stock-Based Compensation Awards
During June 2015, the Company issued 38,332 restricted shares of common stock to certain executives of the Company at a weighted-average grant-date fair value of $47.40. There are no outstanding unvested restricted shares of common stock as of December 31, 2017. The terms of the unvested restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of common stock, and accordingly are included in weighted-average shares outstanding in the Company’s basic earnings per share calculation. See Note 12 “Earnings per Share”.
During the year ended December 31, 2017, of the remaining 18,972 of unvested restricted stock awards that were outstanding, 9,486 shares vested, and the remaining 9,486 shares were forfeited. The executive who held the remaining 18,972 unvested restricted shares changed employment status to a consultant during the first quarter of 2017, and accordingly, the Company remeasured the awards on the date of the change in employment status and reduced stock-based compensation expense by $143. Compensation expense related to these awards for the years ended December 31, 2017, 2016, and 2015, was $(371), $809, and $646, respectively.
|
|||
16. Segment Reporting
The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets or subsidiaries which the Company believes information about the segment would be useful to the readers of the financial statements from a qualitative perspective. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA.
EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.
As of December 31, 2017, the Company’s reportable segments are as follows:
|
· |
U.S. Debit and Credit |
|
· |
U.S. Prepaid Debit |
|
· |
U.K. Limited |
The U.S. Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks in the United States. Products manufactured by this segment primarily include EMV and non-EMV credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands, instant issuance systems, and private label credit cards that are not issued on the networks of the Payment Cards Brands (including general purpose reloadable, gift, payroll and employee benefit, government disbursement, incentive, and transit cards). This segment also provides a variety of integrated card services, including card personalization and fulfillment and instant issuance. The U.S. Debit and Credit segment operations are each certified by multiple global Payment Card Brands and, where required by the Company’s customers, certified to be in compliance with the standards of the PCI Security Standards Council. These operating segments have been aggregated into a single reportable segment due to similarities in the nature of the products and services sold by these subsidiaries, a common customer base, the substantial degree of integration and redundancy across the segments, and utilization of centrally shared sales, marketing, quality and planning departments. Separate information about these segments would not be useful to the readers of the financial statements.
The U.S. Prepaid Debit segment primarily provides integrated card services to prepaid debit card issuers in the United States. Services provided include tamper-evident security packaging, card personalization and fulfillment and CPI on Demand services, where the Company is able to produce all images, personalized payment cards and related collateral on a one-by-one, on demand, basis for its customers, enabling individualized offerings and reducing waste. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages mentioned above. The U.S. Prepaid Debit segment operation is certified by multiple global Payment Card Brands, and is certified to be in compliance with the standards of the PCI Security Standards Council.
The U.K. Limited segment primarily produces retail cards, such as gift and loyalty cards for customers in the United Kingdom and continental Europe. This segment also provides card personalization, packaging and fulfillment services. The U.K. Limited segment operations are not certified by the Payment Card Brands, nor are they PCI certified, but are certified to be in compliance with ISO 27001 standards.
The “Other” category includes the Company’s corporate activities and less significant operating segments that derive their revenue from the production of Financial Payment Cards and retail gift cards in Canada (CPI—Canada) and, through 2015, the U.K. (CPI—Petersfield). For additional information regarding the Company’s decision to shut-down the CPI—Petersfield facility during the third quarter of 2015, see Note 1 “Business.”
Performance Measures of Reportable Segments
Revenue and EBITDA from continuing operations of the Company’s reportable segments for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
|
|
Revenue |
|
EBITDA |
|
||||||||||||||
|
|
|
December 31, |
|
December 31, |
|
||||||||||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
2017 |
|
2016 |
|
2015 |
|
||||||
|
U.S. Debit and Credit |
|
$ |
158,899 |
|
$ |
208,795 |
|
$ |
263,668 |
|
$ |
11,469 |
|
$ |
52,090 |
|
$ |
78,981 |
|
|
U.S. Prepaid Debit |
|
|
61,132 |
|
|
60,065 |
|
|
65,878 |
|
|
19,244 |
|
|
18,646 |
|
|
22,993 |
|
|
U.K Limited |
|
|
31,119 |
|
|
29,689 |
|
|
34,361 |
|
|
2,305 |
|
|
2,839 |
|
|
3,572 |
|
|
Other |
|
|
11,049 |
|
|
13,110 |
|
|
17,420 |
|
|
(32,538) |
|
|
(28,063) |
|
|
(22,145) |
|
|
Intersegment eliminations(a) |
|
|
(7,337) |
|
|
(2,959) |
|
|
(7,217) |
|
|
— |
|
|
— |
|
|
— |
|
|
Total: |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
$ |
480 |
|
$ |
45,512 |
|
$ |
83,401 |
|
|
(a) |
Amounts include the revenue from sales between segments and are eliminated upon consolidation. |
The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net (loss) income from continuing operations” for the years ended December 31, 2017, 2016 and 2015:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Total segment EBITDA from continuing operations |
|
$ |
480 |
|
$ |
45,512 |
|
$ |
83,401 |
|
|
Interest, net |
|
|
(20,848) |
|
|
(20,044) |
|
|
(18,328) |
|
|
Income tax benefit (expense) |
|
|
16,372 |
|
|
(3,142) |
|
|
(17,846) |
|
|
Depreciation and amortization |
|
|
(18,014) |
|
|
(16,927) |
|
|
(15,966) |
|
|
Net (loss) income from continuing operations |
|
$ |
(22,010) |
|
$ |
5,399 |
|
$ |
31,261 |
|
Balance Sheet Data of Reportable Segments
Total assets of the Company’s reportable segments as of December 31, 2017 and 2016 were as follows:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
U.S. Debit and Credit |
|
$ |
164,397 |
|
$ |
205,417 |
|
|
U.S. Prepaid Debit |
|
|
33,130 |
|
|
23,509 |
|
|
U.K. Limited |
|
|
22,640 |
|
|
26,060 |
|
|
Other |
|
|
13,838 |
|
|
9,434 |
|
|
Total assets: |
|
$ |
234,005 |
|
$ |
264,420 |
|
Plant, Equipment and Leasehold Improvement Additions of Geographic Locations
Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
U.S. |
|
$ |
7,164 |
|
$ |
13,169 |
|
$ |
19,129 |
|
|
Canada |
|
|
172 |
|
|
263 |
|
|
275 |
|
|
Total North America |
|
|
7,336 |
|
|
13,432 |
|
|
19,404 |
|
|
U.K. |
|
|
1,540 |
|
|
1,447 |
|
|
659 |
|
|
Total plant, equipment and leasehold improvement additions |
|
$ |
8,876 |
|
$ |
14,879 |
|
$ |
15,568 |
|
Net Sales of Geographic Locations
Net sales of the Company’s geographic locations for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
U.S. |
|
$ |
214,136 |
|
$ |
262,544 |
|
$ |
316,111 |
|
|
Canada |
|
|
9,535 |
|
|
11,998 |
|
|
12,541 |
|
|
Total North America |
|
|
223,671 |
|
|
274,542 |
|
|
328,652 |
|
|
U.K. |
|
|
25,638 |
|
|
25,705 |
|
|
36,954 |
|
|
Other(a) |
|
|
5,553 |
|
|
8,453 |
|
|
8,504 |
|
|
Total net sales |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
|
(a) |
Amounts in other include sales to various countries that individually are not material. |
Long-Lived Assets of Geographic Segments
Long-lived assets of the Company’s geographic segments as of December 31, 2017 and 2016 were as follows:
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
U.S. |
|
$ |
130,767 |
|
$ |
157,773 |
|
|
Canada |
|
|
911 |
|
|
2,899 |
|
|
Total North America: |
|
|
131,678 |
|
|
160,672 |
|
|
U.K. |
|
|
12,705 |
|
|
11,091 |
|
|
Total long-lived assets |
|
$ |
144,383 |
|
$ |
171,763 |
|
Net Sales by Product and Services
Net sales from products and services sold by the Company for the years ended December 31, 2017, 2016 and 2015 were as follows:
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Product net sales(a) |
|
$ |
125,306 |
|
$ |
168,510 |
|
$ |
241,609 |
|
|
Services net sales(b) |
|
|
129,556 |
|
|
140,190 |
|
|
132,501 |
|
|
Total net sales: |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
|
(a) |
Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split the products described into dollar amounts in the table above. |
|
(b) |
Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers, CPI on Demand and software as a service personalization of instant issuance debit cards. The Company also generates services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom). It is impracticable to split the services described into dollar amounts in the table above. |
|
|||
17. Quarterly Financial Information (Unaudited)
Summarized quarterly results for the years ended December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|||||
|
2017 by Quarter: |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
2017 |
|
|||||
|
Net sales |
|
$ |
56,008 |
|
|
65,846 |
|
|
68,044 |
|
$ |
64,964 |
|
$ |
254,862 |
|
|
Gross profit |
|
|
16,095 |
|
|
19,286 |
|
|
20,976 |
|
|
18,634 |
|
|
74,991 |
|
|
Net loss |
|
|
(4,506) |
|
|
(2,161) |
|
|
(735) |
|
|
(14,608) |
|
|
(22,010) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.40) |
|
$ |
(0.20) |
|
$ |
(0.05) |
|
$ |
(1.31) |
|
$ |
(1.98) |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|||||
|
2016 by Quarter: |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
2016 |
|
|||||
|
Net sales |
|
$ |
86,393 |
|
$ |
73,725 |
|
$ |
81,202 |
|
$ |
67,380 |
|
$ |
308,700 |
|
|
Gross profit |
|
|
29,692 |
|
|
22,707 |
|
|
29,063 |
|
|
20,436 |
|
|
101,898 |
|
|
Net income (loss) |
|
|
5,714 |
|
|
(328) |
|
|
4,026 |
|
|
(4,014) |
|
|
5,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
0.50 |
|
$ |
(0.05) |
|
$ |
0.35 |
|
$ |
(0.36) |
|
$ |
0.48 |
|
|
|||
18. Subsequent Events
During February 2018 the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. The Company plans to be substantially complete with the transition in the third quarter of 2018.
