0001558370-18-008725.txt : 20181107 0001558370-18-008725.hdr.sgml : 20181107 20181107085253 ACCESSION NUMBER: 0001558370-18-008725 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CPI Card Group Inc. CENTRAL INDEX KEY: 0001641614 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 260344657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37584 FILM NUMBER: 181164844 BUSINESS ADDRESS: STREET 1: 10026 WEST SAN JUAN WAY CITY: LITTLETON STATE: CO ZIP: 80127 BUSINESS PHONE: 303-973-9311 MAIL ADDRESS: STREET 1: 10026 WEST SAN JUAN WAY CITY: LITTLETON STATE: CO ZIP: 80127 FORMER COMPANY: FORMER CONFORMED NAME: CPI Holdings I, Inc. DATE OF NAME CHANGE: 20150506 10-Q 1 pmts-20180930x10q.htm 10-Q pmts_Current_Folio_10Q

 

 

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 September 30, 2018.

 

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)

(303) 973-9311

(Registrant’s telephone number, including area code) 

 

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 October 26, 2018: 11,160,377

 

 

 


 

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 

 

24

 

 

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk 

 

34

 

 

 

 

 

Item 4 — Controls and Procedures 

 

35

 

 

 

 

 

 

 

 

 

Part II — Other Information 

 

 

 

 

 

 

 

Item 1 — Legal Proceedings 

 

35

 

 

 

 

 

Item 1A — Risk Factors 

 

37

 

 

 

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds 

 

37

 

 

 

 

 

Item 5 — Other Information 

 

37

 

 

 

 

 

Item 6 — Exhibits 

 

38

 

 

 

 

 

Signatures 

 

39

 

 

2


 

Item 1. Financial Statements

 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2018

 

2017

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,818

 

$

23,205

Accounts receivable, net

 

 

51,373

 

 

32,531

Inventories

 

 

10,481

 

 

13,799

Prepaid expenses and other current assets

 

 

2,922

 

 

3,681

Income taxes receivable

 

 

6,736

 

 

8,208

Assets of discontinued operation

 

 

 —

 

 

20,651

Total current assets

 

 

84,330

 

 

102,075

Plant, equipment and leasehold improvements, net

 

 

38,773

 

 

44,436

Intangible assets, net

 

 

36,601

 

 

40,093

Goodwill

 

 

47,150

 

 

47,150

Other assets

 

 

294

 

 

251

Total assets

 

$

207,148

 

$

234,005

Liabilities and stockholders’ deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

15,328

 

$

13,239

Accrued expenses

 

 

17,933

 

 

12,789

Income taxes payable

 

 

678

 

 

 —

Deferred revenue and customer deposits

 

 

515

 

 

3,342

Liabilities of discontinued operation

 

 

 —

 

 

5,669

Total current liabilities

 

 

34,454

 

 

35,039

Long-term debt

 

 

305,330

 

 

303,869

Deferred income taxes

 

 

6,540

 

 

12,168

Other long-term liabilities

 

 

3,163

 

 

2,503

Total liabilities

 

 

349,487

 

 

353,579

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

Common stock; $0.001 par value—100,000,000 shares authorized; 11,160,377 and 11,134,714 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

11

 

 

11

Capital deficiency

 

 

(112,422)

 

 

(113,081)

Accumulated loss

 

 

(28,686)

 

 

(1,366)

Accumulated other comprehensive loss

 

 

(1,242)

 

 

(5,138)

Total stockholders’ deficit

 

 

(142,339)

 

 

(119,574)

Total liabilities and stockholders’ deficit

 

$

207,148

 

$

234,005

 

See accompanying notes to condensed consolidated financial statements

 

 

3


 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Loss

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2018

    

2017

    

2018

    

2017

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

34,673

 

$

26,777

 

$

90,911

 

$

79,644

Services

 

 

36,314

 

 

34,220

 

 

96,387

 

 

86,611

Total net sales

 

 

70,987

 

 

60,997

 

 

187,298

 

 

166,255

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products (exclusive of depreciation and amortization shown below)

 

 

23,796

 

 

18,617

 

 

59,076

 

 

53,724

Services (exclusive of depreciation and amortization shown below)

 

 

21,214

 

 

20,297

 

 

60,991

 

 

53,710

Depreciation and amortization

 

 

2,669

 

 

2,639

 

 

9,620

 

 

8,063

Total cost of sales

 

 

47,679

 

 

41,553

 

 

129,687

 

 

115,497

Gross profit

 

