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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2021.

or

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

For the Transition Period from to

Commission File Number: 001-37584

CPI Card Group Inc.

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

Delaware

26-0344657

(State or other jurisdiction of incorporation or organization)

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

10368 W. Centennial Road

Littleton, CO

80127

(Address of principal executive offices)

(Zip Code)

(720) 681-6304

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

PMTS

Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes      No

Number of shares of Common Stock, $0.001 par value, outstanding as of October 26, 2021: 11,255,466

Table of Contents

    

Page

 

Part I — Financial Information

Item 1 — Financial Statements (Unaudited)

3

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

23

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

35

Item 4 — Controls and Procedures

35

Part II — Other Information

Item 1 — Legal Proceedings

36

Item 1A — Risk Factors

36

Item 6 — Exhibits

38

Signatures

39

2

PART I - Financial Information

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

September 30, 

December 31, 

2021

2020

Assets

Current assets:

Cash and cash equivalents

$

20,853

$

57,603

Accounts receivable, net of allowances of $226 and $289, respectively

65,450

54,592

Inventories

46,442

24,796

Prepaid expenses and other current assets

5,097

5,032

Income taxes receivable

116

10,511

Total current assets

137,958

152,534

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

38,347

39,403

Intangible assets, net

22,821

26,207

Goodwill

47,150

47,150

Other assets

5,999

857

Total assets

$

252,275

$

266,151

Liabilities and stockholders’ deficit

Current liabilities:

Accounts payable

$

18,795

$

18,883

Accrued expenses

32,097

28,149

Current portion of long-term debt

8,027

Deferred revenue and customer deposits

1,029

1,868

Total current liabilities

51,921

56,927

Long-term debt

303,251

328,681

Deferred income taxes

6,657

7,409

Other long-term liabilities

12,979

11,171

Total liabilities

374,808

404,188

Commitments and contingencies (Note 14)

Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020

-

-

Stockholders’ deficit:

Common stock; $0.001 par value—100,000,000 shares authorized; 11,238,994 and 11,230,482 shares issued and outstanding at September 30, 2021 and December 31, 2020

11

11

Capital deficiency

(111,622)

(111,858)

Accumulated loss

(10,922)

(26,190)

Total stockholders’ deficit

(122,533)

(138,037)

Total liabilities and stockholders’ deficit

$

252,275

$

266,151

See accompanying notes to condensed consolidated financial statements

3

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

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

(Unaudited)

Three Months Ended September 30, 

Nine Months Ended September 30, 

2021

    

2020

    

2021

    

2020

Net sales:

Products

$

52,276

$

43,462

$

146,445

$

125,040

Services

47,326

39,240

135,468

103,009

Total net sales

99,602

82,702

281,913

228,049

Cost of sales:

Products (exclusive of depreciation and amortization shown below)

31,493

27,490

86,708

79,780

Services (exclusive of depreciation and amortization shown below)

28,368

22,133

77,975

60,986

Depreciation and amortization

2,056

2,472

6,736

7,938

Total cost of sales

61,917

52,095

171,419

148,704

Gross profit

37,685

30,607

110,494

79,345

Operating expenses:

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

19,469

15,617

55,363

48,893

Depreciation and amortization

1,514

1,508

4,873

4,498

Total operating expenses

20,983

17,125

60,236

53,391

Income from operations

16,702

13,482

50,258

25,954

Other expense, net:

Interest, net

(7,183)

(6,298)

(23,196)

(19,158)

Other income (expense), net

(6)

27

23

(8)

Loss on debt extinguishment

(5,048)

(92)

Total other expense, net

(7,189)

(6,271)

(28,221)

(19,258)

Income from continuing operations before income taxes

9,513

7,211

22,037

6,696

Income tax (expense) benefit

(2,887)

(1,402)

(6,769)

2,178

Net income from continuing operations

6,626

5,809

15,268

8,874

Net loss from discontinued operations, net of tax (Note 1)

(30)

Net income

$

6,626

$

5,809

$

15,268

$

8,844

Basic and diluted earnings per share:

Basic earnings per share from continuing operations:

$

0.59

$

0.52

$

1.36

$

0.79

Diluted earnings per share from continuing operations:

$

0.56

$

0.52

$

1.30

$

0.79

Basic earnings per share:

$

0.59

$

0.52

$

1.36

$

0.79

Diluted earnings per share:

$

0.56

$

0.52

$

1.30

$

0.79

Basic weighted-average shares outstanding:

11,238,678

11,230,028

11,234,054

11,228,116

Diluted weighted-average shares outstanding:

11,799,321

11,231,821

11,755,381

11,235,098

Comprehensive income:

