Quarterly Report (10-q)

Date : 11/06/2019 @ 1:55PM
Source : Edgar (US Regulatory)
Stock : CPI Card Group Inc (PMTS)
Quote : 0.799  0.0 (0.00%) @ 12:00AM
CPI Card share price Chart

Quarterly Report (10-q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

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

 

For the Quarterly Period Ended September 30, 2019.

 

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) 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

PMTS

Nasdaq Capital Market

 

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 25, 2019: 11,224,191

 

 

 

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 

 

23

 

 

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk 

 

33

 

 

 

 

 

Item 4 — Controls and Procedures 

 

33

 

 

 

 

 

 

 

 

 

Part II — Other Information 

 

 

 

 

 

 

 

Item 1 — Legal Proceedings 

 

34

 

 

 

 

 

Item 1A — Risk Factors 

 

35

 

 

 

 

 

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

 

35

 

 

 

 

 

Item 5 — Other Information 

 

35

 

 

 

 

 

Item 6 — Exhibits 

 

36

 

 

 

 

 

Signatures 

 

37

 

 

2

Item 1. Financial Statements

 

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

2019

 

2018

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,290

 

$

20,291

Accounts receivable, net of allowances of $370 and $211, respectively

 

 

44,806

 

 

43,794

Inventories

 

 

22,105

 

 

9,827

Prepaid expenses and other current assets

 

 

3,974

 

 

4,997

Income taxes receivable

 

 

5,202

 

 

5,564

Total current assets

 

$

90,377

 

$

84,473

Plant, equipment and leasehold improvements, net

 

 

43,655

 

 

39,110

Intangible assets, net

 

 

31,951

 

 

35,437

Goodwill

 

 

47,150

 

 

47,150

Other assets

 

 

616

 

 

1,034

Total assets

 

$

213,749

 

$

207,204

Liabilities and stockholders’ deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

14,844

 

$

16,511

Accrued expenses

 

 

21,571

 

 

23,853

Deferred revenue and customer deposits

 

 

442

 

 

912

Total current liabilities

 

$

36,857

 

$

41,276

Long-term debt

 

 

307,287

 

 

305,818

Deferred income taxes

 

 

8,357

 

 

5,749

Other long-term liabilities

 

 

11,388

 

 

3,937

Total liabilities

 

$

363,889

 

$

356,780

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

Common stock; $0.001 par value—100,000,000 shares authorized; 11,224,191 and 11,160,377 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

11

 

 

11

Capital deficiency

 

 

(111,930)

 

 

(112,223)

Accumulated loss

 

 

(38,221)

 

 

(36,004)

Accumulated other comprehensive loss

 

 

 —

 

 

(1,360)

Total stockholders’ deficit

 

$

(150,140)

 

$

(149,576)

Total liabilities and stockholders’ deficit

 

$

213,749

 

$

207,204

 

See accompanying notes to condensed consolidated financial statements

 

 

 

3

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

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

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

 

2018

    

2019

    

2018

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

33,963

 

$

34,673

 

$

99,845

 

$

90,911

Services

 

 

37,718

 

 

36,314

 

 

105,603

 

 

96,387

Total net sales

 

 

71,681

 

 

70,987

 

 

205,448

 

 

187,298

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

Products (exclusive of depreciation and amortization shown below)

 

 

22,182

 

 

23,796

 

 

65,769

 

 

59,076

Services (exclusive of depreciation and amortization shown below)

 

 

21,329

 

 

21,214

 

 

62,142

 

 

60,991

Depreciation and amortization

 

 

2,751

 

 

2,669

 

 

8,216

 

 

9,620

Total cost of sales

 

 

46,262

 

 

47,679

 

 

136,127

 

 

129,687

Gross profit

 

 

25,419

 

 

23,308

 

 

69,321

 

 

57,611

Operating expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

15,936

 

 

17,033

 

 

49,146

 

 

48,119

Depreciation and amortization

 

 

1,513

 

 

1,588

 

 

4,539

 

 

4,513

Litigation settlement gain

 

 

 —

 

 

 —

 

 

(6,000)

 

 

 —

Total operating expenses, net:

 

 

17,449

 

 

18,621

 

 

47,685

 

 

52,632

Income from operations

 

 

7,970

 

 

4,687

 

 

21,636

 

 

4,979

Other expense, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(6,085)

 

 

(6,151)

 

 

(18,847)

 

 

(17,243)

Foreign currency (loss) gain

 

