2020 - A Letter from Scott Scheirman
Dear Shareholders,
Through a steadfast commitment to our customer-centric approach, we quickly adapted to the emergence of the
COVID-19 pandemic and an unprecedented level of uncertainty in 2020. The rapidly changing environment underscored
the importance of our strategic priorities and demonstrated the resilience of our business model as we navigated
challenges, took actions to keep our employees safe, delivered on targeted initiatives and realized new opportunities.
Financial Highlights:
During 2020, CPI® delivered another year of strong top-line growth, significantly improved bottom-line performance and
continued to win new business by offering robust solutions. Total net sales of $312.2 million, up 12% year-over year,
gross profit of $110.3 million, increased by 21% year-over-year, net income of $16.1 million was up 415% year-over-year,
and cash flow from operations was $22.0 million, increasing 675% year-over-year.
In March 2021, we completed a successful private offering of $310 million of Senior Secured Notes and concurrently
entered into a $50 million secured asset based revolving credit facility. Proceeds were used to repay our prior existing
credit facilities and reduce our overall debt. The financings provide us with flexibility in support of the business by
extending debt maturities and enhancing liquidity. Our capital priorities are to maintain ample liquidity, invest in
business initiatives, and deleverage the balance sheet.
Business Highlights:
Our business accomplishments are a testament to our customer-centric approach and the ongoing commitment of our
employees through an unprecedented year. Their dedication enabled us to deliver strong performance in 2020.
Our key accomplishments:
• We delivered over 25 million Second Wave® payment cards since their launch in 2019. We estimate that for every
one million Second Wave cards produced, over one ton of plastic will be diverted from entering the world’s oceans,
waterways and shorelines. We allocate a portion of the proceeds from every Second Wave card we sell to support
the communities from which the recovered ocean-bound plastic is sourced.
• We expanded our eco-focused solutions with the launch of our Earthwise™ “High Content” cards. This is the first
contactless dual-interface card product to incorporate up to 98% upcycled plastic content. As the leading eco-focused
card provider in the U.S., we estimate that we produced more than 80% of all U.S. eco-focused cards in 2020.
• We continued to be well-positioned to support the ongoing transition to contactless cards as our customers
gradually provide their account holders with contactless technology that enables a faster and more “touch-free”
point-of-sale experience.
• We launched the Spectrum by Card@Once® SaaS-based solution, our newest state-of-the-art, high definition
retransfer printer which features a more defined, higher image print quality, with over-the-edge printing capability.
We now have over 11,000 Card@Once SaaS instant issuance solutions installed across more than 1,600 financial institutions.
• We broadened our personalization capabilities, including offering robust on-demand solutions. We believe
our enhanced capabilities and a high level of customer service will enable us to win incremental business from our
current customers and expand our customer base, building on our position as a leading personalization provider for
small and medium enterprise financial institutions in the U.S.
•
As the leader in the U.S. prepaid debit card solutions market, we continue to provide market-leading quality and
innovative solutions to our customers, including differentiated card materials and tamper-evident and sustainable
packaging capabilities, enabling us to add new customers to our portfolio and expand business with existing customers.
• We made contributions to COVID-19 relief efforts and local and global charities including assisting the Nashville,
Tennessee community recover from the tornado in March 2020.
Persistent focus on our strategic priorities has enabled us to diversify our business model, continue our rich
history of innovation and provide solutions that meet the needs and expectations of our customers, even in the
face of the challenges presented during 2020. We remain committed to our strategic priorities as we look ahead.
I look forward to sharing our progress with you.
Scott T. Scheirman
President and Chief Executive Officer
EMV® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo, LLC
Shareholder Information
Corporate Headquarters
CPI Card Group Inc.
10368 West Centennial Road
Littleton, Colorado 80127
(720) 681-6304
Auditor
KPMG LLP
1225 17th Street, Suite 800
Denver, Colorado 80202
Common Stock
Ticker Symbol: PMTS
OTCQX® Best Market (OTCQX)
Toronto Stock Exchange (TSX)
Investor Relations
(877) 369-9016
InvestorRelations@cpicardgroup.com
Transfer Agent and Registrar
EQ Shareowner Services
PO Box 64854
St Paul, Minnesota 55164-0854
(800) 468-9716
www.shareowneronline.com
Canadian Transfer Agent
Acting as Co-Agent
TSX Trust
650 West Georgia Street
Suite 2700
Vancouver, British Columbia V6B4N9
Canada
www.tsxtrust.com
Annual Meeting
The annual meeting of CPI Card Group stockholders will be held at
8:00 a.m. Mountain Time on Thursday, May 27th, 2021 via live webcast.
For information on how to attend our annual meeting of stockholders,
please see our definitive Proxy Statement for the 2021 Annual Meeting
of Stockholders or visit: https://investor.cpicardgroup.com
CPI Card Group® 2020 Annual Report
CPI is committed to being our customers’ partner of
choice and is highly focused on our strategic priorities:
» Deep Customer Focus
We keep our customers at the center of everything we do, strengthening and deepening
our relationships by delivering value to help them thrive. With our full and expanding
suite of catalytic and competitively differentiated products and solutions, we offer our
customers choice, convenience and control.
» Continuous Innovation
Collaborating with our customers to build their brands and achieve top-of-wallet status,
we offer products and solutions that support their initiatives to differentiate. We work to
enhance our offerings and to create and deliver next generation products and solutions
that meet the demands of the marketplace and exceed customers’ expectations.
» Market-Leading Quality Products and Customer Service
Consistently raising the bar on delivering innovative quality products, we pursue
initiatives to ensure exceptional service and make it easier to do business with CPI. We
listen to the voice of our customers and focus our energy on helping them deliver unique
and differentiated solutions that elevate their customers’ experience.
» Market-Competitive Business Model
By creating a dynamic and efficient operating model, we have positioned ourselves to
better serve our customers. We focus on generating top-line performance and
efficiency by driving productivity through process improvements, operational automation,
technology and equipment advancement.
Secure Card Solutions
Earth ElementsTM
Eco-focused upcycled plastic cards that appeal to issuers and
cardholders committed to environmental sustainability.
Second Wave®
Earthwise™
Earthwise™ is the first dual interface contactless payment
card product to offer up to 98% upcycled plastic content,
dependent on design. These beautifully designed, high
quality payment cards incorporate upcycled post-industrial
plastic that might have otherwise entered a landfill.
As the first to market payment cards featuring a core
made with recovered ocean-bound plastic, CPI’s Second
Wave® cards are dual interface contactless capable,
EMV® compliant and certified by major payment brands.
CPI developed this product in an effort to reduce
first-use plastic, divert plastic waste from entering the
world’s oceans and enable our customers to better
serve a growing market of environmentally-conscious
consumers.
Dual Interface Contactless
Dual interface contactless technology allows credit or debit
cards to be used for both contact (EMV®) and contactless
transactions. CPI offers dual interface functionality in
traditional PVC cards, metal cards and cards featuring a core
made with recovered ocean-bound or upcycled plastic.
CPI Metals®
CPI offers two distinct metal card options:
Encased Tungsten and Encased Steel. The Encased
Tungsten card carries a noticeable weight of 20+ grams.
The Encased Steel card provides a distinct feel at twice
the weight of a standard PVC card. Both of our metal
card offerings are available with dual interface contactless
technology.
The Contactless Indicator mark, consisting of four graduating arcs, is a
trademark owned by and used with permission of EMVCo, LLC.
Personalization Solutions
From traditional card personalization to
print-on-demand and instant issuance,
CPI provides next-generation personalization
solutions to fit customer needs.
CPI’s high-quality personalization and fulfillment
services are delivered through a network of high-security
production and card services facilities in the United
States, state-of-the-art equipment, and proven quality
assurance processes. We support magnetic stripe,
EMV®, dual interface contactless, and RFID, with a
variety of card personalization technologies including
print-on-demand, instant card issuance, and more.
CPI On-Demand®
Our innovative solution enables our
customers to quickly personalize their
end-user experience through uniquely
customized cards, carriers and collateral.
Card@Once®
Card@Once is CPI’s market-leading Software-as-a-Service
(SaaS) instant issuance solution for issuing high-quality
EMV®, dual interface contactless and magnetic stripe cards in
the financial institution branch and on-demand. Expanded
flexibility is delivered through Spectrum by Card@Once® and
Precision by Card@Once®.
Prepaid
We collaborate with the industry’s
largest prepaid program managers to deliver
market-leading secure cards, packaging, robust
designs and innovative prepaid solutions.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 2020
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Transition Period from
to
Commission File Number 001-37584
CPI Card Group Inc.
(Exact name of the registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
26-0344657
(I.R.S. employer identification no.)
10368 W. Centennial Road
Littleton, CO
(Address of principal executive offices)
80127
(Zip Code)
Registrant’s telephone number, including area code (720) 681-6304
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common stock $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
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
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. Yes ☐ No ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the registrant’s common stock held by non-affiliates was $13.1 million on June 30, 2020 computed based on the last quoted sales price of
the registrant’s common stock of $2.90 on OTC Markets Group Inc. on that date.
As of February 15, 2021, the number of shares outstanding of the registrant’s common stock was 11,230,482.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Page
Cautionary Statement Regarding Forward-Looking Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
PART I
Item 1
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4
Item 5
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . .
Item 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . . .
Item 9
Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .
Item 12
Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14
Item 15
PART IV
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
13
32
32
32
32
32
33
33
44
45
74
74
75
75
75
75
75
75
76
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80
1
Cautionary Statement Regarding Forward-Looking Information
Certain statements and information in this Annual Report on Form 10-K (as well as information included in
other written or oral statements we make from time to time) may contain or constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,”
“would,” “could,” “guides,” “provides guidance,” “provides outlook” or other similar expressions are intended to
identify forward-looking statements, which are not historical in nature. These forward-looking statements are based on
our current expectations and beliefs concerning future developments and their potential effect on us and other
information currently available. Such forward-looking statements, because they relate to future events, are by their very
nature subject to many important risks and uncertainties that could cause actual results or other events to differ
materially from those contemplated.
These risks and uncertainties include, but are not limited to: the potential effects of COVID-19 on our business,
including our supply-chain, customer demand, workforce, operations and ability to comply with certain covenants in our
credit facilities; our lack of eligibility to participate in government relief programs related to COVID-19 or inability to
realize material benefits from such programs; our substantial indebtedness, including inability to make debt service
payments or refinance such indebtedness; the restrictive terms of our credit facilities and covenants of future agreements
governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our limited ability to
raise capital in the future; a disruption or other failure in our supply chain; the effects of current or additional U.S.
government tariffs as well as economic downturns or disruptions, including delays or interruptions in our ability to
source raw materials and components used in our products from foreign countries; system security risks, data protection
breaches and cyber-attacks; interruptions in our operations, including our information technology (“IT”) systems, or in
the operations of the third parties that operate the data centers or computing infrastructure on which we rely; failure to
comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy
and data use and security; disruptions in production at one or more of our facilities; our failure to retain our existing
customers or identify and attract new customers; our inability to recruit, retain and develop qualified personnel,
including key personnel; our inability to adequately protect our trade secrets and intellectual property rights from
misappropriation or infringement claims and risks related to open source software; defects in our software; problems in
production quality, materials and process; a loss of market share or a decline in profitability resulting from competition;
our inability to develop, introduce and commercialize new products; new and developing technologies that make our
existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services
in a timely manner; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims
for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses, as well as
new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; failure to
meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market; a
continued decrease in the value of our common stock combined with our common stock no longer being traded on a
United States national securities exchange, which may prevent investors or potential investors from investing or
achieving a meaningful degree of liquidity; quarterly variation in our operating results; our inability to realize the full
value of our long-lived assets; our failure to operate our business in accordance with the Payment Card Industry Security
Standards Council security standards or other industry standards; a decline in U.S. and global market and economic
conditions and resulting decreases in consumer and business spending; costs relating to product defects and any related
product liability and/or warranty claims; our dependence on licensing arrangements; risks associated with international
operations; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we
operate and sell our products and services; the effect of legal and regulatory proceedings; our ability to comply with a
wide variety of environmental, health and safety laws and regulations and the exposure to liability for any failure to
comply; risks associated with the majority stockholders’ ownership of our stock; the influence of securities analysts over
the trading market for and price of our common stock; our inability to sell, exit, reconfigure or consolidate businesses or
facilities that no longer meet with our strategy; potential conflicts of interest that may arise due to our board of directors
being comprised in part of directors who are principals of our majority stockholders; certain provisions of our
organizational documents and other contractual provisions that may delay or prevent a change in control and make it
difficult for stockholders other than our majority stockholders to change the composition of our board of directors; and
other risks that are described in Part I, Item 1A – Risk Factors in this Annual Report on Form 10-K and our other reports
filed from time to time with the Securities and Exchange Commission (the “SEC”).
2
We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the
date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that
could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We
undertake no obligation to publicly update or revise any forward-looking statements after the date they are made,
whether as a result of new information, future events or otherwise.
3
Item 1.
Business
PART I
As used herein, “CPI,” “we,” “our” and similar terms refer to CPI Card Group Inc. and its subsidiaries, unless
the context indicates otherwise.
Overview
We are a payment technology company and leading provider of comprehensive Financial Payment Card
solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on
the networks of the “Payment Card Brands” (Visa, Mastercard®, American Express® and Discover® in the United States
and Interac, in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card
Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card
issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual
cardholders. We have established a leading position in the Financial Payment Solutions market through more than
20 years of experience. We serve a diverse set of approximately 2,000 direct customers and several thousand indirect
customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid
Debit Card program managers, as well as thousands of independent community banks, credit unions, “Group Service
Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card
programs, including managing the Financial Payment Card issuance process, core banking operations and other financial
services) and card processors.
We serve our customers through a network of high-security production and card services facilities in the United
States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards
Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers
require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and
services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to
serve the needs of our diverse customer base.
Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have
strong positions in the following markets:
•
•
•
the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers;
the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions;
and
the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers.
Our business consists of the following reportable segments: Debit and Credit, which primarily produces
Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and
Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card program managers primarily in
the United States. Our “Other” segment includes corporate expenses.
On August 3, 2018, we completed the sale of the U.K. Limited segment and, on April 1, 2019, we completed
the sale of our Canada subsidiary. The divestitures of the U.K. and Canada businesses allowed us to better position
ourselves to serve customers by focusing on our core businesses.
For additional details regarding our segments, see Part II, Item 8, Financial Statements and Supplementary
Data, Note 18 "Segment Reporting," and Part II, Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations in this Annual Report on Form 10-K.
4
COVID-19 Update
The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where we, our
customers and our suppliers conduct business. Overall, we believe that COVID-19 had a net negative impact relative to
our full year expectations for 2020. The broader and long-term implications of COVID-19 on our results of operations
and overall financial performance remain uncertain. The health and safety of our employees remain paramount, and
we continue to follow response protocols based on precautions and other appropriate measures recommended by the
Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and
guidelines. All of CPI’s operations have remained open and continue to provide direct and essential support to the
financial services industry. CPI’s net sales in 2020 increased over the prior year; however, in certain areas of the
business we experienced lower customer demand than expected which we believe is primarily attributable to the
COVID-19 pandemic. We may experience constrained supply, curtailed customer demand, impacts on our workforce
and other effects that could materially adversely impact our business, results of operations and overall financial
condition in future periods. CPI’s strategies may not be successful in effectively managing our resources and mitigating
the negative impact of the COVID-19 pandemic on our business, operating results and financial condition. See Item 1A,
Risk Factors, in this Annual Report on Form 10-K for further discussion of the possible impact of the COVID-19
pandemic on our business.
On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into
law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of
employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for
qualified improvement property. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 12
“Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we have deferred
employer social security payments starting with the second quarter of 2020 in accordance with the CARES Act. While
we are participating in certain programs under the CARES Act, the Act and its guidance are subject to change.
Our Competitive Strengths
•
Strong Market Position with Long-Term Customer Relationships. Our vision is to be the partner of choice
for our customers by providing market-leading quality products and customer service with a market-
competitive business model. We believe these efforts have resulted in CPI gaining overall market share
each year from 2018 to 2020. We have long-standing, trust-based relationships with customers, many of
whom we have served for decades. We have collaborated with our top 10 customers for more than ten
years, on average. We strive to put our customers at the center of everything we do. Our customer
relationships often involve the handling of sensitive information as well as process and technology
integration. As a result, our customers are selective about working with partners they can trust and that can
deliver the highest quality products and customer service. We maintain important relationships with the
Payment Card Brands to ensure our facilities and processes meet their standards. We believe we have
established a leading market position in the prepaid debit market, built on high quality services, innovation
and reliable delivery to our customers. Our Card@Once® instant issuance solution provides the necessary
on-site equipment and supplies, customer support and secure data exchange to provide personalized cards
on-site and on-demand at bank and credit union branches across the United States. Data is exchanged
through either a secure web interface or through integrations of our proprietary software with our
customers’ card issuance systems. Integrations provide a more seamless experience for our customers and
we believe they foster longer lasting and closer customer relationships.
• Comprehensive End-to-End Card Solutions. The foundation of our leading market position with our small-
to mid-sized issuer customers is our comprehensive end-to-end Financial Payment Card solutions. Our
solutions provide a full suite of products and card services required to produce, personalize and fulfill
Financial Payment Cards, while maintaining the security requirements of the Payment Card Brands. We are
integral to many of our customers’ card programs, pairing card production with an end-to-end offering of
card data personalization and card services that are integrated within our customers’ operations. We
provide card data personalization services for financial institutions and managers of Prepaid Debit Card
programs that require technology integration, such as secure data links to transfer highly sensitive
cardholder information. We believe that our comprehensive solutions allow our customers to choose a
single trusted partner to address their card program needs in a cost-effective manner instead of managing
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multiple suppliers across a complex value chain. Approximately 2/3rds of our annual net sales in our Debit
and Credit segment is from small- to mid-sized issuers.
•
•
Compliant Network of High-Security Facilities. Our high-security facilities are each audited for
compliance with the standards of the PCI Security Standards Council by one or more of the Payment Card
Brands, forming a leading network of approved production facilities in the United States. The Payment
Card Brand attestations of compliance allow us to produce cards bearing these brands and provide relevant
card services for our issuer customers. These audit processes are long and complex and our facilities must
comply with strict standards of security in order to obtain and retain these designations, which are regularly
verified by both the Payment Card Brands and our customers. We believe the complexity and investment
needed to obtain and retain these compliance designations may serve as a barrier to new entrants into our
market.
Financial Payment Card Capabilities, Industry Experience, and Proprietary and Patented Solutions. Over
the course of our long operating history, we have developed technological, engineering and operational
expertise that we believe has made us a leader in our industry. Europay, Mastercard and Visa (“EMV”) is a
global technical standard, maintained by EMVCo LLC (“EMVCo”) for smart payment cards, and for
payment terminals and automated teller machines that accept them. EMV® cards are smart cards (also
called chip cards) which store data on integrated circuits rather than magnetic stripes, although EMV cards
may also have magnetic stripes. We produce contact EMV cards, which require contact with a surface plate
on an EMV-enabled payment terminal. We also produce dual-interface EMV cards that have both contact
and contactless functionality.
We continuously work to enhance our offerings and to create and deliver next generation products and
solutions that meet the demands of the marketplace and our customers. CPI’s Second Wave® payment
cards featuring a core made with recovered ocean-bound plastic (“ROBP”), and EarthwiseTM “high
content” plastic cards address customer demands for more sustainable card options. We also sell CPI
Metals®, a premium encased metal card. Our offerings also include Card@Once, our proprietary and
patented instant card issuance system and software-as-a-service. We believe that our technological and
operational capabilities, combined with our specific focus on the Financial Payment Solutions market,
gives us a competitive advantage.
•
Experienced Leadership Team. We have built an experienced leadership team that has energized the
organization to focus on customers, accountability, innovation, and delivering results.
EMV® is a registered trademark or tradename of EMVCo LLC in the United States and other countries.
Our Strategy
We are a payment technology company that provides end-to-end debit, credit and prepaid payment solutions
delivered physically, digitally and on-demand. Our vision is to be our customers’ partner of choice by providing market-
leading quality products, customer service and continuous innovation with a market-competitive business model. We
believe we are well-positioned for success given our diversified business model, history of innovation and ability to
evolve with the needs and expectations of our customers. By helping our clients elevate their customers’ experience, we
foster compelling connections between people and technology through traditional and next generation solutions that
build brands and enhance people’s everyday lives. To achieve our vision, we focus on our four strategic priorities: deep
customer focus, market-leading quality products and customer service, continuous innovation, and market competitive
business model.
Deep Customer Focus
We are committed to keeping our customers at the center of everything we do. By partnering with our
customers and allowing their needs to inform our business, we enhance our ability to deliver value and help their
businesses thrive. We aim to inspire and satisfy our customers by redefining experiences that may have traditionally
seemed rigid and complex. With our full and expanding suite of catalytic and competitively differentiated products and
solutions, we offer our customers choice, convenience and control.
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Market-Leading Quality Products and Customer Service
Our strong team of dedicated, passionate employees embrace a culture of collaboration and steadfast focus on
delivering superior products and exceptional customer service which has helped build us into a leading solutions
provider. With a focus on market-leading quality products and customer service, we are committed to operational
excellence and adapting to market dynamics to help our customers achieve top-of-wallet status and build their
businesses. We listen to the voices of our customers and focus on helping them deliver unique and differentiated
solutions that elevate their customers’ experience. We are accountable for our actions, and work synergistically to
deliver results for our customers, our employees and our shareholders.
Continuous Innovation
With innovation as a core competency, we strategically invest to support continued growth and expand our
opportunities to partner purposefully with our current and potential customers. We strive to enhance our offerings and to
create and deliver next generation products and solutions that meet the demands of the marketplace and exceed
customers’ expectations. Continuous innovation is aimed at winning new business and helping our customers
differentiate themselves with distinctive products and solutions, build their brands, and achieve top-of-wallet status.
Market-Competitive Business Model
By creating a dynamic and efficient operating model, we have positioned ourselves to better serve our
customers. We aim to streamline our operations, which enables us to allocate resources focused on providing our
customers with unmatched solutions, innovation and exceptional service. We have also developed standards of
excellence and target metrics regarding the quality, reliability and on-time delivery of our products. We have invested in
equipment advancements and technology in order to create broader capabilities as well as improve the quality and
efficiencies of, and the customer satisfaction with, our offerings. We continue to focus on driving top-line performance,
profitability, and operational efficiency.
Our Products and Services
EMV Financial Payment Cards (Contact and Contactless Dual-Interface)
We produce both plastic and encased metal contact EMV cards, which feature an integrated circuit that
interfaces with an EMV payment terminal over a contact plate on the surface of the card when inserted into an EMV-
enabled payment terminal. We also produce contactless EMV cards, including plastic and encased metal dual-interface
EMV cards, which feature a radio-frequency identification (“RFID”) antenna that utilizes near field communications
(“NFC”) technology to allow transactions to process on a contactless basis when the card is brought within the requisite
proximity to an NFC-enabled payment terminal. Dual-interface EMV cards also have contact EMV technology.
Second Wave Cards Featuring a Core made with Recovered Ocean-Bound Plastic
Our Second Wave cards feature a core made with ROBP. Aimed at reducing first-use plastic and diverting
plastic waste from entering the ocean, Second Wave cards are available in all forms of EMV Financial Payment Cards
(contact and contactless dual-interface) and cards for access applications such as travel, ticketing, lodging, and
entertainment. Our Second Wave cards have been approved by two of the major Payment Card Brands. Second Wave
offers a seamless cardholder experience that aligns with broader consumer values and helps support our customers’
environmental, social and governance (“ESG”) goals by providing companies across multiple segments of the card
industry with a simple, effective, and more environmentally-friendly solution. CPI’s eco-focused solutions also include
Earthwise “High Content” cards, which were launched in 2020. This is the first contactless dual-interface card product
to incorporate up to 98% upcycled plastic content, dependent on design. As the leading eco-focused card provider in the
U.S., we estimate that CPI produced more than 80% of all U.S. eco-focused cards in 2020, shipping over 25 million eco-
focused contactless payment cards in the past 18 months.
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Non-EMV Financial Payment Cards
We produce non-EMV cards that utilize magnetic stripes, contactless cards which utilize NFC technology, and
cards that include both magnetic stripes and NFC technology. In addition, we produce non-EMV cards that are issued on
the networks of the Payment Card Brands including for the purpose of government disbursement, as well as retail gift
cards (which are not issued on the networks of the Payment Card Brands).
Card Data Personalization and Fulfillment
We provide data preparation and card data personalization solutions for debit, credit and Prepaid Debit Cards in
contact, contactless, and dual-interface EMV, and non-EMV card formats. Our personalization services are technology-
driven with full color printing and edge-to-edge coverage, and provide a wide range of card customization options, using
advanced processes to personalize (encode, program and emboss with data such as cardholder name and account
number) and fulfill cards to individual cardholders. Our services provide customers with visibility to manage card stock
inventory and fulfillment materials. In addition, we provide EMV data script development services for our customers
and in certain cases generate PIN numbers and mailers on their behalf. We also provide consultation and card design
services to further assist customers in card customization.