Net income

$

6,626

$

5,809

$

15,268

$

8,844

Total comprehensive income

$

6,626

$

5,809

$

15,268

$

8,844

See accompanying notes to condensed consolidated financial statements

4

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in Thousands, Excludes per Share Amounts)

(Unaudited)

Common Stock

Capital

Accumulated

    

Shares

Amount

deficiency

earnings (loss)

Total

June 30, 2021

 

11,237,056

11

(111,726)

(17,548)

$

(129,263)

Stock-based compensation

116

116

Stock option exercises

1,938

(12)

(12)

Components of comprehensive income:

Net income

 

6,626

6,626

September 30, 2021

 

11,238,994

$

11

$

(111,622)

$

(10,922)

$

(122,533)

Common Stock

Capital

Accumulated

Shares

Amount

deficiency

earnings (loss)

Total

December 31, 2020

11,230,482

11

(111,858)

(26,190)

$

(138,037)

Stock-based compensation

214

214

Stock option exercises

8,512

22

22

Components of comprehensive income:

Net income

 

15,268

15,268

September 30, 2021

11,238,994

$

11

$

(111,622)

$

(10,922)

$

(122,533)

Common Stock

Capital

Accumulated

Shares

Amount

deficiency

earnings (loss)

Total

June 30, 2020

11,229,819

11

(111,935)

(39,284)

$

(151,208)

Shares issued under stock-based compensation plans

663

Stock-based compensation

25

25

Components of comprehensive income:

Net income

 

5,809

5,809

September 30, 2020

11,230,482

$

11

$

(111,910)

$

(33,475)

$

(145,374)

Common Stock

Capital

Accumulated

Shares

Amount

deficiency

earnings (loss)

Total

December 31, 2019

11,224,191

11

(111,988)

(42,319)

$

(154,296)

Shares issued under stock-based compensation plans

6,291

Stock-based compensation

78

78

Components of comprehensive income:

Net income

 

8,844

8,844

September 30, 2020

11,230,482

$

11

$

(111,910)

$

(33,475)

$

(145,374)

See accompanying notes to condensed consolidated financial statements

5

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

Nine Months Ended September 30, 

    

2021

    

2020

Operating activities

Net income

 

$

15,268

$

8,844

Adjustments to reconcile net income to net cash provided by operating activities:

Loss from discontinued operations

30

Depreciation and amortization expense

11,609

12,436

Stock-based compensation expense

214

84

Amortization of debt issuance costs and debt discount

1,880

2,503

Loss on debt extinguishment

5,048

92

Deferred income taxes

(752)

290

Other, net

210

1,253

Changes in operating assets and liabilities:

Accounts receivable

(10,846)

(16,165)

Inventories

(21,831)

(1,109)

Prepaid expenses and other assets

(3,340)

49

Income taxes, net

10,603

(3,630)

Accounts payable

83

921

Accrued expenses

6,419

4,112

Deferred revenue and customer deposits

(843)

417

Other liabilities

793

81

Cash provided by operating activities - continuing operations

14,515

10,208

Cash used in operating activities - discontinued operations

(30)

Investing activities

Capital expenditures for plant, equipment and leasehold improvements

(4,827)

(3,320)

Other

156

Cash used in investing activities

(4,671)

(3,320)

Financing activities

Principal payments on First Lien Term loan

(312,500)

Principal payments on Senior Credit Facility

(30,000)

Principal payments on ABL Revolver

(15,000)

Proceeds from Senior Notes

310,000

Proceeds from ABL Revolver, net of discount

14,750

Proceeds from Senior Credit Facility, net of discount

29,100

Proceeds from exercises of stock options

34

Taxes withheld and paid on stock compensation

(12)

Debt issuance costs

(9,452)

(2,507)

Payments on debt extinguishment

(2,685)

Payments on finance lease obligations

(1,725)

(1,782)

Cash (used in) provided by financing activities

(46,590)

24,811

Effect of exchange rates on cash

(4)

(2)

Net (decrease) increase in cash and cash equivalents

(36,750)

31,667

Cash and cash equivalents, beginning of period

57,603

18,682

Cash and cash equivalents, end of period

 

$

20,853

$

50,349

Supplemental disclosures of cash flow information

Cash paid (refunded) during the period for:

Interest

 

$

22,107

$

17,454

Income taxes paid

$

4,708

$

1,205

Income taxes (refunded)

 

$

(9,846)

$

(259)

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

Operating leases

$

3,666

$

141

Financing leases

$

484

$

1,618

Accounts payable, and accrued expenses for capital expenditures for plant, equipment and leasehold improvements

$

1,005

$

127

See accompanying notes to condensed consolidated financial statements

6

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. 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). The Company defines “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands but not linked to a traditional bank account. CPI also offers an instant card issuance solution, which provides banks 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 Payment Card Industry Security Standards Council (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 effectively meet customers’ needs.