|
|||
Basis of Presentation
The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
On December 18, 2017, the Company filed a Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a one-for-five reverse stock split of the Company’s common stock. The reverse stock split became effective on December 20, 2017, at which time each lot of five shares of common stock issued and outstanding automatically and without any further action on the part of our stockholders, converted into and became one share of common stock. In lieu of issuing any fractional shares, any stockholder entitled to receive less than one share of common stock received cash for such stockholder’s fractional share. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented throughout the accompanying consolidated financial statements and notes thereto.
Revenue Recognition
Generally, the Company recognizes revenue related to sales of its products upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured.
In certain cases, at the customer’s request, the Company enters into bill-and-hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. The Company recognizes revenue associated with bill-and-hold arrangements when the product is complete and ready to ship, hold criteria have been met, the amount due from the customer is fixed and collectability of the related receivable is reasonably assured.
The company includes gross shipping and handling revenue and costs in net sales and cost of sales respectively.
Multiple-Element Arrangements
The Company enters into warehouse, fulfillment and distribution service agreements where customers engage the Company to store and handle completed cards and packages on their behalf. For the sales arrangements that contain multiple deliverables, the arrangement is split into separate units of accounting, and individually delivered elements have value to the customer on a standalone basis. When separate units of accounting exist, revenue is allocated to each element based on the Company’s best estimate of competitive market prices. At the point in which completed cards and packages are shipped to the Company’s warehouses or secure vaults, the product is billed and the revenue is recognized in accordance with the Company’s revenue recognition policy. Warehousing services revenue is recognized monthly based on volume and handling requirements; fulfillment services revenue is recognized when the product is handled in the manner specified by the customer for a unit or handling fee.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents and they are stated at cost, which approximates fair value.
Trade Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potentially uncollectible accounts receivable based upon its assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it becomes probable collection will not occur. The allowance for bad debt and credit activity for the years ended December 31, 2017 and 2016 is summarized as follows:
|
Balance as of December 31, 2015 |
|
$ |
212 |
|
|
Bad debt expense |
|
|
12 |
|
|
Write-off of uncollectible accounts |
|
|
(90) |
|
|
Currency translation adjustments |
|
|
(8) |
|
|
Balance as of December 31, 2016 |
|
$ |
126 |
|
|
Bad debt expense |
|
|
(51) |
|
|
Write-off of uncollectible accounts |
|
|
(26) |
|
|
Currency translation adjustments |
|
|
4 |
|
|
Balance as of December 31, 2017 |
|
$ |
53 |
|
For the year ended December 31, 2017 one customer represented 12.4% of the Company’s consolidated net sales. For the years ended December 31, 2016 and 2015, the Company did not have sales to a single customer that exceeded 10% of consolidated net sales.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and are measured at the lower of cost or net realizable value (determined on the first-in, first-out, specific identification or weighted-average method basis) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2015-11, Inventory—Simplifying the Measurement of Inventory, which the Company adopted on January 1, 2017. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The adoption of this standard did not impact the Company’s financial position, results of operations or cash flows.
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as incurred.
Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their carrying value to determine if a write-down to fair value is required.
Goodwill and Intangible Assets
Goodwill is not amortized, but instead 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. For impairment evaluations, the Company first makes a qualitative assessment with respect to both goodwill and other indefinite-lived intangibles. During 2017, the Company early adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value.
The Company generally bases its measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital; discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
The Company recorded goodwill impairment charges of $19,074 during the year ended December 31, 2017. Refer to Note 6 “Goodwill and Other Intangible Assets” for information.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with their carrying value to determine if a write-down to fair value is required.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the Company’s income tax expense in the period in which this determination is made.
The Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any related appeals or litigation. The tax benefits recognized in the consolidated financial statements from such a position are measured as the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation to employees is required to be measured at fair value and expensed, net of forfeitures, over the requisite service period. The Company recognizes compensation expense on awards on a straight-line basis over the vesting period for each tranche of an award. Refer to Note 15 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.