CPI On-Demand® Solutions
Through our CPI On-Demand® services, we are able to produce images, personalized payment cards and related
collateral on a one-by-one, on-demand basis for our customers, enabling individualized offerings and reducing waste and
inventory. Our service offering includes online ordering of a customized payment card through a program manager,
with direct fulfillment to a consumer. We believe the CPI On-Demand solution further differentiates us with our
financial institution and program manager customers and enables us to access new, business-to-business and business-to-
consumer verticals such as healthcare, transit, payroll, corporate incentives, government disbursement, benefits and
insurance.
Tamper-Evident Secure Packaging Solutions
We offer specialized and innovative tamper-evident secure packaging products and services to customers aimed
at reducing fraud for Prepaid Debit Cards sold through the retail channel. In certain cases, we also manage the
fulfillment of fully-completed Prepaid Debit Card packages to retail locations on behalf of our customers utilizing this
solution.
Instant Card Issuance Systems and Services
We offer Card@Once, our proprietary and patented instant card issuance system and software-as-a-service,
which provides our card issuing bank customers the ability to issue a completely personalized, permanent debit or credit
card within the bank branch to individual cardholders upon demand. Our instant issuance system is enabled by cloud-
based software that securely transfers data from our servers to the card branch to encode a magnetic stripe, a contact
EMV card, or a contactless dual-interface EMV card, and personalizes the card on a desktop printer solution provided by
CPI. These processes are audited for PCI Data Security Standard compliance annually. Our instant issuance system
generates both initial sales revenue for the printer solution and recurring revenue from card personalization and sales of
cards and consumables.
AdaptivesTM
While not currently significant to our financial results, we offer AdaptivesTM, an EMVCo certified chip and
antenna personalization technology. This technology is one of the smallest and most flexible available, allowing for
versatility and use across a wide variety of form factors. Adaptives’ embedded contactless technology can be integrated
into portable, wearable or non-wearable devices, or other objects.
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Digital Services
While not currently significant to our financial results, we are investing in digital services and issuance
technologies, including self-service card customization, online card ordering, on demand fulfillment, order lifecycle
management, customer inventory management, EMV key management, and other innovative solutions. We also offer
patented card design software, known as MYCA™, which provides our customers and their cardholders the ability to
order customized cards on the internet and customize cards with individualized digital images.
Suppliers
While we have developed constructive relationships with our suppliers and, in general, receive a high level of
cooperation and support from them, the objective of our procurement strategy is not to depend on any single supplier.
However, certain components are only available from a single supplier, or substituting a component from a different
supplier may require additional time and investment. Some of the most important components of our products include
the EMV/ dual-interface microchips and antennas. Our main suppliers of EMV/ dual-interface microchips and antennas
include four leading international manufacturers with locations in Germany, Thailand, Netherlands, South Korea, and
Singapore. Approximately 95% of our purchased microchips and antennas for the year ended December 31, 2020 came
from these four main suppliers, primarily on a purchase order basis. The other key components for our products are
substrates and inlays, which include PVC and ROBP. We monitor supply chain risks and evaluate alternative suppliers
based on numerous attributes including quality, performance, service, scalability, features, innovation and price. We
generally purchase inventory sufficient to fulfill customer purchase orders and to maintain certain levels of inventory in
anticipation of future customer demand and potential supply chain constraints.
Customers
In the United States, we categorize our customers as follows: large issuers, small to mid-sized issuers including
financial technology companies, prepaid debit issuers, program managers, Group Service Providers, and card processors.
Our diverse customer base includes some of the largest issuers of credit and debit cards in the United States and the
largest Prepaid Debit Card program managers. The Company had two customers that each accounted for 10% or more of
its net sales in 2020. Net sales from these customers were approximately 15% and 14% of total net sales for a combined
total of approximately 29% of our net sales for the year ended December 31, 2020. We have been serving these
customers for greater than 10 years on-average.
We generally enter into master purchase or service agreements that govern the general terms and conditions of
our commercial relationships. We then enter into a purchase order or other short-term arrangements that define the
quantities of products to be delivered or services rendered, and other terms specific to the order as appropriate. In most
cases, our contractual arrangements include neither exclusivity clauses nor commitments from our customers to order
any given quantities of products on a medium or long-term basis.
Production and Services
We have a network of high-security facilities that we leverage to balance customer orders, expand the array of
products and services available to our customers, provide consistent supply and execute short lead times. Our facilities
and operating processes are designed to provide a differentiated level of service to each of our key customer sets. For
example, we have the processes and capabilities to:
•
•
execute high-volume production runs that allow us to offer cost-effective price points on large orders;
execute lower-volume, highly customized runs that allow us to meet the high-service and quick-turn needs
of smaller orders, as well as on-demand solutions; and
• meet the specific needs of our Prepaid Debit Card customers, as an industry leader in tamper-evident secure
card packaging, and through our expertise and capabilities specifically designed for this prepaid retail
market.
9
As of December 31, 2020, we operate facilities comprising approximately 381,000 square feet in the United
States where we focus on Financial Payment Card production, personalization services, card packaging and fulfillment
services. See Part I, Item 2, Properties in this Annual Report on Form 10-K for information on the operations of each
facility.
We rely on secure ground and secure air freight to deliver finished products to our customers. Due to the high-
security nature of the Financial Payment Card products we provide to our customers, certain products must be shipped to
these customers via a secure method, such as armored vehicle. With respect to customers for whom we fulfill individual
and personalized debit and credit cards, we primarily utilize the U.S. postal service and other express shipping services
to deliver these cards directly to individual cardholders. For other customers, we deliver our products via regular ground
and air freight.
In addition, we embrace practices and solutions at our facilities designed to limit our impact on the
environment, preserve natural resources, and create innovative and responsible products. Our key areas of focus include:
incorporating environmental sustainability practices as and where feasible in alignment with our business model, values
and customer needs; engaging employees; and communicating and promoting our commitment and contribution to more
sustainable practices and products.
Sales and Marketing
We market ourselves as a leader and trusted partner in payments, seeking to meet or exceed the needs of our
customers through high quality, flexibility, and meaningful, innovative products at competitive prices. We strategize and
collaborate with our customers to bring them valuable and innovative solutions. We have sales representatives and
partners that give us a wide geographic reach across the United States. Our sales representatives offer a complete end-to-
end solution that incorporates the full spectrum of our products and services from concept to delivery. Our sales and
marketing strategy focuses on strengthening our relationships with existing customers through a consultative approach
that includes cross-selling expanded services and sharing expertise to enhance customers’ card programs. We leverage
the strength of our full-service offerings to attract new customers. Our marketing efforts focus on the needs of our
specific types of customers. By tailoring our marketing strategy to different customer segments, we are able to provide
relevant targeted solutions to meet our customer’s individual needs. We use an array of different marketing
communications and thought leadership across various industry publications, editorial white papers, case studies,
conferences and trade shows, print and digital advertisements, educational webinars, podcasts, and blogs to introduce our
existing customers and new customers to innovations in the payments market. We believe these efforts drive customer
retention and satisfaction, and attract new customers.
Competition
The market for products and services in the payment card industry is highly competitive. Some of our
competitors possess substantially greater financial, sales and marketing resources than we do, and therefore have
substantial flexibility in competing with us, including through the use of integrated product offerings, innovation, and
competitive pricing. Competitive factors for our business include product quality, durability, security, service reliability,
product line comprehensiveness and integration, timely introduction of new products and features, and price.
Our products and services compete with other card manufacturers and solutions providers. Certain existing and
potential customers also have the ability to produce and/or personalize Financial Payment Cards in-house. Accordingly,
we compete with certain of our customers, including those that offer transaction processing products and services to
financial institutions. We believe we are in competition with Arroweye, CompoSecure L.L.C., Entrust, FIS, Fiserv,
Giesecke & Devrient GmbH, HID Global, IDEMIA (formerly known as Oberthur Technologies S.A.), Perfect Plastic,
Thales (formerly known as Gemalto NV), Valid S.A., Travel Tags and WestRock (Multi Packaging Solutions), among
others.
Intellectual Property
We own, control or license various intellectual property rights, such as patents, trade secrets, confidential
information, trademarks, service marks, tradenames, copyrights and applications. We are party to certain patent cross-
license arrangements with industry participants and may, from time to time, enter into similar commercial agreements
should we consider it necessary or beneficial for our business.
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We rely on a combination of statutory (copyright, trademark and trade secret) and contractual safeguards to
protect our intellectual property throughout the world. As of December 31, 2020, we had 57 U.S. and foreign trademark
registrations and applications, 32 existing U.S. patents, 20 existing foreign patents, as well as 40 pending U.S. and
foreign patent applications. Our U.S. and foreign patents and applications have an average remaining maturity of
approximately 13 years, and our trademarks will be due for renewal for additional ten year periods on an ongoing basis.
Regulation
Privacy and Data Security
In the course of our business, we receive personally identifiable information of cardholders from our customers,
either from a financial institution or through a card processor on behalf of a financial institution. Such information
includes names, email and physical addresses, card account numbers and expiration dates. As a service provider to
financial institutions in the United States, we are subject to certain Federal Trade Commission requirements, certain
privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations, various other federal and state
privacy statutes and regulations, and certain of the PCI Security Standards Council’s requirements, each of which is
subject to change at any time. Outside of the United States, we are subject to privacy laws and regulations of certain
countries and jurisdictions. The interpretation and application of privacy and data protection laws are often uncertain and
in a state of flux. Furthermore, many of our customers are subject to privacy and data protection laws and our customers
often impose contractual obligations on us related to their obligations. In order to comply with our obligations under
applicable privacy laws and regulations and our contractual agreements with our customers, we are required to
implement adequate policies and safeguards to protect the privacy of personally identifiable information we receive.
Under the PCI Security Standards Council requirements, we must meet certain security standards in order to
achieve compliance that allows us to produce and personalize Financial Payment Cards issued on their networks. These
standards include extensive requirements with respect to the physical characteristics of our facilities, as well as our
electronic treatment and storage of cardholder data. We believe that we have developed significant expertise in acquiring
and maintaining compliance with the requirements from the Payment Card Brands, and have invested significant capital
to obtain and retain compliance, which is regularly verified by both the Payment Card Brands and our customers. We
believe the complexity involved and investment needed to obtain and retain these compliance designations may serve as
a barrier to new entrants into our market.
The status and interpretation of pending and existing laws and regulations is evolving and these laws and
regulations may be applied inconsistently, and the obligations imposed upon us by our customers can vary. It is possible
that our current data protection policies and practices may be deemed inconsistent with new legal requirements or
interpretations thereof, and breaches in the security of our systems and technology could result in a violation of these
laws and regulations and contractual requirements. Changes to these laws and regulations, as well as any associated
inquiries or investigations or any other government actions, and additional requirements imposed by our customers may
be costly to comply with and may delay or impede the development of new products, result in negative publicity,
increase our operating costs, require significant management time and attention, and subject us to remedies that may
harm our business, including reputational harm, fines, or demands or orders that we modify or cease existing business
practices.
Financial Services
We are generally not directly subject to federal or state regulations specifically applicable to financial institutions
such as banks, thrifts and credit unions. However, as a provider of products and services to these financial institutions, our
operations may be examined by various state and federal regulatory authorities and representatives of the Federal Financial
Institutions Examination Council, which is a formal inter-agency body empowered to prescribe uniform principles,
standards and report forms for the federal examination of financial institutions and to make recommendations to promote
uniformity in the supervision of financial institutions. Also, state and federal regulations require our financial institution
customers to include certain provisions in their contracts with service providers like us and to conduct ongoing monitoring
and risk management for third party relationships. In addition, we engage independent auditors annually to review certain of
our operations to provide internal control evaluations for our customers’ auditors.
In conducting certain aspects of our card services, we are directly subject to various federal and state laws and
regulations and contractual obligations. In order to comply with our obligations under applicable laws, we are required,
among other things, to comply with reporting requirements, to implement operating policies and procedures to comply
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with Office of Foreign Assets Control requirements, to protect the privacy and security of our customers’ information
and to undergo periodic audits and examinations.
In 2010, the Dodd-Frank Act was enacted. The Dodd-Frank Act introduced substantial reforms to the
supervision and operation of the financial services industry, including introducing changes that: affect the oversight and
supervision of financial institutions; provide for a new resolution procedure for large financial companies; introduce
more stringent regulatory capital requirements; implement changes to corporate governance and executive compensation
practices; and require significant rule-making. The Dodd-Frank Act has generated numerous new regulations that have
imposed compliance costs. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”) which
is empowered to conduct rule-making and supervision related to, and enforcement of, federal consumer financial
protection laws. The CFPB has issued guidance that applies to “supervised service providers” which the CFPB has
defined to include service providers, like us, as well as CFPB supervised banks and nonbanks. The CFPB has in the past
and may in the future issue regulations that may require us to make compliance investments. It is difficult to predict with
certainty the extent to which the Dodd-Frank Act, the CFPB or the resulting regulations will impact our business or the
businesses of our current and potential customers.
Environmental Protection
Our operations are subject to environmental protection regulations, including those governing the emissions of
pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, and the
investigation and remediation of soil and groundwater contamination. We are also required to obtain environmental
permits from governmental authorities for certain of our operations.
Human Capital
Our leadership team has significant experience in the payments industry, and many of our employees possess
career-long expertise and knowledge that is unique to the Financial Payment Card industry. Our compensation programs
are designed to attract and retain individuals with the unique skill sets that are fundamental to our business. We provide
our employees with competitive salaries and incentives, access to health insurance and paid time off, in addition to other
benefits. As part of our promotion and retention efforts, we also invest in ongoing leadership development and conduct
employee pulse surveys to measure employee engagement and identify areas of focus.
Employee health and safety in the workplace is one of the Company’s core values. Throughout the COVID-19
pandemic, the health and safety of our employees has remained paramount. We continue to follow response protocols
based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention,
as well as various state and local orders and guidelines. Our office-based employees moved to a primarily remote work
environment beginning in March 2020.
We are committed to a diverse and inclusive workplace, in which we promote honest, ethical and respectful
conduct. Our Code of Business Conduct and Ethics sets the standards for appropriate behavior and employees are
required to follow these standards and participate in related training. We have an open door policy and encourage
employees to bring forward issues and concerns. In addition, we periodically analyze our employment procedures and
pay practices to help ensure individuals are provided with equal employment opportunities and equitable pay.
As of December 31, 2020, CPI employed approximately 1,000 full-time employees, of which approximately
700 are production and service facility staff and approximately 300 are office staff. We also use the services of
temporary workers in our facilities to provide flexibility for our business needs. None of our employees are represented
by labor unions. We believe that our relations with our employees are positive.
Available Information
CPI Card Group Inc. is a Delaware corporation. We were initially formed as CPI Holdings I, Inc. in June 2007
and changed our name to CPI Card Group Inc. in August 2015. Our principal executive offices are located at 10368 West
Centennial Road, Littleton, CO 80127, telephone (720) 681-6304. The Company's Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge through
the "Investor Relations" portion of the Company's website (www.cpicardgroup.com), as soon as reasonably practical after
they are filed with, or furnished to, the SEC. Our website and the information contained on that site, or connected to that
12
site, are not incorporated into and are not a part of this report. The SEC also maintains a website (www.sec.gov), which
contains reports and information statements, and other information filed electronically with the SEC by the Company.
CPI Card Group Inc. qualifies as a smaller reporting company in accordance with Rule 12b-2 under the
Exchange Act, and has elected to follow certain of the scaled back disclosure accommodations within this Annual
Report on Form 10-K.
Item 1A. Risk Factors
There are many factors that affect our business, financial condition, results of operations and cash flows, some
of which are beyond our control. The following is a description of some important factors that may cause our business,
financial condition, results of operations and cash flows in future periods to differ materially from those currently
expected or desired. Factors not currently known to us or that we currently deem to be immaterial may also materially
and adversely affect our business, financial condition, results of operations and cash flows. You should carefully
consider all of these risks described below, together with the other information included in this Annual Report on
Form 10-K, before investing in our securities. As a result of any of these risks, known or unknown, you may lose all or
part of your investment in our securities.
Risk Factors Summary
Risks Relating to COVID-19
•
The effects of the COVID-19 pandemic and responsive government measures as well as related economic
disruptions adversely affecting our supply chain, workforce, overall operations and financial condition, ability
to access capital markets and refinance indebtedness, and ability to market and sell our products, as well as our
inability to participate in or realize benefit from government relief programs.
Risks Relating to our Business
• Our substantial indebtedness and the covenants and restrictions in the agreements governing our indebtedness
limiting our ability to use our cash flow in certain areas of our business, capitalize on certain business
opportunities and pursue our business strategies, all of which could increase if we incur additional debt.
The effects of the terms of our outstanding indebtedness and our financial condition on our ability to meet debt
service obligations or obtain additional financing.
•
• Disruptions or delays in our supply chain, including with respect to single-source suppliers, or the failure or
inability of our suppliers to comply with our codes of conduct or contractual requirements.
• A cyber-attack or breach of our information technology systems resulting in losses of our intellectual property
and/or sensitive cardholder data, harm to our competitive position and a loss of customer trust and confidence,
and, as threats evolve, the necessity to invest in significant additional resources to enhance our information
security and controls.
• Any interruption of our information technology systems, including disruptions or failures of our third-party data
centers, inhibiting our ability to service our customers.
• A disruption at any of our production facilities and our inability to recover quickly or otherwise provide
•
continuity of production in order to meet customer requirements.
Failure to retain existing key customers and attract new customers due to competitive products, pricing
pressures, financial health of our customers and macroeconomic conditions affecting our industry or our
customers.
• Our inability to recruit, retain, develop and adequately compensate the personnel needed to successfully operate
and grow our business.
• Our inability to protect our trade secrets, intellectual property and proprietary software, to obtain additional
intellectual property rights in the future, and to ensure our products are not infringing the intellectual property
rights of others.
• Defects in our software and computing systems, resulting in errors or delays in the processing of transactions
•
and other interruptions in our business operations.
Problems in our production processes, including as a result of mechanical or technological failures, which could
lead to reduced production capacity and quality.
• Our inability to undertake time-consuming and costly research and development activities in order to develop
new or enhanced products.
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• An increased number of states seeking to apply sales tax “nexus” laws or future increases in U.S. federal or
state income taxes, resulting in additional tax expenses in the event we are unable to pass such expenses along
to our customers.
• Our inability to divest or consolidate certain non-strategic businesses at all or on terms that are acceptable to us.
• A write-down of our long-lived assets, which represent a significant portion of our total assets.
• Defects in our products that may give rise to products recalls, product liability and warranty claims as well as
damage to our reputation.
• Our inability to renew licenses with key technology licensors, resulting in our loss of access to certain
technologies upon which we rely to develop certain of our products.
Risks Relating to our Industry
• The effects of current or additional U.S. government tariffs as well as economic downturns or disruptions,
including delays or interruptions in our ability to source raw materials and components used in our products
from foreign countries and increased prices of our products.
• Existing or future data privacy and security laws, regulations and requirements may cause us to incur significant
compliance costs or result in fines, sanctions, penalties and lawsuits if we fail to comply.
• The highly competitive, saturated and consolidated nature of our marketplace.
• The widespread adoption of technological changes, new products or industry standards, such as digital payment
systems or mobile payments, which may render our products obsolete or irrelevant, and our failure to develop
and introduce innovative products to address the evolving needs of our customers.
• The unpredictability of our operating results due to the varying cyclicality of the financial card and electronic
payment industries, capital requirements, inventory management, the availability of funding, competition, new
product developments, technological changes, production problems, supplier management and other factors.
• Our failure to comply with the standards of the PCI Security Standards Council, including due to an inability to
continue to make investments in our facilities necessary to maintain compliance with such standards.
• A deterioration in general economic conditions, resulting in reduced consumer confidence and consumer and
business spending.
• Our failure to comply with environmental, health and safety laws and regulations that apply to our products and
the raw materials we use in our production processes.
Risks Relating to Ownership of our Common Stock
• Our failure to maintain our listing on the Toronto Stock Exchange (“TSX”) due to failure to comply with TSX
listing standards and/or our failure to continue trading on the OTCQX® Best Market (“OTCQX”) due to failure
to comply with OTCQX rules and standards.
• A reduction in the share price of our common stock and an inability of investors to trade our common stock due
to a limited market for our shares as a result of no longer being listed on a United States national securities
exchange.
• Our majority stockholders’ continued concentrated ownership of our shares and ability to control decisions
regarding our business direction and policies as well as the potential conflicts of interest that may arise between
our majority stockholders and our other stockholders.
• The influence of securities analysts over the trading market for and price of our common stock, particularly due
to the lack of substantial research coverage of our common stock following our delisting from the Nasdaq
Capital Market (“Nasdaq”).
• Certain provisions of our organizational documents and other contractual provisions that may delay or prevent a
change in control and make it difficult for stockholders other than our majority stockholders to change the
composition of our board of directors.
General Risk Factors
• Our inability to comply with numerous evolving and complex laws and regulations relating to financial
reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and
permit requirements, export controls, competitive practices, labor and health and safety.
• Legal costs, insurance expenses, settlement costs and the risk of an adverse decision related to legal or
regulatory proceedings or litigation.
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Risks Relating to COVID-19
The ongoing COVID-19 pandemic and responses thereto may, or may continue to, adversely affect our supply chain,
workforce, overall operations and financial condition, and our ability to access capital markets and refinance
indebtedness, each of which may have a material adverse effect on our business.
The COVID-19 pandemic and efforts by federal, state and local governments to attempt to control its spread,
including “stay-at-home” orders, quarantine requirements, mandating closures of certain businesses not deemed
“essential” and executive and other governmental orders, restrictions and recommendations for residents and businesses
(some of which are still in place) have caused significant economic disruption and adversely impacted the global
economy. Even though some measures may currently be relaxed, they may be put back into place or increased if the
spread of the pandemic continues or increases in the future. Any such new orders, restrictions or recommendations could
mandate or encourage the suspension of some or all of our operations or otherwise negatively impact our ability to
operate our business at full capacity. Additionally, the reinstating of orders, restrictions and recommendations previously
in effect and/or the adoption of new orders, restrictions and recommendations may again result in widespread closures of
businesses, work stoppages, social distancing practices, slowdowns and delays, work-from-home policies, travel
restrictions and cancellations of events, as well as adverse impacts on the national and global economies. Disruptions to
our activities and operations resulting from such governmental orders, restrictions and recommendations would
negatively impact our business, operating results and financial condition. If the recent surge in COVID-19 cases coupled
with the slow rollout of vaccinations continues or worsens, or if vaccinations prove to be ineffectual or mutated virus
strains that are resistant to vaccinations emerge, then the ongoing spread of COVID-19 may have a devastating long-
term negative impact on the national and world economies, in which case the risks to our sales, operating results and
financial condition described herein would be elevated significantly.
The longer term impact of COVID-19 on our business may be difficult to assess or predict. The pandemic may
result in significant and extended disruption of global financial markets, which may reduce or eliminate our ability to
access capital markets and/or to refinance our existing indebtedness, which would negatively affect our liquidity and
prospects. Further, the actual and potential governmental orders, restrictions and recommendations described above
(which include travel restrictions and the potential for import restrictions) in response to COVID-19 have resulted in
delays in certain of our suppliers’ deliveries to us and could continue to disrupt or cause greater disruption to our supply
chain and thus our ability to obtain materials needed to manufacture our products and provide our services. Any import
or other cargo restrictions related to our products or the materials used to manufacture our products would restrict our
ability to manufacture products and thereby harm our business, financial condition and results of operations. Also, such
orders, restrictions and recommendations have resulted and may continue to result in increased transportation costs for
materials from our suppliers (for which we are responsible), which may negatively impact our cash flows, as well as
increased transportation costs for our products that we ship to our customers (for which our customers are responsible in
some cases), which may adversely affect customer demand. Additionally, if we are required to disrupt operations at or
close any of our facilities, or if we elect to do so to protect our employees from an actual or potential outbreak of
COVID-19 at any facility, such disruption or closure could impair our ability to fulfill customer orders and may have a
material adverse impact on our revenues and increase our costs and expenses. In the event of such a disruption or closure
at one of our facilities, our other facilities may not be able to effectively assume the production activities of such
impacted facility due to insufficient capacity, lack of necessary specialized equipment, higher production costs and/or
significant time needed to increase production, any of which may result in failure to meet our customers’ requirements,
resulting in negative impact to our business, results of operations and/or financial condition. Moreover, our key
personnel and other employees could be affected by COVID-19, potentially reducing their availability and disrupting our
operations. We have and may continue to incur additional cost associated with our response to COVID-19 and delay or
reduce certain capital spending and the completion of related projects until the impacts of COVID-19 begin to abate.
The global outbreak of COVID-19 continues to evolve. The ultimate impact of the COVID-19 outbreak
remains uncertain and subject to change, and we cannot predict its future impacts on our business or the economy as a
whole. However, these effects may harm our business, financial condition and results of operations in the near term and
could have a continuing material impact on our operations, sales, liquidity and ability to continue as a going concern in
the longer term. As a result of all of the foregoing, we may, in the future, take actions including reductions to salary and
work hours, furloughs, restructuring or layoffs, which may negatively impact our workforce and our business.