COVID-19 Update

 

The COVID-19 pandemic has impacted economies and societies globally.  The 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.

The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs for, certain raw materials and components, as well as a global chip shortage, which are expected to continue in the future.  CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints. The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays. On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) filed an Emergency Temporary Standard (“ETS”) with the Office of the Federal Register that will require employers with 100 or more employees to require their employees to be fully vaccinated with a COVID-19 vaccine or to produce a negative COVID-19 test result on at least a weekly basis, along with certain other requirements. Based on the pre-publication version of the ETS, the Company believes the proposed rule would apply to the Company. Compliance with the ETS could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company.

The Company expects the labor and supply chain challenges described above, and the associated costs, to continue to increase through the fourth quarter of 2021 and beyond. The Company may not be able to pass all of these costs through to its customers.  The Company has also experienced increased demand for its products and services. The Company is experiencing increased production lead times, which it believes is likely to continue in the fourth quarter of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers.  The Company will continue to monitor and respond as the situation evolves.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “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

7

refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 11, Income Taxes for a discussion of the CARES Act income tax impacts on the Company. In addition, CPI deferred employer social security payments in 2020 in accordance with the CARES Act, which are allowed to be paid in two installments in 2021 and 2022. While the Company is participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to change.    

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The condensed consolidated balance sheet as of December 31, 2020 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Discontinued Operations

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 accordance with GAAP. The Company did not retain significant continuing involvement with the discontinued operations subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2021 and 2020.

Use of Estimates

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

Recent Accounting Standards

Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board 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 the current fiscal year 2021. 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 Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements, during the year ended December 31, 2020, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense that related to prior periods. The condensed consolidated financial statements and other financial information for the

8

prior year period reflect the corrected balances which included sales tax expense in Selling, General and Administrative expenses (“SG&A”) of $293 and depreciation expense of $124 for the nine months ended September 30, 2020. Refer to Note 14, Commitments and Contingencies for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the condensed consolidated balance sheet.

2. Net Sales

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

Three Months Ended September 30, 2021

Products

Services

Total

Debit and Credit

$

52,292

$

23,829

$

76,121

Prepaid Debit

23,498

23,498

Intersegment eliminations

(16)

 

(1)

 

(17)

Total

$

52,276

$

47,326

$

99,602

Nine Months Ended September 30, 2021

Products

Services

Total

Debit and Credit

146,651

72,147

218,798

Prepaid Debit

63,339

63,339

Intersegment eliminations

(206)

(18)

(224)

Total

$

146,445

$

135,468

$

281,913

Three Months Ended September 30, 2020

Products

Services

Total

Debit and Credit

$

44,056

$

18,654

$

62,710

Prepaid Debit

20,604

20,604

Intersegment eliminations

(594)

 

(18)

 

(612)

Total

$

43,462

$

39,240

$

82,702

Nine Months Ended September 30, 2020

Products

Services

Total

Debit and Credit

$

126,507

$

54,348

$

180,855

Prepaid Debit

48,680

48,680

Intersegment eliminations

(1,467)

 

(19)

 

(1,486)

Total

$

125,040

$

103,009

$

228,049

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including contact-EMV®, contactless dual-interface EMV, contactless and magnetic stripe cards, our eco-focused solutions, including Second Wave® and EarthwiseTM cards made with upcycled plastic, metal 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. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales.

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

9

Services Net Sales

Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand® personalization, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software-as-a-service personalization of instant issuance debit and credit cards. The Company also generates “Services” net sales from usage-fees generated from the Company’s patented card design software, known as MYCATM, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. 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 Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606, Revenue from Contracts with Customers, is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

3. Accounts Receivable

Accounts receivable consisted of the following:

    

September 30, 2021

    

December 31, 2020

    

Trade accounts receivable

 

$

53,668

 

$

44,305

Unbilled accounts receivable

 

12,008

 

10,576

 

65,676

 

54,881

Less allowance for doubtful accounts

(226)

(289)

$

65,450

$

54,592

4. Inventories

Inventories consisted of the following:

    

September 30, 2021

    

December 31, 2020

Raw materials

 

$

43,734

 

$

23,009

Finished goods

 

5,741

 

4,635

Inventory reserve

(3,033)

(2,848)

 

$

46,442

 

$

24,796

10

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

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

    

September 30, 2021

    

December 31, 2020

Machinery and equipment

 

$

60,450

 

$

55,459

Machinery and equipment under financing leases

7,676

9,974

Furniture, fixtures and computer equipment

 

4,583

 

4,410

Leasehold improvements

 

13,967

 

15,083

Construction in progress

 

2,264

 

2,386

88,940

87,312

Less accumulated depreciation and amortization

 

(59,853)

 

(55,092)

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

 

9,260

 

7,183

 

$

38,347

 

$

39,403

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $2,482 and $2,831 for the three months ended September 30, 2021 and 2020, respectively, and $8,223 and $8,989 for the nine months ended September 30, 2021 and 2020, respectively.

Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, Financing and Operating Leases.

6. Goodwill and Other Intangible Assets

The Company reports all of its goodwill in the Debit and Credit segment at September 30, 2021 and December 31, 2020. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of September 30, 2021.

Intangible assets consist of customer relationships, technology and software, and trademarks. Intangible amortization expense was $1,088 and $1,149 for the three months ended September 30, 2021 and 2020, respectively, and $3,386 and $3,447 for the nine months ended September 30, 2021 and 2020, respectively.

At September 30, 2021 and December 31, 2020, intangible assets, excluding goodwill, were comprised of the following:

September 30, 2021

December 31, 2020

Weighted Average

Accumulated

Net Book

Accumulated

Net Book

Life (Years)

    

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

Customer relationships

17.2

$

55,454

$

(34,600)

$

20,854

$

55,454

(32,141)

$

23,313

Technology and software

8

 

7,101

(6,517)

 

584

 

7,101

(5,881)

1,220

Trademarks

8.7

 

3,330

 

(1,947)

 

1,383

 

3,330

(1,656)

1,674

Intangible assets subject to amortization

$

65,885

$

(43,064)

$

22,821

$

65,885

$

(39,678)

$

26,207

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2021 was as follows:

2021 (excluding the nine months ended September 30, 2021)

$

966

2022

    

 

3,867

2023

3,867

2024

3,630

2025

3,440

Thereafter

7,051

 

$

22,821

11

7. Fair Value of Financial Instruments

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

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

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

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

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

Carrying

Estimated

Value as of 

Fair Value as of 

Fair Value Measurement at September 30, 2021

September 30, 

September 30, 

 (Using Fair Value Hierarchy)

2021

2021

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

Senior Notes

$

310,000

$

337,993

$

$

337,993

$

Carrying

Estimated

 Value as of

Fair Value as of

Fair Value Measurement at December 31, 2020

December 31, 

December 31, 

 (Using Fair Value Hierarchy)

2020

2020

Level 1

Level 2

Level 3

Liabilities:

    

    

    

    

    

First Lien Term Loan

$

312,500

 

$

287,500

$

 

$

287,500

$

Senior Credit Facility

30,000

30,000

$

$

$

30,000

The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, Long-Term Debt) was based on bank quotes. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value.

8. Accrued Expenses

Accrued expenses consisted of the following:

    

September 30, 2021

    

December 31, 2020

    

Accrued payroll and related employee expenses

 

$

8,018

 

$

4,938

Accrued employee performance bonus

 

7,194

 

4,873

Employer payroll tax, including social security deferral

 

3,171

 

3,034

Accrued rebates

1,510

1,178

Sales tax liability

1,228

1,696

Accrued interest

1,197

4,145

Operating and financing lease liability (current portion)

3,549

4,407

Income taxes payable

2,015

-

Other

4,215

3,878

Total accrued expenses

$

32,097

$

28,149

12

The estimated sales tax liability is further described in Note 14, Commitments and Contingencies and Note 1, Business Overview and Summary of Significant Accounting Policies.

9. Financing and Operating Leases

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.

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

Three Months Ended

Three Months Ended

September 30, 2021

    

September 30, 2020

Operating lease costs

$

538

$

664

Variable lease costs

181

175

Short-term operating lease costs

122

-

Total expense from operating leases

$

841

$

839

Finance lease cost:

Right-of-use amortization expense

256

326

Interest on lease liabilities

92

110

Total financing lease costs

$

348

$

436

Nine Months Ended

Nine Months Ended

September 30, 2021

    

September 30, 2020

Operating lease costs

$

1,580

$

2,006

Variable lease costs

509

524

Short-term operating lease costs

416

-

Total expense from operating leases

$

2,505

$

2,530

Finance lease cost:

Right-of-use amortization expense

751

982

Interest on lease liabilities

297

356

Total financing lease costs

$

1,048

$

1,338

13

The following table reflects balances for operating and financing leases:

September 30, 2021

    

December 31, 2020

Operating leases

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

$

9,260

$

7,183

Operating lease liability (current)

$

1,781

$

2,267

Long-term operating liability

8,034

5,491

Total operating lease liabilities

$

9,815

$

7,758

Financing leases

Property, equipment and leasehold improvements

$

7,676

$

9,974

Accumulated depreciation

(2,188)

(2,422)

Total property, equipment and leasehold improvements, net

$

5,488

$

7,552

Financing lease liability (current)

$

1,768

$

2,140

Long-term financing liability

2,183

3,052

Total financing lease liabilities

$

3,951

$

5,192

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

Future cash payment with respect to lease obligations as of September 30, 2021 were as follows:

Operating

Financing

Lease

Leases

2021 (excluding the nine months ended September 30, 2021)

747

518

2022

2,377

2,136

2023

2,250

1,188

2024

2,049

390

2025

1,477

132

Thereafter

3,706

55

Total lease payments

12,606

4,419

Less imputed interest

(2,791)

(468)

Total

$

9,815

$

3,951

10. Long-Term Debt

At September 30, 2021 and December 31, 2020, long-term debt consisted of the following:

    

Interest

    

September 30, 

    

December 31, 

Rate (1)

2021

2020

Senior Notes

8.625

%  

$

310,000

$

ABL Revolver

%  

First Lien Term Loan

 

5.500

%  

312,500

Senior Credit Facility

9.500

%  

30,000

Unamortized deferred financing costs

 

(6,749)

 

(3,804)

Unamortized discount

(1,988)

Total long-term debt

$

303,251

$

336,708

Less current maturities

(8,027)

Long-term debt, net of current maturities

$

303,251

$

328,681

14

(1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the First Lien Term Loan and Senior Credit Facility was 5.5% and 9.5%, respectively, as of December 31, 2020.

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $310,000 aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. In addition, the Company and CPI CG Inc. as borrower entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $50,000 (the “ABL Revolver”).

In connection with the issuance of the Senior Notes and entry into the ABL Revolver, the Company terminated its existing credit facilities consisting of a $30,000 senior credit agreement, dated as of March 6, 2020, among the Company, CPI CG Inc., as borrower, the lenders party thereto and Guggenheim Credit Services, LLC as administrative agent and collateral agent (the “Senior Credit Facility”), and a $435,000 first lien term loan, dated as of August 17, 2015 as amended, among the Company, the borrower, the lenders party thereto, GLAS USA LLC, as administrative agent and GLAS Americas LLC, as collateral agent (the “First Lien Term Loan”).

Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15,000 under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company had outstanding borrowings of $30,000, plus accrued and unpaid interest, under the Senior Credit Facility, and $304,746, plus accrued and unpaid interest, under the First Lien Term Loan. In addition, early termination of the Senior Credit Facility required payment of a “make-whole” premium of $2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as interest expense on the condensed consolidated statement of comprehensive income for the nine months ended September 30, 2021.

During the second quarter of 2021, the Company used $15,000 of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of September 30, 2021.

The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Base Rate as defined in the ABL Revolver is the greater of the Federal Funds Rate plus 0.5%, the LIBOR Rate for a one month interest period plus 1.0%, or the Wells Fargo Bank, National Association “prime rate”. The Company may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than the Issuer) that guarantee the ABL Revolver, and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than the Issuer and excluded subsidiaries), and is secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. 

The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements.

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The Company may have obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among Issuer, the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments 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 Senior Credit Facility and the First Lien Term Loan. The Company offered to prepay the balance, pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, which resulted in a required principal prepayment of $7,754 to the First Lien Term Loan lenders on March 4, 2021, plus accrued interest thereon.

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 debt issuance costs recorded on the Senior Notes were $7,558 and are reported as a reduction to the long-term debt balance as of September 30, 2021. The net discount and debt issuance costs on the ABL Revolver were $2,144 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of September 30, 2021.

During the nine months ended September 30, 2021, the Company recorded a $5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan.

11. Income Taxes

During the three months ended September 30, 2021, the Company recognized an income tax expense of $2,887 on pre-tax income of $9,513, compared to income tax expense of $1,402 on pre-tax income of $7,211 for the prior year period. During the nine months ended September 30, 2021, the Company recognized income tax expense of $6,769 on pre-tax income of $22,037, representing an effective income tax rate of 30.7%.  For the nine months ended September 30, 2020, the Company recognized an income tax benefit of $2,178 on pre-tax income from continuing operations of $6,696, representing an effective income tax rate of (32.5%).

For the nine months ended September 30, 2021 and 2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: