What changed in this filing

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Item 1. Financial Statements

2022-11-03 compared with 2022-08-08 · 114 added, 97 removed, 448 unchanged (32% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

Current assets:

19 unchanged sentences

$ 0.001 par value— 100,000 shares authorized;

0 shares issued and outstanding at June 30, 2022 and December 31, 2021

0 shares issued and outstanding at September 30, 2022 and December 31, 2021

Stockholders’ deficit:

1 unchanged sentence

$ 0.001 par value— 100,000,000 shares authorized;

11,262,688 and 11,255,466 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

11,287,909 and 11,255,466 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Capital deficiency

7 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Total net sales

29 unchanged sentences

earnings (loss)

March 31, 2022

June 30, 2022

Stock-based compensation

Stock option exercises

Shares issued under stock-based compensation plans

Components of comprehensive income:

June 30, 2022

September 30, 2022

earnings (loss)

1 unchanged sentence

Stock-based compensation

Stock option exercises

Shares issued under stock-based compensation plans

Components of comprehensive income:

June 30, 2022

September 30, 2022

earnings (loss)

March 31, 2021

June 30, 2021

Stock-based compensation

Stock option exercises

Shares issued under stock-based compensation plans

Components of comprehensive income:

June 30, 2021

September 30, 2021

earnings (loss)

1 unchanged sentence

Stock-based compensation

Stock option exercises

Shares issued under stock-based compensation plans

Components of comprehensive income:

June 30, 2021

September 30, 2021

See accompanying notes to condensed consolidated financial statements

3 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Operating activities

12 unchanged sentences

Deferred revenue and customer deposits

Cash (used in) provided by operating activities

Cash provided by operating activities

Investing activities

8 unchanged sentences

Proceeds from ABL Revolver, net of discount

Proceeds from exercises of stock options

Debt issuance costs

32 unchanged sentences

The Company believes the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on its supply chain, production lead times, labor availability, employee absenteeism and costs.

Though the Company has implemented measures to attempt to mitigate the impacts of the challenges described above, the Company believes that such impacts, and the associated costs, may continue to increase throughout 2022 and possibly beyond.

The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain, though the health and safety of CPI employees remains paramount.

2 unchanged sentences

The Company deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021.

The second installment payment is permitted to be paid no later than the fourth quarter of 2022 and had not been paid as of June 30, 2022.

The second installment payment is permitted to be paid no later than the fourth quarter of 2022 and had not been paid as of September 30, 2022.

Basis of Presentation

14 unchanged sentences

The Company has elected not to early adopt this accounting standard.

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.

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

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Debit and Credit

22 unchanged sentences

Accounts receivable consisted of the following:

September 30,

Trade accounts receivable

2 unchanged sentences

Inventories consisted of the following:

September 30,

Raw materials

3 unchanged sentences

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

September 30,

Machinery and equipment

5 unchanged sentences

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

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,604 and $ 2,668 for the three months ended June 30, 2022 and 2021, respectively, and $ 5,248

and $ 5,741 for the six months ended June 30, 2022 and 2021, respectively.

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,870 and $ 2,482 for the three months ended September 30, 2022 and 2021, respectively, and $ 8,118 and $ 8,223 for the nine months ended September 30, 2022 and 2021, respectively.

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

Goodwill and Other Intangible Assets

The Company reports all of its goodwill in the Debit and Credit segment at June 30, 2022 and December 31, 2021.

The Company reports all of its goodwill in the Debit and Credit segment at September 30, 2022 and December 31, 2021.

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 June 30, 2022.

Intangible assets consist of customer relationships, technology and software, and trademarks.

Intangible amortization expense was $ 967 and $ 1,149 for the three months ended June 30, 2022 and 2021, respectively, and $ 1,933 and $ 2,298 for the six months ended June 30, 2022 and 2021, respectively.