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Customer demand for and our ability to sell and market our products and services may be adversely affected by the
COVID-19 pandemic and responses thereto.
As discussed above, state and local governments have imposed orders, restrictions and recommendations
resulting in closures of businesses, work stoppages, social distancing practices, slowdowns and delays, work-from-home
policies, travel restrictions and cancellations of events, some of which are still in place. The reinstating of those orders,
restrictions and recommendations that are currently no longer in effect and/or the issuance of additional orders,
restrictions and recommendations, combined with fears of the spreading of COVID-19, may (i) cause certain of our
customers to delay, cancel or reduce orders of our products and services, and (ii) result in temporary or permanent
closures or reduced hours of operation of certain of our customers’ branches and/or increased consumer utilization of
digital banking services, which could adversely impact our product or service sales and cash flows. A sustained
deterioration in general economic conditions may adversely affect our profits, revenue and financial performance if
credit card issuers reduce credit limits, close accounts, and become more selective in determining to whom they issue
credit cards as a result thereof. We are unable to accurately predict how these factors will reduce our sales going forward
and when orders, restrictions and recommendations that are in place or may be put in place will be relaxed or lifted. A
prolonged economic contraction or recession may also result in our customers seeking to reduce their costs and
expenditures, which could result in lower demand for our products or a shift to demand for lower margin products. If our
sales decline, or if such lost sales are not recoverable in the future, our business and results of operations will be
significantly adversely affected. Additionally, our sales and customer relationship personnel have been and may continue
to be unable to engage in-person meetings and interaction with our customers. COVID-19 related restrictions have thus
harmed our sales and marketing efforts, and continued restrictions could have a negative impact on our sales and results
of operations.
We may not be eligible to participate in the relief programs provided under the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, and even if we are eligible we may not realize any material benefits from
participating in such programs.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into
law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of
employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds,
modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified
improvement property. We are continuing to evaluate the potential impacts of, and apply, certain provisions of the
CARES Act that provide benefit to the Company. While we are participating in certain programs under the CARES Act,
the CARES Act and its guidance are subject to change, and there is no guarantee that any government relief programs
will provide meaningful benefit to our business or that we will meet eligibility requirements of any additional
requirements of any additional relief programs for which we may determine to apply.
Risks Relating to our Business
The covenants and restrictions contained in agreements governing our indebtedness may adversely affect our
business and results of operations, may restrict our ability to grow and could make it difficult or impossible to timely
make our debt service payments or refinance our debt when it comes due.
We maintain a substantial amount of debt, and we may incur additional debt in the future to help fund our
business. Our credit facilities do not fully prohibit us or our subsidiaries from incurring additional indebtedness in the
future, and to the extent that we incur additional indebtedness, the risks associated with our substantial indebtedness
described below, including our possible inability to service our debt, may increase. Our substantial indebtedness and
interest expense could have important consequences to us, including:
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limiting our ability to use a substantial portion of our cash flow from operations in other areas of our business,
including for working capital, research and development, expanding our infrastructure, capital expenditures and
other general business activities and investment opportunities in our company, because we must dedicate a
substantial portion of these funds to pay interest and/or service our debt;
impacting our cash flows, results of operations and financial condition when interest rates rise, because the
interest rates on our credit facilities are floating rates that vary depending on market interest rates from time to
time;
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limiting our ability to retain or attract customers and our ability to attract or retain qualified employees due to
our significant amount of debt and the related implications of such debt for the Company’s long-term financial
condition;
limiting our ability to obtain additional financing in the future for working capital, capital expenditures, debt
service requirements, acquisitions and the execution of our strategy, and other expenses or investments planned
by us;
limiting our flexibility and our ability to capitalize on business opportunities and to react to competitive
pressures and adverse changes in government regulation, our business and our industry;
limiting our ability to timely make our debt service payments or to satisfy our other obligations under our
indebtedness (which could result in an event of default and acceleration if we fail to comply with the
requirements of our indebtedness);
increasing our vulnerability to a downturn in our business and to adverse economic and industry conditions
generally;
placing us at a competitive disadvantage as compared to our competitors that are less leveraged; and
limiting our ability, or increasing the costs, to refinance indebtedness, when our First Lien Term Loan (as
defined below) matures on August 17, 2022 and our Senior Credit Facility (as defined below) matures on
May 17, 2022.
The terms of our Senior Credit Facility and First Lien Term Loan restrict, and any additional indebtedness we may incur
in the future could similarly restrict, our ability to operate our business and to pursue our business strategies. Among
other things, our Senior Credit Facility and First Lien Term Loan restrict our ability to:
incur additional indebtedness or contingent liabilities
declare or pay dividends, repurchase stock, or make other distributions to stockholders;
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• make investments in any business that is not a wholly-owned subsidiary;
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• merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets;
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enter into transactions with affiliates; and
enter into certain asset sale transactions or other dispositions of assets.
create liens or use assets as security in other transactions;
In addition, our Senior Credit Facility contains a covenant requiring us to achieve at least $25 million of
adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the previous four consecutive fiscal
quarters in total for each quarterly period ending on or after March 31, 2020. The adjusted EBITDA computation is
defined in the Senior Credit Facility. Our failure to comply with any of these covenants could result in an event of
default, which could result in the acceleration of all of our indebtedness under the Senior Credit Facility and First Lien
Term Loan. Moreover, these restrictions, as well as the limitations described above, could have a material adverse effect
on our business, financial condition, results of operations and prospects. If we are unable to satisfy our obligations under
our indebtedness as they become due or if we are unable to pay our interest obligations, we would be rendered insolvent.
Our ability to raise capital in the future may be limited, which could lead to delays in innovation and abandonment of
our strategic initiatives.
In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a
combination of both. The terms of our outstanding indebtedness and our financial condition may adversely affect our
ability to obtain additional financing and any such financing may not be available on favorable terms, or at all. If
adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. Any failure to
achieve adequate funding will delay our products and services innovation and development and could lead to
abandonment of one or more of our strategic initiatives and impair our ability to continue as a going concern. Any of
these events could materially harm our business, financial condition and prospects.
A disruption or other failure in our supply chain could adversely affect our business and financial results.
As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities,
including disruptions or delays in supply chain, product quality control, as well other external factors over which we
have no control. Key components for our products include EMV microchips, substrates (such as PVC), resin, modules,
antennas and inlays, which we source from multiple suppliers located in Germany, Thailand, the Netherlands, South
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Korea, the United States and Singapore, primarily on a purchase order basis. Additionally, our Second Wave cards,
featuring a core made with “recovered ocean bound plastic” rely on a largely international supply chain to source and
provide such “recovered ocean bound plastic” in accordance with our defined parameters. It is difficult and costly to
monitor suppliers of key components and their compliance with our parameters, our codes of conduct, and applicable
laws. Any failure by our suppliers to so comply could adversely affect our ability to produce Second Wave payment
cards or cards with EMV microchips at all or in a manner consistent with standards agreed upon with our customers,
which could adversely affect our business, reputation and customer relationships. Moreover, in certain cases, such as
with ROBP, microchip and resin suppliers, we may rely on suppliers for which there are not adequate and immediate or
any replacements, which may result in our inability to continue to produce or a reduction in production of products that
use components from these suppliers in the event the suppliers terminate their relationships with us, fail to deliver
products or materials in required volumes or in required timeframes, or otherwise fail to meet their obligations to us. We
generally do not maintain large volumes of inventory, which makes us even more susceptible to harm if a single-source
supplier fails to deliver products or materials as required. Also, changes in the financial or business condition of our
suppliers, political instability, social unrest or adverse market conditions in a supplier’s country (including relating to
any continued outbreak of COVID-19), demand from other customers of such suppliers or failure to comply with our
codes of conduct or other contractual requirements could render our suppliers unable to provide us with, or render us
unable or unwilling to accept, the components we need to produce our products and thus subject us to losses or adversely
affect our ability to bring products to market. Further, the failure of our suppliers to deliver goods and services in
sufficient quantities, in compliance with applicable standards, contract requirements, or laws and regulations, and in a
timely manner could adversely affect our customer service levels, our reputation and our overall business. For example,
we have in the past experienced delays in our supply chain, which made it difficult to produce our products in a timely
manner. In addition, any increases in the costs of goods and services for our business may adversely affect our profit
margins if we are unable to pass along any higher costs in the form of price increases or otherwise achieve cost
efficiencies in our operations. If a company in our supply chain engages in illegal, unethical or other questionable
conduct, we may not have visibility to these practices and we, and our customers, may face reputational harm in addition
to interruptions to our supply chain.
System security risks, data protection breaches, and cyber-attacks could compromise our proprietary information,
impair customer and vendor relationships, disrupt our internal operations, harm perception of our products, and
expose us to litigation and/or regulatory penalties, which could have a material adverse effect on our business and
our reputation.
The reliability and security of our IT infrastructure and our ability to protect sensitive and confidential
information for our customers, which include many financial institutions, is critical to our business. We may be a target
of cyber-attacks or cyber intrusions via the Internet, computer viruses, break-ins, malware, phishing attacks, ransomware
attacks, hacking, denial-of-service attacks or other attacks and similar disruptions from unauthorized use of or access to
computer systems (including from internal and external sources). A breach of our security defenses could result in a loss
of our intellectual property, the release of sensitive cardholder information and customer, consumer or employee
personal data, or the loss of production capabilities at one or more of our production facilities. In recent years these
types of incidents have become more prevalent and pervasive across industries, including in our industry.
In addition, our encryption systems are at risk of being breached or decoded. We use encryption technology to
protect sensitive data while in transit and at rest. Also, smart cards are equipped with keys that encrypt and decode
messages in order to secure transactions and maintain the confidentiality of data. The security afforded by this
technology depends on the integrity of the encryption keys and the complexity of the algorithms used to encrypt and
decode information. Any significant advances in technology that enable the breach of cryptographic systems, malicious
software infiltration or that allow for the exploitation of weaknesses in such systems could result in a decline in the
security we are able to provide through this technology. Any material breach of our secured systems could harm our
competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to remedy
the damages caused by system or network disruptions, whether caused by cyber-attacks, security breaches or otherwise,
which could ultimately have a material adverse effect on our business, financial condition and results of operations.
The protective measures we have implemented to protect against data and security breaches and cyber-attacks
may not prevent system or network disruptions and may be insufficient to prevent or limit the damage from any future
security breaches. Our activities and investment in protective measures may not be deployed sufficiently quickly or
successfully in order to protect our system or network against disruptions and may not prevent or limit the damage from
any future security breaches. In addition, as these threats continue to evolve, we may be required to invest significant
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additional resources to modify and enhance our information security and controls or to investigate and remediate any
security vulnerabilities.
Interruptions in our operations, particularly in our IT systems, could have a material adverse effect on our business
and reputation.
Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary
business functions, including the operation of complex IT systems. In addition, a significant portion of the
communication between our employees, customers, and suppliers depends on our IT systems. The reliability of our IT
infrastructure and software, and our ability to expand and continually update technologies in response to our changing
needs, are critical to our business.
In order to serve our customers and operate certain aspects of our business, we depend on data centers and
computing infrastructure that is both our own as well as provided by third party vendors. To the extent applications and
data used in our business are hosted by third party vendors at their facilities, we do not control the operation of such
facilities or in some cases the hardware and infrastructure within them. Any disruption of, interference at, or inability to
keep up with our needs for capacity by our third-party data centers or hosted infrastructure partners could interrupt our
business operations. In addition, any problems faced by our third-party data center operations or hosted infrastructure
partners with the telecommunications network providers with whom we or they contract, or with the systems by which
our telecommunications providers allocate capacity among their customers, including us, could adversely affect the
experience of our customers. Our ability to service our customers also largely depends on the efficient and uninterrupted
operation of our own computer information systems residing at our leased facilities. The proper functioning of such
systems can be adversely affected by the increasing age and usage of such systems, among other things. Any interruption
in our business applications, systems or networks, including, but not limited to, new system implementations, server
downtime, facility issues, natural disasters or energy blackouts, could have a material adverse impact on our operations,
sales and operating results. Additionally, we have a limited number of employees with the expertise required to operate
such internal applications, systems and networks as well as remediate them in the event of a failure, and thus the attrition
of such employees could result in our inability to quickly and effectively resolve future IT issues that may arise.
Not only could we suffer damage to our brand and reputation in the event of a system outage or data loss or
interruption, but we may also be liable to third parties, including our customers. Some of our contractual agreements
require the payment of penalties if our systems do not meet certain operating standards, and failure to operate in
accordance with the standards of one or more of the Payment Card Brands could result in a loss of compliance of our
facilities, any of which could have a material adverse effect on our business. In addition, to successfully operate our
business, we must be able to protect our processing and other systems from interruption, including from events that may
be beyond our control. Protective measures we have established for continuation of core business operations in the event
of a catastrophic event may be insufficient to prevent or limit the damage from any future disruptions, and any such
disruption could have a material adverse effect on our business, financial condition and results of operations.
Disruptions in production at one or more of our facilities may have a material adverse impact on our business, results
of operations and/or financial condition.
Any serious disruption at any of our facilities, including as a result of the COVID-19 pandemic, severe weather
conditions, natural disasters, hostilities, political instability, social unrest, network outages, climate change or terrorist
activities, could impair our ability to use our facilities and have a material adverse impact on our revenues and increase
our costs and expenses. In the event of a disruption in production at one of our facilities, our other facilities may not
have sufficient capacity, may not have the specialized equipment necessary, may have higher production costs, may take
significant time to increase production or may fail to meet our customers’ requirements, any of which could negatively
impact our business, results of operations and financial condition. Long-term production disruptions may cause our
customers to seek alternative supply, which could further adversely affect our profitability.
A significant amount of certain specialized manufacturing capacity is also concentrated in single-site
locations. Due to the specialized nature of the assets used in the manufacturing process at each location, in the event a
particular facility experiences disruption, it may not be possible to find replacement capacity quickly or substitute
production from our other facilities. Accordingly, disruption at a single-site manufacturing operation could
significantly impact our ability to supply our customers and could have a severe impact on us.
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Additionally, all of our manufacturing facilities are currently leased, and we are subject to risks associated with
our current and future real estate leases for such facilities. As each lease expires, we may fail to negotiate renewals,
either on commercially acceptable terms or at all, we may be unable to find replacement locations with adequate
capacity for our unique equipment and operational needs, and we may experience disruption or significant cost in
relocating, any of which could have an adverse effect on our operations, customer relationships and financial
performance.
Failure to retain our existing customers or identify and attract new customers could have a material adverse effect on
our business.
A substantial portion of our net sales is derived from several large customers. The Company had two customers
that accounted for 10% or more of its net sales in 2020. Net sales from these customers were approximately 15% and
14% of total net sales for a combined total of approximately 29% of our net sales for the year ended December 31,
2020. If one or more of these key customer relationships ends, it could have a material adverse effect on our business
and financial results. Our ability to provide products and services to these customers and our other customers and meet
very high quality standards in a timely manner is critical to our business success. For example, one of the key services
that we offer our customers is the prompt and timely production and delivery of replacement debit or credit
cards. Orders for replacement debit or credit cards often are placed on short notice and may require personalization. If
we are unable to offer these and our other products and services in a high quality and timely manner, our relationships
with our customers may be adversely affected and customers may terminate our contracts with them.
In addition, our continued business relationship with our customers may be impacted by several factors beyond
our control, including more attractive product offerings from our competitors, pricing pressures, the financial health of
our customers and macroeconomic conditions affecting the Financial Payment Card industry or our financial institution
and other customers. Because our contractual arrangements with customers generally do not include exclusivity clauses
or commitments to order specified quantities of products on a medium or long-term basis, there is no guarantee that we
will receive orders on a consistent basis or on favorable terms, or be able to renew contracts or purchase orders in a
given year on favorable terms or at all.
If we experience difficulty attracting and retaining customers, our business, financial condition and results of
operations may be materially and adversely affected.
The failure to effectively recruit, retain and develop qualified personnel and implement effective succession processes
could adversely affect our success and ability to grow and could have a material adverse effect on our profitability.
Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to
recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual
capital needs, then the ability of our business to successfully compete and grow may be adversely affected. In addition,
the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key
business functions. The market for qualified personnel is highly competitive, particularly in the states in which our
operations are concentrated. This may result in market increases in compensation and difficulty attracting top level
talent in the event we are unable to offer market compensation to prospective employees. Additionally, equity-based
incentive awards have been, and may in the future be, an important element to attract, retain and motivate certain of our
employees and executive officers. We may not be able to make these awards in the future without amending our
Omnibus Incentive Plan to (i) add additional shares eligible for issuance (which would require stockholder approval) and
(ii) increase the number of shares permitted to be awarded to our directors and officers (which, under TSX rules, would
require approval of our disinterested stockholders voting at a duly called meeting). If we are unable to effectuate one or
both of these amendments because we do not have the requisite stockholder approval, we will be unable to offer equity-
based incentives as part of our compensation for certain employees and our executive officers going forward, which may
hinder our ability to retain such personnel and to recruit other talented personnel. Our efforts to retain and develop
personnel may also result in significant additional expenses, which could have a material adverse effect on our
profitability. Even then, we may not succeed in recruiting additional personnel or may fail to effectively replace current
personnel who depart with qualified or effective successors. In addition, our key personnel may not continue to be
employed or we may be unable to attract and retain qualified personnel in the future. Any failure to retain or attract
qualified employees or key personnel could have a material adverse effect on our business, financial condition and
results of operations.
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We may be unable to adequately protect our trade secrets and intellectual property rights against misappropriation or
infringement, which may have a material adverse effect on our business.
Our ability to protect our intellectual property is important to our business. We depend on patents and other
intellectual property rights to protect our products, proprietary designs and technological processes against
misappropriation by others. Our existing or future patents may be challenged, invalidated or circumvented. Our patents
have been and may in the future be challenged as invalid. Furthermore, we may have difficulty obtaining additional
patents and other intellectual property protections in the future. The patents and intellectual property rights that we
receive may be insufficient to provide us with meaningful protection or commercial advantage. Moreover, effective
patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we
provide services or sell or license products.
Our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual
property of our customers may not succeed. We actively seek to protect our proprietary rights and trade secrets by
engaging in litigation and by entering into confidentiality agreements with our employees, consultants, and strategic
partners and controlling access to and distribution of our technologies, documentation and other proprietary
information. Nevertheless, unauthorized parties may attempt to copy aspects of our products or technologies or to obtain
and use information that we regard as proprietary and may use such information to interfere with our
business. Enforcing our intellectual property rights has in the past, and may in the future, cause us to incur significant
costs. These costs and other consequences from the unauthorized use of our intellectual property could have a material
adverse effect on our business, financial condition and results of operations.
We may be required to defend against alleged infringement by us of the intellectual property rights of
others. Our products often contain technology provided to us by other parties such as suppliers or customers, and we
compete in an industry that is highly active in generating intellectual property. We may have little or no ability to
determine in advance whether such technology infringes the intellectual property rights of a third party.
Companies in our industry aggressively protect their intellectual property rights. From time to time, we receive
notices or are named in litigation that claim we have infringed upon, misappropriated or misused other parties’
proprietary rights or that challenge the validity of our patents. In addition to the costs and distraction that result from
intellectual property litigation, an adverse determination in these types of disputes could prevent us from offering some
of our products and services or from enforcing our intellectual property rights. Settlements can involve royalty or other
payments that could reduce our profit margins and may have a material adverse effect on our financial results. Our
suppliers, customers and licensors may not be required to fully indemnify us for the costs of defending against
infringement claims. In addition, we may be required to indemnify some customers and strategic partners related to
allegations, regardless of merit, that our products infringe on the intellectual property rights of others.
We also face risks related to open source software. Certain of our software is derived from open source
software, which is generally made available to the public by its authors and/or other third parties. Open source software
is often made available under licenses, which impose certain obligations in the event we distribute derivative works of
the open source software. These obligations may require us to make source code for the derivative works available to
the public and/or license such derivative works on terms different from those customarily used to protect our intellectual
property. With respect to our proprietary software, we generally license such software under terms that prohibit
combining it with open source software. Despite these restrictions, parties may combine our proprietary software with
open source software without our authorization, in which case we might nonetheless be required to release the source
code of our proprietary software. Usage of open source software can lead to greater risks than the use of third-party
commercial software, as open source licensors generally do not provide warranties, controls on the origin or
development of the software, or remedies against the licensors. Many of the risks associated with open source software
cannot be eliminated and could have a material adverse effect on our business, financial condition and results of
operations.
We may experience software defects, which could harm our business and reputation and expose us to potential
liability.
Our services are based on sophisticated software and computing systems, and the software underlying our
services may contain undetected errors or defects when first introduced or when new versions are released. In addition,
we may experience difficulties in installing or integrating our technology on systems used by our customers. Defects in
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our software, errors or delays in the processing of electronic transactions or other difficulties could result in the
interruption of business operations, delays in market acceptance, additional development and remediation costs,
diversion of technical and other resources, loss of customers, negative publicity or exposure to liability claims.
Our business could suffer from problems in production quality, materials and process, which could reduce, delay or
interrupt production of our products, resulting in adverse impacts to our business and financial results.
We produce our products using processes that are highly complex, require advanced and costly equipment and
must continually be modified to improve yields and performance. Difficulties in the production process can reduce
product yields, reduce product quality or interrupt production altogether. We may not have adequate replacements for
failing or malfunctioning machinery available in a timely fashion. Additionally, we have experienced malfunctions and
errors, including human error, relating to the operation of certain machinery and systems used in our production process
that, in some instances, have resulted in the delivery to our customers of products that did not meet their standards or
specifications or whose functionality in the marketplace was adversely impacted. Such problems may result in our
inability to properly fulfill customer orders and/or our obligation or election to replace products at our cost and expense,
provide credit to or reimburse customers for related damages. We may also be subject to claims relating to such issues.
The occurrence of any of these risks could damage our reputation and result in the loss of business from affected
customers, which could have an adverse impact on our business, financial condition and results of operations.
As the complexity of both our products and our technological processes has become more advanced, production
tolerances have been reduced and requirements for precision have become more demanding. If we do not advance our
production processes at the market rate, we may experience a lower production quality than the market standard. We
may suffer disruptions in our production, either due to production difficulties, such as machinery or technology failures,
human or other errors, or as a result of external factors beyond our control, such as delay of, or quality issues with,
materials provided by suppliers, interruption of our electrical service or a natural disaster. We may also risk non-
compliance with certain industry standards if we experience failure of certain required operations or processes, such as
those related to facility security, which may impede our ability to deliver products to our customers. Any such event
could have a material adverse effect on our business, financial condition and results of operations.
Our future success depends upon our ability to develop, introduce and commercialize new products, which can be a
lengthy and complex process. We may be unable to commercialize new or improved products we may develop on a
timely basis, or at all.
The development of new or enhanced products is a complex and uncertain process requiring the accurate
anticipation of technological, market and industry trends, as well as precise technical execution, all of which could
adversely affect our ability to meet customer demand for new or enhanced products. The successful development of new
products may require us to undertake time-consuming and costly research and development activities, and we may
experience difficulties or challenging market conditions that could delay or prevent the successful development,
commercialization and marketing of these new products, including, for example, limited or delayed market acceptance
of dual-interface EMV technology in the United States. Before we can commercialize any new products, we may need to
expend significant funds in order to conduct substantial research and development. Additionally, we have limited
research and development resources as compared to many of our competitors, which may result in an immature product
development process and lengthy product roll-outs. If we have difficulty producing innovative products, there could be a
material adverse effect on our revenue, results of operations, reputation and business. New or enhanced product
offerings may also expose us to additional risks, such as new sources of supplies, increased regulation or reputational
harm.
As we develop products, we may need to make significant investments in product development, as well as sales
and marketing resources. Furthermore, if we are unable to develop and introduce new and innovative products in a
cost-effective and timely manner, our product and service offerings could be rendered obsolete. In addition, competitors
may be able to develop and commercialize competing products more quickly and efficiently. Any of these factors could
have a material adverse effect on our business, financial condition and results of operations.
We may become subject to additional sales tax collection obligations and claims for uncollected amounts, new U.S.
tax legislation could expose us to additional tax liabilities and our income tax positions may be challenged by relevant
tax authorities, all of which could adversely affect our cash flows and financial results.
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In recent years, a number of states have adopted or considered adopting legislation requiring out-of-state sellers
to collect and remit sales tax on sales transactions into those states where they have no physical presence. The United
States Supreme Court’s June 2018 decision in South Dakota v. Wayfair, Inc. significantly increased the ability of states
to impose sales tax collection responsibilities on out-of-state sellers. In 2020, we determined that sales tax was not
properly collected from certain customers and remitted to the appropriate state tax authorities, and we recorded an
associated sales tax expense (see Part II Item 8, Financial Statements and Supplementary Data, Note 15 “Commitments
and Contingencies” in this Annual Report on Form 10-K regarding the sales tax expense and liability recorded). An
increased number of states seeking to expand applicability of sales tax “nexus” laws could result in additional tax
expenses in the event we are unable to pass these expenses along to our customers and additional administrative burden
to collect and remit sales tax in such jurisdictions. These laws could also subject us to retroactive assessment of state or
local sales taxes in such jurisdictions, which could adversely affect our future cash flows and financial results. In
addition, we are subject to U.S. federal and state income taxes. Our tax receivables may not be realized, and our tax
expense and the tax positions included in our financial statements, which are subject to estimates, could be impacted by
changes in rules or interpretations of existing tax laws and changes in U.S. federal and state tax legislation and tax
rates. Our tax positions may be challenged by relevant tax authorities and we may not be successful in defending against
any such challenge, which may adversely affect our future cash flows and financial results.