 

(40)

 

 

16

 

 

(1,320)

 

 

(248)

Other income, net

 

 

14

 

 

 8

 

 

25

 

 

15

Total other expense, net

 

 

(6,111)

 

 

(6,127)

 

 

(20,142)

 

 

(17,476)

Income (loss) from continuing operations before income taxes

 

 

1,859

 

 

(1,440)

 

 

1,494

 

 

(12,497)

Income tax (expense) benefit

 

 

(2,515)

 

 

355

 

 

(3,695)

 

 

4,933

Net loss from continuing operations

 

 

(656)

 

 

(1,085)

 

 

(2,201)

 

 

(7,564)

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

 

 

(28)

 

 

(5,030)

 

 

(16)

 

 

(22,551)

Net loss

 

$

(684)

 

$

(6,115)

 

$

(2,217)

 

$

(30,115)

Basic and diluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted - Continuing operations

 

$

(0.06)

 

$

(0.10)

 

$

(0.20)

 

$

(0.68)

Basic and diluted  - Discontinued operation

 

 

(0.00)

 

 

(0.45)

 

 

(0.00)

 

 

(2.02)

Net loss per share

 

$

(0.06)

 

$

(0.55)

 

$

(0.20)

 

$

(2.70)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

11,223,715

 

 

11,159,984

 

 

11,187,550

 

 

11,145,946

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(684)

 

$

(6,115)

 

$

(2,217)

 

$

(30,115)

Currency translation adjustment

 

 

 —

 

 

98

 

 

31

 

 

(87)

Other comprehensive loss from discontinued operations

 

 

 —

 

 

3,983

 

 

 —

 

 

3,983

Reclassification adjustment to foreign currency loss

 

 

 —

 

 

 —

 

 

1,329

 

 

 —

Total comprehensive loss

 

$

(684)

 

$

(2,034)

 

$

(857)

 

$

(26,219)

See accompanying notes to condensed consolidated financial statements

 

4

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

Common Stock

 

Capital

 

Accumulated

 

comprehensive

 

 

 

    

Shares

 

Amount

 

deficiency

 

earnings (loss)

 

loss

 

Total

December 31, 2018

 

11,160,377

 

$

11

 

$

(112,223)

 

$

(36,004)

 

$

(1,360)

 

$

(149,576)

Shares issued under stock-based compensation plans

 

63,814

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

293

 

 

 —

 

 

 —

 

 

293

Components of comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(2,217)

 

 

 —

 

 

(2,217)

Currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

31

 

 

31

Reclassification adjustment to foreign currency loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,329

 

 

1,329

September 30, 2019

 

11,224,191

 

$

11

 

$

(111,930)

 

$

(38,221)

 

$

 —

 

$

(150,140)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

Common Stock

 

Capital

 

Accumulated

 

comprehensive

 

 

 

    

Shares

 

Amount

 

deficiency

 

earnings (loss)

 

loss

 

Total

June 30, 2019

 

11,223,528

 

$

11

 

$

(111,939)

 

$

(37,537)

 

$

 —

 

$

(149,465)

Shares issued under stock-based compensation plans

 

663

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

 9

 

 

 —

 

 

 —

 

 

 9

Components of comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(684)

 

 

 —

 

 

(684)

Reclassification adjustment to foreign currency loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

September 30, 2019

 

11,224,191

 

$

11

 

$

(111,930)

 

$

(38,221)

 

$

 —

 

$

(150,140)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

Common Stock

 

Capital

 

Accumulated

 

comprehensive

 

 

 

 

Shares

 

Amount

 

deficiency

 

earnings (loss)

 

loss

 

Total

December 31, 2017

 

11,134,714

 

$

11

 

$

(113,081)

 

$

(1,366)

 

$

(5,138)

 

$

(119,574)

Adoption of ASC 606

 

 —

 

 

 —

 

 

 —

 

 

2,795

 

 

 —

 

 

2,795

Shares issued under stock-based compensation plans

 

25,663

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

659

 

 

 —

 

 

 —

 

 

659

Components of comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(30,115)

 

 

 —

 

 

(30,115)

Currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,896

 

 

3,896

September 30, 2018

 

11,160,377

 

$

11

 

$

(112,422)

 

$

(28,686)

 

$

(1,242)

 

$

(142,339)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

other

 

 

 

 

Common Stock

 

Capital

 

Accumulated

 

comprehensive

 

 

 

    

Shares

 