As a result of the Company’s adoption of ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) as of January 1, 2017, the Company accounts for forfeitures when they occur. The cumulative-effect adjustment to “Accumulated earnings” and “Capital deficiency” in the Company’s Consolidated Balance Sheet was immaterial. In addition, excess tax benefits and deficiencies in connection with the Company’s stock-based compensation plans are recorded in “Income tax benefit” in the Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company elected to present excess tax benefits as an operating activity prospectively in the Consolidated Statement of Cash Flows for the year ended December 31, 2017. As required by ASU 2016-09, the Company classifies payments to tax authorities for shares withheld to satisfy employer income tax obligations in relation to the vesting of stock-based compensation awards as a financing activity in the Consolidated Statement of Cash Flows.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2017, 2016 and 2015 were $783, $801, and $764, respectively.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the Consolidated Financial Statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for inventories and deferred taxes, debt, uncertain tax positions and stock-based compensation expense. Actual results could differ from those estimates.
Foreign Currency Translation
Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average exchange rate for each reporting period for revenue, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements.
Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency gain (loss)” in the accompanying Consolidated Statements of Operations and Comprehensive (Loss) Income. For the years ended December 31, 2017, 2016 and 2015 there were $560, $(417), and $59 of such foreign currency gains (losses), respectively.
Recently Issued Accounting Pronouncements
The FASB issued ASU 2014-09, Revenue from Contracts with Customers, in May 2014, as amended by ASU 2016-12 Narrow-scope Improvements and Practical Expedients, in May 2016. ASU 2014-09, as amended, requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09, as amended, as of January 1, 2018 using the modified retrospective transition method, with the cumulative effect of initial adoption recognized at the date of initial application.
The Company is finalizing the analysis of the effects of ASU 2014-09 on the consolidated financial statements, and subject to completion of this analysis, the Company expects to record a cumulative effective of adoption adjustment as of January 1, 2018 to increase accumulated earnings by a range of $3,000 to $4,000, reflecting the earnings the Company would have recognized under ASU 2014-09 if applied as of December 31, 2017. The Company does not expect the application of ASU 2014-09 will have a material effect on the Consolidated Statement of Operations. Under the new guidance, the Company expects to recognize certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use, and the Company has the right to payment for work completed on such items. This will accelerate the timing of revenue recognition for these arrangements, as revenue will be recognized as goods are produced rather than upon shipment or delivery of goods. In addition to accelerating the timing of recording revenue, the Company expects corresponding decreases in deferred revenue, work in process and finished goods inventories, and an increase to accounts receivable. The Company is in the process of implementing and refining the required changes to its business and accounting processes, and internal controls to support recognition and disclosures under the new standard.