Various levels of government are increasingly focused on tax reform and other legislative actions to increase
tax revenue, and President Biden’s campaign proposals included increasing the U.S. corporate income tax rate and
imposing a new alternative minimum tax on book income. If these proposals are ultimately enacted into legislation, they
could materially impact our tax provision, cash tax liability and effective tax rate.
Additionally, our tax positions may be challenged by relevant tax authorities and we may not be successful in
defending against any such challenge, which may adversely affect our future cash flows and financial results.
We may not be able to sell, exit or reconfigure businesses or facilities that we determine no longer meet with our
strategy or that should be consolidated.
In executing our strategy, we have consolidated certain of our facilities and divested certain of our
businesses. We will continue to evaluate such opportunities. Any such consolidation or divestiture could adversely
affect our continuing business and expenses, revenues, results of operations, cash flows and financial position.
We may not be able to sell non-strategic businesses on terms that are acceptable to us, or at all. In addition, if
the sale of any non-strategic business cannot be consummated or is not practical, alternative courses of action, including
relocation of operations or closure, may not be available to us or may be more costly than anticipated.
Our long-lived assets represent a significant portion of our total assets, and we may never realize their full value.
Our long-lived assets recorded as of December 31, 2020 were $113.6 million, representing 43% of our total
assets, of which we have recorded plant, equipment, leasehold improvements and operating lease right-of-use assets of
$39.4 million, which includes significant investments in machinery and equipment as used in our operations.
We perform goodwill impairment testing on an annual basis as of October 1 of each year. Other long-lived
assets, such as identifiable intangible assets and plant, equipment and leasehold improvements are reviewed for
impairment whenever events, changes or circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. If we were to conclude that a future write-down of our long-lived assets is necessary, we would have
to record the appropriate charge, which could result in a material adverse effect on our results of operations. A
write-down of our long-lived assets may result from, among other things, deterioration in our performance and a decline
in expected future cash flows and could have a material adverse effect on our business, financial condition and results of
operations.
Costs relating to product defects, and any related product liability and warranty claims may materially adversely
affect our business.
We offer highly complex services and products and, accordingly, from time to time, defects have
occurred. Such defects can give rise to significant costs, including expenses relating to recalling products, replacing
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defective items, writing down defective inventory, the loss of potential sales and claims by third parties. In addition, the
occurrence of such defects may give rise to product liability and warranty claims, including liability for damages caused
by such defects. If we sell defective products into the market, our reputation could suffer and we may lose sales
opportunities and incur liability for damages, including damage claims from customers in excess of the amounts they
pay us for our products, including consequential damages. In addition, our customers may recall their products if they
prove to be defective or make compensatory payments in accordance with industry or business practice or in order to
maintain good customer relationships. If such a recall or payment is caused by a defect in one of our products, our
customers may seek to recover all or a portion of their losses from us. If any of these risks materialize, our reputation
would be harmed and there could be a material adverse effect on our business, financial condition and results of
operations.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners
could have a material adverse effect on our business.
Many of our products integrate third-party technologies that we license or otherwise obtain the right to use,
including software relating to smart card operating systems used in products such as EMV cards. As part of our strategy,
we have entered into licensing agreements with other leading industry participants that provide us with, among other
benefits, access to technology owned by third parties. For example, we license Java card technology from Oracle and
Multos card technology from Multos International, a subsidiary of a competitor, for use in certain of our products,
including in EMV cards. This Java and Multos card technology provides a secure environment for applications on smart
cards and other devices with limited memory and processing capabilities, and we rely on our commercial arrangements
with Oracle and Multos International for the continued use of these platforms. Oracle and Multos International may not
continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. We have
also entered into cross-licensing agreements with certain of our competitors that provide for an exchange of intellectual
property, including the sharing of certain patent rights in our respective portfolios. If we are unable to continue to
successfully renew these agreements, we may lose our access to certain technologies that we rely upon to develop certain
of our products, which could have a material adverse effect on our business.
Risks Relating to our Industry
If the U.S. government puts significant tariffs or other restrictions on goods imported into the United States, our
business, financial condition and results of operations may be materially harmed.
Most of our chips, as well as certain other raw materials used in our products, are imported from companies
located outside of the United States. The U.S. government has imposed tariffs on imports from certain countries,
including countries in which are suppliers are located, and may impose further tariffs and/or trade restrictions, including
in response to any continued outbreak of COVID-19 in foreign countries. There may also be other slow-downs or
interruptions in our ability to obtain materials imported into the United States due to global economic downturns and
trade disruptions, including related to the COVID-19 pandemic. The future status of certain existing international trade
agreements to which the United States is party is also uncertain, and such trade agreements could be terminated or
replaced. Any of these factors could depress economic activity, restrict our access to suppliers and have a material
adverse effect on our business, financial condition and results of operations.
Existing tariffs are also subject to a number of uncertainties as they are implemented, including future
adjustments and changes to the products covered by additional tariffs and to the countries included or excluded from
such tariffs. Changes in U.S. trade policy have resulted in one or more foreign governments, including China, adopting
responsive trade policies that make it more difficult or costly for us to import our products, or to purchase products
which include components, from those countries. Additional trade restrictions may lead to increased prices to our
customers, which may reduce demand, or, if we are unable to achieve increased prices, result in lowering our margin on
products sold.
We cannot predict the extent to which the U.S. or other countries will impose quotas, duties, tariffs, taxes or
other similar restrictions on the import or export of goods in the future, nor can we predict future trade policy or the
terms of any renegotiated trade agreements and their impact on our business. The adoption and expansion of trade
restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies
has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S.
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economy, which in turn could have a material adverse effect on our business, financial condition and results of
operations.
Current and prospective regulations, changes in our product offerings and customer contractual requirements
addressing consumer privacy and data use and security could increase our costs of operations, which could adversely
affect our operations, results of operations and financial condition.
In operating a Financial Payment Card business, we manage large amounts of personally identifiable
information of cardholders, including cardholder names, account numbers and similar information and are thus subject to
laws and requirements relating to data privacy and security, which continue to evolve and may become increasingly
difficult to comply with. For example, the California Consumer Privacy Act (“CCPA”) generally requires companies
like CPI, who process consumer personal information on behalf of their customers, to use, retain or disclose consumer
personal information solely for certain limited purposes, including to provide services to our customers according to the
terms of our customer contracts. The CCPA has already been amended, and it remains unclear whether it will be further
amended. Furthermore, to the extent these laws apply to our customers, our customers have imposed, and may continue
to impose additional, privacy related contractual obligations on us, adherence to which may require additional
investment in resources and internal processes. Additionally, as we continue to innovate our products and services
offerings and expand into new lines of business and as the number of jurisdictions enacting privacy and related laws
increases and the scope of these laws and enforcement efforts expand, we may become subject to additional data privacy
and security legal requirements and regulations. New products and services we develop may also require that we obtain
and retain more personally identifiable information for a longer period of time than we have done historically. We have
incurred significant expenses to meet the obligations of current privacy-related laws and requirements, and we expect to
continue to incur these as well as additional expenses if we become subject to additional privacy-related laws and
regulations, which will continue to necessitate us making changes to our internal processes, procedures and systems.
Failure to comply with existing or future data privacy and security laws, regulations and requirements to which we are or
become subject could result in fines, sanctions, penalties, civil lawsuits or other adverse consequences as well as loss of
customer and consumer confidence, which could materially adversely affect our results of operations, overall business
and reputation. The legal, political and business environments in these areas are rapidly changing, and subsequent
legislation, regulation, litigation, court rulings or other events could expose the Company to increased program costs,
liability and reputational damage.
We face competition that may result in a loss of our market share and/or a decline in our profitability.
Our marketplace is highly competitive, relatively saturated and increasingly consolidated. We expect these
market dynamics to continue as new product markets develop, competitors develop lower-cost production processes,
competitors consolidate and other competitors attempt to enter the markets in which we operate.
Some of our competitors have larger global customer bases and significantly greater financial, sales and
marketing, manufacturing, distribution, technical and other capabilities than we do. These competitors may be able to
adapt more quickly to new technological requirements and changes in customer and/or regulatory requirements and to
leverage their scale to lower production costs and prices. We also face competition from newly established competitors,
suppliers of products and customers who choose to develop their own products and services.
Existing or new competitors may develop products, technologies or services that more effectively address our
markets with enhanced features and functionality, greater levels of integration and/or lower cost. As the technological
sophistication of our competitors and the size of the market increases, competing low-cost producers could emerge and
grow stronger. These dynamics could result in declining average selling prices and reduced gross margins in our
businesses. If we cannot sufficiently reduce our production costs or develop new products, technologies or services, we
may not be able to compete successfully, and we may lose market share, which could have a material adverse effect on
our business, financial condition and results of operations.
New and developing technology solutions and products could make our existing technology solutions and products
obsolete or irrelevant, and if we are unable to introduce new products and services in a timely manner, our business
could be materially adversely affected.
The markets for our products and services are subject to technological changes, frequent introductions of new
products and services, evolving industry standards and changing customer preferences and demands. In particular, the
rise in the adoption in digital payment systems or mobile payments may make physical cards less attractive as a method
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of payment. Mobile payments offer consumers an alternative method to make purchases without the need to carry a
physical card and could, if widely adopted, reduce the number of Financial Payment Cards issued to consumers. In
addition, other new and developing technology solutions and products could make our existing technology solutions and
products obsolete or irrelevant.
Our ability to enhance our current products and services and to develop and introduce innovative products and
services that address the increasingly sophisticated needs of our customers will significantly affect our future
success. We may not be successful in developing, marketing or selling new products and services that meet these
changing demands. In addition, we may experience difficulties that could delay or prevent the successful development,
introduction or marketing of these services, or our new services and enhancements may not adequately meet the
demands of the marketplace or achieve market acceptance. If we do not complete or gain market acceptance of new
products, services and technologies, it would likely have a material adverse effect on our ability to retain existing
customers or attract new ones. For example, one of our growth opportunities is the continued transition to dual-interface
EMV cards by U.S. card issuing banks. Banks may be delayed in transitioning to the issuance of dual-interface EMV
cards due to increased costs and other factors. If these entities do not deploy dual-interface EMV technology or do so
less quickly and/or completely than we expect, our ability to grow could be significantly affected which could have a
material adverse effect on our business, financial condition and results of operations.
Our ability to develop and deliver new products and services successfully will depend on various factors,
including our ability to:
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effectively identify and capitalize upon opportunities in new and emerging product markets;
invest resources in innovation and research and development;
complete and introduce new products and integrated services solutions in a timely manner;
license any required third-party technology or intellectual property rights
qualify for and obtain required industry compliance for our products;
effectively manage the supply chain and related risks;
comply with applicable data protection regulations; and
retain and hire personnel experienced in developing new products and services.
Additionally, opportunities to combine or package products and service offerings and the ability to cross-sell
products and services are critical to remaining competitive in our industry. As a result, part of our business strategy is to
develop new products and services that may be used in conjunction with or in addition to our existing offerings. If we
are unable to identify adequate opportunities to cross-sell our products and services, this may have a material adverse
effect on our business, financial condition and results of operations.
Our operating results are unpredictable and may vary significantly from quarter to quarter and annually, and may
differ significantly from our expectations.
Our operating results are affected by a wide variety of factors that could materially and adversely affect revenue
and profitability or lead to significant variability in our operating results. These factors include, among others, the
varying cyclicality of the financial card and electronic payment industries, capital requirements, inventory management,
the availability of funding, competition, new product developments, technological changes, production problems,
supplier management and other factors.
Furthermore, in periods of industry overcapacity or when our customers encounter difficulties in their
end-markets, orders are more exposed to cancellations, reductions, price renegotiations or postponements, which in turn
reduce our management’s ability to forecast the next quarter or full-year production levels, net sales, profits and cash
flows. For these reasons, our net sales and operating results and cash flows may differ materially from our expectations
as visibility is reduced. This may have a material adverse effect on our business, financial condition and results of
operations.
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Our failure to operate our business in accordance with the standards of the PCI Security Standards Council or other
industry standards applicable to our customers, such as Payment Card Brand compliance standards, could have a
material adverse effect on our business.
Many of our customers issue their cards on the networks of the Payment Card Brands that are subject to the
standards of the PCI Security Standards Council or other standards and criteria relating to service providers’ and
manufacturers’ facilities, products and physical and logical security which we must satisfy in order to be eligible to
supply products and services to such customers. Most of our contractual arrangements with our customers may be
terminated, or customers may cease doing business with us, if we fail to comply with these standards and criteria.
We make significant investments in our network of high-security facilities in order to meet these standards and
criteria, including investments required to satisfy changes adopted from time to time in their respective standards and
criteria. Further investments may be costly, and if we are unable to continue to meet these standards and criteria, we
may become ineligible to provide products and services that have constituted in the past an important part of our revenue
and profitability. For the year ended December 31, 2020, the vast majority of the products we produced and services we
provided were subject to compliance with the standards of one or more of the Payment Card Brands. If we were to lose
compliance with one or more of the standards of the Payment Card Brands or of the PCI Security Standards Council for
one or more of our facilities, we may lose the ability to produce cards for or provide services to banks issuing credit or
debit cards on the networks of the Payment Card Brands. Additionally, certain of our facilities operate under variances
of certain of these standards. If such variances are not granted in the future or if we are required to move a facility in
order to maintain compliance, we may incur significant costs and delays, or may lose our ability to offer services in that
facility which would be disruptive to our business and have an adverse effect on our customer relationships and financial
results. If, as a result of noncompliance with standards of the PCI Security Standards Council or other standards of the
Payment Card Brands, we are not able to produce cards for or provide services to any or all of the issuers issuing debit or
credit cards on such networks, we could lose a substantial number of our customers, which could have a material adverse
effect on our business, financial condition and results of operations.
Risks associated with reduced levels of consumer and business spending as well as the effects of an economic
downturn on retailers could adversely affect our business, financial condition and results of operations.
Our business depends heavily on the overall level of consumer and business spending. Our revenue is exposed
to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or
changes in consumer purchasing habits. A sustained deterioration in general economic conditions, particularly in the
United States, or increases in interest rates may adversely affect our financial performance by reducing the demand for
our Financial Payment Card solutions or reducing the purchase of our higher margin products. If an economic downturn
occurs, credit card issuers may reduce credit limits, close accounts and become more selective with respect to whom
they issue credit cards. Additionally, an economic downturn or the continued outbreak of the COVID-19 pandemic could
result in extended voluntary or mandated closure of retail locations that sell certain of our products to consumers,
including our Prepaid Debit Cards. These and other changes in economic conditions could therefore adversely impact
our future revenues and profits and cause a materially adverse effect on our business, financial condition and results of
operations.
Environmental, health and safety laws and regulations expose us to liability and any such liability may have a
material adverse effect on our business.
We are subject to environmental, health and safety laws and regulations in each jurisdiction in which we
operate. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste
disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of our
employees. For example, the handling of certain materials and equipment we use in our production processes is subject
to health and safety and environmental laws and regulations. We are also required to obtain environmental permits from
governmental authorities for certain of our operations. If we violate or fail to comply with these laws, regulations or
permits, we could be fined or otherwise sanctioned by regulators.
As with other companies engaged in similar activities or that own or lease real property, we face inherent risks
of environmental liability at our current and historical production facilities. Certain environmental laws impose strict
and, in certain circumstances, joint and several liabilities on current or previous owners or operators of real property for
the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to
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natural resources. In addition, we may discover new facts or conditions that may change our expectations or be faced
with changes in environmental laws or their enforcement that would increase our liabilities. Furthermore, our costs of
complying with current and future environmental and health and safety laws, or our liabilities arising from past or future
releases of, or exposure to, regulated materials, may have a material adverse effect on our business, financial condition
and results of operations.
The scientific examination of, political attention to, and rules and regulations on issues surrounding the
existence and extent of climate change may result in an increase in our cost of production due to increases in the price of
energy and/or the introduction of energy or carbon taxes. A variety of regulatory developments have been introduced
that focus on restricting or managing the emission of carbon dioxide, methane and other greenhouse gasses. As a result,
we may need to purchase at higher costs new equipment or raw materials with lower carbon footprints. These
developments and further legislation that is likely to be enacted could negatively affect our operations. Changes in
health and safety or environmental regulations could increase our production costs, which could have a material adverse
effect on our business, financial condition and results of operations.
Risks Relating to Ownership of our Common Stock
If we fail to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best
Market, our common stock may no longer be permitted to trade on these platforms, which may adversely affect the
market price and liquidity of our common stock.
Our common stock is currently traded on the TSX and quoted on the OTCQX. In order to maintain our listing
on the TSX, we must maintain certain financial and share distribution targets, including maintaining a minimum number
of public stockholders, a minimum amount of free trading public shares, a minimum amount of market capitalization and
a minimum amount of value held by public stockholders. In addition to objective standards, the TSX may delist the
securities of any issuer if, in the TSX’s opinion, the issuer’s financial condition and/or operating results appear
unsatisfactory; if it appears that the extent of the public distribution or the aggregate market value of the security has
become so reduced as to make continued listing on the TSX inadvisable; if the issuer sells or disposes of principal
operating assets or ceases to be an operating company; if the issuer fails to comply with the listing requirements of the
TSX; or if any other event occurs or any condition exists which makes continued listing on the TSX, in the opinion of
the TSX, inadvisable. In order to continue quotations on the OTCQX, we must maintain a minimum per share bid price,
a minimum amount of market capitalization, minimum net tangible assets, a minimum amount of net sales, and a
minimum public float, in addition to continuing to comply with the United States securities laws and SEC reporting
rules.
If we are unable to maintain the continued listing requirements of the TSX or comply with the OTCQX rules,
this could result in an inability of our stock to trade on such platforms, resulting in adverse consequences for our
stockholders, including limited availability of market quotations for our common stock and reduced liquidity for the
trading of our securities. Other consequences could include a loss of confidence by investors, customers, suppliers, and
employees, and an adverse effect on our ability to obtain financing to continue operations.
Our common stock is not currently traded on a United States national securities exchange, which may continue to
decrease the value of our common stock and prevent investors from investing or achieving a meaningful degree of
liquidity.
In January 2020, our common stock was suspended from Nasdaq and began being quoted on the OTCQX.
While our stock is still currently listed on the TSX, a Canadian stock exchange, we cannot assure investors that our
common stock will be listed on a United States national exchange such as Nasdaq or any securities exchange in the
future.
Based upon the fact that our common stock is no longer traded on a United States national exchange and that
the value of our issued and outstanding common stock has decreased in value in recent years, certain stockholders may
no longer be able to invest in our common stock. Bid quotations on the OTCQX can be sporadic and may not provide
meaningful liquidity to investors. An investor may find it difficult to dispose of shares or obtain accurate quotations as to
the market value of our common stock. As a result of these limitations, our common stock may have fewer market
makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on a national stock
exchange or automated quotation system would typically have.
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Because there may be a limited market and generally low volume of trading in our common stock, the share
price of our common stock may be more significantly affected by broad market fluctuations, general market conditions,
fluctuations in our operating results, changes in the market’s perception of our business and announcements made by us,
our competitors or parties with whom we have business relationships. There may also be fewer institutional investors
willing to hold or acquire our common stock. The lack of liquidity in our common stock may make it difficult for us to
issue additional securities for financing or other purposes or to otherwise arrange for financing that we may need in the
future, which could harm our business.
Furthermore, our common stock may not continue to be quoted on the OTCQX in the future, broker-dealers
may cease to provide public quotes of our common stock on this market or the trading volume of our common stock may
be insufficient to provide for an efficient trading market. Any such developments could impair the value of your
investment. We expect that the price of our common stock could fluctuate substantially.
Because we are not listed on a United States national exchange, we are not subject to certain standards, such as
certain corporate governance requirements. Without required compliance with such standards, our investors do not have
the same protections afforded to investors in companies that are subject to such standards, and interest in our common
stock may decrease.
Our majority stockholders have the ability to control significant corporate activities, which may result in the
Company taking actions that other stockholders did not approve, and their ownership of a significant percentage of
our outstanding common stock may impact your liquidity, reduce the trading price of our stock or trigger a change in
control under our Senior Credit Facility.
Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund
IV) US, Limited Partnership (collectively, the “Tricor Funds”), affiliated with Parallel49 Equity (formerly known as
Tricor Pacific Capital), own approximately 37% and 22% of our common stock, respectively, as of December 31,
2020. Continuation of this concentrated ownership could result in a limited amount of shares being available to be
traded in the market, resulting in reduced liquidity.
Also, as a result of their ownership, the Tricor Funds, so long as they collectively hold a majority of our
outstanding shares, will have the ability to control the outcome of matters submitted to a vote of all stockholders and,
through our board of directors, the ability to control decision-making with respect to our business direction and
policies. Matters over which the Tricor Funds, directly or indirectly, exercise control include:
election of directors;
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• mergers and other business combination transactions, including proposed transactions that would result in our
stockholders receiving a premium price for their shares;
other acquisitions or dispositions of businesses or assets;
incurrence of indebtedness and the issuance of equity securities;
repurchases of stock and payment of dividends; and
the issuance of shares to management under our incentive plans and other executive compensation matters.
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The shares held by the Tricor Funds are restricted securities within the meaning of Rule 144 under the
Securities Act and are eligible for resale in the public market without registration subject to volume, manner of sale and
holding period limitations under Rule 144 under the Securities Act. Further, pursuant to the Registration Rights
Agreement, dated as of October 15, 2015, among the Tricor Funds and the Company, all of the shares of our common
stock owned by the Tricor Funds are now eligible to be registered under the Securities Act, subject to certain limitations
set forth in the Registration Rights Agreement, and may be offered and sold to the public now or in the future. If and
when some or all of these shares are sold by the Tricor Funds or the participants in their funds, either through sale on the
open market or through a distribution to the participants in their funds, or if it is perceived that they will be sold, the
market price of our common stock could decline.
In addition, if Tricor Funds were to sell or otherwise dispose of more than 25% of our outstanding common
stock, or otherwise cease to own at least 30% of our outstanding common stock, other than by means of distributing our
common stock to the participants in Tricor Funds, a “change of control” event of default would occur under the terms of
our Senior Credit Facility.
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Securities analysts may not publish favorable research or reports about our business or may publish no information
at all, which could cause our stock price or trading volume to decline.
The trading market for our common stock could be influenced to some extent by the research and reports that
industry or financial analysts publish about the Company and our business. We do not control these analysts. Since the
decline in the price of our common stock that preceded our delisting from Nasdaq and the subsequent listing of our
common stock on the OTCQX, we have not attracted substantial research coverage, and the analysts who publish
information about our common stock may have relatively little experience with us, which could affect their ability to
accurately forecast our results and could make it more likely that we fail to meet their estimates. In the event we obtain
additional securities or industry analyst coverage, if any of the analysts who cover us provide inaccurate or unfavorable
research or issue an adverse opinion regarding our stock price, our stock price could decline. If one or more of these
analysts cease coverage of us or fail to publish reports covering us regularly, we could lose visibility in the market,
which in turn could cause our stock price or trading volume to decline.
Conflicts of interest may arise because directors who are principals of our largest stockholder constitute a substantial
portion of our board of directors.
Messrs. Bradley Seaman and Nicholas Peters, who are officers or affiliates of Parallel49 Equity (and its
predecessor), serve on our board of directors. The Tricor Funds, our majority stockholders, are funds controlled by
Parallel49 Equity and its affiliates. Parallel49 Equity and entities controlled by it may in the future hold equity interests
in entities that directly or indirectly compete with us, and companies in which it currently invests may begin directly or
indirectly competing with us. As a result of these relationships, when conflicts between the interests of Parallel49
Equity, on the one hand, and of our other stockholders, on the other hand, arise, these directors may not be
disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of
incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally
permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the
transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction,
(2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our
stockholders and a majority of our disinterested stockholders approve the transaction or (3) the transaction is otherwise
fair to us. Our certificate of incorporation also provides that any principal, officer, member, manager and/or employee
of Parallel49 Equity or any entity that controls, is controlled by or under common control with Parallel49 Equity (other
than any company that is controlled by us) or any investment funds managed by Parallel49 Equity will not be required to
offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves
or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their
capacities as our directors.
Certain provisions of our organizational documents and other contractual provisions may make it difficult for
stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that
some of our stockholders may consider to be beneficial.
Certain provisions of our amended and restated certificate of incorporation and bylaws may have the effect of
delaying or preventing changes in control if our board of directors determines that such changes in control are not in the
best interests of us and our stockholders. The provisions in our amended and restated certificate of incorporation and
bylaws include, among other things, the following:
•
•
•
•
the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms,
including preferences and voting rights, of those shares without stockholder approval;
following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common
stock, stockholder action may only be taken at a special or regular meeting and not by written consent, and
special meetings may only be called by a majority of the total number of directors that we would have if there
were no vacancies on our board of directors;
advance notice procedures for nominating candidates to our board of directors or presenting matters at
stockholder meetings;
allowing only our board of directors to fill vacancies on our board of directors; and
30
•
following the time that the Tricor Funds and their affiliates cease to beneficially own a majority of our common
stock, super-majority voting requirements to amend our bylaws and certain provisions of our certificate of
incorporation.
We have entered into a director nomination agreement (the “Director Nomination Agreement”) with the Tricor
Funds that provides the Tricor Funds the right to designate nominees for election to our board of directors for so long as
the Tricor Funds collectively beneficially own 5% or more of the total number of shares of our common stock then
outstanding. The number of nominees that the Tricor Funds are entitled to designate under the Director Nomination
Agreement bears the same proportion to the total number of members of our board of directors as the number of shares
of common stock beneficially owned by the Tricor Funds bears to the total number of shares of common stock
outstanding, rounded up to the nearest whole number. In addition, the Tricor Funds are entitled to designate the
replacement for any of its board designees whose board service terminates prior to the end of such designee’s term
regardless of the Tricor Funds’ beneficial ownership at such time. The Tricor Funds also have the right to have their
designees participate on committees of our board of directors, subject to compliance with applicable law and stock
exchange rules. The Director Nomination Agreement will terminate when the Tricor Funds collectively own less than
5% of our outstanding common stock.
We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a business combination, such as a merger, with a person or group owning 15% or more of the corporation’s
voting stock for a period of three years following the date the person became an interested stockholder, unless (with
certain exceptions) the business combination or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Accordingly, we will not be subject to any anti-takeover effects of
Section 203. However, our certificate of incorporation contains provisions that have the same effect as Section 203,
except that they provide that the Tricor Funds, their affiliates (including any investment funds managed by Tricor) and
any person that becomes an interested stockholder as a result of a transfer of 5% or more of our voting stock by the
forgoing persons to such person are excluded from the “interested stockholder” definition in our certificate of
incorporation and are therefore not subject to the restrictions set forth therein that have the same effect as Section 203.
While these provisions have the effect of encouraging persons seeking to acquire control of the Company to
negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that
some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or
discourage attempts to remove and replace incumbent directors. In addition, the potential issuance of preferred stock
may delay or prevent a change in control of us or discourage bids for our common stock at a premium over the market
price. It may also adversely affect the market price and the voting and other rights of the holders of our common stock as
it could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock.
In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our
current management by making it more difficult for stockholders to replace members of our board of directors, which is
responsible for appointing the members of our management.
General Risk Factors
We are required to comply with complex laws and regulations in the United States and other countries and are
exposed to business risks associated with our international business.
We are subject to numerous evolving and complex laws and regulations which apply, among other things, to
financial reporting standards, corporate governance, data privacy, tax, trade regulations, environmental regulations and
permit requirements, export controls, competitive practices, and labor and health and safety laws and regulations in each
jurisdiction in which we operate. Though we currently have limited international operations, the expansion thereof in
the future may increasingly expose us to risks associated with international business operations, including political
instability (e.g., the threat of war, terrorist attacks or civil unrest), inconsistent regulations across jurisdictions,
unanticipated changes in the regulatory environment, and import and export restrictions. Any of these events may affect
our employees, reputation, business or financial results as well as our ability to meet our objectives.
We may not be in full compliance at all times with the laws and regulations to which we are subject and we
may not have obtained the permits, authorizations or licenses that we need. Any failure to comply with applicable laws
31
or regulations could result in fines or sanctions. In such a case, or if any of these international business risks were to
materialize, there could be a material adverse effect on our business, financial condition and results of operations.
Our business and financial results may be materially adversely affected by various legal and regulatory proceedings.
We are subject to legal proceedings, lawsuits and other claims in the normal course of business and could
become subject to additional claims in the future, some of which could be material. A future adverse ruling, settlement
or unfavorable development could result in charges that could have a material adverse effect on our business, operating
results or financial condition. In addition, litigation can be costly, and the expenses and damages arising from any
liability could harm our business. Furthermore, our insurance may not be adequate to cover claims against us or any
liability that may be imposed on us.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Information regarding each of our facilities, which may include multiple leases at each location, is set forth
below.
Location
Littleton, Colorado . . . . . . . . . . .
Roseville, Minnesota . . . . . . . . . .
Fort Wayne, Indiana . . . . . . . . . .
Nashville, Tennessee . . . . . . . . . .
Item 3. Legal Proceedings
Operations
Financial Payment Card production, corporate facility
Financial Payment Card production, card personalization
services, card packaging services, fulfillment
Financial Payment Card production
Financial Payment Card personalization services, instant
issuance, fulfillment
Square
Footage
Owned/
Leased
65,000 Leased
200,000 Leased
45,000 Leased
71,000 Leased
The Company may be subject to routine legal proceedings in the ordinary course of business. The Company
believes that the ultimate resolution of any such matters will not have a material adverse effect on our business, financial
condition or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities
Market Information for Common Stock
Our common stock is currently quoted on OTCQX Best Market and traded on the TSX under the symbol
“PMTS”. In January 2020, our common stock was suspended from listing on Nasdaq and began being quoted on the
OTCQX. Any over-the-counter market quotations reflect inter-dealer prices, without mark-up, mark-down or
commission and may not necessarily represent actual transactions. We are evaluating our ability to return to listing on
32
Nasdaq and intend to apply for listing on The Nasdaq Global Market as we are able and eligible to do so. However,
there can be no assurance that, if we seek to return to listing on Nasdaq, we will be successful in doing so.
Holders
There were thirty-two stockholders of record as of February 15, 2021. This figure does not include an estimate
of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing
agencies.
Issuer Purchases of Equity Securities
There were no shares repurchased during the years ended December 31, 2020, and 2019.
Item 6.
Selected Financial Data
Not required due to smaller reporting company status.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the consolidated financial statements and the
notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of certain factors, some of which are not within
our control. See "Risk Factors" and “Cautionary Statement Regarding Forward-Looking Statements.”
Company Overview
We are a payment technology company and leading provider of comprehensive Financial Payment Card
solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on
the networks of the “Payment Card Brands” (Visa, Mastercard, American Express and Discover in the United States and
Interac in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands,
but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides card issuing
bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.
We have established a leading position in the Financial Payment Card market through more than 20 years of experience.
We serve a diverse set of approximately 2,000 direct customers and several thousand indirect customers, including some
of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers,
as well as thousands of independent community banks, credit unions, “Group Service Providers” (organizations that
assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing
the Financial Payment Card issuance process, core banking operations and other financial services) and card processors.
We serve our customers through a network of high-security production and card services facilities in the United
States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards
Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers
require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and
services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to
serve the needs of our diverse customer base.
Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have
strong positions in the following markets:
•
•
•
the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers;
the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions;
and
the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers.
33
2020 Summary of Financial Performance
During the year ended December 31, 2020, net sales increased 12.3% from the prior year, to $312.2 million,
and we recorded income from operations of $38.4 million, compared to net sales of $278.1 million and income from
operations of $24.7 million during 2019. Our operating income margin for the year ended December 31, 2020 increased
to 12.3% compared to 8.9% in the prior year. During the year ended December 31, 2019, we received $6.0 million cash
related to a litigation settlement, which was recorded as a reduction to net operating expenses in the Other segment. For
the year ended December 31, 2020, we recorded net income from continuing operations of $16.2 million, compared to
net loss from continuing operations of $5.0 million in 2019, an improvement of $21.2 million.
Cash provided by operating activities from continuing operations for the year ended December 31, 2020 was
$22.1 million, representing an increase of $19.1 million compared to $3.0 million in the prior year.
Segment Overview
Our business consists of the following reportable segments:
• Debit and Credit,
• Prepaid Debit, and
• Other.
Debit and Credit Segment
Our Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card
services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include
EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards and plastic and
encased metal cards, and Second Wave payment cards featuring a core made with ROBP. We also sell Card@Once, our
proprietary and patented instant card issuance system and software-as-a-service, and other private label credit cards that
are not issued on the networks of the Payment Cards Brands. We provide CPI On-Demand services, where we produce
images, personalized payment cards, and related collateral on a one-by-one, on demand basis for our customers. This
segment also provides a variety of integrated card services, including card personalization and fulfillment services. The
Debit and Credit segment operations are each audited for compliance by one or more of the Payment Card Brands. Many
of our customers require us to comply with the standards of the PCI Security Standards Council.
Prepaid Debit Segment
Our Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the
United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued
on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid
Debit segment operation is audited for compliance by one or more of the Payment Card Brands. Many of our customers
require us to comply with the standards of the PCI Security Standards Council.
Other
Our Other segment includes corporate general and administrative expenses and a less significant operation that
generated sales from the production of Financial Payment Cards and retail gift cards, and card personalization and
fulfillment services in Canada, prior to its sale. In the fourth quarter of 2018, we entered into a definitive agreement to
sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial
Payment Cards, as that business migrated to our operations in the U.S. or to other service providers in 2019. The
transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and
transaction costs, including employee termination costs, the majority of which were expensed in 2018, the sale did not
have a significant impact on cash, and there was no significant loss on sale.
On August 3, 2018, we completed the sale of the U.K. Limited segment.
34
Key Components of Results of Operations
Set forth below is a brief description of key line items of our consolidated statements of operations and
comprehensive income.
Net Sales
Net sales reflect our revenue generated from the sale of products and services. Product net sales include the
design and production of Financial Payment Cards, including contact and contactless dual-interface cards, and Second
Wave ROBP cards. Dual-interface EMV cards have additional technology to process contactless transactions and
generally have a higher selling price than contact-only EMV cards. We do not anticipate the conversion from contact
EMV cards to dual interface EMV cards to have a negative impact to our gross profit and gross margin, as this
conversion occurs over time. We also generate product revenue from the sale of our Card@Once instant issuance
system and consumables, private label credit cards and retail gift cards. Services net sales include revenue from the
personalization and fulfillment of Financial Payment Cards, including CPI On-Demand services, tamper-evident security
packaging, fulfillment services and software as a service personalization of instant issuance Financial Payment cards.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 2 “Summary of Significant Accounting
Policies” and Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
“Critical Accounting Policies and Estimates—Revenue Recognition” in this Annual Report on Form 10-K for further
information and timing of revenue recognition for net sales. We include gross shipping and handling revenue in net
sales.
Cost of Sales
Cost of sales includes the direct and indirect costs of the products we sell and the services that we provide.
Product costs include the cost of raw materials, including the EMV/ dual-interface microchips and antennas, labor costs,
equipment and facilities costs, operation overhead, depreciation and amortization, leases and rental charges and transport
costs. Product costs also include Card@Once instant issuance printer costs. Services costs include the cost of labor, raw
materials in the case of tamper-evident security packaging, equipment and facilities costs, operation overhead,
depreciation and amortization, leases and rental charges and transport costs. Cost of sales can be impacted by many
factors, including volume, operational efficiencies, procurement costs, promotional activity and employee relations. We
include the costs of shipping and handling in cost of sales.
Gross Profit and Gross Margin
Gross profit consists of our net sales less our cost of sales. Gross margin is gross profit as a percentage of net
sales.
Operating Expenses
Operating expenses are primarily comprised of selling, general and administrative expenses (“SG&A”) which
generally consist of expenses for executive, finance, sales, marketing, legal, information technology, customer service,
human resources, research and development, and administrative personnel, including payroll, benefits and stock-based
compensation expense, bad debt expense and outside legal and other advisory fees, including consulting, accounting, and
software related fees. Operating expense also includes depreciation and amortization expense and may include
impairment charges on tangible and intangible assets or cash from litigation settlements, when necessary.
Income from Operations and Operating Margin
Income from operations consists of our gross profit less our net operating expenses. Operating margin is income
from operations as a percentage of net sales.
Other Expense, net
Other expense, net consists primarily of interest expense and foreign currency gains or losses.
35
Income tax benefit (expense)
Income tax benefit (expense) consists of our U.S. federal and state income taxes at statutory rates, including the
impact of other items such as valuation allowances, tax credits, permanent items, and foreign taxes.
Net Income (Loss) from Continuing Operations
Net income (loss) from continuing operations consists of our income from operations, less other expense, net,
and income taxes.
Results of Operations
Year Ended December 31, 2020 Compared With Year Ended December 31, 2019
The table below presents our results of operations, on a continuing operations basis, for the years ended
December 31, 2020 and 2019:
Net sales:
Year Ended December 31,
2020
2019
$ Change % Change
(dollars in thousands)
Products . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,968 $ 143,941 $ 28,027
Services . . . . . . . . . . . . . . . . . . . . . . . . .
Total net sales . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative
140,221
312,189
201,881
110,308
134,132
278,073
187,003
91,070
6,089
34,116
14,878
19,238
(including depreciation and amortization) .
Litigation settlement gain . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . .
Other expense, net:
71,917
38,391
72,359
(6,000)
24,711
(442)
6,000
13,680
19.5 %
4.5 %
12.3 %
8.0 %
21.1 %
(0.6)%
*
55.4 %
Interest, net . . . . . . . . . . . . . . . . . . . . . . . .
(25,397)
Foreign exchange loss . . . . . . . . . . . . . . .
(7)
Other income (loss) . . . . . . . . . . . . . . . . .
(102)
Income (loss) before income taxes . . . . . . . . . . .
12,885
3,305
Income tax benefit (expense) . . . . . . . . . . . .
Net income (loss) from continuing operations . . $ 16,190
* Not meaningful
(24,891)
(1,335)
(4)
(1,519)
(3,474)
(506)
1,328
(98)
14,404
6,779
$ (4,993) $ 21,183
2.0 %
*
* %
* %
*
424.3 %
Net Sales
Net sales by segment:
Year Ended December 31,
2020
2019
$ Change % Change
(dollars in thousands)
Debit and Credit . . . . . . . . . . . . . . . . . . . . $ 250,427 $ 213,141 $ 37,286
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . .
(734)
(1,679)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(757)
Eliminations . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,189 $ 278,073 $ 34,116
63,596
—
(1,834)
64,330
1,679
(1,077)
17.5 %
(1.1)%
* %
*
12.3 %
* Not meaningful
Net sales for the year ended December 31, 2020, increased $34.1 million, or 12.3%, to $312.2 million
compared to $278.1 million for the year ended December 31, 2019.
36
Debit and Credit:
Net sales for Debit and Credit for the year ended December 31, 2020, increased $37.3 million, or 17.5%, to
$250.4 million compared to $213.1 million for the year ended December 31, 2019. The net sales increase was primarily
due to higher volumes of contactless dual-interface EMV cards, including our Second Wave cards featuring a core made
with recovered ocean bound plastics. In addition, net sales increased from CPI On-Demand card personalization due to
higher volumes from our existing customers, new customers in the current year, and COVID-19 related government
disbursement work. Dual-interface EMV cards have additional technology to process contactless transactions and
generally have a higher selling price than contact-only EMV cards, which benefitted the current year sales increases
compared to the prior year. Partially offsetting these increases were reductions in volumes of Card@Once instant
issuance product sales and card personalization sales in 2020. The decline in volumes was primarily as a result of
ongoing impacts from COVID-19 including reduced hours of operation and lack of access or closure of certain bank
branches, and fewer new accounts and requests for replacement cards.
Prepaid Debit:
Net sales for Prepaid Debit for the year ended December 31, 2020, decreased $0.7 million, or 1.1%, to $63.6
million, compared to $64.3 million for the year ended December 31, 2019. The decrease was the result of lower sales
volumes primarily associated with COVID-19 impacts, including lower retail store traffic.
Other:
There were no Other net sales for the year ended December 31, 2020, compared to $1.7 million for the year
ended December 31, 2019. In April 2019, we sold our Canadian subsidiary, which was the only operation contributing to
Other segment net sales.
Eliminations:
This includes the elimination of intercompany sales between segments in the consolidation of our financial
statements. The increase in eliminations for the year ended December 31, 2020 compared to the year ended
December 31, 2019, is due to higher sales between segments.
Gross Profit and Gross Margin
Year Ended December 31,
2020
% of
net sales
% of
net sales
2019
(dollars in thousands)
$ Change % Change
Gross profit by segment:
Debit and Credit . . . . . . . $ 85,833
24,475
Prepaid Debit . . . . . . . . .
—
Other . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . $ 110,308
* Not meaningful
34.3 % $ 66,353
38.5 % 24,814
(97)
31.1 % $ 19,480
(339)
38.6 %
97
* %
35.3 % $ 91,070 32.8 % $ 19,238
* %
29.4 %
(1.4)%
* %
21.1 %
Gross profit for the year ended December 31, 2020 increased $19.2 million, or 21.1%, to $110.3 million
compared to $91.1 million for the year ended December 31, 2019.
Debit and Credit
Gross profit for Debit and Credit for the year ended December 31, 2020 increased $19.5 million, or 29.4%, to
$85.8 million compared to $66.4 million for the year ended December 31, 2019. The increase in gross profit was driven
primarily by higher sales volumes and pricing of contactless dual-interface EMV cards, including Second Wave cards. In
addition, higher sales from CPI On-Demand card personalization and COVID-19 related government disbursement work
contributed to an improvement in gross profit compared to the prior year. Gross profit margin increased to 34.3% during
the year ended December 31, 2020, compared to 31.1% in the prior year, due primarily to operating leverage from higher
contactless dual-interface card sales including Second Wave cards and CPI On-Demand net sales.
37
Prepaid Debit
Gross profit for Prepaid Debit during the year ended December 31, 2020 decreased 1.4% to $24.5 million
compared to $24.8 million for the year ended December 31, 2019. Gross profit margin for Prepaid Debit for the year
ended December 31, 2020 decreased to 38.5% compared to 38.6% for the prior year. The decrease in gross profit and
margin was attributed to lower sales primarily from COVID-19 impacts which resulted in unfavorable cost absorption.
Other
There was no gross profit for the year ended December 31, 2020 compared to gross loss of $0.1 million for the
year ended December 31, 2019. In April 2019, we sold our Canadian subsidiary, which was the only operation
contributing to Other segment gross profit.
Operating Expenses, net
Year Ended December 31,
% of
net sales
2020
% of
net sales
2019
$ Change % Change
(dollars in thousands)
Operating expenses by segment:
Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,985
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,533
36,399
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other-litigation settlement . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,917
12.4 % $ 31,204
7.1 % 4,431
* % 36,724
* % (6,000)
23.0 % $ 66,359
14.6 % $ (219)
102
6.9 %
(325)
* %
* % 6,000
23.9 % $ 5,558
(0.7)%
2.3 %
(0.9)%
* %
8.4 %
* Not meaningful
Operating expenses, net, for the year ended December 31, 2020 increased $5.6 million, or 8.4%, to
$71.9 million compared to $66.4 million for the year ended December 31, 2019. The increase was primarily due to the
cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019, which was a reduction to net
operating expenses.
Debit and Credit
Debit and Credit operating expenses decreased $0.2 million to $31.0 million for the year ended December 31,
2020 compared to $31.2 million for the year ended December 31, 2019, primarily due to cost reductions.
Prepaid Debit
Prepaid Debit operating expenses were $4.5 million for the year ended December 31, 2020, an increase of 2.3%
compared to the year ended December 31, 2019.
Other
Other operating expenses were down $0.3 million for the year ended December 31, 2020 when compared to the
year ended December 31, 2019. The reduction in operating expenses was primarily due to certain cost reductions and
expense savings from the sale of our Canadian subsidiary. During the second quarter of 2019, we received $6.0 million
cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement.
38
Income from Operations and Operating Margin
2020
Year Ended December 31,
% of
net sales
% of
net sales
(dollars in thousands)
2019
$ Change % Change
Income (loss) from operations
by segment:
Debit and Credit . . . . . . . . . . . . . $ 54,848
19,942
Prepaid Debit . . . . . . . . . . . . . . .
(36,399)
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $ 38,391
* Not meaningful
21.9 % $ 35,149
31.4 % 20,383
* % (30,821)
12.3 % $ 24,711
16.5 % $ 19,699
(441)
31.7 %
* % (5,578)
8.9 % $ 13,680
56.0 %
(2.2) %
(18.1) %
55.4 %
During the year ended December 31, 2020 we had income from operations of $38.4 million compared to
income from operations of $24.7 million for the year ended December 31, 2019. Our operating profit margin for the year
ended December 31, 2020, increased to 12.3% compared to 8.9% for the year ended December 31, 2019. In the prior
year, we reached a litigation settlement and received $6.0 million cash which was recorded through income from
operations within the Other segment.
Debit and Credit
Income from operations for Debit and Credit for the year ended December 31, 2020 increased $19.7 million to
$54.8 million compared to $35.1 million for the year ended December 31, 2019. The increase in income from operations
was driven primarily by higher sales volumes and pricing of contactless dual-interface EMV cards including Second
Wave cards, and CPI On-Demand card personalization and COVID-19 related government disbursement work.
Operating margins for the year ended December 31, 2020 increased to 21.9% compared to 16.5% for the prior year.
Prepaid Debit
Income from operations for Prepaid Debit for the year ended December 31, 2020 decreased $0.4 million, or
2.2%, to $19.9 million compared to $20.4 million for the year ended December 31, 2019. The decrease in income from
operations was due to reduced sales volumes primarily due to COVID-19 impacts from lower retail store traffic.
Operating income margin for the year ended December 31, 2020 decreased to 31.4% from 31.7% in 2019, primarily as a
result of unfavorable cost absorption from lower sales, which impacted gross profit.
Other
The loss from operations in Other was $36.4 million for the year ended December 31, 2020, compared to a loss
from operations of $30.8 million for 2019. The 2019 loss benefited from the $6.0 million cash litigation settlement gain,
and was partially offset by lower net current year operating expenses.
Interest, net
Interest expense for the year ended December 31, 2020, increased $0.5 million to $25.4 million compared to
$24.9 million for the year ended December 31, 2019. Interest expense was higher in 2020 primarily as a result of interest
incurred on the Senior Credit Facility entered into on March 6, 2020. This additional expense was partially offset by a
decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the year ended
December 31, 2020 compared to 2019.
Income tax expense/ benefit
During the year ended December 31, 2020, we recorded an income tax benefit of $3.3 million on pre-tax
income of $12.9 million, representing an effective income tax rate of (25.6)%. The effective tax rate differs from the
federal U.S. statutory rate in 2020 primarily due to the impact of the CARES Act which was signed into law in March
2020. The CARES Act allows companies with net operating losses (“NOLs”) originating in 2018, 2019, or 2020 to carry
back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of
39
taxable income. The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019
and 2020, and allows for the acceleration of refunds of alternative minimum tax credits. For the year ended
December 31, 2020, the Company recorded a tax benefit for certain provisions in the CARES Act including the
carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 20.9%. In
addition, we applied the 2018 proposed regulations relating to the Section 163(j) interest deduction limitation which
contributed to a valuation allowance change and tax rate benefit of 41.1%. Other items impacting the effective tax rate
in 2020 include unrecognized tax benefits, permanent non-deductible items and tax credits. During the year ended
December 31, 2019, we recorded an income tax expense of $3.5 million on pre-tax loss of $1.5 million, representing an
effective tax rate of (228.7)%. Given the amount of pre-tax loss and the partial valuation allowance on certain U.S.
deferred tax assets, the effective tax rate can be subject to significant variance from the federal U.S. statutory rate of
21%. For 2019, the effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax
expense recorded related to a partial valuation allowance on certain U.S. deferred tax assets at an effective income tax
rate impact of (213.8)%. The partial valuation allowance was due to the limitation on the deductibility of interest
expense.
Net income/ loss from continuing operations
Net income from continuing operations for the year ended December 31, 2020 was $16.2 million, compared to
net loss of $5.0 million for the year ended December 31, 2019. The change was primarily due to higher net sales and
gross profit, and the income tax benefit recorded in 2020, partially offset by the cash litigation settlement gain recorded
in the prior year.
Fourth Quarter
Our net sales increased 15.9% in the fourth quarter of 2020 to $84.1 million, compared to $72.6 million in the
fourth quarter of 2019. Net sales for Debit and Credit increased by $7.9 million to $69.6 million, or 12.9% in the fourth
quarter of 2020 compared to the fourth quarter of 2019. The increase in net sales was primarily due to higher net sales
volumes from contactless dual-interface EMV cards, including Second Wave cards, and CPI On-Demand card
personalization.
Net sales for our Prepaid Debit segment increased $3.7 million, or 33.6%, to $14.9 million in the fourth quarter
of 2020 compared to $11.2 million in the fourth quarter of 2019. This increase in sales is related to higher demand of
customer orders in the fourth quarter of 2020 as compared to the prior year.
Selling, general and administrative (exclusive of depreciation and amortization) expenses increased $0.1 million
to $16.9 million in the fourth quarter of 2020 compared to $16.8 million in the fourth quarter 2019. The increase was due
to an additional estimated sales tax expense, partially offset by certain corporate cost reductions, and restructuring
severance charges incurred in the prior year.
During the fourth quarter of 2020 we earned income from operations of $12.4 million compared to $3.7 million
in the fourth quarter of 2019. The increase in income from operations was primarily due to higher net sales volumes and
gross profit.
Liquidity and Capital Resources
As of December 31, 2020, we had $57.6 million of cash and cash equivalents. Of this amount, $0.5 million was
held in accounts outside of the United States.
Our ability to make investments in and grow our business, service our debt and improve our debt leverage
ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through
our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations,
combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required,
to support our ongoing operations, capital expenditures, lease obligations and working capital needs.
The Company is party to a First Lien Credit Facility, dated as of August 17, 2015, that includes a $312.5
million First Lien Term Loan that matures on August 17, 2022. On March 6, 2020, the Company entered into a new $30
million Senior Credit Facility which matures on May 17, 2022. The Senior Credit Facility ranks senior in priority to the
40
Company’s First Lien Term Loan, which had $312.5 million outstanding as of December 31, 2020. The Company’s
Revolving Credit Facility was terminated concurrently with the entry into the new Senior Credit Facility on March 6,
2020. The Revolving Credit Facility had no borrowings outstanding as of the termination date.
The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and
events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability
to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter
into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of
investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational
documents, among other restrictions and subject to certain exceptions. In accordance with the terms of the Senior Credit
Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25 million for the
previous four consecutive fiscal quarters in total at the end of each quarterly period ending on or after March 31, 2020.
The Senior Credit Facility and the First Lien Term Loan also require prepayment or offers to prepay certain
amounts, in advance of the maturity date upon the occurrence of certain customary events, including based on an annual
excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made
after the issuance of the Company’s annual financial statements. As of December 31, 2020, we have classified $8.0
million of debt principal as a current liability as a result of an excess free cash flow calculation for 2020, pursuant to the
terms of the debt agreements, which amount the Company will offer to prepay pursuant to the terms of the Senior Credit
Facility and the First Lien Term Loan, as applicable. The Company was not required to make any prepayments of the
First Lien Term Loan in 2020, with respect to our 2019 annual financial statements.
Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate subject
to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. As of December 31, 2020,
the interest rate on our Senior Credit Facility was 9.5%. Interest rates under the First Lien Term Loan, at the Company’s
election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base
rate plus a margin of 3.5%. As of December 31, 2020, the interest rate on our First Lien Term Loan was 5.5%.
Operating Activities – Continuing Operations
Cash provided by operating activities – continuing operations for the year ended December 31, 2020, was $22.1
million compared to $3.0 million for the year ended December 31, 2019. The year over year increase was primarily due
to net income of $16.1 million for the year ended December 31, 2020, compared to a net loss of $5.1 million for 2019.
In addition, during 2020 we had working capital cash benefits, including in accrued expenses as we deferred
approximately $2.6 million of 2020 employer social security payments in accordance with CARES Act provisions.
Comparatively in 2019, we had a cash usage in accrued expenses related primarily to employee performance incentive
compensation earned in 2018 and paid in the first quarter of 2019. We had a cash usage of $6.1 million and $10.4
million in 2020 and 2019, respectively, related to our investment in additional inventory to support the growth of our
business. Partially offsetting the increases in cash provided by operating activities during 2020 compared to the prior
year, was an increase in accounts receivable of $11.7 million, primarily relating to unbilled accounts receivable for work
performed but not completed. In addition, we received $6.0 million cash from a litigation settlement during the second
quarter of 2019. For the year ended December 31, 2020, cash interest paid was $22.8 million, compared to $23.0 million
in the prior year, as lower interest rates on our First Lien Term Loan in 2020 were partially offset by additional cash
interest due on the new Senior Credit Facility.
Investing Activities
Cash used in investing activities for the year ended December 31, 2020 was $7.1 million, compared to a usage
of $2.6 million during the year ended December 31, 2019. Cash used in investing activities was related primarily to
capital expenditures, including investments to support the growth of the business, such as machinery and equipment, and
information technology equipment, and was $7.1 million and $4.2 million for the years ended December 31, 2020 and
2019, respectively. Partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of
our Canadian subsidiary in the second quarter of 2019. As presented in our supplemental disclosures of non-cash
information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery
and equipment assets totaling $1.7 million and $6.4 million during the years ended December 31, 2020, and 2019,
respectively.
41
Financing Activities – Continuing Operations
During the year ended December 31, 2020, cash provided by financing activities was $24.0 million compared to
cash used in financing activities of $1.9 million. The Senior Credit Facility provided $29.1 million of cash, net of
discount, partially offset by $2.5 million of associated debt issuance costs during the year ended December 31, 2020.
The Company paid $2.6 million and $1.9 million of principal on finance leases during the years ended December 31,
2020 and 2019, respectively. For working capital purposes, we borrowed and repaid $11.5 million on the Revolving
Credit Facility for the year ended December 31, 2019, all occurring within the first and second quarter of 2019. The
Revolving Credit Facility was terminated concurrently with the new Senior Credit Facility on March 6, 2020.
Working Capital
Our working capital as of December 31, 2020 was $95.6 million, compared to $50.5 million as of December 31,
2019. During the year ended December 31, 2020, our cash balance increased by $38.9 million, accounts receivable
increased by $11.8 million, and our inventory balance increased $4.6 million to support the growth of the business.
Partially offsetting these increases to working capital was the reclassification of $8.0 million of long term debt principal
to a current liability as a result of the excess cash flow calculation, pursuant to the terms of the debt agreements which
amount we will offer to prepay pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, as
applicable.
Cyclical and Seasonal Nature of Business
Financial Payment Cards are generally influenced by broader cyclical changes in the economy, with economic
downturns resulting in decreases in the demand for our products and services, while economic upturns may increase
demand. In particular, prolonged economic downturns typically have resulted in significant reductions in the demand for
general purpose credit cards due to tightening credit conditions. Our net sales are also influenced by Financial Payment
Card renewal cycles and demand for new products, such as contactless dual-interface cards. Additionally, we
historically have generated higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions
are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products
and services in anticipation of the holiday season in the United States.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements at December 31, 2020, and 2019.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our
consolidated financial statements which have been prepared in accordance with accounting principles generally accepted
in the United States of America. In preparing our financial statements, we make estimates, assumptions and judgments
that can have a significant impact on our reported net sales, results of operations and net income, as well as on the value
of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions
and judgments are necessary because future events and their effects on our results and the value of our assets cannot be
determined with certainty, and are made based on our historical experience and on other assumptions that we believe to
be reasonable under the circumstances. These estimates may change as new events occur or additional information is
obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may
not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process,
actual results could differ from those estimates.
Revenue Recognition
Products Net Sales: “Products” net sales are recognized when obligations under the terms of a contract with a
customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and
have no alternative use and the Company has an enforceable right to payment for work performed. For work performed
but not completed and unbilled, we estimate net sales by taking actual costs incurred and applying historical margins for
similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including
42
contact-EMV, Dual-Interface EMV, Second Wave, contactless and magnetic stripe cards, private label credit cards and
retail gift cards. Card@Once printers and consumables are also included in “Products” net sales, and their associated
revenues are recognized at the time of shipping.
Services Net Sales: Net sales are recognized for “Services” as the services are performed. Items included in
“Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident
secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service
personalization of instant issuance debit and credit cards. For work performed but not completed and billed, we estimate
revenue by taking actual costs incurred and applying historical margins for similar types of contracts.
Customer Contracts: The Company often enters into Master Services Agreements (“MSAs”) with its
customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a
purchase order or statement of work to obtain goods or services under an MSA. Usually our contractual arrangements
include neither exclusivity clauses nor commitments from our customers to order any given quantities of products on a
medium or long-term basis. The contract term as defined by ASC 606, Revenue from Contracts with Customers, is the
length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such,
the Company's contracts are generally short term in nature.
Income Taxes
We are subject to income taxes in the United States and certain foreign jurisdictions. Significant judgment is
required in evaluating our tax positions and determining our provision for income taxes. Deferred income tax assets and
liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely
than not that all or a portion of deferred tax assets will not be realized. Significant judgment is required in determining
any valuation allowance recorded against deferred tax assets. The determination of the amount of valuation allowance to
be provided on recorded deferred tax assets involves consideration of estimates regarding the timing and amount of the
reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning
strategies. Changes in the relevant facts can significantly impact the judgment or need for valuation allowances. In the
event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our
valuation allowance with a corresponding impact to the provision for income taxes in the period in which such
determination is made.
During the ordinary course of business, there are transactions and calculations for which the ultimate tax
determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the
extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are
likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe
our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with
what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these
matters is different from the amounts recorded, such differences will impact the current provision for income taxes. We
recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Sales Tax
We are in the process of evaluating a state sales tax liability analysis for states in which we have economic
nexus, and collecting exemption documentation from our customers. It is probable that we will be subject to sales tax
liabilities plus interest and penalties relating to historical activity in certain states. We have estimated a contingent
liability for sales tax which is recorded in accrued expenses in the consolidated balance sheet. The liability includes
significant judgments and estimates that may change in the future, and the liability may exceed our current estimate. We
may be subject to examination by the relevant state tax authorities and we can provide no assurances that outcomes from
these examinations will not have a significant effect on our operating results, financial condition, and cash flows.
43
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC 842, Leases (“ASC
842”), which provides guidance for accounting for leases. The guidance required companies to recognize the assets and
liabilities for the rights and obligations created by leased assets. The Company adopted the guidance on January 1, 2019
and used the adoption date as the date of initial application as allowed under ASC 842. Right-of-use (“ROU”) represents
the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make
lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date
based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the
right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of
time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain
substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. We
recorded lease liabilities and right-to-use assets as the present value of future minimum lease payments using a discount
rate that is either implicit in the lease or our incremental borrowing rate. If not implicit in the lease, we estimate our
incremental borrowing rate by using market data from companies similar to us, having publicly traded debt instruments
and similar credit ratings. Our estimated incremental borrowing rate utilizes judgements, including selection of
comparable companies, our credit risk, sensitivity analysis and certain other valuation estimates. We also use judgement
in determining whether a contract contains a lease.
Recently Issued Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses
on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an
incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected
loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial
instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since
CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years
beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has
elected not to early adopt this accounting standard in 2020. The Company is evaluating the impact of adoption of this
standard, and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s
consolidated financial position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required due to smaller reporting company status.
44
Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CPI Card Group Inc.
As of December 31, 2020 and 2019 and for the years ended December 31, 2020 and 2019
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations and Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
46
48
49
50
51
52
45
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
CPI Card Group Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CPI Card Group Inc. and subsidiaries (the Company)
as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss),
stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020, and the
related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in
conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
leases as of January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way
our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Realizability of the Deferred Tax Asset related to the Interest Deduction Limitation
As discussed in Note 12 to the consolidated financial statements, the Company has a gross deferred tax asset
related to Section 163(j) interest deduction limitation of $1.4 million as of December 31, 2020. Prior to 2020,
46
the Company had a valuation allowance related to this deferred tax asset, as it was not expected to be fully
realized. In 2020, the Company has elected to apply the 2018 Proposed Regulations, which allow previously
disallowed business interest expense carryforward to be added back in the computation of its adjusted taxable
income. In order for the Company to apply the 2018 Proposed Regulations, “related parties” to the Company as
defined by Internal Revenue Code Section 267(b) and 707(b)(1) must also consistently apply the 2018 Proposed
Regulations to those same tax years. The 2018 Proposed Regulations may only be adopted by the Company
through tax year December 31, 2020. Under the 2018 Proposed Regulations, the Company is able to deduct
additional business interest expense, and as a result, they have reversed the valuation allowance as the deferred
tax asset is now expected to be fully realized.
We identified management’s evaluation of the realizability of the deferred tax asset related to the interest
deduction limitation as a critical audit matter. Subjective auditor judgment was required in evaluating the
application of the 2018 Proposed Regulations, which included the determination of related parties in the
Company’s ownership structure, and validation, as needed, of consistent application of the 2018 Proposed
Regulations among the applicable related parties. In addition, the evaluation required the involvement of tax
professionals with specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter. We obtained the
ownership structure of the Company to identify the related parties required to consistently apply the 2018
Proposed Regulations. We involved tax professionals with specialized skills and knowledge who assisted in:
‒ evaluating the Company’s application of the 2018 Proposed Regulations
‒ evaluating the Company’s determination of related parties required to consistently apply the 2018
Proposed Regulations.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Denver, Colorado
February 25, 2021
47
CPI Card Group Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, Except Shares and Per Share Amounts)
December 31,
2020
2019
Assets
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable, net of allowances of $289 and $395, respectively . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,682
42,832
20,192
6,345
4,164
92,215
41,612
30,802
47,150
1,232
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 266,151 $ 213,011
57,603 $
54,592
24,796
5,032
10,511
152,534
39,403
26,207
47,150
857
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,883 $
28,149
8,027
1,868
56,927
328,681
7,409
11,171
404,188
16,482
24,735
—
468
41,685
307,778
6,366
11,478
367,307
Commitments and contingencies (Note 15)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued
and outstanding at December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Stockholders’ deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 and
11,224,191 shares issued and outstanding at December 31, 2020 and 2019,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital deficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11
(111,988)
(42,319)
(154,296)
Total liabilities and stockholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 266,151 $ 213,011
11
(111,858)
(26,190)
(138,037)
See accompanying notes to consolidated financial statements
48
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars in Thousands, Except Share and Per Share Amounts)
Year Ended December 31,
2019
2020
Net sales:
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
171,968 $
140,221
312,189
143,941
134,132
278,073
Cost of sales:
Products (exclusive of depreciation and amortization shown below) . . . . . . . . . . . . .
Services (exclusive of depreciation and amortization shown below) . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization
shown below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net:
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss from discontinued operation, net of tax (Note 4) . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic and Diluted net income (loss) per share from continuing operations: . . . . . .
Basic and Diluted net income (loss) per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107,642
83,538
10,701
201,881
110,308
65,791
6,126
—
71,917
38,391
(25,397)
(7)
(102)
(25,506)
12,885
3,305
16,190
(61)
16,129 $
94,889
80,894
11,220
187,003
91,070
66,328
6,031
(6,000)
66,359
24,711
(24,891)
(1,335)
(4)
(26,230)
(1,519)
(3,474)
(4,993)
(124)
(5,117)
1.44 $
1.44 $
(0.45)
(0.46)
$
$
$
Basic weighted-average shares outstanding: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average shares outstanding: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,228,707
11,232,004
11,196,710
11,196,710
Comprehensive income (loss)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment to foreign currency loss . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,129
—
—
16,129 $
(5,117)
1,329
31
(3,757)
$
See accompanying notes to consolidated financial statements
49
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
(Dollars in Thousands, Except Share Amounts)
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,160,377 $
Shares issued under stock-based compensation plans . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Components of comprehensive (loss) income:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment to foreign currency loss . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . .
63,814
—
—
—
—
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,224,191 $
Shares issued under stock-based compensation plans . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . .
Components of comprehensive (loss) income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,291
—
—
11,230,482 $
Common Stock
Shares
Amount deficiency
Capital
Accumulated comprehensive Stockholders
Accumulated
other
11 $ (112,223) $
—
—
—
235
—
—
—
—
—
—
11 $ (111,988) $
—
—
—
130
loss
(37,202) $
—
—
(5,117)
—
—
(42,319) $
—
—
loss
Deficit
(1,360) $
—
—
(150,774)
—
235
—
1,329
31
— $
—
—
(5,117)
1,329
31
(154,296)
—
130
—
11 $ (111,858) $
—
16,129
(26,190) $
—
— $
16,129
(138,037)
See accompanying notes to consolidated financial statements
50
CPI Card Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year Ended December 31,
2020
2019
Operating activities
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,129 $
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs and debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment to foreign currency loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
61
16,827
136
3,453
1,043
—
1,834
(5,117)
124
17,251
250
1,960
969
1,329
153
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue and customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash provided by operating activities - continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in operating activities -discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,662)
(6,105)
494
(6,346)
1,657
2,958
1,404
192
22,075
(61)
(688)
(10,410)
(1,328)
1,369
1,127
(3,810)
(446)
232
2,965
(124)
Investing activities
Capital expenditures for plant, equipment and leasehold improvements . . . . . . . . . . . . . . . .
Cash received from sale of Canadian subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,093)
—
—
(7,093)
(4,175)
1,451
150
(2,574)
Financing activities
—
Proceeds from Senior Credit Facility, net of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,500
Proceeds from revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,500)
Principal payment on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,926)
Payments on financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,926)
Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
Effect of exchange rates on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,609)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,291
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,603 $ 18,682
Supplemental disclosures of cash flow information
Cash paid during the period for:
29,100
(2,507)
—
—
(2,616)
23,977
23
38,921
18,682
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,750 $ 23,036
Income tax payments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
780
1,043 $
Right-of-use assets obtained in exchange for lease obligations:
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts payable and accrued expenses for capital expenditures for plant, equipment and
3,260 $
1,718 $
8,533
6,438
leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,052 $
308
See accompanying notes to consolidated financial statements
51
CPI Card Group Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)
1. Business
CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the
“Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card
solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment
of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks
of the Payment Card Brands (Visa, Mastercard, American Express and Discover in the United States and Interac, in
Canada). CPI also offers an instant card issuance solution, which provides card issuing bank customers the ability to
issue a personalized debit or credit card within the bank branch to individual cardholders.
CPI serves its customers through a network of high-security production and card services facilities in the United
States, each of which is audited for compliance with the standards of the PCI Security Standards Council by one or more
of the Payment Card Brands. CPI’s leading network of high-security production facilities allows the Company to
optimize its solutions offerings and to serve its customers.
The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and
Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services
to card-issuing banks primarily in the United States. The Prepaid Debit segment primarily provides integrated card
services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment
includes corporate expenses.
In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary.
The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business
migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on
April 1, 2019, and the Company received cash proceeds of $1,451. After the payment of liabilities and transaction costs,
including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on
sale. In connection with the disposition of the foreign entity, the Company released the related cumulative translation
adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing
operations during the year ended December 31, 2019. This adjustment was $1,329 and is included in “Foreign Currency
Loss” on the Statement of Operations. The Canadian subsidiary was not a significant operating segment and was part of
the Other reportable segment.
COVID-19 Update
The ongoing adverse effects of the COVID-19 pandemic have continued to impact the locations where CPI, its
customers and its suppliers conduct business. Overall, CPI believes that COVID-19 had a net negative impact relative to
its full year expectations for 2020. The broader and long-term implications of COVID-19 on the Company’s results of
operations and overall financial performance remain uncertain. The health and safety of CPI employees remain
paramount, and the Company continues to follow response protocols based on precautions and other appropriate
measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive
orders, health orders and guidelines. All of CPI’s operations have remained open and continue to provide direct and
essential support to the financial services industry. CPI’s net sales in 2020 increased over the prior year; however, in
certain areas of the business, the Company experienced lower customer demand than expected which it believes is
primarily attributable to the COVID-19 pandemic. CPI may experience constrained supply, curtailed customer demand,
impacts on its workforce and other effects that could materially adversely impact the Company’s business, results of
operations and overall financial condition in future periods. CPI’s strategies may not be successful in effectively
managing its resources and mitigating the negative impact of the COVID-19 pandemic on its business, operating results
and financial condition. See Item 1A, Risk Factors, in this Annual Report on Form 10-K for further discussion of the
possible impact of the COVID-19 pandemic on the Company.
52
On March 27, 2020, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act was signed into
law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of
employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for
qualified improvement property. Refer to Note 12 “Income Taxes” for a discussion of the CARES Act income tax
impacts on the Company. In addition, CPI has deferred employer social security payments starting with the second
quarter of 2020 in accordance with the CARES Act. While the Company is participating in certain programs under the
CARES Act, the Act and its guidance are subject to change.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Consolidated Financial Statements include the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents and they are stated at cost, which approximates fair value.
Trade Accounts Receivable and Concentration of Credit Risk
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The
Company performs ongoing credit evaluations of its customers and generally requires no collateral to secure accounts
receivable.
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020 December 31, 2019
39,004
4,223
43,227
(395)
42,832
44,305 $
10,576
54,881
(289)
54,592 $
$
The Company maintains an allowance for potentially uncollectible accounts receivable based upon its
assessment of the collectability of accounts receivable. Accounts are written off against the allowance when it is
determined collection will not occur. The allowance for bad debt activity for the years ended December 31, 2020 and
2019 is summarized as follows:
Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Bad debt expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-off of uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
211
228
(37)
(7)
395
(89)
(2)
(15)
289
During 2020, the Company recorded a bad debt benefit due to the reduction of allowances for potentially
uncollectible accounts receivable from the prior year. The increase in bad debt expense during 2019 primarily relates to
reserves established for outstanding receivables from the Company’s Canadian operations that were disposed on April 1,
2019.
For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the
Company’s consolidated net sales. Net sales for these customers were approximately 15% and 14% of the Company’s
53
consolidated net sales. For the year ended December 31, 2019 one customer represented 18% of the Company’s
consolidated net sales.
Inventories
Inventories consist of raw materials, and finished goods and are measured at the lower of cost or net realizable
value (determined on the first-in, first-out, specific identification or weighted-average method basis). Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Finished goods inventory represents primarily stock cards and Card@Once printers. The
stock cards are not manufactured for a specific customer, but are ready to be personalized and sold as customer orders
are received. The Company monitors inventory for events or circumstances that may indicate the net realizable value is
less than the carrying value of inventory, such as negative margins, expiration of material usage, and other forms of
obsolescence, and records adjustments to the valuation of inventory, as necessary.
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements are recorded at cost. Accumulated depreciation is computed
using the straight-line method over the lesser of the estimated useful life of the related assets (generally 3 to 10 years for
machinery and equipment, furniture, computer equipment, and leasehold improvements) or, when applicable, the lease
term. Maintenance and repairs that do not extend the useful life of the respective assets are charged to expense as
incurred.
Long-lived assets with finite lives are reviewed for impairment whenever events indicate that the carrying
amount of the asset or the carrying amounts of the asset group containing the asset may not be recoverable. In such
reviews, estimated undiscounted future cash flows associated with these assets or asset groups are compared with their
carrying value to determine if a write-down to fair value is required.
Goodwill and Intangible Assets
Goodwill is not amortized, but instead is tested for impairment at least annually on October 1 or more
frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. For
impairment evaluations, the Company may first make a qualitative assessment with respect to goodwill, if appropriate.
In accordance with accounting standards, the Company performs its goodwill impairment test by comparing the fair
value of the reporting unit with its carrying amount, and recognizes an impairment charge for the amount by which the
carrying amount of the reporting unit exceeds its fair value.
All of the Company’s goodwill is included in the Debit and Credit segment. The Company generally bases its
measurement of the fair value of a reporting unit on a blended analysis of the present value of future discounted cash
flows and the market valuation approach. The discounted cash flows model indicates the fair value of the reporting unit
based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The
Company's significant estimates in the discounted cash flows model include: its weighted average cost of capital;
discrete and long-term rate of growth and profitability of the reporting unit's business; and working capital effects. The
market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to publicly
traded companies in similar lines of business. Significant estimates in the market valuation approach model include
identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on
investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the
reporting unit.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of
the assets, and are reviewed for impairment whenever events indicate that the carrying amount of the asset may not be
recoverable. In such reviews, estimated undiscounted future cash flows associated with these assets are compared with
their carrying value to determine if a write-down to fair value is required.
54
Sales Tax
The Company records sales tax collected from its customers on a net basis, and therefore excludes it from net
sales as defined in ASC 606, Revenue from Contracts with Customers. Cash collected from customers is recorded in
accrued expenses on the Company’s consolidated Balance Sheet and then remitted to the proper taxing authority. In
addition, refer to Note 15 “Commitments and Contingencies” for discussion regarding an estimated sales tax liability the
Company recorded in relation to historical activity in certain states.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable
income.
The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely
than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will
not realize the benefit of some or all of its deferred tax assets, then these deferred tax assets will be adjusted through the
Company’s income tax expense in the period in which this determination is made.
The Company establishes reserves for tax-related uncertainties based on estimates of whether, and the extent to
which, additional taxes will be due. The reserves are established when the Company believes that certain positions are
likely to be challenged and may not be fully sustained on review by tax authorities. The Company adjusts uncertain tax
position in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. The
Company recognizes the tax benefits from uncertain tax positions only when it is more likely than not, based on the
technical merits of the position, that the tax position will be sustained upon examination, including the resolution of any
related appeals or litigation. The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of income tax expense.
Stock-Based Compensation
The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-
based compensation to employees is required to be measured at fair value and expensed over the requisite service period.
The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion
of the forfeited shares. The Company recognizes compensation expense on awards on a straight-line basis over the
vesting period for each tranche of an award. Refer to Note 17 “Stock Based Compensation” for additional discussion
regarding details of the Company's stock-based compensation plans.
Net Sales
Products Net Sales
“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied.
In most instances, this occurs over time as cards are manufactured for specific customers, have no alternative use and the
Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled,
the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of
contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including
contact-EMV, Dual-Interface EMV, Second Wave, metal, contactless and magnetic stripe cards, and private label credit
cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their
associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue
in net sales, and shipping and handling costs in cost of sales.
Services Net Sales
Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales
include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and
55
fulfillment services to Prepaid Debit Card program managers, and software as a service personalization of instant
issuance debit cards. The Company also generates “Service” revenue usage-fees from the Company’s patented card
design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet
and customize cards with individualized digital images. “Services” revenue was also generated from personalizing retail
gift cards historically in Canada prior to disposition. As applicable, for work performed but not completed and unbilled,
the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of
contracts.
Customer Contracts
The Company often enters into MSAs with its customers. Generally, enforceable rights and obligations for
goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services
under an MSA. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services
promised under the purchase order or statement of work. As such, the Company's contracts are generally considered
short term in nature.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). These accounting principles require
management to make assumptions and estimates relating to the reporting of assets and liabilities in its preparation of the
consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying
amount of property and equipment, goodwill and intangible assets, leases, liability for sales tax, valuation allowances for
inventories and deferred taxes, revenue recognized for work performed but not completed, and uncertain tax positions.
Actual results could differ from those estimates.
Foreign Currency Translation
Financial statements of foreign subsidiaries that use local currencies as their functional currency are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted-average
exchange rate for each reporting period for net sales, expenses, gains and losses. Translation adjustments are recorded as
a component of Accumulated Other Comprehensive Loss in the accompanying consolidated financial statements.
Subsequent to the sale of the Company’s UK Limited and Canada subsidiary, the Company has no significant foreign
subsidiaries.
Foreign currency transaction gains and losses resulting from the process of re-measurement are recorded in
“Foreign currency loss” in the accompanying Consolidated Statements of Operations and Comprehensive Loss. For the
years ended December 31, 2020 and 2019 there were ($7) and ($1,335) of such foreign currency losses, respectively.
The foreign currency loss for the year ended December 31, 2019, includes the release of the cumulative translation
adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the Balance Sheet in connection with the sale
of the Company’s Canada subsidiary.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASC 842, Leases, which provides guidance for accounting for leases. The
guidance required companies to recognize the assets and liabilities for the rights and obligations created by leased assets.
The Company adopted the guidance on January 1, 2019 and used the adoption date as the date of initial application as
allowed under ASC 842. ROU represents the right to use an underlying asset for the lease term and lease liabilities
represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The
lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option.
A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment,
as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to
occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the
56
right to direct the use of such assets. Lease expense for operating leases recorded in the balance sheet is included in
operating costs and expenses and is based on the future minimum lease payments recognized on a straight-line basis over
the term of the lease plus any variable lease costs. The Company recorded lease liabilities and right-to-use assets as the
present value of future minimum lease payments using a discount rate that is either implicit in the lease or our
incremental borrowing rate. If not implicit in the lease, the Company estimates the incremental borrowing rate by using
market data from similar companies, having publicly traded debt instruments and similar credit ratings. The estimated
incremental borrowing rate utilizes judgements, including selection of comparable companies, credit risk, sensitivity
analysis and certain other valuation estimates. The Company also uses judgement in determining whether a contract
contains a lease.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. This
ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses
only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate
the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was
amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this
accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim
periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in
2020. The Company is evaluating the impact of adoption of this standard, and does not anticipate the application of ASU
2016-13 will have a material impact on the Company’s consolidated financial position and results of operations.
Adjustment of Prior Period Financial Statements for Immaterial Items
In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in
ASC 250, Presentation of Financial Statements, the Company corrected two immaterial items relating to estimated sales
tax expense and depreciation expense for all prior periods presented by revising the consolidated financial statements
and other financial information included herein. The total impact on prior years for estimated sales tax expense was
$1,907 and depreciation expense was $476. These adjustments represent the expenses pertaining to the period of 2017 to
2019, including an increase to estimated sales tax expense recorded in “Selling, General and Administrative expenses”
(“SG&A”) of $584, and depreciation expense in “Cost of sales” of $249, for the year ended December 31, 2019. For the
year ended December 31, 2020, the Company recorded estimated sales tax expense in SG&A of $926. Refer to Note 15,
“Commitments and Contingencies” for additional discussion of the estimated sales tax liability recorded in “Accrued
expenses” on the consolidated balance sheet.
3. Net Sales
The Company disaggregates its net sales by major source as follows:
For the year ended December 31, 2020
Total
Services
Products
Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173,765 $ 76,662 $ 250,427
63,596
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,834)
Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,968 $ 140,221 $ 312,189
63,596
(37)
—
(1,797)
Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 144,541 $ 68,600 $ 213,141
64,330
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,679
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,077)
Intersegment eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 143,941 $ 134,132 $ 278,073
64,330
1,283
(81)
—
396
(996)
For the year ended December 31, 2019
Total
Services
Products
57
4. Discontinued Operation
On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced
retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided
personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby
locations. The Company reported the U.K. Limited reporting segment as discontinued operations in conformity with
GAAP. Unless otherwise indicated, information in these notes to the consolidated financial statements relate to
continuing operations. The Company did not retain significant continuing involvement with the discontinued operation
subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s consolidated
statement of operations for the years ended December 31, 2020 and 2019.
5. Inventories
Inventories are summarized below:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2020
23,009 $
4,635
(2,848)
24,796 $
2019
16,492
5,047
(1,347)
20,192
6. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-use Assets
Plant, equipment, leasehold improvements and operating lease right-of-use assets consist of the following:
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Machinery and equipment under financing leases . . . . . . . . . .
Furniture, fixtures and computer equipment . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation and amortization . . . . . . . . . . .
Operating lease right-of-use assets, net of accumulated
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2020
55,459 $
9,974
4,410
15,083
2,386
87,312
(55,092)
2019
52,212
8,256
4,749
14,905
455
80,577
(45,277)
7,183
39,403 $
6,312
41,612
Amounts recorded for the depreciation of plant, equipment and leasehold improvements were $12,232 and
$12,616 for the years ended December 31, 2020 and 2019, respectively.
There were no impairments of the Company’s plant, equipment, and leasehold improvement assets for the years
ended December 31, 2020 and 2019.
7. Goodwill and Other Intangible Assets
All of the Company’s $47,150 of goodwill is included in the Debit and Credit segment at December 31, 2020
and 2019. The Company completed its goodwill impairment testing as of October 1, 2020 and the Company determined
it is not more likely than not that the fair value of each reporting unit is less than its carrying amount.
CPI’s amortizable intangible assets consist of customer relationships, technology and software, and trademarks.
Total intangible assets are being amortized over a weighted-average useful life of 15.7 years. Intangible amortization
expense totaled $4,595 and $4,635 for the years ended December 31, 2020 and 2019, respectively. During the years
ended December 31, 2020 and 2019, there were no impairments of the Company’s amortizable intangible assets.
58
Intangible assets consist of the following:
Customer relationships . . . . .
Technology and software . . .
Trademarks . . . . . . . . . . . . . .
Intangible assets subject to
Weighted Average
Life (Years)
17.2
8
8.7
December 31, 2020
Accumulated Net Book
December 31, 2019
Accumulated Net Book
Amortization
Value
Cost
$ 55,454
7,101
3,330
Amortization
Value
Cost
(32,141) $ 23,313 $ 55,454 $ (28,865) $ 26,589
2,149
7,101
(5,881)
2,064
3,330
(1,656)
(4,952)
(1,266)
1,220
1,674
amortization . . . . . . . . . . . .
$ 65,885 $ (39,678) $ 26,207 $ 65,885 $ (35,083) $ 30,802
The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as
of December 31, 2020 is as follows:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
4,352
3,867
3,867
3,630
3,440
7,051
26,207
8. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (exit price). In determining fair value, the
Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those three levels:
•
•
•
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the
reporting entity at the measurement date.
Level 2—Inputs, other than quoted prices included in Level 1 inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that
observable inputs are not available, thereby allowing for situations in which there is little, if any, market
activity for the asset or liability at the measurement date.
The Company’s financial assets and liabilities that are not required to be remeasured at fair value in the
Consolidated Balance Sheets are as follows:
Liabilities:
First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,500 $
30,000 $
Senior Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
287,500 $ — $ 287,500 $ —
— $ 30,000
30,000 $ — $
Carrying
Value as of Fair Value as of
December 31, December 31,
Fair Value Measurement at
December 31, 2020
(Using Fair Value Hierarchy)
2020
2020
Level 1 Level 2
Level 3
Carrying
Value as of Fair Value as of
December 31, December 31,
2019
2019
Fair Value Measurement at
December 31, 2019
(Using Fair Value Hierarchy)
Level 2
Level 3
Level 1
Liabilities:
First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 312,500 $
234,375 $ — $ 234,375 $ —
59
The aggregate fair value of the Company’s First Lien Term Loan (as defined in Note 11 “Long-Term Debt”)
was based on bank quotes. The fair value measurement associated with the Senior Credit Facility (as defined in Note 11
“Long-Term Debt”) is based on significant unobservable Level 3 inputs, which require management judgment and
estimation. The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, and was valued
using market data from companies with similar credit ratings.
The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each
approximate fair value due to their short-term nature.
9. Accrued Liabilities
Accrued liabilities consisted of the following:
December 31, 2020 December 31, 2019
Accrued payroll and related employee expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued employee performance bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer payroll tax, including social security deferral . . . . . . . . . . . . . . . . . . . . .
Accrued rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating and financing lease liability (current portion) . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,938 $
4,873
3,034
1,178
1,696
4,145
4,407
3,878
28,149 $
3,954
3,920
368
1,573
1,907
4,951
4,494
3,568
24,735
The estimated sales tax liability is further described in Note 15, Commitments and Contingencies and Note 2,
Summary of Significant Accounting Policies. Other accrued liabilities include miscellaneous accruals for invoices not
yet received and other items such as self- insurance liability accruals and the current portion of uncertain tax position
reserves.
10. Financing and Operating Leases
CPI adopted ASC 842 effective January 1, 2019. As a result of the adoption of ASC 842, the Company
recorded $8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019,
relating to existing real estate operating leases.
The components of operating and finance lease costs were as follows:
Year Ended
Year Ended
December 31, 2020 December 31, 2019
Operating lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term operating lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expense from operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finance lease cost:
Right-of-use amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financing lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,649
667
75
3,391
1,342
540
1,882
2,625
719
-
3,344
886
290
1,176
60
The following table reflects balances for operating and financing leases:
December 31, 2020
December 31, 2019
Operating leases
Operating lease right-of-use assets, net of amortization . . . . . . . . . . . . . . . . . . . . $
Operating lease liability (current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term operating liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Financing leases
Property, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . $
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financing leases in property, equipment and leasehold
7,183 $
2,267 $
5,491
7,758 $
6,312
2,283
5,067
7,350
9,974 $
(2,422)
8,256
(1,094)
improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,552 $
7,162
Financing lease liability (current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term financing liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financing lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,140 $
3,052
5,192 $
2,211
3,886
6,097
Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and
operating lease right-of-use assets, net”. Financing and operating lease liabilities are recorded in “Accrued expenses” and
“Other long-term liabilities.”
Components of lease expense were as follows:
Weighted Average Remaining Lease Term
Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Discount Rate
Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020
4.93
2.52
9.29%
8.71%
Future cash payment with respect to lease obligations as of December 31, 2020 were as follows:
Operating
Lease
Financing
Leases
Year Ending
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,894 $
1,782
1,467
1,250
670
1,792
9,855
(2,097)
7,758 $
2,494
2,007
1,069
261
2
—
5,833
(641)
5,192
Cash paid on operating lease liabilities was $2,347 and $1,973 during the years ended December 31, 2020 and
December 31, 2019, respectively.
61
11. Long-Term Debt
Long-term debt consists of the following:
Interest
Rate (1)
First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.50 %
9.50 %
December 31, December 31,
2020
312,500
30,000
(1,988)
(3,804)
336,708
(8,027)
328,681
2019
312,500
—
(1,770)
(2,952)
307,778
—
307,778
(1) The interest rate on the First Lien Term Loan was 5.5%, and 6.71% as of December 31, 2020, and December 31, 2019, respectively. The interest
rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.5% as of December 31, 2020.
On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a
syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving
credit facility (the “Revolving Credit Facility”). The First Lien Term Loan matures on August 17, 2022 and the
Revolving Credit Facility was terminated concurrently with the Company entering into a new senior credit facility on
March 6, 2020.
On March 6, 2020, the Company and its wholly owned subsidiary, CPI Acquisition, Inc. (now known as CPI
CG Inc.) (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC
(“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P., Guggenheim, as administrative agent and
collateral agent, and certain other lenders from time to time party thereto (the “Senior Credit Agreement” and together
with all ancillary documents thereto, the “Senior Credit Facility”). The Senior Credit Facility matures on May 17, 2022,
and provides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal
amount of $30,000, and ranks senior in priority to the Company’s First Lien Term Loan.
The Senior Credit Facility and the First Lien Term Loan are secured by substantially all of the Company’s
assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.
The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and
events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability
to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter
into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of
investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational
documents, among other restrictions and subject to certain exceptions. In accordance with the terms of the Senior Credit
Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25,000 for the
previous four consecutive fiscal quarters in total, at the end of each quarterly period ending on or after March 31, 2020.
The Senior Credit Facility and the First Lien Term Loan also require prepayment or offers to prepay certain
amounts, in advance of the maturity date upon the occurrence of certain customary events, including based on an annual
excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made
after the issuance of the Company’s annual financial statements. As of December 31, 2020, $8,027 of debt principal was
classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the
debt agreements, which amount the Company will offer to prepay pursuant to the terms of the Senior Credit Facility and
the First Lien Term Loan, as applicable. The Company was not required to make any prepayments of the First Lien
Term Loan with respect to the excess free cash flow calculation relating to the 2019 annual financial statements.
Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate, subject
to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. Certain prepayments made
prior to February 15, 2022 are subject to a make-whole premium. Interest rates under the First Lien Term Loan are
based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or
a base rate plus a margin of 3.5%.
62
The term loans made under the Senior Credit Facility would be accelerated and become immediately due and
payable if an event of default (as defined in the Senior Credit Agreement) were to occur. Tricor Pacific Capital Partners
(Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the
“Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31,
2020. If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or
otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI
common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally,
certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the
outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may
be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts
payable, as well as a make-whole premium.
The Company is authorized to use the proceeds from the Senior Credit Facility to provide for the working
capital and general corporate requirements of the Company and its subsidiaries, including to pay any fees and expenses
in connection with the Senior Credit Facility and other related loan documents.
Deferred Financing Costs and Discount
Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are
reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense
over the life of the borrowing using the effective-interest rate method. The discount on the Senior Credit Facility was
$1,400, and financing costs were $3,215, and both were recorded as a reduction to the long-term debt balance in the
quarter ended March 31, 2020. The net discount and debt issuance costs on the Senior Credit Facility is included within
financing activities on the consolidated statement of cash flows and relates to cash flows during the year ended
December 31, 2020.
12. Income Taxes
Income tax (benefit) expense from continuing operations and effective income tax rates consist of the
following:
Current taxes:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes:
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) before income taxes
December 31,
2020
2019
(4,364) $
16
(4,348)
1,043
—
1,043
(3,305) $
2,490
15
2,505
969
—
969
3,474
Domestic income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,790 $
95
12,885 $
(25.6)%
(40)
(1,479)
(1,519)
(228.7)%
63
The effective income tax rate differs from the U.S. federal statutory income tax rate as follows:
Tax at federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit for U.K. sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit CARES Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The components of the deferred tax assets and liabilities are as follows:
Deferred tax assets:
Accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
December 31,
2020
21.0 %
5.3
—
—
(41.1)
5.6
(1.2)
4.0
(20.9)
1.7
(25.6)%
2019
21.0 %
(50.3)
(23.3)
154.8
(213.8)
(15.5)
(48.6)
(54.1)
—
1.1
(228.7)%
December 31,
2020
2019
2,519 $
524
260
935
645
1,418
1,899
2,030
2,598
12,828
(2,615)
10,213
2,854
1,216
400
892
17
8,773
1,728
—
669
16,549
(5,659)
10,890
Plant, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(4,939)
(8,689)
(1,758)
(2,236)
(17,622)
(7,409) $
(5,382)
(8,877)
(1,486)
(1,511)
(17,256)
(6,366)
The net change in the valuation allowance during the year ended December 31, 2020 was a decrease of $3,044.
The change was comprised primarily of a decrease due to Company’s election to apply the 2018 proposed regulations
relating to the interest deduction limitation in section 163(j) of the Internal Revenue Code. This was partially offset by
an increase related to the sale of certain foreign subsidiaries. The valuation allowance as of December 31, 2020, is
relating to a capital loss realized on the sale of a foreign subsidiary whereby the Company does not anticipate a capital
gain in the foreseeable future that would allow for the recognition of the capital loss carryover. In addition, the Company
has a full valuation allowance related to a state net operating loss and a partial valuation allowance on a state interest
limitation, both of which the Company estimates may not be fully utilized.
In March 2020, the CARES Act was signed into law. The CARES Act allows companies with net operating
losses (“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates
the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increases the Internal
Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of
alternative minimum tax credits. For the year ended December 31, 2020, the Company recorded a tax benefit for certain
provisions in the CARES Act resulting in a tax rate benefit of 20.9%. In addition, the Company reduced the partial
valuation allowance due to the limitation on the deductibility of interest expense, and recorded an income tax rate benefit
64
during for the year ended December 31, 2020 of 41.1%. Other items impacting the effective tax rate in 2020 include
unrecognized tax benefits, permanent non-deductible items and tax credits.
The Company no longer has any substantial potential tax benefits associated with gross foreign operating loss
carryforwards due to the sale of its foreign subsidiaries. The Company has various state and local operating loss
carryforwards which will expire at various dates from 2033 to 2038. The Company does expect to be able to utilize a
portion of these losses prior to expiration. The Company’s income tax receivable on the consolidated balance sheet as of
December 31, 2020, is primarily comprised of U.S. federal income tax refund claims attributable to the CARES Act
provisions, including alternative minimum tax credits and allowance of NOL carrybacks.
The Company has potential tax benefits associated with federal research and development tax credit
carryforwards as of December 31, 2020 of $645, which will expire in 2036. The Company expects to be able to
recognize these credit carryforwards, and accordingly has not provided a valuation allowance for the tax benefit.
Additionally, the Company does not have any potential tax benefits associated with state research and development tax
credit carryforwards as of December 31, 2020.
At December 31, 2020, no provision has been made for U.S. federal and state taxes on cumulative foreign
earnings as there are no current or cumulative earnings of foreign operations. The Company recorded no net current tax
benefit in 2019 related to the sale of the Canadian operations.
Unrecognized Tax Benefits
Unrecognized tax benefits represent the aggregate tax effect of differences between the tax return positions and
the amounts otherwise recognized in the Company’s consolidated financial statements, and are reflected in “Accrued
expenses”, “Other long term liabilities” and “Deferred income taxes” in the Company’s consolidated balance sheets.
The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax provision only
when based upon the technical merits, it is “more-likely-than-not” that the tax position will be sustained upon
examination.
Balance as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to current year tax position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase related to prior year tax position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2,172
72
1,068
3,312
The Company recognizes interest and penalties with respect to unrecognized tax benefits as a component of
income tax expense. The amount of accrued interest and penalties related to unrecognized tax benefits for the year ended
December 31, 2020 was $255, and was $238 for the year ended December 31, 2019.
The Company believes that it is reasonably possible that approximately $852 of its unrecognized tax benefits
may be recognized by the end of 2021 as a result of settlement with the taxing authorities. As such, this balance is
reflected in “Accrued expenses” in the Company’s consolidated balance sheet as of December 31, 2020. The Company
is generally subject to potential federal and state examinations for the tax years on and after December 31, 2013 for
federal purposes and December 31, 2016 for state purposes. The Company is subject to examinations for its U.K.
subsidiaries for tax years ended on and after December 31, 2018. The Company's Canadian subsidiary which was sold
April 1, 2019, is subject to examination for tax years ended on and after December 31, 2016.
13. Stockholders’ Deficit
Common Stock
Common Stock has a par value of $0.001 per share. Holders of common stock are entitled to receive dividends
and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such
holders have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation,
dissolution, or winding up of the Company, after required payments are made to holders of any series of Preferred Stock,
65
any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common
Stock are entitled to one vote per share.
14. Income (Loss) per Share
Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding during the period. The following table sets forth the computation of basic and
diluted income (loss) per share:
Year Ended
December 31,
2020
2019
Numerator:
Net income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net loss from discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,190 $
(61)
16,129 $
(4,993)
(124)
(5,117)
Denominator:
Basic weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .
11,228,707
3,297
11,232,004
11,196,710
—
11,196,710
Net income (loss) per share from continuing operations - Basic: . . . . . . . . . . . . . . . . . . $
Net income (loss) per share from discontinued operations - Basic: . . . . . . . . . . . . . . . .
Net income (loss) per share - Basic: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) per share from continuing operations - Diluted: . . . . . . . . . . . . . . . . $
Net income (loss) per share from discontinued operations - Diluted: . . . . . . . . . . . . . . .
Net income (loss) per share - Diluted: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.44 $
0.00
1.44 $
1.44
0.00
1.44
$
$
(0.45)
(0.01)
(0.46)
(0.45)
(0.01)
(0.46)
The Company reported a net loss for the year ended December 31, 2019. Accordingly, the potentially dilutive
effect of 793,084 stock options and 7,347 restricted stock units were excluded from the computation of diluted earnings
per share as of December 31, 2019, as their inclusion would be anti-dilutive.
15. Commitments and Contingencies; Litigation Settlement
Commitments
Refer to Note 10 “Financing and Operating Leases” for details on the Company’s future cash payments with
respect to financing and operating leases. During the normal course of business, the Company enters into non-
cancellable agreements to purchase goods and services, including production equipment and information technology
systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and
facility leases expire at various dates between 2021 and 2028 and contain various provisions for rental adjustments and
renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs.
Contingencies
In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss
contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts
accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on
an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss
contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a
corresponding amount of expense. The Company expenses professional fees associated with litigation claims and
assessments as incurred.
66
Heckermann v. Montross et al., Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)
On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United
States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and
former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI is also named as a
nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Exchange Act and Securities
and Exchange Commission Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges
false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and
subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of
fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.
On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the
Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed
with prejudice all claims (the “Settlement”). Under the Settlement, (i) all claims that were or could have been asserted in
the Derivative Suit were resolved and discharged, (ii) the Company agreed to implement certain corporate governance
reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the
amount of $343 and a service award to the plaintiff of a nominal amount. No liability was recorded for the Settlement as
of December 31, 2020 or December 31, 2019.
In addition to the matter described above, the Company may be subject to routine legal proceedings in the
ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a
material adverse effect on its business, financial condition or results of operations.
Estimated Sales Tax Liability
The Company is evaluating a state sales tax liability analysis for states in which it has economic nexus, and
collecting exemption documentation from its customers. It is probable that the Company will be subject to sales tax
liabilities plus interest and penalties relating to historical activity in certain states. The estimated liability for sales tax as
of December 31, 2020 is $1,696, and is recorded in accrued expenses in the consolidated balance sheets. The liability
changed from the original estimate recorded in prior periods primarily due to the Company remitting cash to the proper
state tax authorities for historical sales tax and interest, partially offset by an increase of $633 in the contingency
estimate during the fourth quarter of 2020. Due to the estimates involved in the analysis, the Company expects that the
estimated liability will change in the future, and may exceed the current estimate. The Company also may be subject to
examination by the relevant state tax authorities. Sales tax recovered from customers reduces the estimated expense
when it is probable of collection, and the Company recorded $596 of probable customer collections during the second
half of 2020. Future changes to the liability estimate that impact the consolidated statements of operations will be
recorded within selling, general, and administrative expenses.
Litigation Settlement
CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case
During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc. (together, the
“Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a
former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees as individuals (collectively, the
“Defendants”). On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the
case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to
the Company. The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded
the gain within income from operations, in the Other segment. The case was dismissed in its entirety, with prejudice, by
court order on July 12, 2019.
16. Employee Benefit Plan
The Company maintains a qualified defined-contribution plan under the provisions of the Internal Revenue
Code Section 401(k), which covers substantially all employees in the United States who meet certain eligibility
requirements. Under the plan, participants may defer their salary subject to statutory limitations and may direct the
contributions among various investment options. The Company matches 100% of the participant’s first 3% of deferrals
67
and 50% matching on each of the 4th and 5th percent contributed by the participant. As the Company operates the plan as
a safe harbor 401(k) plan, the Company’s match is 100% vested at the time of the match.
The aggregate amounts charged to expense in connection with the plan were $1,473 and $1,359 for the years
ended December 31, 2020 and 2019, respectively.
17. Stock Based Compensation
CPI Card Group Inc. Omnibus Incentive Plan
During October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus
Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and
directors. The Company had reserved 1,200,000 shares of common stock for issuance under the Omnibus Plan. As of
December 31, 2020, there were 185,113 shares available for grant under the Omnibus Plan.
The Company did not grant any awards of non-qualified stock options for the years ended December 31, 2020
and December 31, 2019. All stock option grants have a 10-year term, and will generally vest ratably over a three-year
period beginning on the first anniversary of the grant date. The following is a summary of the activity in outstanding
stock options under the Omnibus Plan:
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual Term
(in Years)
Options
Outstanding as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options vested and exercisable as of December 31, 2020 . . . . . . . . . . . .
Options vested and expected to vest as of December 31, 2020 . . . . . . . .
793,084 $
(86,712)
706,372 $
661,053
706,372
14.91
12.61
15.20
16.08
15.20
6.44
6.37
6.44
The following is a summary of the activity in unvested stock options under the Omnibus Plan:
Unvested as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Grant-Date
Fair Value
1.90
2.33
2.05
1.10
Number
250,571 $
(16,028)
(189,224)
45,319 $
68
Unvested stock options as of December 31, 2020 of 45,319, will entirely vest in 2021.
The following table summarizes the changes in the number of outstanding restricted stock units for the year
ended December 31, 2020 under the Omnibus Plan:
Outstanding as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-
Average
Grant-Date
Fair Value
22.49
2.12
22.51
21.75
2.12
Shares
7,347 $
180,001
(7,144)
(203)
180,001 $
The Company granted 180,001 awards of restricted stock units for the year ended December 31, 2020. The
restricted stock unit awards contain conditions associated with continued employment or service, and vest two years
from the date of grant. On the vesting dates, shares of common stock are issued to the award recipients. Unvested
restricted stock units of 180,001 as of December 31, 2020 will vest entirely in 2022.
During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units
with a grant-date fair value of $663. These awards settled in cash in three annual payments on the first, second and third
anniversaries of the date of grant. The cash performance units were based on the performance of the Company’s stock,
measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date
compared to the Company’s stock price on the date of grant. The Company recognized compensation expense on a
straight-line basis for each annual performance period. The cash performance units were accounted for as a liability and
remeasured to fair value at the end of each reporting period. During the twelve months ended December 31, 2020, the
third tranche of the cash performance units vested and the Company made a cash payment of $68 to the award recipients.
There are no outstanding cash performance units as of December 31, 2020.
Compensation expense for the Omnibus Plan for the years ended December 31, 2020 and 2019 was $136 and
$250, respectively. As of December 31, 2020, the total unrecognized compensation expense related to unvested options
and restricted stock units, was $340, which the Company expects to recognize over an estimated weighted average
period of 1.7 years.
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan
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.
As a result of the Company’s adoption of its Omnibus Plan, as further described above, no further awards will
be made under the Option Plan. During the year ended December 31, 2019, the remaining 6,600 outstanding shares in
the Option Plan were exercised. As such, there were no outstanding shares remaining as of December 31, 2020. There
was no compensation expense related to options previously granted under the Option Plan, for years ended
December 31, 2020 and 2019.
18. Segment Reporting
The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more
of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the
segment would be useful to the readers of the financial statements. 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 net sales and EBITDA.
69
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 before interest expense, income
taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful
measure and is useful as a supplement to 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 to identify strategies to improve the allocation of resources amongst segments.
As of December 31, 2020, the Company’s reportable segments were as follows:
• Debit and Credit,
•
• Other.
Prepaid Debit, and
Debit and Credit Segment
The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card
services to card-issuing banks primarily in the United States. Products manufactured by this segment primarily include
EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards, and plastic and
encased metal cards, and Second Wave payment cards featuring a core made with ROBP. The Company also sells
Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the
Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards,
and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a
variety of integrated card services, including card personalization and fulfillment services and instant issuance services.
The Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands. Many of
the Company’s customers require CPI to comply with the standards of the PCI Security Standards Council.
Prepaid Debit Segment
The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the
United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued
on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid
Debit segment operation is audited for compliance by multiple Payment Card Brands. Many of the Company’s
customers require CPI to comply with the standards of the PCI Security Standards Council.
Other
The Other segment includes corporate expenses and a less significant operation that generated sales from the
production of Financial Payment Cards and retail gift cards, and card personalization and fulfillment services in Canada,
prior to its sale. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as
those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other
service providers in 2019.
70
Performance Measures of Reportable Segments
Net sales and EBITDA from continuing operations of the Company’s reportable segments for the years ended
December 31, 2020 and 2019 were as follows:
Net Sales
December 31,
EBITDA
December 31,
2020
2019
2020
2019
Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,427 $ 213,141 $ 64,522 $ 45,635
22,456
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(27,468)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intersegment eliminations(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,189 $ 278,073 $ 55,109 $ 40,623
22,156
(31,569)
—
63,596
—
(1,834)
64,330
1,679
(1,077)
(a) Amounts include the elimination of sales between segments for consolidation.
The following table provides a reconciliation of total segment EBITDA from continuing operations to “Net loss
from continuing operations” for the years ended December 31, 2020 and 2019:
Total segment EBITDA from continuing operations . . . . . . . . . . . . . . . $ 55,109 $ 40,623
(24,891)
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,474)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,251)
Net Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . $ 16,190 $ (4,993)
(25,397)
3,305
(16,827)
December 31,
2020
2019
Balance Sheet Data of Reportable Segments
Total assets of the Company’s reportable segments as of December 31, 2020 and 2019 were as follows:
Debit and Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,846 $ 176,020
25,259
Prepaid Debit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,732
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 266,151 $ 213,011
34,734
15,571
December 31,
2020
2019
Net Sales to Geographic Location; Property, Equipment and Leasehold Improvements and Long-Lived assets by
Geographic Segments
Subsequent to the sale of the Company’s Canada operations on April 1, 2019, the Company’s Net Sales,
Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of
the United States is insignificant.
Net Sales to Major Customers
For the year ended December 31, 2020 the Company had two customers that represented more than 10% of the
Company’s consolidated net sales. Net sales for these customers were approximately 15% and 14% of the Company’s
consolidated net sales. For the year ended December 31, 2019 one customer represented 18% of the Company’s
consolidated net sales.
71
Net Sales by Product and Services
Net sales from products and services sold by the Company for the years ended December 31, 2020 and 2019
were as follows:
Product net sales(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,968 $ 143,941
Services net sales(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
134,132
Total net sales: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,189 $ 278,073
140,221
December 31,
2020
2019
(a) “Products” net sales include the design and production of Financial Payment Cards in contact-EMV, contactless
dual-interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products”
revenue from the sale of Card@Once printers and consumables, private label credit cards and retail gift cards.
(b) “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing
tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as
a service personalization of instant issuance cards.
19. Quarterly Financial Information (Unaudited)
Summarized quarterly results for the years ended December 31, 2020 and 2019 on a continuing operations
basis, were as follows:
Year Ended
2020 by Quarter:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73,969 $ 71,378 $ 82,702 $ 84,140 $
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,648 $ 23,090 $ 30,607 $ 30,963 $
Net income from continuing operations . . . . . . . . . . . . . . . . $ 1,782 $ 1,283 $ 5,809 $ 7,316 $
Q4
Q1
Q3
Q2
December 31,
2020
312,189
110,308
16,190
Basic and diluted earnings per share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.16 $
0.11 $
0.52 $
0.65 $
1.44
Year Ended
December 31,
2019 by Quarter:
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,866 $ 66,901 $ 71,681 $ 72,625 $ 278,073
91,070
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,459 $ 22,318 $ 25,357 $ 21,936 $
(4,993)
(629) $ (2,287) $
Net income (loss) from continuing operations . . . . . . . . . . . $ (3,262) $ 1,185 $
2019
Q1
Q2
Q4
Q3
Basic and diluted earnings (loss) per share from
continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.29) $
0.11 $ (0.06) $
(0.20) $
(0.45)
72
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73
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), that are
designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2020.
Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our
disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a
control system must reflect the fact that there are resource constraints, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people,
or by management’s override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of
compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting
is a process designed under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States.
As of December 31, 2020, our management assessed the effectiveness of our internal control over financial
reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that,
as of December 31, 2020, our internal control over financial reporting was effective based on those criteria. This Annual
Report does not include an attestation report of our independent registered public accounting firm as it is not required.
74
Changes in Internal Control Over Financial Reporting
Except as noted in the following sentence, there have not been any changes in the Company’s internal control
over financial reporting that occurred during the fourth quarter of 2020 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting. During the fourth quarter of 2020, the
Company continued to enhance internal controls to appropriately determine compliance with, and accounting for, certain
state and local sales tax regulations.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item will be included in our definitive Proxy Statement for the 2021 Annual Meeting of
Stockholders (the “Proxy Statement”), which we expect to be filed within 120 days of the end of our fiscal year ended
December 31, 2020 and is incorporated herein by reference.
Item 11. Executive Compensation
Information relating to our executive officer and director compensation is incorporated herein by reference to the Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to security ownership of certain beneficial owners of our common stock and information relating to
the security ownership of the registrant’s management is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to certain relationships and related transactions and director independence is incorporated herein by
reference to the Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is incorporated herein by reference to the Proxy Statement.
75
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Form 10-K.
1. Financial Statements filed as a part of this document under Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Stockholders’ Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
All financial statement schedules have been omitted because they are not required, not applicable, or the required
information is included in the financial statements or notes thereto included in this Annual Report on Form 10-K.
3. Exhibits
2.1
2.2
3.1
3.2
3.3
4.1
Exhibit Description
Purchase and Sale Agreement, dated as of August 22, 2014, by and among William S. Dinker, Katherine
S. Nevill, Bobby Smith and Tom Hedrich, William S. Dinker 2012 Trust for Edward McCullough Dinker,
William S. Dinker 2012 Trust for John Walsh Dinker and William S. Dinker 2012 Trust for William S.
Dinker III, EFT Source, Inc., CPI Acquisition, Inc. and William S. Dinker, as Sellers' Representative
(incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-206218)).
Share Purchase Agreement, dated August 1, 2018, by and between CPI Card Group-Europe Limited,
SEAFOX BIDCO Limited and CPI Acquisition, Inc. (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed August 9, 2018).
Third Amended and Restated Certificate of Incorporation of CPI Card Group Inc. (incorporated by
reference to the Company’s Registration Statement on Form S-8 (File No. 333-207350)).
Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of CPI Card
Group Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed December 22,
2017).
Amended and Restated Bylaws of CPI Card Group Inc. (incorporated by reference to the Company’s
Registration Statement on Form S-8 (File No. 333-207350)).
Form of Stock Certificate (incorporated by reference to the Company’s Registration Statement on
Form S-1 (File No. 333-206218)).
4.2*
Description of Registrant’s Securities.
10.1**
10.2**
Employment and Non-Competition Agreement, dated April 22, 2009, between CPI Acquisition, Inc. and
Steven Montross (incorporated by reference to the Company’s Registration Statement on Form S-1 (File
No. 333-206218)).
First Amendment of the Employment and Non-Competition Agreement, effective as of April 17, 2017,
between CPI Acquisition, Inc. and Steven Montross (incorporated by reference to the Company’s Current
Report on Form 8-K filed on April 20, 2017).
76
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9**
10.10**
10.11**
10.12
Employment and Non-Competition Agreement, dated September 25, 2017, by and between CPI Card
Group Inc. and Scott Scheirman (incorporated by reference to the Company’s Current Report on
Form 8-K filed September 29, 2017).
Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan, dated
September 25, 2017, by and between CPI Card Group Inc. and Scott Scheirman (incorporated by
reference to the Company’s Current Report on Form 8-K filed September 29, 2017).
Employment and Non-Competition Agreement, dated October 1, 2008, between Metaca Corporation and
Anna Rossetti (incorporated by reference to the Company’s Registration Statement on Form S-1 (File
No. 333-206218)).
CPI Card Group Inc. Omnibus Incentive Plan, as amended and restated effective September 25, 2017
(incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2017).
Form of Cash Performance Unit Award Agreement under the CPI Card Group Inc. Omnibus Incentive
Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 4, 2017).
Form of Nonqualified Stock Option Agreement under the CPI Card Group Inc. Omnibus Incentive Plan
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 8, 2017)
CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (incorporated by reference to the
Company’s Registration Statement on Form S-1 (File No. 333-206218)).
CPI Card Group Inc. U.S. Executive Severance and Change in Control Guidelines (incorporated by
reference to the Company’s Quarterly Report on Form 10-Q filed August 3, 2017).
Form of Indemnification Agreement (incorporated by reference to the Company’s Registration Statement
on Form S-1 (File No. 333-206218)).
First Lien Credit Agreement, dated as of August 17, 2015, by and among CPI Card Group Inc., CPI
Acquisition Inc., the lenders from time to time party thereto and the Bank of Nova Scotia, as
Administrative Agent and Collateral Agent (incorporated by reference to the Company’s Registration
Statement on Form S-1 (File No. 333-206218)).
10.13**
Director Nomination Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated
by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015).
10.14
10.15
10.16**
10.17**
10.18**
Registration Rights Agreement by and between CPI Card Group Inc. and the Tricor Funds (incorporated
by reference to the Company’s Current Report on Form 8-K filed on October 21, 2015).
First Amendment to Credit Agreement dated December 31, 2016, between CPI Card Group Inc. and the
Bank of Nova Scotia (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
November 7, 2018).
2019 Executive Retention Agreement dated November 7, 2018 between CPI Card Group Inc. and Scott
Scheirman Officers (incorporated by reference to the Company’s Annual Report on Form 10-K filed
March 6, 2019).
Form of 2019 Executive Retention Agreement for certain Executive Officers (incorporated by reference to
the Company’s Annual Report on Form 10-K filed March 6, 2019).
2019 Executive Incentive Plan dated February 27, 2019 (incorporated by reference to the Company’s
Annual Report on Form 10-K filed March 6, 2019).
77
10.19**
10.20**
10.21**
10.22
10.23
10.24
10.25
10.26**
10.27**
10.28**
10.29**
21.1*
23.1*
31.1*
31.2*
32.1*
2020 Executive Retention Agreement, dated September 11, 2019 between CPI Card Group Inc. and Scott
Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
November 6, 2019).
Form of 2020 Executive Retention Agreement, dated September 11, 2019 for certain Executive Officers
(incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed November 6, 2019).
Form of 2020 Executive Short-Term Incentive Plan (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed November 6, 2019).
First Lien Amending Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim
Credit Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
May 6, 2020).
Intercreditor Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim Credit
Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed May 6,
2020).
Super Senior Credit Agreement, dated March 6, 2020 between CPI Card Group Inc. and Guggenheim
Credit Services, LLC (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
May 6, 2020).
Amendment to Credit Agreement, dated July 10, 2020, by and among CPI CG INC., CPI Card Group Inc.,
the other Loan Parties (as defined therein), the Lenders party thereto, GLAS USA LLC and GLAS
Americas LLC, as collateral agent for the lenders (incorporated by reference to the Company’s Quarterly
Report on Form 10-Q filed August 5, 2020).
Form of Executive Retention Agreement (incorporated by reference to the Company’s Quarterly Report
on Form 10-Q filed November 3, 2020).
2021 Executive Retention Agreement, dated October 2, 2020, between CPI Card Group. Inc. and Scott
Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
November 3, 2020).
Form of Executive Restricted Stock Unit Agreement (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed November 3, 2020).
Restricted Stock Unit Agreement, dated October 2, 2020, between CPI Card Group Inc. and Scott
Scheirman (incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed
November 3, 2020).
List of Subsidiaries of the Company.
Consent of Independent Registered Accounting Firm, KPMG LLP.
Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002.
Certificate of Chief Executive Officer and Chief Financial Officer Required Under Section 906 of the
Sarbanes-Oxley Act of 2002.
78
101.INS* XBRL Instance Document.
101.SCH* XBRL Taxonomy Extension Schema Document.
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document.
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document.
* Filed or furnished herewith.
** Management contract or compensatory plan or arrangement.
79
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
CPI CARD GROUP INC.
/s/ John Lowe
John Lowe
Chief Financial Officer
February 25, 2021
KNOWN BY ALL PERSONS BY THESE PRESENTS, that the individuals whose signatures appear below
hereby constitute and appoint Scott Scheirman and John Lowe and each of them severally, as his or her true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution for him and in his name, place and stead in
any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do or perform each and every act and thing requisite
and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or of his substitute or
substitutes, may lawfully do to cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Scott Scheirman
Scott Scheirman
/s/ John Lowe
John Lowe
/s/ Kevin O’Brien
Kevin O’Brien
/s/ Bradley Seaman
Bradley Seaman
/s/ Robert Pearce
Robert Pearce
/s/ Nicholas Peters
Nicholas Peters
/s/ Marc Sheinbaum
Marc Sheinbaum
/s/ Valerie Soranno Keating
Valerie Soranno Keating
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer
(Principal Accounting Officer)
February 25, 2021
February 25, 2021
February 25, 2021
Chairman of the Board
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
Director
Director
Director
Director
80
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Scheirman, certify that:
1.
I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 25, 2021
/s/ Scott Scheirman
Scott Scheirman
Chief Executive Officer (Principal
Executive Officer)
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John Lowe, certify that:
Exhibit 31.2
1.
I have reviewed this Annual Report on Form 10-K of CPI Card Group Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made not misleading, with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 25, 2021
/s/ John Lowe
John Lowe
Chief Financial Officer (Principal
Financial Officer)
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES–OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of CPI Card Group Inc. (the “Company”) for the period
ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we,
Scott Scheirman, Chief Executive Officer of the Company, and John Lowe, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
our knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By: /s/ Scott Scheirman
Scott Scheirman
Chief Executive Officer (Principal Executive Officer)
By: /s/ John Lowe
John Lowe
Chief Financial Officer (Principal Financial Officer)
Date: February 25, 2021
This written statement accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to the Company and will
be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CPI Card Group® 2020 Annual Report
Collaborating to Make a Difference
CPI is the first company to become a licensee of the ICMA EcoLabel Standard Program, created by the
International Card Manufacturers Association (ICMA), which recognizes card manufacturer members for
their commitment to sustainability and for specific card products that meet program requirements.
The program establishes measureable criteria for assessing the environmental impact of transaction
and identification cards for the purpose of ICMA EcoLabel Standard Program certification.
CPI’s Second Wave® Recovered Ocean-Bound Plastic and Earthwise™ High-Content Cards have achieved
certification under the ICMA EcoLabel Standard Program. For further details on which attributes ICMA
evaluated and the requirements to use the EcoLabel logo, visit https://icma.com/ecolabel-standard-program/
The First Mile®, an initiative of Thread
International and WORK, formalizes waste
collection networks in low-income communities
and bridges the gap for global brands to
purchase from these responsible supply
chains, while diverting plastic waste from
our oceans and landfills.
NextWave Plastics is a collaborative and
open-source initiative convening leading
multinational companies to develop the first
global network of ocean-bound plastic supply
chains. Simply put, NextWave keeps plastic in
the economy and out of the ocean.
Elan
A W A R D S
ICMA’s Élan Awards
•
•
•
•
Best Secure Payment Card - credit card
design and manufacture for a luxury
vehicle and motorcycle producer
Best Secure Payment Card – Finalist -
Recovered Ocean-Bound Plastic EMV®
Card design and manufacture for a
timeshare exchange company
Best Secure Metal Payment Cards for the
largest credit service organization in the
United States
Best Personalization & Fulfillment
Product, Service or Project for a Debit
Card Package for a digital bank
Awards
2020 Gold Stevie Award
CPI was named the winner of a Gold Stevie®
in the Product & Service – Business-to-Business
Products Category for Second Wave®
Recovered Ocean-Bound Plastic Cards in
the 2020 American Business Awards.
Leadership Team
Scott Scheirman
President and Chief Executive Officer
John Lowe
Chief Financial Officer
Guy DiMaggio
SVP and General Manager, Secure Card and Sustainability Solutions
Lane Dubin
SVP and General Manager, Prepaid, Personalization Solutions and Instant Issuance
Lori Frasier
Chief Human Resources Officer
Sarah Kilgore
Chief Legal and Compliance Officer
Kevin O’Brien
Chief Accounting Officer
Beth Williams
Chief Technology Officer
Board of Directors
Bradley Seaman (2)
Non-Executive Chairman
Scott Scheirman
President and Chief Executive Officer
Robert Pearce (1)*(2)
Nicholas Peters (2)*(3)
Marc Sheinbaum (1)(3)
Valerie Soranno Keating (1)(3)*
(1) Audit Committee (2) Compensation Committee (3) Nominating and Corporate Governance Committee *Committee Chair
2020 - A Letter from Scott Scheirman
Dear Shareholders,
Through a steadfast commitment to our customer-centric approach, we quickly adapted to the emergence of the
COVID-19 pandemic and an unprecedented level of uncertainty in 2020. The rapidly changing environment underscored
the importance of our strategic priorities and demonstrated the resilience of our business model as we navigated
challenges, took actions to keep our employees safe, delivered on targeted initiatives and realized new opportunities.
Financial Highlights:
During 2020, CPI® delivered another year of strong top-line growth, significantly improved bottom-line performance and
continued to win new business by offering robust solutions. Total net sales of $312.2 million, up 12% year-over year,
gross profit of $110.3 million, increased by 21% year-over-year, net income of $16.1 million was up 415% year-over-year,
and cash flow from operations was $22.0 million, increasing 675% year-over-year.
In March 2021, we completed a successful private offering of $310 million of Senior Secured Notes and concurrently
entered into a $50 million secured asset based revolving credit facility. Proceeds were used to repay our prior existing
credit facilities and reduce our overall debt. The financings provide us with flexibility in support of the business by
extending debt maturities and enhancing liquidity. Our capital priorities are to maintain ample liquidity, invest in
business initiatives, and deleverage the balance sheet.
Business Highlights:
Our business accomplishments are a testament to our customer-centric approach and the ongoing commitment of our
employees through an unprecedented year. Their dedication enabled us to deliver strong performance in 2020.
Our key accomplishments:
• We delivered over 25 million Second Wave® payment cards since their launch in 2019. We estimate that for every
one million Second Wave cards produced, over one ton of plastic will be diverted from entering the world’s oceans,
waterways and shorelines. We allocate a portion of the proceeds from every Second Wave card we sell to support
the communities from which the recovered ocean-bound plastic is sourced.
• We expanded our eco-focused solutions with the launch of our Earthwise™ “High Content” cards. This is the first
contactless dual-interface card product to incorporate up to 98% upcycled plastic content. As the leading eco-focused
card provider in the U.S., we estimate that we produced more than 80% of all U.S. eco-focused cards in 2020.
• We continued to be well-positioned to support the ongoing transition to contactless cards as our customers
gradually provide their account holders with contactless technology that enables a faster and more “touch-free”
point-of-sale experience.
• We launched the Spectrum by Card@Once® SaaS-based solution, our newest state-of-the-art, high definition
retransfer printer which features a more defined, higher image print quality, with over-the-edge printing capability.
We now have over 11,000 Card@Once SaaS instant issuance solutions installed across more than 1,600 financial institutions.
• We broadened our personalization capabilities, including offering robust on-demand solutions. We believe
our enhanced capabilities and a high level of customer service will enable us to win incremental business from our
current customers and expand our customer base, building on our position as a leading personalization provider for
small and medium enterprise financial institutions in the U.S.
•
As the leader in the U.S. prepaid debit card solutions market, we continue to provide market-leading quality and
innovative solutions to our customers, including differentiated card materials and tamper-evident and sustainable
packaging capabilities, enabling us to add new customers to our portfolio and expand business with existing customers.
• We made contributions to COVID-19 relief efforts and local and global charities including assisting the Nashville,
Tennessee community recover from the tornado in March 2020.
Persistent focus on our strategic priorities has enabled us to diversify our business model, continue our rich
history of innovation and provide solutions that meet the needs and expectations of our customers, even in the
face of the challenges presented during 2020. We remain committed to our strategic priorities as we look ahead.
I look forward to sharing our progress with you.
Scott T. Scheirman
President and Chief Executive Officer
EMV® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo, LLC
Shareholder Information
Corporate Headquarters
CPI Card Group Inc.
10368 West Centennial Road
Littleton, Colorado 80127
(720) 681-6304
Auditor
KPMG LLP
1225 17th Street, Suite 800
Denver, Colorado 80202
Common Stock
Ticker Symbol: PMTS
OTCQX® Best Market (OTCQX)
Toronto Stock Exchange (TSX)
Investor Relations
(877) 369-9016
InvestorRelations@cpicardgroup.com
Transfer Agent and Registrar
EQ Shareowner Services
PO Box 64854
St Paul, Minnesota 55164-0854
(800) 468-9716
www.shareowneronline.com
Canadian Transfer Agent
Acting as Co-Agent
TSX Trust
650 West Georgia Street
Suite 2700
Vancouver, British Columbia V6B4N9
Canada
www.tsxtrust.com
Annual Meeting
The annual meeting of CPI Card Group stockholders will be held at
8:00 a.m. Mountain Time on Thursday, May 27th, 2021 via live webcast.
For information on how to attend our annual meeting of stockholders,
please see our definitive Proxy Statement for the 2021 Annual Meeting
of Stockholders or visit: https://investor.cpicardgroup.com