Company Quick10K Filing
CPI Card Group
Price2.66 EPS-0
Shares11 P/E-13
MCap30 P/FCF-10
Net Debt293 EBIT1
TEV323 TEV/EBIT218
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-05
10-Q 2020-03-31 Filed 2020-05-06
10-K 2019-12-31 Filed 2020-03-06
10-Q 2019-09-30 Filed 2019-11-06
10-Q 2019-06-30 Filed 2019-08-07
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-06
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-03-31 Filed 2018-05-09
10-Q 2017-09-30 Filed 2017-11-08
10-Q 2017-06-30 Filed 2017-08-03
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-03-02
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-24
10-Q 2015-09-30 Filed 2015-11-23
8-K 2020-08-05 Earnings, Regulation FD, Exhibits
8-K 2020-05-27
8-K 2020-05-08
8-K 2020-05-06
8-K 2020-03-16
8-K 2020-03-09
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8-K 2018-11-07
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8-K 2018-06-13
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8-K 2018-05-08
8-K 2018-04-26
8-K 2018-03-12
8-K 2018-02-22
8-K 2018-01-05

PMTS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-10.1 pmts-20200630ex101146895.htm
EX-31.1 pmts-20200630ex3113e0fb8.htm
EX-31.2 pmts-20200630ex3126bcfc6.htm
EX-32.1 pmts-20200630ex32180e72a.htm
EX-32.2 pmts-20200630ex322ce184b.htm

CPI Card Group Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
28519710921-67-1552015201620182020
Assets, Equity
957249263-202015201620182020
Rev, G Profit, Net Income
251791-7-152015201620182020
Ops, Inv, Fin

10-Q 1 pmts-20200630x10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the Quarterly Period Ended June 30, 2020.

or

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from to

Commission File Number 001-37584

CPI Card Group Inc.

(Exact name of the registrant as specified in its charter)

Delaware

26-0344657

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

10026 West San Juan Way

Littleton, CO

80127

(Address of principal executive offices)

(Zip Code)

(720) 681-6304

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act of :

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

PMTS

OTC Markets Group Inc.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No

Number of shares of Common Stock, $0.001 par value, outstanding as of July 24, 2020: 11,229,819


Table of Contents

    

Page

 

Part I — Financial Information

Item 1 — Financial Statements (Unaudited)

3

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

35

Item 4 — Controls and Procedures

35

Part II — Other Information

Item 1 — Legal Proceedings

35

Item 1A — Risk Factors

36

Item 6 — Exhibits

38

Signatures

39

2


PART I - Financial Information

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in Thousands, Except Share and Per Share Amounts)

(Unaudited)

June 30, 

December 31, 

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

54,445

$

18,682

Accounts receivable, net of allowances of $281 and $395, respectively

45,317

42,832

Inventories

18,895

20,192

Prepaid expenses and other current assets

4,172

6,345

Income taxes receivable

9,404

4,164

Total current assets

132,233

92,215

Plant, equipment, leasehold improvements and operating lease right-of-use assets, net

37,558

42,088

Intangible assets, net

28,504

30,802

Goodwill

47,150

47,150

Other assets

1,059

1,232

Total assets

$

246,504

$

213,487

Liabilities and stockholders’ deficit

Current liabilities:

Accounts payable

$

15,042

$

16,482

Accrued expenses

28,718

22,820

Deferred revenue and customer deposits

1,097

468

Total current liabilities

44,857

39,770

Long-term debt

334,819

307,778

Deferred income taxes

6,924

6,896

Other long-term liabilities

9,757

11,478

Total liabilities

396,357

365,922

Commitments and contingencies (Note 15)

Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at June 30, 2020 and December 31, 2019

-

-

Stockholders’ deficit:

Common stock; $0.001 par value—100,000,000 shares authorized; 11,229,819 and 11,224,191 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

11

11

Capital deficiency

(111,935)

(111,988)

Accumulated loss

(37,929)

(40,458)

Total stockholders’ deficit

(149,853)

(152,435)

Total liabilities and stockholders’ deficit

$

246,504

$

213,487

See accompanying notes to condensed consolidated financial statements

3


CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Amounts in Thousands, Except Share and Per Share Amounts)

(Unaudited)

Three Months Ended June 30, 

Six Months Ended June 30, 

2020

    

2019

    

2020

    

2019

Net sales:

Products

$

39,077

$

33,125

$

81,578

$

65,882

Services

32,301

33,776

63,769

67,885

Total net sales

71,378

66,901

145,347

133,767

Cost of sales:

Products (exclusive of depreciation and amortization shown below)

25,911

22,098

52,290

43,587

Services (exclusive of depreciation and amortization shown below)

19,666

19,647

38,853

40,813

Depreciation and amortization

2,649

2,775

5,342

5,465

Total cost of sales

48,226

44,520

96,485

89,865

Gross profit

23,152

22,381

48,862

43,902

Operating expenses, net:

Selling, general and administrative (exclusive of depreciation and amortization shown below)

19,141

16,792

35,683

33,210

Depreciation and amortization

1,505

1,493

2,990

3,026

Litigation settlement gain

(6,000)

(6,000)

Total operating expenses, net

20,646

12,285

38,673

30,236

Income from operations

2,506

10,096

10,189

13,666

Other expense, net:

Interest, net

(6,772)

(6,438)

(12,860)

(12,762)

Foreign currency (loss)

(25)

(1,321)

(33)

(1,280)

Other (expense) income, net

(7)

(8)

(94)

11

Total other expense, net

(6,804)

(7,767)

(12,987)

(14,031)

(Loss) income from continuing operations before income taxes

(4,298)

2,329

(2,798)

(365)

Income tax benefit (expense)

4,414

(777)

5,357

(1,180)

Net income (loss) from continuing operations

116

1,552

2,559

(1,545)

Net (loss) income from discontinued operation, net of tax (Note 3)

(4)

(30)

(30)

12

Net income (loss)

$

112

$

1,522

$

2,529

$

(1,533)

Basic net income (loss) per share from continuing operations:

$

0.01

$

0.14

$

0.23

$

(0.14)

Diluted net income (loss) per share from continuing operations:

$

0.01

$

0.14

$

0.23

$

(0.14)

Basic net income (loss) per share:

$

0.01

$

0.14

$

0.23

$

(0.14)

Diluted net income (loss) per share:

$

0.01

$

0.14

$

0.22

$

(0.14)

Basic weighted-average shares outstanding:

11,229,819

11,178,462

11,227,160

11,169,468

Diluted weighted-average shares outstanding:

11,233,852

11,242,225

11,242,272

11,169,468

Comprehensive income (loss):

Net income (loss)

$

112

$

1,522

$

2,529

$

(1,533)

Currency translation adjustment

-

31

Reclassification adjustment to foreign currency loss

1,329

1,329

Total comprehensive income (loss)

$

112

$

2,851

$

2,529

$

(173)

See accompanying notes to condensed consolidated financial statements

4


CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in Thousands)

(Unaudited)

Accumulated

other

  

Common Stock

Capital

Accumulated

comprehensive

  

Shares

  

Amount

  

deficiency

  

earnings (loss)

  

loss

  

Total

March 31, 2020

 

11,229,819

$

11

$

(111,953)

$

(38,041)

$

$

(149,983)

Stock-based compensation

18

18

Components of comprehensive (loss) income:

Net income

 

 

112

112

June 30, 2020

 

11,229,819

$

11

$

(111,935)

$

(37,929)

$

$

(149,853)

Accumulated

other

Common Stock

Capital

Accumulated

comprehensive

Shares

Amount

deficiency

earnings (loss)

loss

Total

December 31, 2019

11,224,191

$

11

$

(111,988)

$

(40,458)

$

$

(152,435)

Shares issued under stock-based compensation plans

5,628

Stock-based compensation

53

53

Components of comprehensive (loss) income:

Net income

2,529

2,529

June 30, 2020

11,229,819

$

11

$

(111,935)

$

(37,929)

$

$

(149,853)

Accumulated

other

Common Stock

Capital

Accumulated

comprehensive

Shares

Amount

deficiency

earnings (loss)

loss

Total

March 31, 2019

11,160,537

$

11

$

(112,091)

$

(39,059)

$

(1,329)

$

(152,468)

Shares issued under stock-based compensation plans

62,991

Stock-based compensation

152

152

Components of comprehensive (loss) income:

Net income

1,522

1,522

Reclassification adjustment to foreign currency loss

1,329

1,329

June 30, 2019

11,223,528

$

11

$

(111,939)

$

(37,537)

$

$

(149,465)

Accumulated

other

Common Stock

Capital

Accumulated

comprehensive

Shares

Amount

deficiency

earnings (loss)

loss

Total

December 31, 2018

11,160,377

$

11

$

(112,223)

$

(36,004)

$

(1,360)

$

(149,576)

Shares issued under stock-based compensation plans

63,151

Stock-based compensation

284

284

Components of comprehensive (loss) income:

Net loss

 

(1,533)

(1,533)

Currency translation adjustment

 

31

31

Reclassification adjustment to foreign currency loss

1,329

1,329

June 30, 2019

11,223,528

$

11

$

(111,939)

$

(37,537)

$

$

(149,465)

See accompanying notes to condensed consolidated financial statements

5


CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

    

Six Months Ended June 30, 

 

2020

   

2019

Operating activities

Net income (loss)

 

$

2,529

$

(1,533)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Loss (income) from discontinued operation

30

(12)

Depreciation and amortization expense

8,332

8,491

Stock-based compensation expense

59

308

Amortization of debt issuance costs and debt discount

1,565

979

Deferred income taxes

28

593

Reclassification adjustment to foreign currency loss

1,329

Other, net

1,289

(190)

Changes in operating assets and liabilities:

Accounts receivable

(2,381)

66

Inventories

259

(5,028)

Prepaid expenses and other assets

1,136

1,593

Income taxes receivable, net

(5,239)

228

Accounts payable

(1,660)

(1,042)

Accrued expenses

5,686

(6,249)

Deferred revenue and customer deposits

629

(564)

Other liabilities

(216)

74

Cash provided by (used in) operating activities - continuing operations

12,046

(957)

Cash provided by (used in) operating activities - discontinued operation

(30)

12

Investing activities

Acquisitions of plant, equipment and leasehold improvements

(1,644)

(2,686)

Cash received for sale of Canadian subsidiary

1,451

Cash used in investing activities - continuing operations

(1,644)

(1,235)

Financing activities

Proceeds from Senior Credit Facility, net of discount

29,100

Debt issuance costs

(2,507)

Proceeds from Revolving Credit Facility

11,500

Payments on Revolving Credit Facility

(11,500)

Payments on finance lease obligations

(1,181)

(663)

Cash provided by (used in) financing activities

25,412

(663)

Effect of exchange rates on cash

(21)

36

Net increase (decrease) in cash and cash equivalents

35,763

(2,807)

Cash and cash equivalents, beginning of period

18,682

20,291

Cash and cash equivalents, end of period

 

$

54,445

$

17,484

Supplemental disclosures of cash flow information

Cash paid during the period for:

Interest

 

$

11,519

$

11,660

Income taxes

 

$

16

$

340

Right-to-use assets obtained in exchange for lease obligations:

Operating leases

$

141

$

8,533

Financing leases

$

763

$

3,366

Accounts payable, and accrued expenses for acquisitions of plant, equipment and leasehold improvements

$

528

$

841

See accompanying notes to condensed consolidated financial statements

6


CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc., (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company,”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. The Company defines “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa®, Mastercard®, American Express® and Discover® in the United States) and Interac (in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. The Company also offers an instant card issuance solution, which provide card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be compliant and registered with one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Company’s Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the Debit and Credit segment or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451. After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale was recorded. In connection with the disposition of the Canadian subsidiary, the Company released the related cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the six months ended June 30, 2019. The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

COVID-19 Update

 

On March 11, 2020, the World Health Organization (“WHO”) characterized the novel coronavirus disease (“COVID-19”) as a pandemic. Further, on March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act – the legislation that directs federal emergency disaster response. The broader and long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The adverse effects of the COVID-19 pandemic have become widespread, including in the locations where the Company operates and its customers and suppliers conduct business. The health and safety of CPI’s employees remains paramount, and the Company continues to follow the safety precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention.  All of CPI’s operations remain open and continue to provide direct and essential support to the financial services industry. However, the Company may experience constrained supply, curtailed customer demand or impacts on CPI’s workforce that could materially adversely impact the business, results of operations and overall financial performance in future periods. While CPI’s net sales in the second quarter and first half of 2020 increased over the prior year, the Company experienced lower customer demand than expected (which CPI believes is primarily attributable to the COVID-19 pandemic), and the Company may experience further effects in the Company’s results of operations and overall financial performance in future periods. There can be no assurance that the Company’s strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 pandemic on the business and operating results. See Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 for further discussion of the possible impact of the COVID-19 pandemic on the business.

 

              On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The CARES Act, among other things, includes provisions relating to refundable payroll

7


tax credits, deferment of employer side social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. CPI is continuing to evaluate the applicability of the CARES Act to the Company, and the potential impacts on the business. Refer to Note 12, Income Taxes – Continuing Operations, for a discussion of the CARES Act income tax refund the Company has applied for. In addition, the Company has applied for the deferment of employer side social security payments during the second quarter of 2020. While the Company is participating in certain programs under the CARES Act, the Act and its guidance are subject to change, and there is no guarantee that CPI will continue to meet eligibility requirements or that such programs will provide meaningful benefit to the Company.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The condensed consolidated balance sheet as of December 31, 2019 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions. Actual results could differ from those estimates.

Recent Accounting Standards

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company adopted the new guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Refer to Note 10, Financing and Operating Leases.

Recently Issued Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years

8


beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in the current fiscal year 2020. The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations.

2. Net Sales

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

Three Months Ended June 30, 2020

Products

Services

Total

Debit and Credit

$

39,541

$

18,765

$

58,306

Prepaid Debit

13,536

13,536

Other

 

 

Intersegment eliminations

(464)

 

 

(464)

Total

$

39,077

$

32,301

$

71,378

Six Months Ended June 30, 2020

Products

Services

Total

Debit and Credit

$

82,452

$

35,693

$

118,145

Prepaid Debit

28,076

28,076

Other

 

 

Intersegment eliminations

(874)

 

 

(874)

Total

$

81,578

$

63,769

$

145,347

Three Months Ended June 30, 2019

Products

Services

Total

Debit and Credit

$

33,276

17,810

$

51,086

Prepaid Debit

15,966

15,966

Other

 

 

Intersegment eliminations

(151)

 

(151)

Total

$

33,125

$

33,776

$

66,901

Six Months Ended June 30, 2019

Products

Services

Total

Debit and Credit

$

66,120

33,895

$

100,015

Prepaid Debit

32,710

32,710

Other

397

1,282

 

1,679

Intersegment eliminations

(635)

(2)

 

(637)

Total

$

65,882

$

67,885

$

133,767

Products Net Sales

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

EMV® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo, LLC .

9


Services Net Sales

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

Customer Contracts

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

3. Discontinued Operation

On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated, information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2020 and 2019.

4. Accounts Receivable

Accounts receivable consisted of the following:

    

June 30, 2020

    

December 31, 2019

    

Trade accounts receivable

 

$

38,716

 

$

39,004

Unbilled accounts receivable

 

6,882

 

4,223

 

45,598

 

43,227

Less allowance for doubtful accounts

(281)

(395)

$

45,317

$

42,832

5. Inventories

Inventories consisted of the following:

    

June 30, 2020

    

December 31, 2019

Raw materials

 

$

16,602

 

$

16,492

Finished goods

 

4,679

 

5,047

Inventory reserve

(2,386)

(1,347)

 

$

18,895

 

$

20,192

10


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

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

    

June 30, 2020

    

December 31, 2019

Machinery and equipment

 

$

52,787

 

$

52,212

Machinery and equipment under financing leases

9,019

8,256

Furniture, fixtures and computer equipment

 

3,272

 

4,749

Leasehold improvements

 

14,934

 

14,905

Construction in progress

 

724

 

455

80,736

80,577

Less accumulated depreciation and amortization

 

(48,621)

 

(44,801)

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

 

5,443

 

6,312

 

$

37,558

 

$

42,088

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,005 and $3,104 for the three months ended June 30, 2020 and 2019, respectively, and $6,034 and $6,163 for the six months ended June 30, 2020 and 2019, respectively.

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

7. Goodwill and Other Intangible Assets

The Company reports all of its goodwill in its Debit and Credit segment at June 30, 2020 and December 31, 2019. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of June 30, 2020. The potential negative implications of COVID-19, and a related potential decline in the Company’s total fair value of invested capital and financial performance for reporting units with goodwill, could require the Company to perform a quantitative test for goodwill impairment in future quarters.

Intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements. Intangible amortization expense was $1,149 and $1,164 for the three months ended June 30, 2020 and 2019, respectively, and $2,298 and $2,328 for the six months ended June 30, 2020 and 2019. 

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

June 30, 2020

December 31, 2019

Weighted Average

    

Gross Book

    

Accumulated

    

Net Book

    

Gross Book

    

Accumulated

    

Net Book

Life (Years)

    

Value

    

Amortization

    

Value

    

Value

    

Amortization

    

Value

Customer relationships

17.2

$

55,454

$

(30,504)

$

24,950

$

55,454

(28,865)

$

26,589

Technology and software

8

 

7,101

(5,416)

 

1,685

 

7,101

(4,952)

2,149

Trademarks

8.7

 

3,330

 

(1,461)

 

1,869

 

3,330

(1,266)

2,064

Non-compete agreements

5

 

491

 

(491)

 

 

491

(491)

Intangible assets subject to amortization

$

66,376

$

(37,872)

$

28,504

$

66,376

$

(35,574)

$

30,802

11


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

2020 (excluding the six months ended June 30, 2020)

$

2,297

2021

    

 

4,352

2022

3,867

2023

3,867

2024

3,530

Thereafter

10,591

 

$

28,504

8. Fair Value of Financial Instruments

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

    Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

    Level 2— Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities.

    Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the condensed consolidated balance sheets were as follows:

Carrying

Value as of 

Fair Value as of 

Fair Value Measurement at June 30, 2020

June 30, 

June 30, 

 (Using Fair Value Hierarchy)

2020

2020

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

First Lien Term Loan

$

312,500

$

254,688

$

$

254,688

$

Senior Credit Facility

$

30,000

$

30,000

$

$

$

30,000

  

Carrying

 Value as of

Fair Value as of

Fair Value Measurement at December 31, 2019

December 31, 

December 31, 

 (Using Fair Value Hierarchy)

2019

2019

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

First Lien Term Loan

$

312,500

 

$

234,375

$

 

$

234,375

$

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

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

12


9. Accrued Liabilities

Accrued liabilities consisted of the following:

    

June 30, 2020

    

December 31, 2019

    

Accrued payroll and related employee expenses

 

$

5,078

 

$

3,954

Accrued employee performance bonus

 

2,734

 

3,920

Accrued rebates

3,559

1,573

Sales tax liability

2,700

-

Accrued interest

 

4,771

 

4,951

Operating and financing lease liability (current portion)

4,592

4,494

Other

5,284

3,928

Total accrued expenses

$

28,718

$

22,820

The sales tax liability is further described in Note 15, Commitments and Contingencies.

10. Financing and Operating Leases

CPI adopted ASC 842 effective January 1, 2019. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. As a result of the adoption of ASC 842, the Company recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

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

Three Months Ended

Three Months Ended

June 30, 2020

    

June 30, 2019

Total operating lease costs

671

665

Finance lease cost:

Right-of-use amortization expense

$

329

$

178

Interest on lease liabilities

117

40

Total financing lease costs

$

446

$

218

Six Months Ended

Six Months Ended

June 30, 2020

    

June 30, 2019

Total operating lease costs

1,342

1,308

Finance lease cost:

Right-of-use amortization expense

$

656

$

301

Interest on lease liabilities

246

62

Total financing lease costs

$

902

$

363

13


The following table reflects balances for operating and financing leases:

June 30, 2020

    

December 31, 2019

Operating leases

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

$

5,443

$

6,312

Operating lease liability (current)

$

2,470

$

2,283

Long-term operating liability

3,890

5,067

Total operating lease liabilities

$

6,360

$

7,350

Financing leases

Property, equipment and leasehold improvements

$

9,019

$

8,256

Accumulated depreciation

(1,740)

(1,094)

Total property, equipment and leasehold improvements, net

$

7,279

$

7,162

Financing lease liability (current)

$

2,122

$

2,211

Long-term financing liability

3,513

3,886

Total financing lease liabilities

$

5,635

$

6,097

Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and operating lease right-of-use assets, net”.  Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.”

Future cash payment with respect to lease obligations as of June 30, 2020 were as follows:

Operating

Financing

    

Lease

    

Leases

2020 (excluding six months ended June 30, 2020)

1,473

$

1,395

2021

2,700

2,256

2022

1,428

1,745

2023