Amount

 

deficiency

 

earnings (loss)

 

loss

 

Total

June 30, 2018

 

11,159,714

 

$

11

 

$

(112,377)

 

$

(22,571)

 

$

(5,323)

 

$

(140,260)

Shares issued under stock-based compensation plans

 

663

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

(45)

 

 

 —

 

 

 —

 

 

(45)

Components of comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(6,115)

 

 

 —

 

 

(6,115)

Currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,081

 

 

4,081

September 30, 2018

 

11,160,377

 

$

11

 

$

(112,422)

 

$

(28,686)

 

$

(1,242)

 

$

(142,339)

 

See accompanying notes to condensed consolidated financial statements

 

5

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

Operating activities

 

 

 

 

 

 

Net loss

 

$

(2,217)

 

$

(30,115)

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

 

 

 

 

 

 

Loss from discontinued operation

 

 

16

 

 

22,551

Depreciation and amortization expense

 

 

12,755

 

 

14,133

Stock-based compensation expense

 

 

316

 

 

741

Amortization of debt issuance costs and debt discount

 

 

1,469

 

 

1,461

Deferred income taxes

 

 

2,608

 

 

(6,169)

Reclassification adjustment to foreign currency loss

 

 

1,329

 

 

 —

Other, net

 

 

 6

 

 

165

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,605)

 

 

(13,016)

Inventories

 

 

(12,279)

 

 

(2,628)

Prepaid expenses and other assets

 

 

1,659

 

 

711

Income taxes

 

 

331

 

 

2,207

Accounts payable

 

 

(358)

 

 

2,108

Accrued expenses

 

 

(5,574)

 

 

4,725

Deferred revenue and customer deposits

 

 

(472)

 

 

230

Other liabilities

 

 

17

 

 

1,052

Cash used in operating activities - continuing operations

 

 

(2,999)

 

 

(1,844)

Cash used in operating activities - discontinued operation

 

 

(16)

 

 

(2,914)

Investing activities

 

 

 

 

 

 

Acquisitions of plant, equipment and leasehold improvements

 

 

(3,298)

 

 

(5,028)

Cash received for sale of Canadian subsidiary

 

 

1,451

 

 

 —

Cash used in investing activities - continuing operations

 

 

(1,847)

 

 

(5,028)

Cash used in investing activities - discontinued operation

 

 

 —

 

 

(220)

Financing activities

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

11,500

 

 

 —

Payments on revolving credit facility

 

 

(11,500)

 

 

 —

Payments on financing leases

 

 

(1,175)

 

 

(388)

Cash used in financing activities

 

 

(1,175)

 

 

(388)

Effect of exchange rates on cash

 

 

36

 

 

 7

Net decrease in cash and cash equivalents

 

 

(6,001)

 

 

(10,387)

Cash and cash equivalents, beginning of period

 

 

20,291

 

 

23,205

Cash and cash equivalents, end of period

 

$

14,290

 

$

12,818

Supplemental disclosures of cash flow information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

     Interest

 

$

17,315

 

$

14,703

     Income taxes, net payments (refunds)

 

$

675

 

$

(1,299)

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

 

 

 

 

 

 

  Operating leases

 

$

8,533

 

$

 —

  Financing leases

 

$

5,196

 

$

821

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

 

$

159

 

$

171

 

See accompanying notes to condensed consolidated financial statements

 

6

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

1. Business Overview and Summary of Significant Accounting Policies

 

Business Overview

 

CPI Card Group Inc. (which, together with its 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 and Discover) in the United States. To a lesser extent, the Company is also engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards.  

 

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.

 

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Company’s Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.  After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale.  In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the nine months ended September 30, 2019. This adjustment was $1,329 and is included in “Foreign Currency Loss” on the Statement of Operations.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

 

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 $0 and $552, and recorded lease termination charges of $0 and $432 in the three and nine months ended September 30, 2018, respectively. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of Sales” and “Selling, General, and Administrative Expenses” on the 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, 2018 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, 2018.

 

 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 Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated,

7

information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. See Note 3 “Discontinued Operation” for further information.

 

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 useful lives of property and equipment, the valuation of goodwill and intangible assets, valuation allowances for inventories and accounts receivable, deferred tax assets, uncertain tax positions, discount rates used to determine right-to-use assets and lease liabilities, and revenue recognized for period-end work in process. Actual results could differ from those estimates.

 

Adoption of New Accounting Standards

 

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

The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, historical financial information has not been updated and the disclosures required under the new standard have not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient.

The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements as applicable. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.

Right-to-use (“ROU’) represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. If applicable, the Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

 

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

 

8

The components of operating and finance lease costs for the three and nine months ended September 30, 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

    

September 30, 2019

   

 

September 30, 2019

Total operating lease costs

 

$

659

 

$

1,967

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

  Amortization of right-to-use assets

 

$

273

 

$

574

  Interest on lease liabilities

 

 

98

 

 

160

  Total financing lease costs

 

$

371

 

$

734

 

The following table reflects balances for operating leases and financing leases:

 

 

 

 

 

 

 

 

 

    

September 30, 2019

Operating leases

 

 

 

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

 

$

6,796

 

 

 

 

Operating lease liability (current)

 

$

2,218

Long-term operating liability

 

 

5,657

  Total operating lease liabilities

 

$

7,875

 

 

 

 

Financing leases

 

 

 

Property, equipment and leasehold improvements

 

$

7,014

Accumulated depreciation

 

 

(782)

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

 

$

6,232

 

 

 

 

Financing lease liability (current)

 

$

2,207

Long-term financing liability

 

 

3,427

  Total financing lease liabilities

 

$

5,634

 

 

 

 

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

Components of lease expense were as follows:

 

 

 

 

 

 

 

 

September 30, 2019

Weighted Average Remaining Lease Term

 

 

 

  Operating Leases

 

 

3.61

  Financing Leases

 

 

2.80

 

 

 

 

Weighted Average Discount Rate

 

 

 

  Operating Leases

 

 

8.95%

  Financing Leases

 

 

9.22%

 

 

 

 

 

9

Future cash payments with respect to lease obligations as of September 30, 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

Financing

 

 

 

Lease

 

 

Leases

Year Ending

 

 

 

 

 

 

2019

 

$

696

 

$

740

2020

 

 

2,854

 

 

2,332

2021

 

 

2,646

 

 

1,716

2022

 

 

1,371

 

 

1,238

2023

 

 

1,097

 

 

178

Thereafter

 

 

602

 

 

 -

  Total lease payments

 

 

9,266

 

 

6,204

Less imputed interest

 

 

(1,391)

 

 

(570)

  Total 

 

$

7,875

 

$

5,634

 

 

 

 

 

 

 

 

Future cash payments with respect to lease obligations as of December 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

    

Operating

    

Capital

 

 

Leases

 

Leases

2019

 

$

2,927

 

$

521

2020

 

 

2,771

 

 

474

2021

 

 

2,512

 

 

243

2022

 

 

1,243

 

 

256

2023

 

 

971

 

 

71

Thereafter

 

 

652

 

 

 —

Total

 

$

11,076

 

$

1,565

 

Cash paid on operating leases was $514 and $1,448  during the three and nine months ended September 30, 2019, respectively.

 

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

 

Recently Issued Accounting Standards

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not anticipate the adoption of this standard will have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

 

10

 

2. Net Sales

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

Products

 

Services

 

Total

U.S. Debit and Credit

 

$

34,218

 

$

17,284

 

$

51,502

U.S. Prepaid Debit

 

 

 —

 

 

20,452

 

 

20,452

Intersegment eliminations

 

 

(255)

 

 

(18)

 

 

(273)

Total

 

$

33,963

 

$

37,718

 

$

71,681

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

Products

 

Services

 

Total

U.S. Debit and Credit

 

$

100,338

 

$

51,179

 

$

151,517

U.S. Prepaid Debit

 

 

 —

 

 

53,162

 

 

53,162

Other

 

 

397

 

 

1,282

 

 

1,679

Intersegment eliminations

 

 

(890)

 

 

(20)

 

 

(910)

Total

 

$

99,845

 

$

105,603

 

$

205,448

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

Products

 

Services

 

Total

U.S. Debit and Credit

 

$

34,176

 

$

13,826

 

$

48,002

U.S. Prepaid Debit

 

 

 —

 

 

21,190

 

 

21,190

Other

 

 

549

 

 

1,371

 

 

1,920

Intersegment eliminations

 

 

(52)

 

 

(73)

 

 

(125)

Total

 

$

34,673

 

$

36,314

 

$

70,987

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Products

 

Services

 

Total

U.S. Debit and Credit

 

$

88,340

 

$

40,652

 

$

128,992

U.S. Prepaid Debit

 

 

 —

 

 

52,128