 

23,308

 

 

19,444

 

 

57,611

 

 

50,758

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

17,033

 

 

14,541

 

 

48,119

 

 

43,801

Depreciation and amortization

 

 

1,588

 

 

1,533

 

 

4,513

 

 

4,779

Total operating expenses

 

 

18,621

 

 

16,074

 

 

52,632

 

 

48,580

Income from operations

 

 

4,687

 

 

3,370

 

 

4,979

 

 

2,178

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(6,151)

 

 

(5,304)

 

 

(17,243)

 

 

(15,532)

Foreign currency gain (loss)

 

 

16

 

 

348

 

 

(248)

 

 

520

Other income, net

 

 

 8

 

 

 5

 

 

15

 

 

11

Total other expense, net

 

 

(6,127)

 

 

(4,951)

 

 

(17,476)

 

 

(15,001)

Loss from continuing operations before income taxes

 

 

(1,440)

 

 

(1,581)

 

 

(12,497)

 

 

(12,823)

Income tax benefit

 

 

355

 

 

783

 

 

4,933

 

 

4,154

Net loss from continuing operations

 

 

(1,085)

 

 

(798)

 

 

(7,564)

 

 

(8,669)

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

 

 

(5,030)

 

 

63

 

 

(22,551)

 

 

1,266

Net loss

 

$

(6,115)

 

$

(735)

 

$

(30,115)

 

$

(7,403)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.10)

 

$

(0.07)

 

$

(0.68)

 

$

(0.78)

Discontinued operation

 

 

(0.45)

 

 

0.01

 

 

(2.02)

 

 

0.11

Net loss per share

 

$

(0.55)

 

$

(0.06)

 

$

(2.70)

 

$

(0.67)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted-average shares outstanding

 

 

11,159,984

 

 

11,127,873

 

 

11,145,946

 

 

11,111,728

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 —

 

$

 —

 

$

 —

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(6,115)

 

$

(735)

 

$

(30,115)

 

$

(7,403)

Other comprehensive loss from discontinued operations

 

 

3,983

 

 

 —

 

 

3,983

 

 

 —

Currency translation adjustment

 

 

98

 

 

434

 

 

(87)

 

 

1,221

Total comprehensive loss

 

$

(2,034)

 

$

(301)

 

$

(26,219)

 

$

(6,182)

 

See accompanying notes to condensed consolidated financial statements

 

4


 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2018

    

2017

Operating activities

 

 

 

 

 

 

Net loss

 

$

(30,115)

 

$

(7,403)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Loss (income) from discontinued operation

 

 

22,551

 

 

(1,266)

Depreciation and amortization expense

 

 

14,133

 

 

12,842

Stock-based compensation expense

 

 

741

 

 

1,367

Amortization of debt issuance costs and debt discount

 

 

1,461

 

 

1,461

Deferred income taxes

 

 

(6,169)

 

 

(863)

Other, net

 

 

165

 

 

(209)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(13,016)

 

 

(10,309)

Inventories

 

 

(2,628)

 

 

1,498

Prepaid expenses and other assets

 

 

711

 

 

746

Income taxes

 

 

2,207

 

 

(4,470)

Accounts payable

 

 

2,108

 

 

2,460

Accrued expenses

 

 

4,725

 

 

(1,574)

Deferred revenue and customer deposits

 

 

230

 

 

1,188

Other liabilities

 

 

1,052

 

 

438

Cash used in operating activities - continuing operations

 

 

(1,844)

 

 

(4,094)

Cash used in operating activities - discontinued operation

 

 

(2,914)

 

 

(2,834)

Investing activities

 

 

 

 

 

 

Acquisitions of plant, equipment and leasehold improvements

 

 

(5,028)

 

 

(6,289)

Cash used in investing activities - continuing operations

 

 

(5,028)

 

 

(6,289)

Cash used in investing activities - discontinued operation

 

 

(220)

 

 

(1,519)

Financing activities

 

 

 

 

 

 

Payments on capital lease obligations

 

 

(388)

 

 

 —

Dividends paid on common stock

 

 

 —

 

 

(7,537)

Taxes withheld and paid on stock-based compensation awards

 

 

 —

 

 

(341)

Cash used in financing activities

 

 

(388)

 

 

(7,878)

Effect of exchange rates on cash

 

 

 7

 

 

474

Net decrease in cash and cash equivalents

 

 

(10,387)

 

 

(22,140)

Cash and cash equivalents, beginning of period

 

 

23,205

 

 

36,955

Cash and cash equivalents, end of period

 

$

12,818

 

$

14,815

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

14,703

 

$

13,719

Income taxes, net (refunds) payments

 

$

(1,299)

 

$

1,437

Capital lease obligations incurred for certain machinery and equipment leases

 

$

821

 

$

 —

Accounts payable for acquisitions of plant, equipment and leasehold improvements

 

$

171

 

$

385

 

See accompanying notes to condensed consolidated financial statements

5


 

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 engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express, Discover and Interac (in Canada)) in the United States and Canada. The Company also is engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards (primarily in Canada).  

