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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 subsidiaries, is referred to herein as “CPI” or the “Company”) is a leading provider of comprehensive Financial Payment Card solutions in North America. 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) and Interac (in Canada). The Company serves its customers through a network of nine production and card services facilities, including seven high-security facilities in North America that are each certified by one or more of the Payment Card Brands and Interac (in Canada) and, where required by the Company’s customers, the PCI Security Standards Council. In addition to its seven North American facilities, the Company has two facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards that are not issued on the networks of the Payment Card Brands, and personalization services.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. 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, 2014 is derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our prospectus dated October 8, 2015, filed with the Securities and Exchange Commission (“SEC”) on October 9, 2015 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (“Securities Act”).
The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s consolidated balance sheet for the year ended December 31, 2014 and the statements of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 have been reclassified to present the Nevada operations as a discontinued operation. See Note 3.
In August 2015, the Company completed the shut down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its 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; valuation allowances for receivables, inventories and deferred tax assets; and stock-based compensation expense. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018. The Company is in the process of determining the method of adoption and assessing the impact of ASU 2014-09 on its results of operations, financial position and consolidated financial statements.
The FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, in April 2015. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2015. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. The Company has elected to early adopt this standard in 2015 Accordingly, the Company recorded a reduction of $11,078 to long-term debt in the company’s condensed consolidated balance sheet as of September 30, 2015, and reclassified $614 from Capitalized loan fees to long-term debt in the Company’s condensed consolidated balance sheet as of December 31, 2014.
The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.
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2. EFT Source Acquisition
On September 2, 2014, the Company, through its wholly-owned subsidiary, CPI Acquisition, Inc., purchased EFT Source, Inc. (“EFT Source”) headquartered in Nashville, Tennessee. EFT Source is a provider of Financial Payment Card services such as data personalization and fulfillment in the U.S. market. The primary reasons for the acquisition were to extend the Company’s existing product lines, expand its markets and increase revenue. Total consideration of $68,859 consisted of $54,859 paid in cash and non-cash considerations of a $9,000 Sellers Note and the issuance of $5,000 of CPI Card Group Inc. preferred and common stock.
The assets and liabilities assumed in the acquisition were included in the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014. The results of the EFT Source operations were also included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and from September 2, 2014 through September 30, 2014.
Pro Forma Information
The following unaudited pro forma consolidated operating results give effect to the EFT Source acquisition as if it had been completed on January 1, 2014. These pro forma amounts are not necessarily indicative of the operating results that would have occurred if these transactions had occurred on such date. The pro forma adjustments are based on certain assumptions that the Company considers to be reasonable.
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Three Months |
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Nine Months |
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|
|
|
September 30, |
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September 30, |
|
|
|
|
|
|
|
|
|
Revenue – Continuing Operations |
|
$ |
85,235 |
|
$ |
203,437 |
|
Net Income – Continuing Operations |
|
|
8,483 |
|
|
11,279 |
|
Basic and diluted loss per share from Continuing Operations(a) |
|
$ |
(0.49) |
|
$ |
(0.05) |
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(a) |
Loss per share from continuing operations attributable to common stockholders after giving effect to preferred stock dividends. |
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3. Discontinued Operation and Disposition
On January 12, 2015, the Company sold its Nevada non-secure operations pursuant to an asset purchase agreement for $5,000 in cash. At December 31, 2014, the net carrying values of the assets classified as a discontinued operation include inventory and plant, equipment and leasehold improvements of $3,128 and $2,910 respectively. During the nine months ended September 30, 2015, the Company recognized a gain on the sale of a discontinued operation of $887, which is included in the gain from a discontinued operation, net of an income tax benefit of $1,926 in the Company’s condensed consolidated statement of operations.
The Nevada operations recognized income of $699 for the three months ended September 30, 2014, net of income tax expense of $374 in the Company’s condensed consolidated statement of operations. The Nevada operations recognized a loss of $606 for the nine months ended September 30, 2015 and a loss of $2,064 for the nine months ended September 30, 2014, net of an income tax benefit of $404 and $1,108, respectively, in the Company’s condensed consolidated statement of operations.
After the Nevada Sale, CPI retained no significant continuing involvement in the Nevada operations other than a 180 day transition of services agreement, which expired on July 11, 2015. As a result of the Nevada Sale, the Company expects to be able to take a tax deduction of $32,128 related to the tax deductible goodwill and intangible assets of the Nevada operations of which $4,190 of the tax deductible goodwill resulted in the recognition of an income tax benefit of $1,510 during the nine months ended September 30, 2015.
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4. Inventories
Inventories include the following:
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September 30, 2015 |
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December 31, 2014 |
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|
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Raw materials |
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$ |
9,365 |
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$ |
12,110 |
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Work-in-process |
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14,383 |
|
|
8,625 |
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Finished goods |
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3,348 |
|
|
870 |
|
|
|
$ |
27,096 |
|
$ |
21,605 |
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5. Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements consist of the following asset classes:
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September 30, 2015 |
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December 31, 2014 |
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|
|
|
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|
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Buildings |
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$ |
2,613 |
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$ |
2,486 |
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Machinery and equipment |
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53,756 |
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47,792 |
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Furniture and fixtures |
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6,085 |
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4,203 |
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Leasehold improvements |
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14,935 |
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12,593 |
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Construction in progress |
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2,036 |
|
|
3,448 |
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|
|
|
79,425 |
|
|
70,522 |
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Less accumulated depreciation and amortization |
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(29,591) |
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(25,750) |
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|
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$ |
49,834 |
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$ |
44,772 |
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For the Company’s continuing operations, amounts recorded for the depreciation of plant, equipment and leasehold improvements were $2,674 and $2,772 for the three months ended September 30, 2015 and 2014, respectively, and $8,430 and $7,410 for the nine months ended September 30, 2015 and 2014, respectively.
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6. Goodwill and Other Intangible Assets
Goodwill relates to the Company’s U.S. Debit and Credit, U.K. Limited and Canada reporting segments. The change in goodwill from December 31, 2014 to September 30, 2015 was a result of currency translation adjustments.
Intangible assets consist of customer relationships, technology and software, non-compete agreements, favorable leases and trademarks. Total intangible assets are being amortized over a weighted-average useful life of 16 years. The changes in the cost basis of the intangibles from December 31, 2014 to September 30, 2015 are related to foreign currency translations. Intangible amortization expense was $1,145 and $509 for the three months ended September 30, 2015 and 2014, respectively. Intangible amortization expense was $3,433 and $1,531 for the nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015 and December 31, 2014, intangible assets, excluding goodwill, were comprised of the following:
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September 30, 2015 |
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December 31, 2014 |
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Average Life |
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|
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Accumulated |
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Net Book |
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|
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Accumulated |
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Net Book |
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||||||
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(Years) |
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Cost |
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Amortization |
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Value |
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Cost |
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Amortization |
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Value |
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||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Customer relationships |
|
12 |
to |
20 |
|
$ |
59,717 |
|
$ |
(16,908) |
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$ |
42,809 |
|
$ |
59,871 |
|
$ |
(14,304) |
|
$ |
45,567 |
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Technology and software |
|
7 |
to |
10 |
|
|
7,101 |
|
|
(1,006) |
|
|
6,095 |
|
|
7,101 |
|
|
(310) |
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|
6,791 |
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Non-compete agreements |
|
5 |
to |
8 |
|
|
491 |
|
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(252) |
|
|
239 |
|
|
491 |
|
|
(198) |
|
|
293 |
|
Favorable leases |
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9.5 |
|
|
|
111 |
|
|
(97) |
|
|
14 |
|
|
111 |
|
|
(88) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization |
|
|
|
|
|
|
67,420 |
|
|
(18,263) |
|
|
49,157 |
|
|
67,574 |
|
|
(14,900) |
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|
52,674 |
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Trademarks (indefinite-lived) |
|
|
|
|
|
|
6,029 |
|
|
— |
|
|
6,029 |
|
|
6,029 |
|
|
— |
|
|
6,029 |
|
|
|
|
|
|
|
$ |
73,449 |
|
$ |
(18,263) |
|
$ |
55,186 |
|
$ |
73,603 |
|
$ |
(14,900) |
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$ |
58,703 |
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The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2015 is as follows:
2015 (remaining 3 months) |
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$ |
1,145 |
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2016 |
|
|
4,569 |
|
2017 |
|
|
4,554 |
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2018 |
|
|
4,554 |
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2019 |
|
|
4,535 |
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Thereafter |
|
|
29,800 |
|
|
|
$ |
49,157 |
|
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7. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
· |
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
· |
Level 2— Observable inputs other than Level 1 prices such as quoted prices in active markets for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. |
· |
Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
The Company’s financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows:
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Fair Value as of |
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Fair Value Measurement at September 30, 2015 |
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||||||||
|
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September 30, |
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(Using Fair Value Hierarchy) |
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2015 |
|
Level 1 |
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Level 2 |
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Level 3 |
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|
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Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan |
|
$ |
432,825 |
|
$ |
— |
|
$ |
432,825 |
|
$ |
— |
|
Sellers Note |
|
$ |
9,000 |
|
$ |
— |
|
$ |
— |
|
$ |
9,000 |
|
|
|
Fair Value as of |
|
Fair Value Measurement at December 31, 2014 |
|
||||||||
|
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December 31, |
|
(Using Fair Value Hierarchy) |
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||||||||
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2014 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan |
|
$ |
170,866 |
|
$ |
— |
|
$ |
170,866 |
|
$ |
— |
|
Sellers Note |
|
$ |
9,000 |
|
$ |
— |
|
$ |
— |
|
$ |
9,000 |
|
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8. Related-Party Transactions
The Company leases its operating facility in Indiana from a company that is owned by an individual who was a member of the Company’s Board of Directors until August 7, 2015. The lease expires in January 2018 and requires the Company to pay property taxes, insurance and normal maintenance costs. The Company paid rent of $40 for each of the three month periods ended September 30, 2015 and 2014, and $121 for each of the nine month periods ended September 30, 2015 and 2014.
In conjunction with certain Company employees acquiring preferred and common stock during 2013 and 2012, the Company obtained notes receivable from the employees that have remaining balances outstanding of $0 and $108 at September 30, 2015 and December 31, 2014, respectively.
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9. Long-Term Debt and Credit Facility
As of September 30, 2015 and December 31, 2014, long-term debt and credit facilities consist of the following:
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Interest |
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September 30, |
|
December 31, |
|
||
|
|
Rate (1) |
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2015 |
|
2014 |
|
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First lien term loan facility (1) |
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6.75 |
% |
$ |
435,000 |
|
$ |
— |
|
Unamortized discount on first lien term loan facility |
|
|
|
|
(6,433) |
|
|
— |
|
Senior term loan dated September 2, 2014 |
|
3.02 |
% |
|
— |
|
|
170,645 |
|
Unamortized discount on senior term loan |
|
|
|
|
— |
|
|
(221) |
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Unamortized deferred financing costs |
|
|
|
|
(11,078) |
|
|
(614) |
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Sellers note |
|
5.0 |
% |
|
9,000 |
|
|
9,000 |
|
Total long-term debt |
|
|
|
|
426,489 |
|
|
178,810 |
|
Less current maturities of long-term debt |
|
|
|
|
(13,350) |
|
|
(6,326) |
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Long-term debt, excluding current maturities |
|
|
|
$ |
413,139 |
|
$ |
172,484 |
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(1) |
Interest rate at September 30, 2015 |
First Lien Credit Facility
On August 17, 2015, the Company entered into a first lien credit agreement (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan facility (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.
The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.
Interest rates under the First Lien Credit Facility are based, at the Company’s election, on a Eurodollar rate plus a margin of 4.50% or a base rate plus a margin of 3.50%. Letters of credit are subject to a 0.125% fronting fee payable to the issuing bank and a fee payable to the revolving lenders equal to the margin applicable to Eurodollar revolving loans. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.
The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, restrictions on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions. The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including the completion of a qualified initial public offering. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage not in excess of 7.00 times.
In accordance with the terms of the First Lien Credit Facility, the Company repaid $112,500 of the First Lien Term Loan on October 15, 2015 in conjunction with the completion of its initial public offering (“IPO”). See Note 18.
As of September 30, 2015, the Company did not have any outstanding amounts under the Revolving Credit Facility other than outstanding letters of credit of approximately $100, which reduced the borrowing capacity to $39,900.
Senior Term Loan dated September 2, 2014
At September 30, 2015, there were no amounts outstanding on the Senior Term Loan dated November 8, 2012, and amended September 2, 2014, and the related revolver with a maturity of September 30, 2016. The outstanding balance of $158,420 on the Senior Term Loan was repaid in full on August 17, 2015 using a portion of the proceeds from the new $435,000 First Lien Term Loan. In conjunction with the repayment of the Senior Term Loan, the Company recognized a $703 loss on early extinguishment related to the unamortized deferred financing costs and discount on the Senior Term Loan.
Sellers Note
The Company entered into a subordinated, unsecured promissory note for $9,000 with certain sellers of EFT Source as part of the EFT Source acquisition. Interest on the Sellers Note accrues at 5.0% per annum and is paid quarterly. The Sellers Note principal and unpaid interest is due to the sellers at the earlier of September 2, 2016 or with the occurrence of certain specific events as outlined in the Sellers Note. The Company recorded the Sellers Note as current liability at September 30, 2015, as the maturity date of the loan is within twelve months from September 30, 2015.
Letters of Credit
The Company has two outstanding letters of credit for the security deposits on two real property lease agreements. These letters of credit are for a total of $100, reducing availability under the Revolving Credit Facility. The Company pays a fee on the outstanding letters of credit at the applicable margin, which was 4.50% as of September 30, 2015, in addition to a fronting fee of 0.125% per annum.
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10. Income Taxes
During the three months ended September 30, 2015, the Company recognized an income tax expense of $6,554 on pre-tax income of $21,314, representing an effective income tax rate of 30.7% compared to an income tax expense of $4,751 on pre-tax income of $11,519, representing an effective tax rate of 41.2% during the three months ended September 30, 2014.
The effective tax rates for all periods presented also differ from the federal U.S. statutory rate primarily due to a benefit from permanent deductions related to credits for domestic production activities and the impact of state income taxes.
During the nine months ended September 30, 2015, the Company recognized an income tax expense of $16,528 on pre-tax income of $49,404, representing an effective income tax rate of 33.5% compared to an income tax expense of $7,084 on pre-tax income of $17,419, representing an effective tax rate of 40.7% during the nine months ended September 30, 2014.
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11. Series A Preferred Stock
Series A Preferred Stock has a par value of $0.001 per share. The Series A Preferred Stock has an initial liquidation preference equal to $1,000 per outstanding share. In addition, the Series A Preferred Stock liquidation preference earns a dividend of 20% per share per annum payable when declared by the Board of Directors. Such dividends accrue on each share from the date of original issuance and accrue on a daily basis, whether or not declared. Such dividends are cumulative so that if such dividend in respect of any previous or current annual dividend period, at the annual 20% rate, has not been paid, the deficiency shall first be fully paid before any dividend or other distribution shall be paid or declared and set apart for the common stock. In the event of any liquidation, dissolution or winding up of the Company, the Series A Preferred Stock holders shall be entitled to receive, prior and in preference to any distributions of any of the Company’s assets to the common stock holders, the value of the liquidation preference. If the distribution of such assets is insufficient to permit the payment to such holders, the distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each holder. The Series A Preferred Stock has no voting rights.
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Series A Preferred Stock |
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|||
|
|
Shares |
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Amount |
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014 |
|
64,809 |
|
$ |
58,250 |
|
Less redemptions of preferred stock |
|
(62,233) |
|
|
(55,946) |
|
Balance as of September 30, 2015 |
|
2,576 |
|
$ |
2,304 |
|
On August 17, 2015, the Company redeemed 62,140 shares of the Series A Preferred Stock for $276,688, or $4,446.70 per share. Of the $276,688 redemption amount, $55,946 was treated as a return of capital and $220,742 was treated as a dividend. During the nine months ended September 30, 2015, the Company redeemed a total of 62,233 shares of Series A Preferred Stock at prices ranging between $3,950.33 and $4,446.70 per share.
On October 15, 2015, the Company redeemed the remaining 2,576 shares of the Series A Preferred Stock for $11,877, or $4,610.68 per share. See Note 18.
