Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s
References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”).
Cautionary Statement Regarding Forward-Looking Information
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (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, 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,” “continue,” “committed,” “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, including statements about our strategic initiatives and market opportunities, 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; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology 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, infringement claims brought against us 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 decrease in the value of our common stock combined with our common stock not 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
22
Table of Contents
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 our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 25, 2021 and our other reports filed from time to time with the SEC.
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.
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.
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 providers in the United States. Our “Other” segment includes corporate expenses.
23
Table of Contents
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 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. The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain including access to, and higher pricing of, certain raw materials which may continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to address potential supply chain constraints. The current economic environment has affected the available labor pool in the areas in which the Company operates which may result in increased labor cost and turnover in our facilities. The Company will continue to monitor and respond as the situation evolves. All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. See Item 1A, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC 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 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 refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Part I, Item 1, Financial Statements, Note 11 “Income Taxes” for a discussion of the CARES Act income tax impacts on the Company. In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act. While we are participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to change.
Results of Operations
The following table presents the components of our condensed consolidated statements of operations for each of the periods presented:
Three Months Ended
March 31,
2021
2020
(dollars in thousands)
Net sales:
Products
$
47,013
$
42,501
Services
42,079
31,468
Total net sales
89,092
73,969
Cost of sales
53,371
48,321
Gross profit
35,721
25,648
Operating expenses
17,952
18,148
Income from operations
17,769
7,500
Other expense, net:
Interest, net
(8,976)
(6,088)
Other income (expense), net
25
(3)
Loss on debt extinguishment
(5,048)
(92)
Income before taxes
3,770
1,317
Income tax (expense) benefit
(1,360)
465
Net income from continuing operations
2,410
1,782
Net loss from discontinued operations
—
(26)
Net income
$
2,410
$
1,756
Note: The Company revised its prior year financial statements to adjust immaterial items, relating to estimated sales tax expense and depreciation expense. Refer to Note 1, Business Overview and Summary of Significant Accounting Policies, for an explanation of the immaterial prior period adjustments.
24
Table of Contents
Segment Discussion
Three Months Ended March 31, 2021 Compared With Three Months Ended March 31, 2020
Net Sales
Three Months Ended March 31,
2021
2020
$ Change
% Change
(dollars in thousands)
Net sales by segment:
Debit and Credit
$
69,817
$
59,839
$
9,978
16.7
%
Prepaid Debit
19,458
14,540
4,918
33.8
%
Eliminations
(183)
(410)
227
*
Total
$
89,092
$
73,969
$
15,123
20.4
%
* Not meaningful
Net sales for the three months ended March 31, 2021 increased $15.1 million, or 20.4%, to $89.1 million compared to $74.0 million for the three months ended March 31, 2020.
Debit and Credit:
Net sales for Debit and Credit for the three months ended March 31, 2021 increased $10.0 million, or 16.7%, to $69.8 million compared to $59.8 million for the three months ended March 31, 2020 . The net sales increase was primarily due to higher volumes of contactless dual-interface EMV card sales, including new customer growth. In addition, net sales increased from card personalization due to new customers, higher volumes from our existing customers including from a transition to contactless dual interface cards, and from our CPI On-Demand and Card@Once instant issuance solutions. Contactless dual-interface EMV cards have additional technology to process contactless transactions and generally have a higher selling price to produce and personalize than contact-only EMV cards, which benefitted the current year sales increase compared to the prior year period. Net sales also benefitted from government disbursement work during the first quarter of 2021.
Prepaid Debit:
Net sales for Prepaid Debit for the three months ended March 31, 2021, increased $4.9 million, or 33.8%, to $19.5 million, compared to $14.5 million for the three months ended March 31, 2020 . Net sales increased from higher volumes from an existing customer which included new portfolio wins, as compared to the prior year period.
Gross Profit and Gross Profit Margin
Three Months Ended March 31,
% of 2021
% of 2020
2021
Net Sales
2020
Net Sales
$ Change
% Change
(dollars in thousands)
Gross profit by segment:
Debit and Credit
$
27,549
39.5
%
$
20,408
34.1
%
$
7,141
35.0
%
Prepaid Debit
8,172
42.0
%
5,240
36.0
%
2,932
56.0
%
Total
$
35,721
40.1
%
$
25,648
34.7
%
$
10,073
39.3
%
Gross profit for the three months ended March 31, 2021, increased $10.1 million, or 39.3%, to $35.7 million compared to $25.7 million for the three months ended March 31, 2020. Gross profit margin for the three months ended March 31, 2021 increased to 40.1% compared to 34.7% for the three months ended March 31, 2020.
25
Table of Contents
Debit and Credit:
Gross profit for Debit and Credit for the three months ended March 31, 2021, increased $7.1 million, or 35.0%, to $27.5 million compared to $20.4 million during the three months ended March 31, 2020 . The increase in gross profit for the Debit and Credit segment was driven primarily by higher sales volumes of contactless EMV cards. In addition, the net sales increase from new customers and higher volumes of card personalization, including contactless cards, CPI On-Demand and Card@Once instant issuance solutions, contributed to an improvement in gross profit compared to the prior year period. Gross profit margin increased to 39.5% during the three months ended March 31, 2021, compared to 34.1% in the prior year period, due primarily to operating leverage from higher sales volumes from a transition to contactless dual interface cards .
Prepaid Debit:
Gross profit for Prepaid Debit during the three months ended March 31, 2021, increased $2.9 million, or 56.0%, to $8.2 million compared to $5.2 million during the three months ended March 31, 2020. Gross profit margin for Prepaid Debit for the three months ended March 31, 2021, increased to 42.0% compared to 36.0% for the three months ended March 31, 2020. The increase in gross profit and margin was primarily attributed to favorable overhead cost absorption from higher sales volumes.
Operating Expenses
Three Months Ended March 31,
% of 2021
% of 2020
2021
Net Sales
2020
Net Sales
$ Change
% Change
(dollars in thousands)
Operating expenses by segment:
Debit and Credit
$
7,395
10.6
%
$
7,932
13.3
%
$
(537)
(6.8)
%
Prepaid Debit
1,154
5.9
%
1,124
7.7
%
30
2.7
%
Other
9,403
*
%
9,092
*
%
311
3.4
%
Total
$
17,952
20.1
%
$
18,148
24.5
%
$
(196)
(1.1)
%
* Not meaningful
Operating expenses declined $0.2 million to $18.0 million for the three months ended March 31, 2021, compared to $18.1 million for the three months ended March 31, 2020.
Debit and Credit:
Debit and Credit operating expenses decreased $0.5 million to $7.4 million in the three months ended March 31, 2021 compared to $7.9 million in the three months ended March 31, 2020 . The decrease was due primarily to cost reductions compared to the prior year period.
Prepaid Debit:
Prepaid Debit operating expenses remained relatively flat for the three months ended March 31, 2021 and 2020.
Other:
Other operating expenses during the three months ended March 31, 2021 increased $0.3 million compared to the three months ended March 31, 2020 . The increase in operating expenses was due to higher self insurance medical expense and accelerated depreciation in connection with a reduction in leased corporate office space.
26
Table of Contents
Income from Operations and Operating Margin
Three Months Ended March 31,
% of 2021
% of 2020
2021
Net Sales
2020
Net Sales
$ Change
% Change
(dollars in thousands)
Income from operations by segment:
Debit and Credit
$
20,154
28.9
%
$
12,476
20.8
%
$
7,678
61.5
%
Prepaid Debit
7,018
36.1
%
4,116
28.3
%
2,902
70.5
%
Other
(9,403)
*
%
(9,092)
*
%
(311)
3.4
%
Total
$
17,769
19.9
%
$
7,500
10.1
%
$
10,269
136.9
%
* Not meaningful
Income from operations for the three months ended March 31, 2021 was $17.8 million compared to income from operations of $7.5 million for the three months ended March 31, 2020. The Company’s operating income margin for the three months ended March 31, 2021 increased to 19.9% compared to 10.1% for the three months ended March 31, 2020 .
Debit and Credit:
Income from operations for Debit and Credit for the three months ended March 31, 2021 was $20.2 million, an increase of 61.5% compared to $12.5 million for the three months ended March 31, 2020 due primarily to higher volumes of contactless dual-interface EMV card sales, higher card personalization sales, including from contactless dual interface cards, our CPI On-Demand and Card@Once instant issuance solutions, and from government disbursement work. In addition, lower operating expenses as a result of cost reductions during the three months ended March 31, 2021 contributed to an improvement in income from operations. Operating margins for the three months ended March 31, 2021 increased to 28.9% compared to 20.8% for the three months ended March 31, 2020 due to the higher net sales and operating leverage, and the decrease in operating expenses.
Prepaid Debit:
Income from operations for Prepaid Debit for the three months ended March 31, 2021 was $7.0 million, an increase of 70.5% compared to $4.1 million for the three months ended March 31, 2020 . The increase was the result of higher net sales volumes from an existing customer which included new portfolio wins. Operating income margin for the three months ended March 31, 2021 increased to 36.1% from 28.3% for the same period in 2020, due to the higher net sales and favorable overhead cost absorption.
Other :
The loss from operations in Other was $9.4 million for the three months ended March 31, 2021, compared to a loss from operations of $9.1 million for the same period in 2020. The loss from operations was higher in the first quarter of 2021 by $0.3 million, primarily due to an increase in operating expenses from self insurance medical costs and accelerated depreciation in connection with a reduction in leased corporate office space.
Interest, net :
Interest expense for the three months ended March 31, 2021 increased to $9.0 million compared to $6.1 million for the three months ended March 31, 2020. Interest expense is higher in the first quarter of 2021 primarily due to $2.6 million of “make-whole” premium interest expense incurred a result of the termination of our Senior Credit Facility on March 15, 2021.
Loss on debt extinguishment:
During the three months ended March 31, 2021, we recorded a $5.0 million loss on debt extinguishment relating to the termination of our Senior Credit Facility and First Lien Term Loan as we expensed the unamortized deferred financing costs and debt discount. This was completed in connection with the issuance of new Senior Notes and entrance into a new ABL Revolver.
27
Table of Contents
Income tax (expense) benefit:
During the three months ended March 31, 2021, we recorded an income tax expense of $1.4 million on pre-tax income of $3.8 million, representing an effective income tax rate of 36.1%. During the three months ended March 31, 2020, we recorded an income tax benefit of $0.5 million on pre-tax income of $1.3 million , representing an effective tax rate of (35.3)%. For the quarter ended March 31, 2021, the effective tax rate differs from the federal U.S. statutory rate of 21.0% primarily due to the impact of state taxes and permanent items. For the quarter ended March 31, 2020, the effective tax rate differs from the federal U.S. statutory rate of 21.0% primarily due to the impact of the CARES Act which was signed into law in March 2020. We estimated 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 250.9%. In addition, partially offsetting the CARES Act tax rate benefit in the prior year was tax expense for a partial valuation allowance for the limitation on the deductibility of interest expense, permanent items and states taxes.
Net income:
During the three months ended March 31, 2021, net income was $2.4 million, compared to net income of $1.8 million during the three months ended March 31, 2020 . The increase was primarily due to higher net sales and gross profit, partially offset by the loss on debt extinguishment, higher interest expense and income tax expense during the three months ended March 31, 2021, compared to the prior year period.
Liquidity and Capital Resources
At March 31, 2021, we had $24.9 million of cash and cash equivalents. Of this amount, $0.4 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.
On March 15, 2021, we completed a private offering of $310 million aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees at an issue price of 100%. In addition, we entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an ABL revolver of up to $50 million (the “ABL Revolver”), subject to a borrowing base.
In connection with the issuance of the Senior Notes and entrance into the ABL Revolver, we terminated our existing credit facilities consisting of a $30 million senior credit agreement, dated as of March 6, 2020, among the Company, the borrower as CPI CG Inc., 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 (the “First Lien Term Loan”). Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15 million 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 million, plus accrued and unpaid interest, under the Senior Credit Facility, and $304.7 million, plus accrued and unpaid interest, under the First Lien Term Loan. During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.
Our ability to borrow under the ABL Revolver is also limited during periods in which the amount available to borrow under the ABL Revolver is less than $5 million. Commencing with the month immediately following a date on which borrowing availability is below $5 million until such time that borrowing availability equals or exceeds $5 million for 30 consecutive days, in order to borrow under the ABL Revolver, we must maintain a fixed charge coverage ratio (as defined in the credit agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, tested monthly during such period.
The Senior Notes and the ABL Revolver also contain covenants limiting the ability of the Company, the borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue
28
Table of Contents
disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; 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.
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 the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.
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 borrower 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.
Operating Activities
Cash provided by operating activities for the three months ended March 31, 2021 was $0.1 million compared to cash provided by operating activities of $3.2 million during the three months ended March 31, 2020. The year over year decrease was due primarily to working capital cash used in accounts receivable and inventory, partially offset by the increase in accounts payable and higher net income and profitability. The increase in accounts receivable is due to higher net sales during the first quarter of 2021. In addition, the increase in inventory during the first quarter of 2021 included EMV dual interface chips to support our business, including to maintain certain levels of inventory in anticipation of future customer demand and potential supply chain constraints.
During the three months ended March 31, 2021, we paid in full and terminated our existing Senior Credit Facility and First Lien Term Loan. In connection with the debt extinguishment, we paid all accrued interest on the terminated credit facilities . Cash interest paid during the three months ended March 31, 2021, was $8.4 million, which was higher than the prior year period by $2.8 million, and includes a $2.6 million “make-whole” premium included in cash flows used in financing activities.
Investing Activities
Cash used in investing activities for the three months ended March 31, 2021 was $2.4 million, compared to a usage of $0.9 million during the three months ended March 31, 2020. Cash used in investing activities was related primarily to capital expenditures, including investments to support the growth of the business, such as machinery and information technology equipment. 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 $0.5 million during the three months ended March 31, 2021, compared to $0.3 million during the prior year period.
Financing Activities
During the three months ended March 31, 2021 , cash used in financing activities was $30.5 million. Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million, respectively. During the three months ended March 31, 2021, we paid $9.5 million of debt issuance costs and $2.7 million of debt extinguishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility.
We used proceeds from the Senior Notes and ABL Revolver, plus cash on hand from our balance sheet, to pay in full and terminate the Senior Credit Facility balance of $30 million and the First Lien Term Loan balance of $304.7
29
Table of Contents
million on March 15, 2021. During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.
During the three months ended March 31, 2020, we entered into the Senior Credit Facility which provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance costs. We also paid $0.6 million of principal on finance leases during both the three months ended March 31, 2021 and 2020.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at March 31, 2021.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2020, for which there were no material changes as of March 31, 2021, included:
● Revenue recognition, including estimates of work performed but not completed ,
● Income taxes, including valuation allowances and uncertain tax positions, and
● Sales tax, including an estimated contingent liability.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.