 

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

 

During February 2018, the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $266 for the three months ended September 30, 2018 and $2,398 for the nine months ended September 30, 2018.  The Company recorded severance charges of $552 and recorded lease termination charges of $432 in the nine months ended September 30, 2018. The charges were recorded in the U.S. Debit and Credit segment and primarily included in “Cost of sales” on the Condensed Consolidated Statement of Operations.

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, 2017 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, 2017.

 

 On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The transaction was structured as a sale of all of the outstanding shares of CPI Card Group – UK Limited, for total consideration of approximately $4,500, to an affiliate of SEA Equity Limited, a private investment firm focused on investments in companies in the United Kingdom and Europe. The Company received net cash proceeds of $315 after the repayment of liabilities associated with the United Kingdom facilities, excluding tax benefits related to the structure of the sale.

 

The Company has 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. See Note 3 “Discontinued Operation” for further information.

 

On December 20, 2017, the Company effected a one-for-five reverse stock split of its common stock, whereby each lot of five shares of common stock issued and outstanding immediately prior to the reverse stock split was

6


 

converted into and became one share of common stock. Share and per share amounts reflect the one-for-five reverse stock split for all periods presented.

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 inventories and deferred tax assets, debt, discontinued operations, revenue recognized for period-end work in process and stock-based compensation expense. Actual results could differ from those estimates.

 

Machinery and Equipment Financing

 

The Company leases certain machinery and equipment under capital leases. The assets and liabilities under these capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. Once ready for their intended use, the assets are depreciated over the lower of their related lease term or their estimated productive lives.

 

Foreign Currency Translation

 

 

 

The change in the balance of "accumulated other comprehensive loss"  on the balance sheet was comprised of the following:

 

 

 

Foreign Currency Translation

Balance at December 31, 2017

(5,138)

Amount released to loss from discontinued operations

3,983

Change in foreign currency translation

(87)

Balance at September 30, 2018

(1,242)

 

 

 

Adoption of New Accounting Standard

 

As of January 1, 2018, the Company adopted Accounting Standards Update Codification ASC 606, Revenue from Contracts with Customers, which 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. ASC 606 also requires an entity to 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. The Company applied ASC 606 as of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Condensed Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. In addition, as a result of adopting the new guidance, the Company has recorded decreases to deferred revenue, and work in process and finished goods inventories, and an increase to accounts receivable. These changes are reflected in the adoption adjustments table below. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.

See Note 2 “Revenue” for revenue recognition timing and methodology under ASC 606.

7


 

The cumulative effects of the adjustments made to the Company’s January 1, 2018 Condensed Consolidated Balance Sheet upon adoption of ASC 606 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

    

Adoption

    

January 1,

 

 

2017

 

Adjustments

 

2018

Assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

32,531

 

$

5,991

 

$

38,522

Inventories

 

 

13,799

 

 

(5,929)

 

 

7,870

Assets of discontinued operation

 

 

20,651

 

 

(357)

 

 

20,294

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred revenue and customer deposits

 

 

3,342

 

 

(3,063)

 

 

279

Liabilities of discontinued operation

 

 

5,669

 

 

(535)

 

 

5,134

Deferred income taxes

 

 

12,168

 

 

479

 

 

12,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

 

Accumulated (loss) earnings

 

 

(1,366)

 

 

2,824

 

 

1,458

 

In accordance with ASC 606, the impact on the Company’s Condensed Consolidated Balance Sheet and Statement of Operations and Comprehensive Loss was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances

 

 

As Reported

 

 

 

Without

 

 

September 30,

    

 

    

Adoption of

Balance Sheet

 

2018

 

Adjustments

 

ASC 606

Assets:

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

51,373

 

$

(7,726)

 

$

43,647

Inventories

 

 

10,481

 

 

8,735

 

 

19,216

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Deferred revenue and customer deposits

 

 

515

 

 

2,258

 

 

2,773

Deferred income taxes

 

 

6,540

 

 

(479)

 

 

6,061

 

 

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

 

Accumulated loss

 

 

(28,686)

 

 

(770)

 

 

(29,456)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

Balances

 

 

 

 

 

 

Balances

 

 

As Reported

 

 

 

Without

 

As Reported

 

 

 

Without

Statement of Operations and

 

September 30,

    

 

    

Adoption of

 

September 30,

    

 

    

Adoption of

Comprehensive Loss

 

2018

 

Adjustments

 

ASU 2014-09

 

2018

 

Adjustments

 

ASC 606

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

34,673

 

$

(2,219)

 

$

32,454

 

$

90,911

 

$

(2,874)

 

$

88,037

Services

 

 

36,314

 

 

1,517

 

 

37,831

 

 

96,387

 

 

1,152

 

 

97,539

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products (exclusive of depreciation and amortization)

 

 

23,796

 

 

(2,139)

 

 

21,657

 

 

59,076

 

 

(3,056)

 

 

56,020

Services (exclusive of depreciation and amortization)

 

 

21,214

 

 

789

 

 

22,003

 

 

60,991

 

 

720

 

 

61,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

23,308

 

 

648

 

 

23,956

 

 

57,611

 

 

614

 

 

58,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense)

 

 

355

 

 

(136)

 

 

219

 

 

4,933

 

 

(129)

 

 

4,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations

 

 

(1,085)

 

 

512

 

 

(573)

 

 

(7,564)

 

 

485

 

 

(7,079)

Net loss from discontinued operation, net of tax

 

 

(5,030)

 

 

176

 

 

(4,854)

 

 

(22,551)

 

 

157

 

 

(22,394)

8


 

 

During 2017, the Company early adopted ASU 2017-04,  Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) in conjunction with its annual impairment testing effective October 1, 2017. In accordance with ASU 2017-04, an entity is required to perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount of the reporting unit exceeds its fair value.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. 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 is considering the method of transition upon adoption of this guidance. The Company is in the process of assessing the impact of ASU 2016-02 on its results of operations, financial position and consolidated financial statements.

 

2. Revenue

 

The Company disaggregates its revenue by major source as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

 

 

Products

 

Services

 

Total

 

Products

 

Services

 

Total

U.S. Debit and Credit

 

$

34,176

 

$

13,826

 

$

48,002

 

$

88,340

 

$

40,652

 

$

128,992

U.S. Prepaid Debit

 

 

 —

 

 

21,190

 

 

21,190

 

 

 —

 

 

52,128

 

 

52,128

Other

 

 

549

 

 

1,371

 

 

1,920

 

 

3,549

 

 

4,050

 

 

7,599

Intersegment eliminations

 

 

(52)

 

 

(73)

 

 

(125)

 

 

(978)

 

 

(443)

 

 

(1,421)

Total

 

$

34,673

 

$

36,314

 

$

70,987

 

$

90,911

 

$

96,387

 

$

187,298

 

For periods after January 1, 2018, the Company accounts for its revenue as follows:

Products Revenue

Products” revenue is 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” revenue are manufactured Financial Payment Cards, including in contact-EMV, Dual-Interface EMV®, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” revenue, and their associated revenues are recognized at the time of shipping.

 

Services Revenue

 

Revenue is recognized for “Services” as the services are performed. Items included in “Services” revenue include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. 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.

 

9


 

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 ASU 2014-09 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 United Kingdom facilities that comprised the U.K. Limited reporting segment. The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal. In connection with the sale, the Company performed a goodwill impairment test and recorded a charge of $6,366 in the second quarter of 2018.  The impairment was a result of continued market softness in the U.K. Limited segment, resulting in lower sales and margins and an expected sales price below the carrying value of the segment. The Company also recorded an impairment charge of $1,249 to customer relationship intangible assets related to the U.K. Limited segment in the second quarter of 2018.

 

The Company recorded a $7,248 loss on sale of U.K Limited for the nine months ended September 30, 2018.  In connection with the substantial liquidation of the foreign entity, the Company released the related cumulative translation adjustment from accumulated other comprehensive loss into loss from discontinued operations.  This adjustment was $3,983 and is included in other expense (income), net in the schedule below.

 

As of December 31, 2017, the carrying amounts of the major classes of assets and liabilities of the discontinued operation were as follows:

 

 

 

 

 

 

    

December 31, 2017

 

 

    

 

Assets:

 

 

 

Accounts receivable

 

$

5,006

Inventories

 

 

2,438

Other assets

 

 

506

Plant, equipment and leasehold improvements

 

 

4,864

Intangible assets

 

 

1,379

Goodwill

 

 

6,458

Total assets of discontinued operation

 

 

20,651

 

 

 

 

Liabilities:

 

 

 

Accounts payable

 

 

3,307

Other current liabilities

 

 

1,866

Other long-term liabilities

 

 

496

Total liabilities of discontinued operation

 

$

5,669

 

10


 

The major line items constituting the (loss) income of the discontinued operation for the three and nine months ended September 30, 2018 and 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

2018

 

2017

 

2018

 

2017

Total net sales

 

$

1,943

 

$

7,047

 

$

10,741

 

$

23,644

Total cost of sales

 

 

1,721

 

 

5,514

 

 

10,221

 

 

18,045

Selling, general and administrative

 

 

1,238

 

 

1,406

 

 

4,303

 

 

4,122

Impairments

 

 

 -

 

 

 —

 

 

7,615

 

 

 

Other expense (income), net

 

 

4,009

 

 

35

 

 

4,038

 

 

(50)

Pretax (loss) income from discontinued operation

 

 

(5,025)

 

 

92

 

 

(15,436)

 

 

1,527

  Pretax loss on sale of discontinued operation

 

 

(5)

 

 

 —

 

 

(7,248)

 

 

 —

Total pretax (loss) income on discontinued operation

 

 

(5,030)

 

 

92

 

 

(22,684)

 

 

1,527

Income tax benefit (expense)

 

 

 -

 

 

(29)

 

 

133

 

 

(261)

Net (loss) income from discontinued operation

 

$

(5,030)

 

$

63

 

$

(22,551)

 

$

1,266

 

 

4. Accounts Receivable

 

Accounts receivable consisted of the following:

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

 

 

 

 

    

Trade accounts receivable

 

$

43,862

 

$

32,579

Unbilled accounts receivable

 

 

7,747

 

 

 —

 

 

 

51,609

 

 

32,579

Less allowance for doubtful accounts

 

 

(236)

 

 

(48)

 

 

$

51,373

 

$

32,531

 

 

 

5.  Inventories

 

Inventories are summarized below:

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

 

 

 

 

 

Raw materials

 

$

8,453

 

$

5,718

Work-in-process

 

 

 —

 

 

5,107

Finished goods

 

 

2,028

 

 

2,974

 

 

$

10,481

 

$

13,799

 

 

6. Plant, Equipment and Leasehold Improvements

 

Plant, equipment and leasehold improvements consisted of the following:

 

 

 

 

 

 

 

 

 

    

September 30, 2018

    

December 31, 2017

 

 

 

 

 

 

 

Machinery and equipment

 

$

59,589

 

$

58,595

Machinery and equipment under capital leases

 

 

821

 

 

 —

Furniture, fixtures and computer equipment

 

 

6,936

 

 

6,288

Leasehold improvements

 

 

19,372

 

 

19,601

Construction in progress

 

 

3,320

 

 

1,512

 

 

 

90,038

 

 

85,996

Less accumulated depreciation

 

 

(51,265)

 

 

(41,560)

 

 

$

38,773

 

$

44,436

 

11


 

Depreciation of plant, equipment and leasehold improvements, including depreciation of assets under capital leases, was $3,093 and $3,000 for the three months ended September 30, 2018 and 2017, respectively, and $10,641 and $9,327 for the nine months ended September 30, 2018 and 2017, respectively.

 

 

 

7. Goodwill and Other Intangible Assets

 

The Company reports all of its goodwill in its U.S. Debit and Credit segment at September 30, 2018 and December 31, 2017.

 

Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. Intangible amortization expense was $1,164 and $1,172 for the three months ended September 30, 2018 and 2017, respectively, and $3,492 and $3,515 for the nine months ended September 30, 2018 and 2017, respectively. 

 

At September 30, 2018 and December 31, 2017, intangible assets, excluding goodwill, were comprised of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

December 31, 2017

 

 

Average Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

 

Accumulated

 

Net Book

 

 

(Years)

 

Cost

 

Amortization

 

Value

 

Cost

 

Amortization

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

    

12

to

20

    

$

55,454

    

$

(24,768)

    

$

30,686

    

$

55,454

    

$

(22,311)

    

$

33,143

Technology and software

 

 7

to

10

 

 

7,101

 

 

(3,793)

 

 

3,308

 

 

7,101

 

 

(3,095)