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12. Stockholders’ Equity
Common Stock
On September 3, 2015, the Company’s Board of Directors approved a 22-for-1 stock split of our common stock. Upon the effective date of the stock split, each outstanding share of common stock and restricted common stock was divided into 22 shares of common stock or restricted common stock, as applicable. Shares of common stock available for issuance under the 2007 Stock Option Plan were increased accordingly. All of the share numbers, share prices and exercise prices have been retroactively adjusted to reflect the stock split in this Quarterly Report on Form 10-Q, including the accompanying condensed consolidated financial statements and these notes.
During the nine months ended September 30, 2015, the Company issued no common stock and redeemed 86,768 shares of common stock at values of $0.32 and $0.91 per share. During the three months ended September 30, 2015, there was no common stock issued or redeemed. The redeemed common stock share values were calculated in accordance with the terms of the applicable award agreements.
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14. Commitments and Contingencies
Asset retirement obligations relate to legal obligations associated with the removal of all leasehold improvements at the end of the lease term. The Company records all asset retirement obligations, which primarily relate to “make-good” clauses in operating leases, for its leased property containing leasehold improvements. The liability, reported within other long-term liabilities, is accreted through charges to operating expenses. If the asset retirement obligation is settled for an amount other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement. Accretion expense was $6 for both the nine month periods ended September 30, 2015 and 2014. As of September 30, 2015 and December 31, 2014, the Company’s asset retirement obligations included in other long-term liabilities were $621 and $911, respectively.
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15. Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to Accounting Standards Codification (“ASC”) 718, Share-Based Payment, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of estimated forfeitures, over the requisite service period for awards expected to vest.
In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options may be granted to employees, directors, and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option is granted. The number of common shares available under the Option Plan is 2,090,000, of which 1,562,000 were available to be granted during the nine month period ended September 30, 2015. The stock options have a 10-year life and vest as noted in each respective grant letter. All stock options are nonqualified. No stock options were granted during the nine month period ended September 30, 2015.
The following table summarizes the changes in the number of outstanding stock options for the nine month period ended September 30, 2015:
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Weighted- Average |
|
Contractual Term |
|
|
|
|
Options |
|
Exercise Price |
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
627,000 |
|
$ |
0.0003 |
|
6.44 |
|
Granted |
|
— |
|
|
— |
|
— |
|
Forfeited |
|
(99,000) |
|
|
0.0003 |
|
— |
|
Outstanding as of September 30, 2015 |
|
528,000 |
|
$ |
0.0003 |
|
5.86 |
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2015 |
|
480,333 |
|
$ |
0.0004 |
|
5.68 |
|
Unvested options as of September 30, 2015 vest as follows:
2015 |
|
7,334 |
|
2016 |
|
40,333 |
|
Total unvested options as of September 30, 2015 |
|
47,667 |
|
Compensation expense and unrecorded compensation expense related to stock options granted under the Option Plan for the three and nine month periods ended September 30, 2015 and 2014 were de minimis.
The following table summarizes the changes in the number of outstanding restricted shares of common stock for the nine month period ended September 30, 2015:
|
|
|
|
Weighted- |
|
|
|
|
Shares |
|
Average Grant Date Fair Value |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
— |
|
$ |
— |
|
Granted |
|
191,664 |
|
|
9.48 |
|
Vested |
|
— |
|
|
— |
|
Forfeited |
|
— |
|
|
— |
|
Outstanding as of September 30, 2015 |
|
191,664 |
|
$ |
9.48 |
|
During the nine months ended September 30, 2015, the Company issued 191,664 restricted shares of common stock to executives of the Company. The awards contain service conditions associated with continued employment or service. The terms of the non-vested restricted shares of common stock provide voting and regular dividend rights to the holders of the restricted shares of common stock. Upon vesting, the restrictions on the restricted shares of common stock lapse and the shares are considered issued and outstanding. The restricted shares vest over one to three year periods.
Total compensation expense related to the unvested restricted shares of common stock awards was $323 for the three and nine month periods ended September 30, 2015. As of September 30, 2015, there was $1,494 of total remaining unrecognized compensation expense related to non-vested restricted shares of common stock that will be recognized over a weighted average period of 1.74 years.
|
16. Phantom Stock Plan
Total authorized units under the CPI Acquisition, Inc. Phantom Stock Plan, (the “Phantom Stock Plan”) are 100,000. At December 31, 2014, there were 84,297 units issued and outstanding under the terms of the Phantom Stock Plan, of which 13,088 were fully vested. At September 30, 2015, there were 81,156 units issued and outstanding under the terms of the Phantom Stock Plan, of which 13,088 were fully vested.
As these awards must be settled in cash, the Company accounts for them as liabilities. The Company measures the liability at intrinsic value; with changes in the intrinsic value of the liability recognized as expense in the consolidated statements of operations and comprehensive income. There was $311 and $2,604 of compensation expense recognized for the three months ended September 30, 2015 and 2014, respectively, related to the Phantom Stock Plan. There was $1,813 and $2,013 of compensation expense recognized for the nine months ended September 30, 2015 and 2014, respectively, related to the Phantom Stock Plan.
On October 15, 2015, the Company settled the full liability associated with the Phantom Stock Plan for $13,268. See Note 18.
|
17. Segment Reporting
The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, EBITDA (as defined below), or total assets or subsidiaries which the Company believes information about the segment would be useful to the readers of the financial statements from a qualitative perspective. The Company’s chief operating decision maker is its Chief Executive Officer who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures such as revenue and EBITDA.
EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income from continuing operations before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available U.S. GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and identify strategies to improve the allocation of resources amongst segments.
As of September 30, 2015, the Company’s reportable segments are as follows:
· |
U.S. Debit and Credit |
· |
U.S. Prepaid Debit |
· |
U.K. Limited |
· |
Other |
On February 16, 2015, the Company determined that the Petersfield, United Kingdom operation, which is included in Other, would be shut down. The shut down and closure of the Petersfield facility was completed in August 2015.
Performance Measures of Reportable Segments
Revenue and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
|
Revenue |
|
||||||||||
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
U.S. Debit and Credit (a) |
|
$ |
72,785 |
|
$ |
43,069 |
|
$ |
196,190 |
|
$ |
92,339 |
|
U.S. Prepaid Debit |
|
|
23,659 |
|
|
23,752 |
|
|
53,482 |
|
|
47,050 |
|
U.K. Limited |
|
|
9,668 |
|
|
7,808 |
|
|
23,586 |
|
|
24,138 |
|
Other |
|
|
3,995 |
|
|
6,310 |
|
|
13,917 |
|
|
17,493 |
|
Intersegment eliminations |
|
|
(2,410) |
|
|
(3,565) |
|
|
(6,632) |
|
|
(7,879) |
|
Total: |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
|
|
EBITDA |
|
||||||||||
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
U.S. Debit and Credit (a) |
|
$ |
23,368 |
|
$ |
11,180 |
|
$ |
59,961 |
|
$ |
22,170 |
|
U.S. Prepaid Debit |
|
|
9,973 |
|
|
9,336 |
|
|
19,733 |
|
|
15,314 |
|
U.K. Limited |
|
|
1,235 |
|
|
596 |
|
|
2,076 |
|
|
1,410 |
|
Other |
|
|
(4,820) |
|
|
(4,431) |
|
|
(12,379) |
|
|
(7,255) |
|
Total: |
|
$ |
29,756 |
|
$ |
16,681 |
|
$ |
69,391 |
|
$ |
31,639 |
|
(a) |
Amounts for the three and nine months ended September 30, 2015 include the post-acquisition revenue and EBITDA of EFT Source. |
The following table provides a reconciliation of total segment EBITDA to income before income taxes for the three months ended September 30, 2015 and 2014 and the nine months ended September 30, 2015 and 2014:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Total segment EBITDA |
|
$ |
29,756 |
|
$ |
16,681 |
|
$ |
69,391 |
|
$ |
31,639 |
|
Depreciation and amortization |
|
|
(3,818) |
|
|
(3,215) |
|
|
(11,858) |
|
|
(8,829) |
|
Interest, net |
|
|
(4,624) |
|
|
(1,947) |
|
|
(8,129) |
|
|
(5,391) |
|
Income before income taxes |
|
$ |
21,314 |
|
$ |
11,519 |
|
$ |
49,404 |
|
$ |
17,419 |
|
Balance Sheet Data of Reportable Segments
Total assets of the Company’s reportable segments as of September 30, 2015 and December 31, 2014 were as follows:
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
219,484 |
|
$ |
200,572 |
|
U.S. Prepaid Debit |
|
|
25,998 |
|
|
20,183 |
|
U.K. Limited |
|
|
26,772 |
|
|
29,740 |
|
Other |
|
|
17,057 |
|
|
9,653 |
|
Total continuing operations: |
|
|
289,311 |
|
|
260,148 |
|
Discontinued operation (a): |
|
|
— |
|
|
5,862 |
|
Total assets: |
|
$ |
289,311 |
|
$ |
266,010 |
|
(a) |
As of December 31, 2014, certain assets of the Nevada operation sold on January 12, 2015 (Note 3) are presented in assets of a discontinued operation in the Company’s consolidated balance sheet. |
Plant, Equipment and Leasehold Improvement Additions of Geographic Locations
Plant, equipment and leasehold improvement additions of the Company’s geographical locations for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
3,625 |
|
$ |
5,705 |
|
$ |
13,598 |
|
$ |
12,000 |
|
Canada |
|
|
136 |
|
|
3 |
|
|
417 |
|
|
25 |
|
Total North America |
|
|
3,761 |
|
|
5,708 |
|
|
14,015 |
|
|
12,025 |
|
U.K. |
|
|
437 |
|
|
98 |
|
|
573 |
|
|
359 |
|
Total plant, equipment and leasehold improvement additions |
|
$ |
4,198 |
|
$ |
5,806 |
|
$ |
14,588 |
|
$ |
12,384 |
|
Net Sales of Geographic Locations
Net sales of the Company’s geographic locations for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.(a) |
|
$ |
94,125 |
|
$ |
63,788 |
|
$ |
244,636 |
|
$ |
130,974 |
|
Canada |
|
|
3,084 |
|
|
2,905 |
|
|
7,209 |
|
|
10,669 |
|
Total North America |
|
|
97,209 |
|
|
66,693 |
|
|
251,845 |
|
|
141,643 |
|
U.K. |
|
|
8,236 |
|
|
8,058 |
|
|
22,089 |
|
|
23,135 |
|
Other (b) |
|
|
2,252 |
|
|
2,623 |
|
|
6,609 |
|
|
8,363 |
|
Total revenue |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
(a) |
Amounts for the three and nine months ended September 30, 2015 include the post-acquisition revenue of EFT Source. |
(b) |
Amounts in Other include sales to various countries that individually are not material. |
Long-Lived Assets of Geographic Segments
Long-lived assets of the Company’s geographic segments as of September 30, 2015 and December 31, 2014 were as follows:
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
U.S. |
|
$ |
162,854 |
|
$ |
160,144 |
|
Canada |
|
|
2,382 |
|
|
2,525 |
|
Total North America: |
|
|
165,236 |
|
|
162,669 |
|
U.K. |
|
|
13,139 |
|
|
14,607 |
|
Total long-lived assets |
|
$ |
178,375 |
|
$ |
177,276 |
|
Net Sales by Product and Services
Net sales from products and services sold by the Company for the three and nine months ended September 30, 2015 and 2014 were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales (a) |
|
$ |
65,567 |
|
$ |
43,267 |
|
$ |
178,338 |
|
$ |
102,172 |
|
Services net sales (b) |
|
|
42,130 |
|
|
34,107 |
|
|
102,205 |
|
|
70,969 |
|
Total net sales: |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
(a) |
Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats. The Company also generates product revenue from the sale of Card@Once® instant issuance systems, private label credit cards and retail gift cards. |
(b) |
Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-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. |
|
18. Subsequent Events
On October 15, 2015, the Company completed its IPO issuing 15,000,000 shares of common stock. The public offering price of the shares sold in the IPO was $10.00 per share. The net proceeds of $142,500 from the IPO were utilized to (i) redeem all of our remaining Series A Preferred Stock for a total redemption price of $11,877, (ii) repay $112,500 of the amount outstanding under the First Lien Term Loan, and (iii) terminate and settle all outstanding obligations due under the Phantom Stock Plan of $13,268. Deferred offering expenses of $3,941 were recorded as other assets in the September 30, 2015 balance sheet. Upon completion of the IPO, these offering expenses were reclassified to additional paid-in capital. Approximately $1,804 of deferred offering costs were accrued as of September 30, 2015.
After the issuance of 15,000,000 shares of common stock in the IPO, the Company had 56,476,116 shares of common stock outstanding.
On October 4, 2015, the Company’s Board of Directors increased the number of authorized shares of common stock to 100 million.
In conjunction with the completion of the IPO, the Company adopted the CPI Card Group Inc. Omnibus Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. The Company has reserved 4,000,000 shares of common stock for issuance under the Omnibus Plan. Further, the Company granted awards of stock options for 770,450 shares of common stock at an exercise price of $10 per share on October 9, 2015. The options will generally vest 33.4% on October 9, 2017, 33.3% on October 9, 2018, and 33.3% on October 9, 2019.
|
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. 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, 2014 is derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our prospectus dated October 8, 2015, filed with the Securities and Exchange Commission (“SEC”) on October 9, 2015 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (“Securities Act”).
The Company sold its non-secure operation located in Nevada on January 12, 2015 (the “Nevada Sale”) pursuant to an asset purchase agreement for $5,000 in cash. The Nevada operations primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company’s consolidated balance sheet for the year ended December 31, 2014 and the statements of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 have been reclassified to present the Nevada operations as a discontinued operation. See Note 3.
In August 2015, the Company completed the shut down and closure of its operation in Petersfield, United Kingdom. Petersfield primarily produced retail gift cards that are not issued on the networks of the Payment Card Brands. Accordingly, the Company accrued facility contract termination costs of $681 in the three and nine months ended September 30, 2015.
Use of Estimates
Management uses estimates and assumptions relating to the reporting of assets and liabilities in its 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; valuation allowances for receivables, inventories and deferred tax assets; and stock-based compensation expense. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, in May 2014. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB deferred the effective date to annual reporting periods beginning after December 15, 2017, and interim reporting periods within those periods. The Company plans to implement the provisions of ASU 2014-09 as of January 1, 2018. The Company is in the process of determining the method of adoption and assessing the impact of ASU 2014-09 on its results of operations, financial position and consolidated financial statements.
The FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, in April 2015. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2015. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. The Company has elected to early adopt this standard in 2015 Accordingly, the Company recorded a reduction of $11,078 to long-term debt in the company’s condensed consolidated balance sheet as of September 30, 2015, and reclassified $614 from Capitalized loan fees to long-term debt in the Company’s condensed consolidated balance sheet as of December 31, 2014.
The FASB issued ASU 2015-11, Inventory—Simplifying the Measurement of Inventory, in July 2015. ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for public entities’ annual reporting periods beginning after December 15, 2016. The Company plans to implement the provisions of ASU 2015-11 as of January 1, 2017. The Company is in the process of assessing the impact of ASU 2015-11 on its results of operations, financial position and consolidated financial statements.
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
|
|
Revenue – Continuing Operations |
|
$ |
85,235 |
|
$ |
203,437 |
|
Net Income – Continuing Operations |
|
|
8,483 |
|
|
11,279 |
|
Basic and diluted loss per share from Continuing Operations(a) |
|
$ |
(0.49) |
|
$ |
(0.05) |
|
Loss per share from continuing operations attributable to common stockholders after giving effect to preferred stock dividends.
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
9,365 |
|
$ |
12,110 |
|
Work-in-process |
|
|
14,383 |
|
|
8,625 |
|
Finished goods |
|
|
3,348 |
|
|
870 |
|
|
|
$ |
27,096 |
|
$ |
21,605 |
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
Buildings |
|
$ |
2,613 |
|
$ |
2,486 |
|
Machinery and equipment |
|
|
53,756 |
|
|
47,792 |
|
Furniture and fixtures |
|
|
6,085 |
|
|
4,203 |
|
Leasehold improvements |
|
|
14,935 |
|
|
12,593 |
|
Construction in progress |
|
|
2,036 |
|
|
3,448 |
|
|
|
|
79,425 |
|
|
70,522 |
|
Less accumulated depreciation and amortization |
|
|
(29,591) |
|
|
(25,750) |
|
|
|
$ |
49,834 |
|
$ |
44,772 |
|
|
|
|
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||||||||||||||
|
|
Average Life |
|
|
|
|
Accumulated |
|
Net Book |
|
|
|
|
Accumulated |
|
Net Book |
|
||||||
|
|
(Years) |
|
Cost |
|
Amortization |
|
Value |
|
Cost |
|
Amortization |
|
Value |
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
12 |
to |
20 |
|
$ |
59,717 |
|
$ |
(16,908) |
|
$ |
42,809 |
|
$ |
59,871 |
|
$ |
(14,304) |
|
$ |
45,567 |
|
Technology and software |
|
7 |
to |
10 |
|
|
7,101 |
|
|
(1,006) |
|
|
6,095 |
|
|
7,101 |
|
|
(310) |
|
|
6,791 |
|
Non-compete agreements |
|
5 |
to |
8 |
|
|
491 |
|
|
(252) |
|
|
239 |
|
|
491 |
|
|
(198) |
|
|
293 |
|
Favorable leases |
|
|
9.5 |
|
|
|
111 |
|
|
(97) |
|
|
14 |
|
|
111 |
|
|
(88) |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization |
|
|
|
|
|
|
67,420 |
|
|
(18,263) |
|
|
49,157 |
|
|
67,574 |
|
|
(14,900) |
|
|
52,674 |
|
Trademarks (indefinite-lived) |
|
|
|
|
|
|
6,029 |
|
|
— |
|
|
6,029 |
|
|
6,029 |
|
|
— |
|
|
6,029 |
|
|
|
|
|
|
|
$ |
73,449 |
|
$ |
(18,263) |
|
$ |
55,186 |
|
$ |
73,603 |
|
$ |
(14,900) |
|
$ |
58,703 |
|
2015 (remaining 3 months) |
|
$ |
1,145 |
|
2016 |
|
|
4,569 |
|
2017 |
|
|
4,554 |
|
2018 |
|
|
4,554 |
|
2019 |
|
|
4,535 |
|
Thereafter |
|
|
29,800 |
|
|
|
$ |
49,157 |
|
|
|
|
Fair Value as of |
|
Fair Value Measurement at September 30, 2015 |
|
||||||||
|
|
September 30, |
|
(Using Fair Value Hierarchy) |
|
||||||||
|
|
2015 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan |
|
$ |
432,825 |
|
$ |
— |
|
$ |
432,825 |
|
$ |
— |
|
Sellers Note |
|
$ |
9,000 |
|
$ |
— |
|
$ |
— |
|
$ |
9,000 |
|
|
|
Fair Value as of |
|
Fair Value Measurement at December 31, 2014 |
|
||||||||
|
|
December 31, |
|
(Using Fair Value Hierarchy) |
|
||||||||
|
|
2014 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan |
|
$ |
170,866 |
|
$ |
— |
|
$ |
170,866 |
|
$ |
— |
|
Sellers Note |
|
$ |
9,000 |
|
$ |
— |
|
$ |
— |
|
$ |
9,000 |
|
|
|
|
Interest |
|
September 30, |
|
December 31, |
|
||
|
|
Rate (1) |
|
2015 |
|
2014 |
|
||
First lien term loan facility (1) |
|
6.75 |
% |
$ |
435,000 |
|
$ |
— |
|
Unamortized discount on first lien term loan facility |
|
|
|
|
(6,433) |
|
|
— |
|
Senior term loan dated September 2, 2014 |
|
3.02 |
% |
|
— |
|
|
170,645 |
|
Unamortized discount on senior term loan |
|
|
|
|
— |
|
|
(221) |
|
Unamortized deferred financing costs |
|
|
|
|
(11,078) |
|
|
(614) |
|
Sellers note |
|
5.0 |
% |
|
9,000 |
|
|
9,000 |
|
Total long-term debt |
|
|
|
|
426,489 |
|
|
178,810 |
|
Less current maturities of long-term debt |
|
|
|
|
(13,350) |
|
|
(6,326) |
|
Long-term debt, excluding current maturities |
|
|
|
$ |
413,139 |
|
$ |
172,484 |
|
(1) |
Interest rate at September 30, 2015 |
|
|
|
Series A Preferred Stock |
|
|||
|
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014 |
|
64,809 |
|
$ |
58,250 |
|
Less redemptions of preferred stock |
|
(62,233) |
|
|
(55,946) |
|
Balance as of September 30, 2015 |
|
2,576 |
|
$ |
2,304 |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
Weighted- Average |
|
Contractual Term |
|
|
|
|
Options |
|
Exercise Price |
|
(in Years) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
627,000 |
|
$ |
0.0003 |
|
6.44 |
|
Granted |
|
— |
|
|
— |
|
— |
|
Forfeited |
|
(99,000) |
|
|
0.0003 |
|
— |
|
Outstanding as of September 30, 2015 |
|
528,000 |
|
$ |
0.0003 |
|
5.86 |
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2015 |
|
480,333 |
|
$ |
0.0004 |
|
5.68 |
|
2015 |
|
7,334 |
|
2016 |
|
40,333 |
|
Total unvested options as of September 30, 2015 |
|
47,667 |
|
|
|
|
|
Weighted- |
|
|
|
|
Shares |
|
Average Grant Date Fair Value |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2014 |
|
— |
|
$ |
— |
|
Granted |
|
191,664 |
|
|
9.48 |
|
Vested |
|
— |
|
|
— |
|
Forfeited |
|
— |
|
|
— |
|
Outstanding as of September 30, 2015 |
|
191,664 |
|
$ |
9.48 |
|
|
|
|
Revenue |
|
||||||||||
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
U.S. Debit and Credit (a) |
|
$ |
72,785 |
|
$ |
43,069 |
|
$ |
196,190 |
|
$ |
92,339 |
|
U.S. Prepaid Debit |
|
|
23,659 |
|
|
23,752 |
|
|
53,482 |
|
|
47,050 |
|
U.K. Limited |
|
|
9,668 |
|
|
7,808 |
|
|
23,586 |
|
|
24,138 |
|
Other |
|
|
3,995 |
|
|
6,310 |
|
|
13,917 |
|
|
17,493 |
|
Intersegment eliminations |
|
|
(2,410) |
|
|
(3,565) |
|
|
(6,632) |
|
|
(7,879) |
|
Total: |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
|
|
EBITDA |
|
||||||||||
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
U.S. Debit and Credit (a) |
|
$ |
23,368 |
|
$ |
11,180 |
|
$ |
59,961 |
|
$ |
22,170 |
|
U.S. Prepaid Debit |
|
|
9,973 |
|
|
9,336 |
|
|
19,733 |
|
|
15,314 |
|
U.K. Limited |
|
|
1,235 |
|
|
596 |
|
|
2,076 |
|
|
1,410 |
|
Other |
|
|
(4,820) |
|
|
(4,431) |
|
|
(12,379) |
|
|
(7,255) |
|
Total: |
|
$ |
29,756 |
|
$ |
16,681 |
|
$ |
69,391 |
|
$ |
31,639 |
|
(a) |
Amounts for the three and nine months ended September 30, 2015 include the post-acquisition revenue and EBITDA of EFT Source. |
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
Total segment EBITDA |
|
$ |
29,756 |
|
$ |
16,681 |
|
$ |
69,391 |
|
$ |
31,639 |
|
Depreciation and amortization |
|
|
(3,818) |
|
|
(3,215) |
|
|
(11,858) |
|
|
(8,829) |
|
Interest, net |
|
|
(4,624) |
|
|
(1,947) |
|
|
(8,129) |
|
|
(5,391) |
|
Income before income taxes |
|
$ |
21,314 |
|
$ |
11,519 |
|
$ |
49,404 |
|
$ |
17,419 |
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
U.S. Debit and Credit |
|
$ |
219,484 |
|
$ |
200,572 |
|
U.S. Prepaid Debit |
|
|
25,998 |
|
|
20,183 |
|
U.K. Limited |
|
|
26,772 |
|
|
29,740 |
|
Other |
|
|
17,057 |
|
|
9,653 |
|
Total continuing operations: |
|
|
289,311 |
|
|
260,148 |
|
Discontinued operation (a): |
|
|
— |
|
|
5,862 |
|
Total assets: |
|
$ |
289,311 |
|
$ |
266,010 |
|
(a) |
As of December 31, 2014, certain assets of the Nevada operation sold on January 12, 2015 (Note 3) are presented in assets of a discontinued operation in the Company’s consolidated balance sheet. |
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
3,625 |
|
$ |
5,705 |
|
$ |
13,598 |
|
$ |
12,000 |
|
Canada |
|
|
136 |
|
|
3 |
|
|
417 |
|
|
25 |
|
Total North America |
|
|
3,761 |
|
|
5,708 |
|
|
14,015 |
|
|
12,025 |
|
U.K. |
|
|
437 |
|
|
98 |
|
|
573 |
|
|
359 |
|
Total plant, equipment and leasehold improvement additions |
|
$ |
4,198 |
|
$ |
5,806 |
|
$ |
14,588 |
|
$ |
12,384 |
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.(a) |
|
$ |
94,125 |
|
$ |
63,788 |
|
$ |
244,636 |
|
$ |
130,974 |
|
Canada |
|
|
3,084 |
|
|
2,905 |
|
|
7,209 |
|
|
10,669 |
|
Total North America |
|
|
97,209 |
|
|
66,693 |
|
|
251,845 |
|
|
141,643 |
|
U.K. |
|
|
8,236 |
|
|
8,058 |
|
|
22,089 |
|
|
23,135 |
|
Other (b) |
|
|
2,252 |
|
|
2,623 |
|
|
6,609 |
|
|
8,363 |
|
Total revenue |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
(a) |
Amounts for the three and nine months ended September 30, 2015 include the post-acquisition revenue of EFT Source. |
(b) |
Amounts in Other include sales to various countries that individually are not material. |
|
|
September 30, 2015 |
|
December 31, 2014 |
|
||
|
|
|
|
|
|
|
|
U.S. |
|
$ |
162,854 |
|
$ |
160,144 |
|
Canada |
|
|
2,382 |
|
|
2,525 |
|
Total North America: |
|
|
165,236 |
|
|
162,669 |
|
U.K. |
|
|
13,139 |
|
|
14,607 |
|
Total long-lived assets |
|
$ |
178,375 |
|
$ |
177,276 |
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product net sales (a) |
|
$ |
65,567 |
|
$ |
43,267 |
|
$ |
178,338 |
|
$ |
102,172 |
|
Services net sales (b) |
|
|
42,130 |
|
|
34,107 |
|
|
102,205 |
|
|
70,969 |
|
Total net sales: |
|
$ |
107,697 |
|
$ |
77,374 |
|
$ |
280,543 |
|
$ |
173,141 |
|
(a) |
Product net sales include the design and production of Financial Payment Cards in contact-EMV, Dual-Interface EMV, contactless and magnetic stripe card formats. The Company also generates product revenue from the sale of Card@Once® instant issuance systems, private label credit cards and retail gift cards. |
(b) |
Services net sales include revenue from the personalization and fulfillment of Financial Payment Cards, the provision of tamper-evident security packaging, providing fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates service revenue from personalizing retail gift cards (primarily in Canada and the United Kingdom) and from click-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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|