In February 2016, the FASB issued ASU 2016-02, Leases, 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. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The new standard is required to be adopted using a modified retrospective approach. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.
|
|||
|
Balance as of December 31, 2015 |
|
$ |
212 |
|
|
Bad debt expense |
|
|
12 |
|
|
Write-off of uncollectible accounts |
|
|
(90) |
|
|
Currency translation adjustments |
|
|
(8) |
|
|
Balance as of December 31, 2016 |
|
$ |
126 |
|
|
Bad debt expense |
|
|
(51) |
|
|
Write-off of uncollectible accounts |
|
|
(26) |
|
|
Currency translation adjustments |
|
|
4 |
|
|
Balance as of December 31, 2017 |
|
$ |
53 |
|
|
|||
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Raw materials |
|
$ |
6,498 |
|
$ |
8,206 |
|
|
Work-in-process |
|
|
6,557 |
|
|
6,340 |
|
|
Finished goods |
|
|
3,182 |
|
|
4,823 |
|
|
|
|
$ |
16,237 |
|
$ |
19,369 |
|
|
|||
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Buildings |
|
$ |
2,318 |
|
$ |
2,077 |
|
|
Machinery and equipment |
|
|
62,318 |
|
|
59,464 |
|
|
Furniture, fixtures and computer equipment |
|
|
7,585 |
|
|
6,634 |
|
|
Leasehold improvements |
|
|
19,754 |
|
|
18,655 |
|
|
Construction in progress |
|
|
1,980 |
|
|
1,136 |
|
|
|
|
|
93,955 |
|
|
87,966 |
|
|
Less accumulated depreciation and amortization |
|
|
(44,655) |
|
|
(34,547) |
|
|
|
|
$ |
49,300 |
|
$ |
53,419 |
|
|
|||
The Company’s goodwill by reportable segment at December 31, 2017 and 2016 is as follows:
|
|
|
December 31, |
||||
|
|
|
2017 |
|
2016 |
||
|
U.S. Debit and Credit |
|
$ |
47,150 |
|
$ |
64,330 |
|
U.K. Limited |
|
|
6,461 |
|
|
5,908 |
|
Other |
|
|
— |
|
|
1,758 |
|
|
|
$ |
53,611 |
|
$ |
71,996 |
Goodwill activity is summarized as follows:
|
Balance as of January 1, 2016 |
|
$ |
73,123 |
|
|
Currency translation |
|
|
(1,127) |
|
|
Balance as of December 31, 2016 |
|
$ |
71,996 |
|
|
Currency translation |
|
|
689 |
|
|
Impairments |
|
|
(19,074) |
|
|
Balance as of December 31, 2017 |
|
$ |
53,611 |
|
|
|
|
|
|
December 31, 2017 |
|
December 31, 2016 |
|
||||||||||||||
|
|
|
Average |
|
|
|
Accumulated |
|
Net Book |
|
|
|
Accumulated |
|
Net Book |
|
||||||
|
|
|
Life (Years) |
|
Cost |
|
Amortization |
|
Value |
|
Cost |
|
Amortization |
|
Value |
|
||||||
|
Customer relationships |
|
12 to 20 |
|
$ |
58,895 |
|
|
(24,373) |
|
|
34,522 |
|
$ |
58,994 |
|
$ |
(20,972) |
|
$ |
38,022 |
|
|
Technology and software |
|
7 to 10 |
|
|
7,101 |
|
|
(3,095) |
|
|
4,006 |
|
|
7,101 |
|
|
(2,167) |
|
|
4,934 |
|
|
Trademarks |
|
7.5 to 10 |
|
|
3,330 |
|
|
(487) |
|
|
2,843 |
|
|
3,330 |
|
|
(98) |
|
|
3,232 |
|
|
Noncompete agreements |
|
5 to 8 |
|
|
491 |
|
|
(390) |
|
|
101 |
|
|
491 |
|
|
(331) |
|
|
160 |
|
|
Intangible assets subject to amortization |
|
|
|
$ |
69,817 |
|
$ |
(28,345) |
|
$ |
41,472 |
|
$ |
69,916 |
|
$ |
(23,568) |
|
$ |
46,348 |
|
|
2018 |
|
$ |
4,880 |
|
2019 |
|
|
4,860 |
|
2020 |
|
|
4,820 |
|
2021 |
|
|
4,577 |
|
2022 |
|
|
4,091 |
|
Thereafter |
|
|
18,244 |
|
|
|
$ |
41,472 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Carrying |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
|
Value as of |
|
Fair Value as of |
|
December 31, 2017 |
|
|||||||||
|
|
|
December 31, |
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
|
2017 |
|
2017 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
228,125 |
|
$ |
— |
|
$ |
228,125 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
Carrying |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
|
Value as of |
|
Fair Value as of |
|
December 31, 2016 |
|
|||||||||
|
|
|
December 31, |
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
|||||||||
|
|
|
2016 |
|
2016 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan |
|
$ |
312,500 |
|
$ |
290,625 |
|
$ |
— |
|
$ |
290,625 |
|
$ |
— |
|
|
|||
|
|
|
|
|
|||||||
|
|
|
Interest |
|
December 31, |
|
December 31, |
|
|||
|
|
|
Rate |
|
2017 |
|
2016 |
|
|||
|
First Lien Term Loan (a) |
|
|
5.96% |
|
$ |
312,500 |
|
$ |
312,500 |
|
|
Unamortized discount |
|
|
|
|
|
(3,122) |
|
|
(3,795) |
|
|
Unamortized deferred financing costs |
|
|
|
|
|
(5,509) |
|
|
(6,783) |
|
|
Total long-term debt |
|
|
|
|
|
303,869 |
|
|
301,922 |
|
|
Less current maturities |
|
|
|
|
|
- |
|
|
- |
|
|
Long-term debt, net of current maturities |
|
|
|
|
$ |
303,869 |
|
$ |
301,922 |
|
|
(a) |
Interest rate on December 31, 2017 |
|
|||
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Current taxes: |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(7,376) |
|
$ |
4,944 |
|
$ |
16,036 |
|
|
Foreign |
|
|
99 |
|
|
27 |
|
|
254 |
|
|
|
|
|
(7,277) |
|
|
4,971 |
|
|
16,290 |
|
|
Deferred taxes: |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(9,161) |
|
|
(1,830) |
|
|
1,656 |
|
|
Foreign |
|
|
66 |
|
|
1 |
|
|
(100) |
|
|
|
|
|
(9,095) |
|
|
(1,829) |
|
|
1,556 |
|
|
Income tax (benefit) expense |
|
$ |
(16,372) |
|
$ |
3,142 |
|
$ |
17,846 |
|
|
(Loss) income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
(36,646) |
|
$ |
7,437 |
|
$ |
50,692 |
|
|
Foreign |
|
|
(1,736) |
|
|
1,104 |
|
|
(1,585) |
|
|
Total |
|
$ |
(38,382) |
|
$ |
8,541 |
|
$ |
49,107 |
|
|
Effective income tax rate |
|
|
42.7 |
% |
|
36.8 |
% |
|
36.3 |
% |
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|
Tax at federal statutory rate |
|
35.0 |
% |
35.0 |
% |
35.0 |
% |
|
State income taxes |
|
0.5 |
|
6.3 |
|
2.0 |
|
|
Foreign taxes |
|
0.3 |
|
(1.9) |
|
0.3 |
|
|
Deferred tax impact of enacted tax rate and law changes |
|
18.4 |
|
— |
|
— |
|
|
Goodwill impairments |
|
(17.4) |
|
— |
|
— |
|
|
Tax credits |
|
10.8 |
|
— |
|
— |
|
|
Unrecognized tax benefits |
|
(3.2) |
|
— |
|
— |
|
|
Other |
|
(1.7) |
|
(2.6) |
|
(1.0) |
|
|
Effective income tax rate |
|
42.7 |
% |
36.8 |
% |
36.3 |
% |
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expense |
|
$ |
744 |
|
$ |
1,089 |
|
|
Unrealized foreign exchange loss |
|
|
647 |
|
|
1,426 |
|
|
Net operating loss carryforward |
|
|
2,227 |
|
|
3,066 |
|
|
Deferred financing costs |
|
|
707 |
|
|
1,355 |
|
|
Stock compensation |
|
|
679 |
|
|
1,166 |
|
|
Tax credit carryforward |
|
|
420 |
|
|
— |
|
|
Other |
|
|
868 |
|
|
555 |
|
|
Total gross deferred tax assets |
|
|
6,292 |
|
|
8,657 |
|
|
Valuation allowance |
|
|
(4,688) |
|
|
(4,930) |
|
|
Net deferred tax assets |
|
|
1,604 |
|
|
3,727 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Plant, equipment and leasehold improvements |
|
|
(2,819) |
|
|
(6,393) |
|
|
Intangible assets |
|
|
(10,144) |
|
|
(17,159) |
|
|
Prepaid expenses |
|
|
(927) |
|
|
(1,436) |
|
|
Total gross deferred tax liabilities |
|
|
(13,890) |
|
|
(24,988) |
|
|
Net deferred tax liabilities |
|
$ |
(12,286) |
|
$ |
(21,261) |
|
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
Long-term deferred tax liabilities |
|
$ |
(12,286) |
|
$ |
(21,261) |
|
|
|
|
|
|
|
Balance as of December 31, 2016 |
|
$ |
— |
|
Increase related to current year tax position |
|
|
154 |
|
Increase related to prior year tax position |
|
|
1,058 |
|
Decrease related to settlements with tax authorities |
|
|
— |
|
Lapse of statute of limitations |
|
|
— |
|
Balance as of December 31, 2017 |
|
$ |
1,212 |
|
|||
Future cash payments with respect to operating leases and purchase obligations as of December 31, 2017 are as follows:
|
|
|
Operating |
|
Purchase |
|
||
|
|
|
Leases |
|
Obligations |
|
||
|
2018 |
|
$ |
3,613 |
|
|
4,793 |
|
|
2019 |
|
|
2,823 |
|
|
9,720 |
|
|
2020 |
|
|
2,568 |
|
|
|
|
|
2021 |
|
|
2,291 |
|
|
|
|
|
2022 |
|
|
1,008 |
|
|
|
|
|
Thereafter |
|
|
1,059 |
|
|
|
|
|
Total |
|
$ |
13,362 |
|
$ |
14,513 |
|
|
|||
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding as of December 31, 2016 |
|
— |
|
$ |
— |
|
Granted |
|
932,837 |
|
|
0.71 |
|
Vested |
|
— |
|
|
|
|
Forfeited |
|
(109,922) |
|
|
0.71 |
|
Outstanding as of December 31, 2017 |
|
822,915 |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding as of December 31, 2016 |
|
54,075 |
|
$ |
35.67 |
|
Granted |
|
47,870 |
|
|
15.55 |
|
Vested |
|
(50,604) |
|
|
36.21 |
|
Forfeited |
|
(1,664) |
|
|
21.75 |
|
Outstanding as of December 31, 2017 |
|
49,677 |
|
$ |
16.20 |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual Term |
|
|
|
|
|
Options |
|
Price |
|
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016 |
|
287,500 |
|
$ |
42.86 |
|
|
|
|
|
Granted |
|
713,075 |
|
|
8.85 |
|
|
|
|
|
Forfeited |
|
(63,265) |
|
|
40.96 |
|
|
|
|
|
Outstanding as of December 31, 2017 |
|
937,310 |
|
$ |
17.11 |
|
|
9.20 |
|
|
Options vested and exercisable as of December 31, 2017 |
|
60,407 |
|
|
47.91 |
|
|
7.89 |
|
|
Options vested and expected to vest as of December 31, 2017 |
|
937,310 |
|
|
17.11 |
|
|
9.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Number |
|
Fair Value |
|
|
Non-vested as of December 31, 2016 |
|
287,500 |
|
$ |
11.77 |
|
Granted |
|
713,075 |
|
|
2.43 |
|
Forfeited |
|
(63,265) |
|
|
11.55 |
|
Vested |
|
(60,407) |
|
|
13.35 |
|
Non-vested as of December 31, 2017 |
|
876,903 |
|
$ |
4.08 |
|
|
|
|
|
|
|
|
2018 |
|
313,818 |
|
2019 |
|
307,637 |
|
2020 |
|
253,022 |
|
2021 |
|
2,426 |
|
Total unvested options as of December 31, 2017 |
|
876,903 |
|
|
|
Year ended December 31, |
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|||
|
Expected term in years |
|
6.0 |
|
|
6.3 |
|
|
6.5 |
|
|
Volatility |
|
31.9 |
% |
|
35.4 |
% |
|
36.7 |
% |
|
Risk-free interest rate |
|
2.0 |
% |
|
1.5 |
% |
|
1.8 |
% |
|
Dividend yield(1) |
|
0.9 |
% |
|
3.3 |
% |
|
1.3 |
% |
|
(1) |
Represents the weighted-average dividend yield for grants made during the year ended December 31, 2017. The Company discontinued its quarterly dividend program during August 2017. |
|
|
|
Year Ended December 31, |
|||||||
|
|
|
2017 |
|
|
2016 |
|
|
2015 |
|
|
Weighted Average Grant Date Fair Value of Options Granted |
$ |
2.43 |
|
$ |
7.12 |
|
$ |
17.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Weighted- Average |
|
Contractual Term |
|
|
|
|
|
Options |
|
Exercise Price |
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Exercisable as of December 31, 2016 |
|
43,266 |
|
$ |
0.002 |
|
|
|
|
Granted |
|
— |
|
|
— |
|
|
|
|
Exercised |
(36,666) |
0.002 |
||||||
|
Forfeited |
|
— |
|
|
— |
|
|
|
|
Outstanding and Exercisable as of December 31, 2017 |
|
6,600 |
|
$ |
0.002 |
|
5.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Revenue |
|
EBITDA |
|
||||||||||||||
|
|
|
December 31, |
|
December 31, |
|
||||||||||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
2017 |
|
2016 |
|
2015 |
|
||||||
|
U.S. Debit and Credit |
|
$ |
158,899 |
|
$ |
208,795 |
|
$ |
263,668 |
|
$ |
11,469 |
|
$ |
52,090 |
|
$ |
78,981 |
|
|
U.S. Prepaid Debit |
|
|
61,132 |
|
|
60,065 |
|
|
65,878 |
|
|
19,244 |
|
|
18,646 |
|
|
22,993 |
|
|
U.K Limited |
|
|
31,119 |
|
|
29,689 |
|
|
34,361 |
|
|
2,305 |
|
|
2,839 |
|
|
3,572 |
|
|
Other |
|
|
11,049 |
|
|
13,110 |
|
|
17,420 |
|
|
(32,538) |
|
|
(28,063) |
|
|
(22,145) |
|
|
Intersegment eliminations(a) |
|
|
(7,337) |
|
|
(2,959) |
|
|
(7,217) |
|
|
— |
|
|
— |
|
|
— |
|
|
Total: |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
$ |
480 |
|
$ |
45,512 |
|
$ |
83,401 |
|
|
(a) |
Amounts include the revenue from sales between segments and are eliminated upon consolidation. |
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Total segment EBITDA from continuing operations |
|
$ |
480 |
|
$ |
45,512 |
|
$ |
83,401 |
|
|
Interest, net |
|
|
(20,848) |
|
|
(20,044) |
|
|
(18,328) |
|
|
Income tax benefit (expense) |
|
|
16,372 |
|
|
(3,142) |
|
|
(17,846) |
|
|
Depreciation and amortization |
|
|
(18,014) |
|
|
(16,927) |
|
|
(15,966) |
|
|
Net (loss) income from continuing operations |
|
$ |
(22,010) |
|
$ |
5,399 |
|
$ |
31,261 |
|
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
U.S. Debit and Credit |
|
$ |
164,397 |
|
$ |
205,417 |
|
|
U.S. Prepaid Debit |
|
|
33,130 |
|
|
23,509 |
|
|
U.K. Limited |
|
|
22,640 |
|
|
26,060 |
|
|
Other |
|
|
13,838 |
|
|
9,434 |
|
|
Total assets: |
|
$ |
234,005 |
|
$ |
264,420 |
|
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
U.S. |
|
$ |
7,164 |
|
$ |
13,169 |
|
$ |
19,129 |
|
|
Canada |
|
|
172 |
|
|
263 |
|
|
275 |
|
|
Total North America |
|
|
7,336 |
|
|
13,432 |
|
|
19,404 |
|
|
U.K. |
|
|
1,540 |
|
|
1,447 |
|
|
659 |
|
|
Total plant, equipment and leasehold improvement additions |
|
$ |
8,876 |
|
$ |
14,879 |
|
$ |
15,568 |
|
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
U.S. |
|
$ |
214,136 |
|
$ |
262,544 |
|
$ |
316,111 |
|
|
Canada |
|
|
9,535 |
|
|
11,998 |
|
|
12,541 |
|
|
Total North America |
|
|
223,671 |
|
|
274,542 |
|
|
328,652 |
|
|
U.K. |
|
|
25,638 |
|
|
25,705 |
|
|
36,954 |
|
|
Other(a) |
|
|
5,553 |
|
|
8,453 |
|
|
8,504 |
|
|
Total net sales |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
Amounts in other include sales to various countries that individually are not material.
|
|
|
December 31, |
|
||||
|
|
|
2017 |
|
2016 |
|
||
|
U.S. |
|
$ |
130,767 |
|
$ |
157,773 |
|
|
Canada |
|
|
911 |
|
|
2,899 |
|
|
Total North America: |
|
|
131,678 |
|
|
160,672 |
|
|
U.K. |
|
|
12,705 |
|
|
11,091 |
|
|
Total long-lived assets |
|
$ |
144,383 |
|
$ |
171,763 |
|
|
|
|
December 31, |
|
|||||||
|
|
|
2017 |
|
2016 |
|
2015 |
|
|||
|
Product net sales(a) |
|
$ |
125,306 |
|
$ |
168,510 |
|
$ |
241,609 |
|
|
Services net sales(b) |
|
|
129,556 |
|
|
140,190 |
|
|
132,501 |
|
|
Total net sales: |
|
$ |
254,862 |
|
$ |
308,700 |
|
$ |
374,110 |
|
|
(a) |
Product net sales include the design and production of Financial Payment Cards, in contact EMV, dual-interface EMV, contactless and magnetic stripe formats. The Company also generates product revenue from the sale of Card@Once® instant issuance systems, Private Label Credit Cards, and retail gift cards. It is impracticable to split the products described into dollar amounts in the table above. |
Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers, CPI on Demand and software as a service personalization of instant issuance debit cards. The Company also generates services revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom). It is impracticable to split the services described into dollar amounts in the table above.
|
|||
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|||||
|
2017 by Quarter: |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
2017 |
|
|||||
|
Net sales |
|
$ |
56,008 |
|
|
65,846 |
|
|
68,044 |
|
$ |
64,964 |
|
$ |
254,862 |
|
|
Gross profit |
|
|
16,095 |
|
|
19,286 |
|
|
20,976 |
|
|
18,634 |
|
|
74,991 |
|
|
Net loss |
|
|
(4,506) |
|
|
(2,161) |
|
|
(735) |
|
|
(14,608) |
|
|
(22,010) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.40) |
|
$ |
(0.20) |
|
$ |
(0.05) |
|
$ |
(1.31) |
|
$ |
(1.98) |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|||||
|
2016 by Quarter: |
|
Q1 |
|
Q2 |
|
Q3 |
|
Q4 |
|
2016 |
|
|||||
|
Net sales |
|
$ |
86,393 |
|
$ |
73,725 |
|
$ |
81,202 |
|
$ |
67,380 |
|
$ |
308,700 |
|
|
Gross profit |
|
|
29,692 |
|
|
22,707 |
|
|
29,063 |
|
|
20,436 |
|
|
101,898 |
|
|
Net income (loss) |
|
|
5,714 |
|
|
(328) |
|
|
4,026 |
|
|
(4,014) |
|
|
5,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share |
|
$ |
0.50 |
|
$ |
(0.05) |
|
$ |
0.35 |
|
$ |
(0.36) |
|
$ |
0.48 |
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||
|
|||||||||||||||||||||||||
|
|||||||||||||||||||||
|
|
||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||
|
|
||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|