At June 30, 2022 and December 31, 2021, intangible assets, excluding goodwill, were comprised of the following:

The Company did not identify a triggering event requiring a quantitative test for impairment as of September 30, 2022.

Intangible assets consist of customer relationships, technology, and trademarks.

Intangible amortization expense was $ 967 and $ 1,088 for the three months ended September 30, 2022 and 2021, respectively, and $ 2,900 and $ 3,386 for the nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022 and December 31, 2021, intangible assets, excluding goodwill, were comprised of the following:

September 30,

Weighted Average

Customer relationships

Technology and software

Intangible assets subject to amortization

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2022 was as follows:

2022 (excluding the six months ended June 30, 2022)

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2022 was as follows:

2022 (excluding the nine months ended September 30, 2022)

Fair Value of Financial Instruments

7 unchanged sentences

Fair Value as of

Fair Value Measurement at June 30, 2022

Fair Value Measurement at September 30, 2022

September 30,

(Using Fair Value Hierarchy)

3 unchanged sentences

The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, “Long-Term Debt”) was based on bank quotes.

The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of June 30, 2022, given the applicable variable interest rates and nature of the security interest in Company assets.

The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of September 30, 2022, given the applicable variable interest rates and nature of the security interest in Company assets.

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature.

1 unchanged sentence

Accrued expenses consisted of the following:

September 30,

Accrued payroll and related employee expenses

15 unchanged sentences

Three Months Ended

June 30, 2022

June 30, 2021

September 30, 2022

September 30, 2021

Operating lease costs

6 unchanged sentences

Total financing lease costs

Six Months Ended

June 30, 2022

June 30, 2021

Nine Months Ended

September 30, 2022

September 30, 2021

Operating lease costs

7 unchanged sentences

The following table reflects balances for operating and financing leases:

September 30,

Operating leases:

12 unchanged sentences

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 June 30, 2022 were as follows:

2022 (excluding the six months ended June 30, 2022)

Future cash payment with respect to lease obligations as of September 30, 2022 were as follows:

2022 (excluding the nine months ended September 30, 2022)

Total lease payments

1 unchanged sentence

Long-Term Debt

At June 30, 2022 and December 31, 2021, long-term debt consisted of the following:

ABL Revolver (1)

At September 30, 2022 and December 31, 2021, long-term debt consisted of the following:

September 30,

Unamortized deferred financing costs

3 unchanged sentences

(1) The Senior Notes bear interest at a fixed rate.

The average effective variable interest rate on outstanding borrowings under the ABL Revolver was 2.997 % as of June 30, 2022.

The interest rate on the ABL Revolver represents the average effective variable interest rate on outstanding borrowings as of September 30, 2022.

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310,000 aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees.

7 unchanged sentences

The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75,000 , increased the uncommitted accordion feature to $ 25,000 from $ 15,000 , and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York.

Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to SOFR and adjusted for a credit spread, plus an interest rate margin.

On October 11, 2022, the Company and CPI CG Inc.

entered into Amendment No.

2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory.

Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin.

The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected.

For each quarter through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average unused capacity of the facility for the previous quarter.

The unused portion of the ABL Revolver commitment accrues a monthly 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 previous month.

Unused commitment fee expense was $ 115 and $ 54 for the six months ended June 30, 2022 and 2021, respectively.

The fee percentage and calculation of the unused commitment fee changes, effective April 1, 2023, to between 0.375 % and 0.50 % (determined based on the average revolver usage over a specified period of time) of the unused portion of the facility.

The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount

available to borrow under the ABL Revolver is less than $ 7,500 .

The unused portion of the ABL Revolver commitment accrues a monthly commitment fee, 0.50 % per annum through March 31, 2023, based on the average daily borrowing capacity under the ABL Revolver over the previous month.

Unused commitment fee expense was $ 179 and $ 118 for the nine months ended September 30, 2022 and 2021, respectively.

The interest rate margin and unused commitment fee percentage changes, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused commitment fee).

The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $ 75,000 of available borrowing capacity under the ABL Revolver (“Borrowing Base”).

28 unchanged sentences

These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.

The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 5,261 and is reported as a reduction to the long-term debt balance as of June 30, 2022.

The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,800 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of June 30, 2022.

During the six months ended June 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, as described earlier.

During the three months ended June 30, 2022, the Company recognized an income tax expense of $ 1,742 on pre-tax income of $ 7,893 , compared to income tax expense of $ 2,522 on pre-tax income of $ 8,754 for the prior year period.

During the six months ended June 30, 2022, the Company recognized an income tax expense of $ 5,460 on pre-tax income of $ 17,613 , representing an effective income tax rate of 31.0 %.

For the six months ended June 30, 2021, the Company recognized an income tax expense of $ 3,882 on pre-tax income of $ 12,524 , representing an effective income tax rate of 31.0 %.

For the six months ended June 30, 2022 and 2021, the effective tax rate differs from the U.S.

The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 4,909 and is reported as a reduction to the long-term debt balance as of September 30, 2022.

The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,670 and are recorded as other assets (current and long-term) on the condensed consolidated balance sheet as of September 30, 2022.

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, as described earlier.

The Company’s effective tax rates on pre-tax income were 25.8 % and 30.3 % for the three months ended September 30, 2022 and 2021, respectively, and 28.5 % and 30.7 % for the nine months ended September 2022 and 2021, respectively.

The decrease in the Company’s effective tax rate for the three and nine months compared to the corresponding periods in the prior year was primarily due to a greater proportion of pre-tax income in relation to the impact of permanent items.

The effective tax rate for the three months ended September 30, 2022 also decreased as a result of the release of a federal valuation allowance for increased deductibility of interest costs due to a tax election made in the current year.

For the nine months ended September 30, 2022 and 2021, the effective tax rate differs from the U.S.

federal statutory income tax rate as follows:

September 30,

Tax at federal statutory rate

3 unchanged sentences

Effective income tax rate

The net change in the valuation allowance during the six months ended June 30, 2022 was an increase of $ 432 .

The increase was due to the more restrictive interest deduction limitation in Section 163(j) of the Internal Revenue Code that took effect in 2022.

Stockholders’ Deficit

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Basic weighted-average common shares outstanding

25 unchanged sentences

The Company’s motion to dismiss the complaint is currently pending.

Additionally, a third party, Infineon, has filed requests for Inter Parties Reexamination (“IPR”) proceedings concerning each of the four patents.

As a result, the Delaware District Court stayed the case pending resolution of the requests for reexamination.

Thus far, the United States Patent Office has instituted proceedings with respect to two of the IPR requests and the others remain pending.

proceedings in the patent office are scheduled to run through April 6, 2023.

Should the remaining reexamination requests be denied or should the patents survive reexamination by the United States Patent Office, the Company intends to defend the suit vigorously.

Additionally, a third party, Infineon, has filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents.

As a result, the Delaware District Court stayed the case pending resolution of the requests for review.

Thus far, the United States Patent Office has instituted proceedings with respect to three of the IPR requests and the other remains pending.

The current proceedings

in the patent office are scheduled to run through June 22, 2023.

Should the remaining IPR request be denied or should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously.

However, no assurance can be given that this matter will be resolved favorably.

Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of June 30, 2022 .

In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business.

3 unchanged sentences

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 June 30, 2022 and December 31, 2021 was $ 936 and $ 1,019 , respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets.

The estimated liability for sales tax as of September 30, 2022 and December 31, 2021 was $ 762 and $ 1,019 , respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets.

The liability decreased from the estimate recorded in the prior period primarily due to the Company remitting cash to the applicable state tax authorities for historical sales tax and interest.

4 unchanged sentences

Future changes to the liability that impact the condensed consolidated statements of operations will be recorded within “Selling, general and administrative” (“SG&A”).

