CPI CARD GROUP INC., 10-K filed on 2/25/2021
Annual Report
v3.20.4
Document and Entity Information - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2020
Feb. 15, 2021
Jun. 30, 2020
Cover Abstract      
Entity Registrant Name CPI Card Group Inc.    
Entity Central Index Key 0001641614    
Document Type 10-K    
Document Period End Date Dec. 31, 2020    
Amendment Flag false    
Current Fiscal Year End Date --12-31    
Entity Interactive Data Current Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Well-known Seasoned Issuer No    
Entity Filer Category Non-accelerated Filer    
Entity Common Stock, Shares Outstanding   11,230,482  
Entity Public Float     $ 13.1
Entity Small Business true    
Entity Emerging Growth Company false    
Entity Shell Company false    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
v3.20.4
Consolidated Balance Sheets - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 57,603 $ 18,682
Accounts receivable, net of allowances of $289 and $395, respectively 54,592 42,832
Inventories 24,796 20,192
Prepaid expenses and other current assets 5,032 6,345
Income taxes receivable 10,511 4,164
Total current assets 152,534 92,215
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net 39,403 41,612
Intangible assets, net 26,207 30,802
Goodwill 47,150 47,150
Other assets 857 1,232
Total assets 266,151 213,011
Current liabilities:    
Accounts payable 18,883 16,482
Accrued expenses 28,149 24,735
Current portion of Long-term debt 8,027  
Deferred revenue and customer deposits 1,868 468
Total current liabilities 56,927 41,685
Long-term debt 328,681 307,778
Deferred income taxes 7,409 6,366
Other long-term liabilities 11,171 11,478
Total liabilities 404,188 367,307
Commitments and contingencies (Note 15)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at December 31, 2020 and 2019
Stockholders’ deficit:    
Common Stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 and 11,224,191 shares issued and outstanding at December 31, 2020 and 2019, respectively 11 11
Capital deficiency (111,858) (111,988)
Accumulated loss (26,190) (42,319)
Total stockholders’ deficit (138,037) (154,296)
Total liabilities and stockholders’ deficit $ 266,151 $ 213,011
v3.20.4
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Consolidated Balance Sheets    
Allowance on accounts receivable $ 289 $ 395
Preferred shares, par value (in dollars per share) $ 0.001 $ 0.001
Preferred shares, authorized shares (in shares) 100,000 100,000
Preferred shares, issued shares (in shares) 0 0
Preferred shares, outstanding shares (in shares) 0 0
Common shares, par value (in dollars per share) $ 0.001 $ 0.001
Common shares, authorized shares (in shares) 100,000,000 100,000,000
Common shares, issued shares (in shares) 11,230,482 11,224,191
Common shares, outstanding shares (in shares) 11,230,482 11,224,191
v3.20.4
Consolidated Statements of Operations and Comprehensive Income (Loss) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Net sales:    
Net Sales $ 312,189 $ 278,073
Cost of sales:    
Depreciation and amortization 10,701 11,220
Total cost of sales 201,881 187,003
Gross profit 110,308 91,070
Operating expenses:    
Selling, general and administrative (exclusive of depreciation and amortization shown below) 65,791 66,328
Depreciation and amortization 6,126 6,031
Litigation settlement gain   (6,000)
Total operating expenses, net 71,917 66,359
Income from operations 38,391 24,711
Other expense, net:    
Interest, net (25,397) (24,891)
Foreign currency loss (7) (1,335)
Other expense, net (102) (4)
Total other expense, net (25,506) (26,230)
Income (loss) before income taxes 12,885 (1,519)
Income tax benefit (expense) 3,305 (3,474)
Net income (loss) from continuing operations 16,190 (4,993)
Net loss from discontinued operation, net of tax (Note 4) (61) (124)
Net income (loss) $ 16,129 $ (5,117)
Basic and Diluted net income (loss) per share from continuing operations (in dollar per share) $ 1.44 $ (0.45)
Basic and Diluted net income (loss) per share (in dollars per share) $ 1.44 $ (0.46)
Basic weighted-average shares outstanding (in shares) 11,228,707 11,196,710
Diluted weighted-average shares outstanding (in shares) 11,232,004 11,196,710
Comprehensive income (loss):    
Net income (loss) $ 16,129 $ (5,117)
Reclassification adjustment to foreign currency loss   1,329
Currency translation adjustment   31
Total comprehensive income (loss) 16,129 (3,757)
Products    
Net sales:    
Net Sales 171,968 143,941
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) 107,642 94,889
Services    
Net sales:    
Net Sales 140,221 134,132
Cost of sales:    
Products and Services (exclusive of depreciation and amortization shown below) $ 83,538 $ 80,894
v3.20.4
Consolidated Statements of Stockholders' Deficit - USD ($)
$ in Thousands
Common Stock
Capital deficiency
Accumulated earnings (loss)
Accumulated other comprehensive loss
Total
Beginning balance at Dec. 31, 2018 $ 11 $ (112,223) $ (37,202) $ (1,360) $ (150,774)
Beginning balance (in shares) at Dec. 31, 2018 11,160,377        
Shares issued under stock-based compensation plans (in shares) 63,814        
Stock-based compensation   235     235
Components of comprehensive (loss) income:          
Net income (loss)     (5,117)   (5,117)
Reclassification adjustment to foreign currency loss       1,329 1,329
Currency translation adjustment       $ 31 31
Ending balance at Dec. 31, 2019 $ 11 (111,988) (42,319)   $ (154,296)
Ending balance (in shares) at Dec. 31, 2019 11,224,191       11,224,191
Shares issued under stock-based compensation plans (in shares) 6,291        
Stock-based compensation   130     $ 130
Components of comprehensive (loss) income:          
Net income (loss)     16,129   16,129
Ending balance at Dec. 31, 2020 $ 11 $ (111,858) $ (26,190)   $ (138,037)
Ending balance (in shares) at Dec. 31, 2020 11,230,482       11,230,482
v3.20.4
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Operating activities    
Net income (loss) $ 16,129 $ (5,117)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:    
Loss from discontinued operations 61 124
Depreciation and amortization expense 16,827 17,251
Stock-based compensation expense 136 250
Amortization of debt issuance costs and debt discount 3,453 1,960
Deferred income tax 1,043 969
Reclassification adjustment to foreign currency loss   1,329
Other, net 1,834 153
Changes in operating assets and liabilities:    
Accounts receivable (11,662) (688)
Inventories (6,105) (10,410)
Prepaid expenses and other assets 494 (1,328)
Income taxes (6,346) 1,369
Accounts payable 1,657 1,127
Accrued expenses 2,958 (3,810)
Deferred revenue and customer deposits 1,404 (446)
Other liabilities 192 232
Cash provided by operating activities - continuing operations 22,075 2,965
Cash used in operating activities - discontinued operations (61) (124)
Investing activities    
Capital expenditures for plant, equipment and leasehold improvements (7,093) (4,175)
Cash received from sale of Canadian subsidiary   1,451
Other   150
Cash used in investing activities (7,093) (2,574)
Financing activities    
Proceeds from Senior Credit Facility, net of discount 29,100  
Debt issuance costs (2,507)  
Proceeds from revolving credit facility   11,500
Principal payment on revolving credit facility   (11,500)
Payments on financing leases (2,616) (1,926)
Cash provided by (used in) financing activities 23,977 (1,926)
Effect of exchange rates on cash 23 50
Net increase (decrease) in cash and cash equivalents 38,921 (1,609)
Cash and cash equivalents, beginning of period 18,682 20,291
Cash and cash equivalents, end of period 57,603 18,682
Supplemental disclosures of cash flow information    
Cash paid during the period for: Interest 22,750 23,036
Cash paid during the period for: Income tax payments, net 1,043 780
Right-of-use assets obtained in exchange for lease obligations- Operating leases 3,260 8,533
Right-of-use assets obtained in exchange for lease obligations- Financing leases 1,718 6,438
Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements $ 1,052 $ 308
v3.20.4
Business
12 Months Ended
Dec. 31, 2020
Business  
Business

1. Business

CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States.  CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the Payment Card Brands (Visa, Mastercard, American Express and Discover in the United States and Interac, in Canada).  CPI also offers an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. 

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

The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States.  The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States.  The Company’s “Other” segment includes corporate expenses.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.  After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale.  In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the year ended December 31, 2019. This adjustment was $1,329 and is included in “Foreign Currency Loss” on the Statement of Operations.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

COVID-19 Update

 

The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where CPI, its customers and its suppliers conduct business. Overall, CPI believes that COVID-19 had a net negative impact relative to its full year expectations for 2020. The broader and long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain.  The health and safety of CPI employees remain paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry.  CPI’s net sales in 2020 increased over the prior year; however, in certain areas of the business, the Company experienced lower customer demand than expected which it believes is primarily attributable to the COVID-19 pandemic.  CPI may experience constrained supply, curtailed customer demand, impacts on its workforce and other effects that could materially adversely impact the Company’s business, results of operations and overall financial condition in future periods. CPI’s strategies may not be successful in effectively managing its resources and mitigating the negative impact of the COVID-19 pandemic on its business, operating results and financial condition. See Item 1A, Risk Factors, in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19 pandemic on the Company.

 

On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 12 “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company.  In addition, CPI has deferred employer social security payments starting with the second quarter of 2020 in accordance with the CARES Act.  While the Company is participating in certain programs under the CARES Act, the Act and its guidance are subject to change.   

 

v3.20.4
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

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.

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.

 

 

 

 

 

 

 

 

    

December 31, 2020

    

December 31, 2019

Trade accounts receivable

 

$

44,305

 

$

39,004

Unbilled accounts receivable

 

 

10,576

 

 

4,223

 

 

 

54,881

 

 

43,227

Less allowance for doubtful accounts

 

 

(289)

 

 

(395)

 

 

$

54,592

 

$

42,832

 

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 is determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2020 and 2019 is summarized as follows:

 

 

 

 

 

 

Balance as of December 31, 2018

    

$

211

 

Bad debt expense

 

 

228

 

Write-off of uncollectible accounts

 

 

(37)

 

Currency translation adjustments

 

 

(7)

 

Balance as of December 31, 2019

 

$

395

 

Bad debt expense (benefit)

 

 

(89)

 

Write-off of uncollectible accounts

 

 

(2)

 

Currency translation adjustments

 

 

(15)

 

Balance as of December 31, 2020

 

$

289

 

 

During 2020, the Company recorded a bad debt benefit due to the reduction of allowances for potentially uncollectible accounts receivable from the prior year.  The increase in bad debt expense during 2019 primarily relates to reserves established for outstanding receivables from the Company’s Canadian operations that were disposed on April 1, 2019.

For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the Company’s consolidated net sales.  Net sales for these customers were approximately 15% and 14% of the Company’s consolidated net sales. For the year ended December 31, 2019 one customer represented 18% of the Company’s consolidated net sales.

Inventories

Inventories consist of raw materials, 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). Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers.  The stock cards are not manufactured for a specific customer, but are ready to be personalized and sold as customer orders are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of obsolescence, and records adjustments to the valuation of inventory, as necessary.

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 may first make a qualitative assessment with respect to goodwill, if appropriate. In accordance with accounting standards,  the Company performs its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognizes an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value.

All of the Company’s goodwill is included in the Debit and Credit segment.  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 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.

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.    

Sales Tax

The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net sales as defined in ASC 606, Revenue from Contracts with Customers. Cash collected from customers is recorded in accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. In addition, refer to Note 15 “Commitments and Contingencies” for discussion regarding an estimated sales tax liability the Company recorded in relation to historical activity in certain states.

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 establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due.  The reserves are established when the Company believes that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities.  The Company adjusts uncertain tax position in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate.  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 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 over the requisite service period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares.  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 17 “Stock Based Compensation” for additional discussion regarding details of the Company's stock-based compensation plans.

Net Sales

Products Net Sales

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

 

Services Net Sales

 

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

 

Customer Contracts

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

 

Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles require management to make assumptions and estimates 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, leases, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates.

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 net sales, expenses, gains and losses. Translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements. Subsequent to the sale of the Company’s UK Limited and Canada subsidiary, the Company has no significant foreign subsidiaries.

Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in “Foreign currency loss” in the accompanying Consolidated Statements of Operations and Comprehensive Loss. For the years ended December 31, 2020 and 2019 there were ($7) and ($1,335) of such foreign currency losses, respectively. The foreign currency loss for the year ended December 31, 2019, includes the release of the cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the Balance Sheet in connection with the sale of the Company’s Canada subsidiary.  

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASC 842, Leases, which provides guidance for accounting for leases. The guidance required companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The Company adopted the guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. ROU represents the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. Lease expense for operating leases recorded in the balance sheet is included in operating costs and expenses and is based on the future minimum lease payments recognized on a straight-line basis over the term of the lease plus any variable lease costs. The Company recorded lease liabilities and right-to-use assets as the present value of future minimum lease payments using a discount rate that is either implicit in the lease or our incremental borrowing rate. If not implicit in the lease, the Company estimates the incremental borrowing rate by using market data from similar companies, having publicly traded debt instruments and similar credit ratings. The estimated incremental borrowing rate utilizes judgements, including selection of comparable companies, credit risk, sensitivity analysis and certain other valuation estimates. The Company also uses judgement in determining whether a contract contains a lease.

Recently Issued Accounting Pronouncements

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

Adjustment of Prior Period Financial Statements for Immaterial Items

In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in ASC 250, Presentation of Financial Statements, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense for all prior periods presented by revising the consolidated financial statements and other financial information included herein. The total impact on prior years for estimated sales tax expense was $1,907 and depreciation expense was $476. These adjustments represent the expenses pertaining to the period of 2017 to 2019, including an increase to estimated sales tax expense recorded in “Selling, General and Administrative expenses” (“SG&A”) of $584, and depreciation expense in “Cost of sales” of $249, for the year ended December 31, 2019. For the year ended December 31, 2020, the Company recorded estimated sales tax expense in SG&A of $926.  Refer to Note 15, “Commitments and Contingencies” for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the consolidated balance sheet. 

v3.20.4
Net Sales
12 Months Ended
Dec. 31, 2020
Net Sales.  
Net Sales

3. Net Sales

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2020

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

173,765

 

$

76,662

 

$

250,427

Prepaid Debit

 

 

 —

 

 

63,596

 

 

63,596

Intersegment eliminations

 

 

(1,797)

 

 

(37)

 

 

(1,834)

Total

 

$

171,968

 

$

140,221

 

$

312,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2019

 

 

Products

 

Services

 

Total

Debit and Credit

 

$

144,541

 

$

68,600

 

$

213,141

Prepaid Debit

 

 

 —

 

 

64,330

 

 

64,330

Other

 

 

396

 

 

1,283

 

 

1,679

Intersegment eliminations

 

 

(996)

 

 

(81)

 

 

(1,077)

Total

 

$

143,941

 

$

134,132

 

$

278,073

 

v3.20.4
Discontinued Operation
12 Months Ended
Dec. 31, 2020
Discontinued Operation  
Discontinued Operation

4. Discontinued Operation

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

v3.20.4
Inventories
12 Months Ended
Dec. 31, 2020
Inventories  
Inventories

5. Inventories

 

Inventories are summarized below:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2020

    

2019

 

Raw materials

 

$

23,009

 

$

16,492

 

Finished goods

 

 

4,635

 

 

5,047

 

Inventory reserve

 

 

(2,848)

 

 

(1,347)

 

 

 

$

24,796

 

$

20,192

 

 

v3.20.4
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets
12 Months Ended
Dec. 31, 2020
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets  
Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2020

    

2019

 

Machinery and equipment

 

$

55,459

 

$

52,212

 

Machinery and equipment under financing leases

 

 

9,974

 

 

8,256

 

Furniture, fixtures and computer equipment

 

 

4,410

 

 

4,749

 

Leasehold improvements

 

 

15,083

 

 

14,905

 

Construction in progress

 

 

2,386

 

 

455

 

 

 

 

87,312

 

 

80,577

 

Less accumulated depreciation and amortization

 

 

(55,092)

 

 

(45,277)

 

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

 

 

7,183

 

 

6,312

 

 

 

$

39,403

 

$

41,612

 

 

Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $12,232 and $12,616 for the years ended December 31, 2020 and 2019, respectively.

 

There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years ended December 31, 2020 and 2019.

v3.20.4
Goodwill and Other Intangible Assets
12 Months Ended
Dec. 31, 2020
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

7. Goodwill and Other Intangible Assets

 

All of the Company’s $47,150 of goodwill is included in the Debit and Credit segment at December 31, 2020 and 2019. The Company completed its goodwill impairment testing as of October 1, 2020 and the Company determined it is not more likely than not that the fair value of each reporting unit is less than its carrying amount.

 

CPI’s amortizable intangible assets consist of customer relationships, technology and software, and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization expense totaled $4,595 and $4,635 for the years ended December 31, 2020 and 2019, respectively.  During the years ended December 31, 2020 and 2019, there were no impairments of the Company’s amortizable intangible assets. 

Intangible assets consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

December 31, 2019

 

 

    

Weighted Average

    

 

    

Accumulated

    

Net Book

    

 

    

Accumulated

    

Net Book

 

 

 

Life (Years)

 

Cost

 

Amortization

 

Value

 

Cost

 

Amortization

 

Value

 

Customer relationships

 

17.2

 

$

55,454

 

 

(32,141)

 

$

23,313

 

$

55,454

 

$

(28,865)

 

$

26,589

 

Technology and software

 

 8

 

 

7,101

 

 

(5,881)

 

 

1,220

 

 

7,101

 

 

(4,952)

 

 

2,149

 

Trademarks

 

8.7

 

 

3,330

 

 

(1,656)

 

 

1,674

 

 

3,330

 

 

(1,266)

 

 

2,064

 

Intangible assets subject to amortization

 

 

 

$

65,885

 

$

(39,678)

 

$

26,207

 

$

65,885

 

$

(35,083)

 

$

30,802

 

 

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

 

 

 

 

 

2021

 

$

4,352

2022

    

 

3,867

2023

 

 

3,867

2024

 

 

3,630

2025

 

 

3,440

Thereafter

 

 

7,051

 

 

$

26,207

 

v3.20.4
Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2020
Fair Value of Financial Instruments  
Fair Value of Financial Instruments

 

8. Fair Value of Financial Instruments

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

·

Level 1—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, 2020

 

 

December 31,

 

December 31,

 

(Using Fair Value Hierarchy)

 

    

2020

    

2020

    

Level 1

    

Level 2

    

Level 3

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Lien Term Loan

 

$

312,500

 

$

287,500

 

$

 

$

287,500

 

$

Senior Credit Facility

 

$

30,000

 

$

30,000

 

$

 

$

 —

 

$

30,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

 

 

Fair Value Measurement at

 

 

Value as of

 

Fair Value as of

 

December 31, 2019

 

 

December 31,

 

December 31,

 

(Using Fair Value Hierarchy)

 

    

2019

    

2019

    

Level 1

    

Level 2

    

Level 3

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Lien Term Loan

 

$

312,500

 

$

234,375

 

$

 

$

234,375

 

$

 

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

 

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature.

v3.20.4
Accrued Liabilities
12 Months Ended
Dec. 31, 2020
Accrued Liabilities  
Accrued Liabilities

9. Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

    

December 31, 2020

    

December 31, 2019

 

 

 

 

 

 

    

Accrued payroll and related employee expenses

 

$

4,938

 

$

3,954

Accrued employee performance bonus

 

 

4,873

 

 

3,920

Employer payroll tax, including social security deferral

 

 

3,034

 

 

368

Accrued rebates

 

 

1,178

 

 

1,573

Sales tax liability

 

 

1,696

 

 

1,907

Accrued Interest

 

 

4,145

 

 

4,951

Operating and financing lease liability (current portion)

 

 

4,407

 

 

4,494

Other

 

 

3,878

 

 

3,568

Total accrued expenses

 

$

28,149

 

$

24,735

 

 

The estimated sales tax liability is further described in Note 15, Commitments and Contingencies and Note 2, Summary of Significant Accounting Policies.  Other accrued liabilities include miscellaneous accruals for invoices not yet received and other items such as self- insurance liability accruals and the current portion of uncertain tax position reserves.

v3.20.4
Financing and Operating Leases
12 Months Ended
Dec. 31, 2020
Financing and Operating Leases  
Financing and Operating Leases

10. Financing and Operating Leases

 

CPI adopted ASC 842 effective January 1, 2019.  As a result of the adoption of ASC 842, the Company recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

 

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

 

 

 

 

 

 

 

 

 

 

Year Ended

 

Year Ended

 

 

 

December 31, 2020

 

December 31, 2019

 

 

 

 

 

 

Operating lease costs

 

$

2,649

 

2,625

Variable lease costs

 

 

667

 

719

Short-term operating lease costs

 

 

75

 

 -

Total expense from operating leases

 

$

3,391

 

3,344

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

Right-of-use amortization expense

 

$

1,342

 

886

  Interest on lease liabilities

 

 

540

 

290

  Total financing lease costs

 

$

1,882

 

1,176

 

The following table reflects balances for operating and financing leases:

 

 

 

 

 

 

 

 

 

    

December 31, 2020

 

December 31, 2019

Operating leases

 

 

 

 

 

 

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

 

$

7,183

 

$

6,312

 

 

 

 

 

 

 

Operating lease liability (current)

 

$

2,267

 

$

2,283

Long-term operating liability

 

 

5,491

 

 

5,067

  Total operating lease liabilities

 

$

7,758

 

$

7,350

 

 

 

 

 

 

 

Financing leases

 

 

 

 

 

 

Property, equipment and leasehold improvements

 

$

9,974

 

$

8,256

Accumulated depreciation

 

 

(2,422)

 

 

(1,094)

  Total financing leases in property, equipment and leasehold improvements, net

 

$

7,552

 

$

7,162

 

 

 

 

 

 

 

Financing lease liability (current)

 

$

2,140

 

$

2,211

Long-term financing liability

 

 

3,052

 

 

3,886

  Total financing lease liabilities

 

$

5,192

 

$

6,097

 

Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and

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

 

Components of lease expense were as follows:

 

 

 

 

 

 

 

 

December 31, 2020

Weighted Average Remaining Lease Term

 

 

 

  Operating Leases

 

 

4.93

  Financing Leases

 

 

2.52

 

 

 

 

Weighted Average Discount Rate

 

 

 

  Operating Leases

 

 

9.29%

  Financing Leases

 

 

8.71%

 

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

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Financing

 

 

 

Lease

 

 

Leases

Year Ending

 

 

 

 

 

 

2021

 

$

2,894

 

$

2,494

2022

 

 

1,782

 

 

2,007

2023

 

 

1,467

 

 

1,069

2024

 

 

1,250

 

 

261

2025

 

 

670

 

 

 2

2026

 

 

1,792

 

 

 —

  Total lease payments

 

 

9,855

 

 

5,833

Less imputed interest

 

 

(2,097)

 

 

(641)

  Total 

 

$

7,758

 

$

5,192

 

Cash paid on operating lease liabilities was $2,347 and $1,973 during the years ended December 31, 2020 and December 31, 2019, respectively.

v3.20.4
Long-Term Debt
12 Months Ended
Dec. 31, 2020
Long-Term Debt.  
Long-Term Debt

11. Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Interest

 

December 31,

 

December 31,

 

 

 

Rate (1)

    

2020

    

2019

    

First Lien Term Loan

 

 

5.50

%  

 

312,500

 

 

312,500

 

Senior Credit Facility

 

 

9.50

%  

 

30,000

 

 

 —

 

Unamortized discount

 

 

 

 

 

(1,988)

 

 

(1,770)

 

Unamortized deferred financing costs

 

 

 

 

 

(3,804)

 

 

(2,952)

 

Total long-term debt

 

 

 

 

 

336,708

 

 

307,778

 

Less current maturities

 

 

 

 

 

(8,027)

 

 

 —

 

Long-term debt, net of current maturities

 

 

 

 

 

328,681

 

 

307,778

 

(1)  The interest rate on the First Lien Term Loan was 5.5%, and 6.71% as of December 31, 2020, and December 31, 2019, respectively. The interest rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.5% as of December 31, 2020.

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

 

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

 

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

 

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

 

The Senior Credit Facility and the First Lien Term Loan also require prepayment or offers to prepay certain amounts, in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. As of December 31, 2020, $8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the debt agreements, which amount the Company will offer to prepay pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, as applicable. The Company was not required to make any prepayments of the First Lien Term Loan with respect to the excess free cash flow calculation relating to the 2019 annual financial statements.

 

Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. Certain prepayments made prior to February 15, 2022 are subject to a make-whole premium. Interest rates under the First Lien Term Loan are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%.

 

The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur. Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31, 2020. If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts payable, as well as a make-whole premium.

 

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

 

Deferred Financing Costs and Discount

 

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

v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Taxes  
Income Taxes

12. Income Taxes

 

Income tax (benefit) expense from continuing operations and effective income tax rates consist of the following:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2020

    

2019

    

Current taxes:

 

 

 

 

 

 

 

Domestic

 

$

(4,364)

 

$

2,490

 

Foreign

 

 

16

 

 

15

 

 

 

 

(4,348)

 

 

2,505

 

Deferred taxes:

 

 

 

 

 

 

 

Domestic

 

 

1,043

 

 

969

 

Foreign

 

 

 —

 

 

 —

 

 

 

 

1,043

 

 

969

 

Income tax (benefit) expense

 

$

(3,305)

 

$

3,474

 

Income (loss) before income taxes

 

 

 

 

 

 

 

Domestic income (loss)

 

$

12,790

 

$

(40)

 

Foreign income (loss)

 

 

95

 

 

(1,479)

 

Total

 

$

12,885

 

$

(1,519)

 

Effective income tax rate

 

 

(25.6)

%

 

(228.7)

%

 

The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

2020

    

2019

    

Tax at federal statutory rate

 

21.0

%

21.0

%

State income taxes

 

5.3

 

(50.3)

 

Foreign taxes

 

 —

 

(23.3)

 

Tax benefit for U.K. sale

 

 —

 

154.8

 

Valuation allowance

 

(41.1)

 

(213.8)

 

Unrecognized tax benefits

 

5.6

 

(15.5)

 

Tax credits

 

(1.2)

 

(48.6)

 

Permanent items

 

4.0

 

(54.1)

 

Tax benefit CARES Act

 

(20.9)

 

 —

 

Other

 

1.7

 

1.1

 

Effective income tax rate

 

(25.6)

%

(228.7)

%

 

The components of the deferred tax assets and liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

    

2020

 

2019

 

Deferred tax assets:

 

 

 

 

 

 

 

Accrued expense