During the six months ended June 30, 2022 and 2021, the Company recorded sales tax expense of $ 52 and sales tax benefit of $ 465 , respectively, within SG&A for current activity relating to updates to the estimated liability.

During the nine months ended September 30, 2022 and 2021, the Company recorded sales tax expense of $ 74 and sales tax benefit of $ 465 , respectively, within SG&A for current activity relating to updates to the estimated liability.

Voluntary Disclosure Program

The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time.

Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances.

During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance.

On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits.

The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program.

Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.

Stock-Based Compensation

4 unchanged sentences

On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan.

As of June 30, 2022, there were 920,657 shares of Common Stock available for grant under the Omnibus Plan.

During the six months ended June 30, 2022, the Company granted 30,452 awards of non-qualified stock options.

The Company did no t grant any awards of non-qualified stock options during the six months ended June 30, 2021.

As of September 30, 2022, there were 879,197 shares of Common Stock available for grant under the Omnibus Plan.

During the nine months ended September 30, 2022, the Company granted 44,905 awards of non-qualified stock options.

The Company granted 115,659 awards of non-qualified stock options of during the nine months ended September 30, 2021.

The following is a summary of the activity in outstanding stock options under the Omnibus Plan:

1 unchanged sentence

Outstanding as of December 31, 2021

Outstanding as of June 30, 2022

Options vested and exercisable as of June 30, 2022

Options vested and expected to vest as of June 30, 2022

Outstanding as of September 30, 2022

Options vested and exercisable as of September 30, 2022

Options vested and expected to vest as of September 30, 2022

The following is a summary of the activity in unvested stock options under the Omnibus Plan:

2 unchanged sentences

Unvested as of December 31, 2021

Unvested as of June 30, 2022

Unvested stock options of 151,349 as of June 30, 2022 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date.

The fair value of the stock option awards granted during the six months ended June 30, 2022, was

determined using a Black-Scholes option-pricing model with the following weighted-average assumptions:

Six Months Ended

June 30, 2022

Unvested as of September 30, 2022

Unvested stock options of 108,850 as of September 30, 2022 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date.

The fair value of the stock option awards granted during the nine months ended September 30, 2022, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions:

Nine Months Ended

September 30,

Expected term in years (1)

8 unchanged sentences

Outstanding as of December 31, 2021

Outstanding as of June 30, 2022

Outstanding as of September 30, 2022

The restricted stock unit awards contain conditions associated with continued employment or service.

1 unchanged sentence

On the vesting date, shares of Common Stock will be issued to the award recipients.

Compensation expense for the Omnibus Plan for the three months ended June 30, 2022 and 2021 was $ 1,001 and $ 47 , respectively.

Compensation expense for the Omnibus Plan for the six months ended June 30, 2022 and 2021 was $ 1,962 and $ 98 , respectively.

As of June 30, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 2,701 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.23 years.

Compensation expense for the Omnibus Plan for the three months ended September 30, 2022 and 2021 was $ 966 and $ 116 , respectively.

Compensation expense for the Omnibus Plan for the nine months ended September 30, 2022 and 2021 was $ 2,928 and $ 214 , respectively.

As of September 30, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 1,892 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.14 years.

Segment Reporting

The Company has identified reportable segments 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.

3 unchanged sentences

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 June 30, 2022, the Company’s reportable segments were as follows:

As of September 30, 2022, the Company’s reportable segments were as follows:

● Debit and Credit;

13 unchanged sentences

Performance Measures of Reportable Segments

Net Sales and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021, were as follows:

Three Months Ended June 30,

Six Months Ended June 30,

Net Sales and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021, were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Debit and Credit

Prepaid Debit

The following table provides a reconciliation of total segment EBITDA to net income for the three and six months ended June 30, 2022 and 2021:

The following table provides a reconciliation of total segment EBITDA to net income for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Total segment EBITDA

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements