What changed in this filing

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Item 1. Financial Statements

2021-05-11 compared with 2020-11-03 · 225 added, 315 removed, 301 unchanged (64% of the section changed)

4 unchanged sentences

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

September 30,

Current assets:

10 unchanged sentences

Accrued expenses

Current portion of long-term debt

Deferred revenue and customer deposits

7 unchanged sentences

$0.001 par value—100,000 shares authorized;

0 shares issued and outstanding at September 30, 2020 and December 31, 2019

0 shares issued and outstanding at March 31, 2021 and December 31, 2020

Stockholders’ deficit:

1 unchanged sentence

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

11,230,482 and 11,224,191 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

11,230,482 shares issued and outstanding at March 31, 2021 and December 31, 2020

Capital deficiency

5 unchanged sentences

and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

Condensed Consolidated Statements of Operations and Comprehensive Income

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Total net sales

4 unchanged sentences

Total cost of sales

Operating expenses, net:

Operating expenses:

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

Depreciation and amortization

Litigation settlement gain

Total operating expenses, net

Total operating expenses

Income from operations

1 unchanged sentence

Interest, net

Foreign currency gain (loss)

Other income (expense), net

Loss on debt extinguishment

Total other expense, net

1 unchanged sentence

Income tax (expense) benefit

Net income (loss) from continuing operations

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

Net income (loss)

Basic and Diluted net income (loss) per share from continuing operations:

Basic and Diluted net income (loss) per share:

Net income from continuing operations

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

Basic and diluted earnings per share:

Earnings per share from continuing operations - Basic and Diluted:

Earnings per share - Basic and Diluted:

Basic weighted-average shares outstanding:

Diluted weighted-average shares outstanding:

Comprehensive income (loss):

Net income (loss)

Currency translation adjustment

Reclassification adjustment to foreign currency loss

Total comprehensive income (loss)

Comprehensive income:

Total comprehensive income

See accompanying notes to condensed consolidated financial statements

2 unchanged sentences

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in Thousands)

comprehensive

earnings (loss)

June 30, 2020

Shares issued under stock-based compensation plans

Stock-based compensation

Components of comprehensive (loss) income:

September 30, 2020

comprehensive

(Dollars in Thousands, Excludes per Share Amounts)

earnings (loss)

December 31, 2020

Shares issued under stock-based compensation plans

Stock-based compensation

Components of comprehensive (loss) income:

September 30, 2020

comprehensive

earnings (loss)

June 30, 2019

Shares issued under stock-based compensation plans

Stock-based compensation

Components of comprehensive (loss) income:

Reclassification adjustment to foreign currency loss

September 30, 2019

comprehensive

earnings (loss)

Components of comprehensive income:

March 31, 2021

December 31, 2019

1 unchanged sentence

Stock-based compensation

Components of comprehensive (loss) income:

Currency translation adjustment

Reclassification adjustment to foreign currency loss

September 30, 2019

Components of comprehensive income:

March 31, 2020

See accompanying notes to condensed consolidated financial statements

3 unchanged sentences

(Amounts in Thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities

Net income (loss)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

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

Loss from discontinued operations

2 unchanged sentences

Amortization of debt issuance costs and debt discount

Loss on debt extinguishment

Deferred income taxes

Reclassification adjustment to foreign currency loss

Changes in operating assets and liabilities:

6 unchanged sentences

Other liabilities

Cash provided by (used in) operating activities - continuing operations

Cash provided by operating activities - continuing operations

Cash used in operating activities - discontinued operations

Investing activities

Acquisitions of plant, equipment and leasehold improvements

Cash received for sale of Canadian subsidiary

Cash used in investing activities - continuing operations

Capital expenditures for plant, equipment and leasehold improvements

Cash used in investing activities

Financing activities

Principal payments on First Lien Term loan

Principal payments on Senior Credit Facility

Proceeds from Senior Notes

Proceeds from ABL Revolver, net of discount

Proceeds from Senior Credit Facility, net of discount

Debt issuance costs

Proceeds from Revolving Credit Facility

Payments on Revolving Credit Facility

Payments on debt extinguishment

Payments on finance lease obligations

Cash provided by (used in) financing activities

Cash (used in) provided by financing activities

Effect of exchange rates on cash

Net increase (decrease) in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents, beginning of period

1 unchanged sentence

Supplemental disclosures of cash flow information

Cash paid during the period for:

Cash paid (refunded) during the period for:

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

1 unchanged sentence

Financing leases

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

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

See accompanying notes to condensed consolidated financial statements

5 unchanged sentences

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.

The Company defines “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).

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.

The Company also offers an instant card issuance solution, which provide card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be compliant and registered with one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions.

Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Company’s Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors.

The sale did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the Debit and Credit segment or to other service providers in 2019.

The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.

After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale was recorded.

In connection with the disposition of the Canadian subsidiary, the Company released the related cumulative translation adjustment of $1,329 from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the nine months ended September 30, 2019.

The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

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

On March 11, 2020, the World Health Organization (“WHO”) characterized the novel coronavirus disease (“COVID-19”) as a pandemic.

Further, on March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act – the legislation that directs federal emergency disaster response.

The broader and long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain.

The adverse effects of the COVID-19 pandemic have become widespread, including in the locations where the Company operates and its custom ers and suppliers conduct business.

The health and safety of CPI’s employees remains 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 remain open and continue to provide direct and essential support to the financial services industry.

T he Company may experience constrained supply, curtailed customer demand or impacts on CPI’s workforce that could materially adversely impact the business, results of operations and overall financial performance in future periods.

While CPI’s net sales in the third quarter and first nine months of 2020 increased over the prior year, the Company experienced lower customer demand than expected (which CPI believes is primarily attributable to the COVID-19 pandemic), and the Company may experience further effects in the Company’s results of operations and overall financial performance in future periods.

There can be no assurance that the Company’s strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 pandemic on the business and operating results.

See Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 for further discussion of the possible impact of the COVID-19 pandemic on the business.

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

CPI is continuing to evaluate and apply certain provisions of the CARES Act that may benefit the Company.

Refer to Note 12, Income Taxes – Continuing Operations, for a discussion of the CARES Act income tax impacts.

In addition, the Company has deferred employer side social security payments starting with the second quarter of 2020.

While the Company is participating in certain programs under the CARES Act, the Act and its guidance are subject to change.

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.

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 help mitigate 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 Securities and Exchange Commission (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 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.

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

1 unchanged sentence

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, 2019 is derived from the audited financial statements as of that date.

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 months ended March 31, 2020.

Use of Estimates

3 unchanged sentences

Recent Accounting Standards

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases.

The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets.

ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted.

The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented.

In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

The Company adopted the new guidance on January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842.

Refer to Note 10, Financing and Operating Leases.

Recently Issued Accounting Standards

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

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.

2 unchanged sentences

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.

The Company is evaluating the impact of adoption of this standard and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations.

Adjustment of Prior Period Financial Statements for Immaterial Items

In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in ASC 250, Presentation of Financial Statements, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense for all prior periods presented by revising the condensed consolidated financial statements and other financial information included herein.

The total impact on prior years for estimated sales tax expense was $1,907 and depreciation expense was $476.

These adjustments represent the expenses pertaining to the period of 2017 to 2020, including an increase to estimated sales tax expense recorded in Selling, General and Administrative expenses (“SG&A”) of $168 and $396, and depreciation expense in Cost of sales of $62 and $187, for the three and nine months ended September 30, 2019, respectively.

In addition, the Company recorded sales tax expense in SG&A of $293 and depreciation expense of $124 for the nine months ended September 30, 2020.

The estimated sales tax expense determined during the quarter ended June 30, 2020 was $2,700, and the estimate reduced primarily due to probable customer collections of $500, resulting in $2,200 estimated expense recorded to the prior periods of 2017 to 2020.

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 for prior periods presented by revising the condensed consolidated financial statements and other financial information included herein.

For the quarter ended March 31, 2020, the total impact of the prior period adjustment was an increase to “Selling, General and Administrative expenses” (“SG&A”) of $121 for estimated sales tax expense and an increase to “Cost of sales” of $62 for depreciation expense.

The total impact on prior fiscal years 2017 to 2019 was an increase to SG&A for estimated sales tax expense of $1,907 and an increase to “Cost of sales” for depreciation expense of $476.

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.

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

Three Months Ended September 30, 2020

Debit and Credit

Prepaid Debit

Intersegment eliminations

Nine Months Ended September 30, 2020

Debit and Credit

Prepaid Debit

Intersegment eliminations

Three Months Ended September 30, 2019

Three Months Ended March 31, 2021

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Nine Months Ended September 30, 2019

Three Months Ended March 31, 2020

Debit and Credit

4 unchanged sentences

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 ® , dual-interface EMV, contactless and magnetic stripe cards, Second Wave TM , metal, private label credit cards and retail gift cards.

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 Earthwise TM “high content” upcycled plastic cards, 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.

2 unchanged sentences

and other countries and an unregistered trademark elsewhere.

The EMV trademark is owned by EMV Co, L LC .

The EMV trademark is owned by EMV Co, LLC .

Services Net Sales

Net sales are recognized for “Services” as the services are performed.

Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit and credit cards.

The Company also generates “Services” net sales from usage-fees generated from the Company’s patented card design software, known as MYCA®, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images.

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 “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 MYCA TM , 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

3 unchanged sentences

As such, the Company's contracts are generally short term in nature.

Discontinued Operation

The facilities sold included Colchester, Liverpool and Derby locations.

The Company reported the U.K.

Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP.

Unless otherwise indicated, information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations.

The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal.

The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2020 and 2019.

Accounts Receivable

Accounts receivable consisted of the following:

September 30, 2020

March 31, 2021

December 31, 2020

3 unchanged sentences

Inventories consisted of the following:

September 30, 2020

March 31, 2021

December 31, 2020

4 unchanged sentences

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

September 30, 2020

March 31, 2021

December 31, 2020

6 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 $2,831 and $3,167 for the three months ended September 30, 2020 and 2019, respectively, and $8,989 and $9,455 for the nine months ended September 30, 2020 and 2019, respectively.

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,073 and $3,091 for the three months ended March 31, 2021 and 2020, 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 September 30, 2020 and December 31, 2019.

The Company reports all of its goodwill in the Debit and Credit segment at March 31, 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 indicates 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 , 2020.

Intangible assets consist of customer relationships, technology and software, trademarks and non-compete agreements.

Intangible amortization expense was $1,149 and $1,159 for the three months ended September 30, 2020 and 2019, respectively, and $3,447 and $3,487 for the nine months ended September 30, 2020 and 2019.

At September 30, 2020 and December 31, 2019, intangible assets, excluding goodwill, were comprised of the following:

September 30, 2020

The Company did not identify a triggering event requiring a quantitative test for impairment as of March 31 , 2021.

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

Intangible amortization expense was $1,149 and $1,149 for the three months ended March 31, 2021 and 2020, respectively.

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

March 31, 2021

December 31, 2020

2 unchanged sentences

Technology and software

Non-compete agreements

Intangible assets subject to amortization

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2020 was as follows:

2020 (excluding the nine months ended September 30, 2020)

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of March 31, 2021 was as follows:

2021 (excluding the three months ended March 31, 2021)

Fair Value of Financial Instruments

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● 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 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:

Fair Value as of

Fair Value Measurement at September 30, 2020

September 30,

Fair Value Measurement at March 31, 2021

(Using Fair Value Hierarchy)

First Lien Term Loan

Senior Credit Facility

Fair Value as of

2 unchanged sentences

First Lien Term Loan

The aggregate fair value of the Company’s First Lien Term Loan (as defined in Note 11, Long-Term Debt) was based on bank quotes.

The fair value measurement associated with the Senior Credit Facility (as defined in Note 11, Long-Term Debt) is based on significant unobservable Level 3 inputs, which require management judgment and estimation.

The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, and was valued using market data from companies with si milar credit ratings.

Senior Credit Facility

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 March 31, 2021, given the close proximity to the date the Company entered into the credit facility on March 15, 2021, and the applicable 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.

Accrued Liabilities

Accrued liabilities consisted of the following:

September 30, 2020

Accrued Expenses

Accrued expenses consisted of the following:

March 31, 2021

December 31, 2020

9 unchanged sentences

Financing and Operating Leases

CPI adopted ASC 842 effective January 1, 2019.

The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs.

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.

2 unchanged sentences

The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

As a result of the adoption of ASC 842, the Company recorded

$8,025 of operating ROU assets, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

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

1 unchanged sentence

Three Months Ended

September 30, 2020

September 30, 2019

Total operating lease costs

Finance lease cost:

Right-of-use amortization expense

Interest on lease liabilities

Total financing lease costs

Nine Months Ended

September 30, 2020

September 30, 2019

Total operating lease costs

March 31, 2021

March 31, 2020

Operating lease costs

Variable lease costs

Short-term operating lease costs

Total expense from operating leases

Finance lease cost:

3 unchanged sentences

The following table reflects balances for operating and financing leases:

September 30, 2020

March 31, 2021

December 31, 2020

11 unchanged sentences

Total financing lease liabilities

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, 2020 were as follows:

2020 (excluding nine months ended September 30, 2020)

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 March 31, 2021 were as follows:

2021 (excluding the three months ended March 31, 2021)

Total lease payments

1 unchanged sentence

Long-Term Debt

At September 30, 2020 and December 31, 2019, long-term debt consisted of the following:

September 30,

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

First Lien Term Loan

Senior Credit Facility

Unamortized discount

Unamortized deferred financing costs

Unamortized discount

Total long-term debt

1 unchanged sentence

Long-term debt, net of current maturities

(1) The interest rate on the First Lien Term Loan was 5.5%, and 6.71% as of September 30, 2020, and December 31, 2019, respectively.

The interest rate on the Senior Credit Facility, which was entered into on March 6, 2020, was 9.5% as of September 30, 2020.

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”).

The First Lien Term Loan matures on August 17, 2022 and the Revolving Credit Facility was terminated concurrently with the Company entering into a new senior credit facility on March 6, 2020.

On March 6, 2020, t he Company and its wholly owned subsidiary, CPI Acquisition, Inc.

(now known as CPI CG Inc.) (the “Borrower”), entered into a super senior credit agreement with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P., Guggenheim, as administrative agent and collateral agent, and certain other lenders from time to time party thereto (the “Senior Credit Agreement” and together with all ancillary documents thereto, the “Senior Credit Facility”).

The Senior Credit Facility matures on May 17, 2022, and provides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal amount of $30,000, and ranks senior in priority to the Company’s First Lien Term Loan.

The Senior Credit Facility and the First Lien Term Loan are secured by substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions.

In accordance with the Senior Credit Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, at the end of each quarterly period ending on or after March 31 , 2020.

The Senior Credit Facility and the First Lien Term Loan also require prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the respective agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.

The Company was not required to make any prepayments of the First Lien Term Loan with respect to our 2019 annual financial statements.

Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%.

Prepayments made prior to February 15, 2022 are subject to a make-whole premium.

Interest rates under the First Lien Term Loan are based, at the Company’s election, on a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%.

The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur.

Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31, 2019.

If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur.

Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest, fees and other amounts payable, as well as a make-whole premium.

The proceeds of the Senior Credit Facility may be used by the Company to provide for the working capital and general corporate requirements of the Company and its subsidiaries, including to pay any fees and expenses in connection with the Senior Credit Facility and other related loan documents.

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

The variable interest rate on the ABL Revolver was 1.356% as of March 31, 2021.

The variable interest rate on the First Lien Term Loan and Senior Credit Facility was 5.5% and 9.5%, respec tively, 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 (the “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 .

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 unpa id 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 three months ended March 31, 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 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.

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, 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

1 unchanged sentence

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

The discount on the Senior Credit Facility was $1,400, and financing costs were $3,215, and both were recorded as a reduction to the long-term debt balance in the quarter ended March 31, 2020.

The net discount and debt issuance costs on the Senior Credit Facility as included within financing activities on the condensed consolidated statement of cash flows relates to cash flows during the nine months ended September 30, 2020.

Income Taxes – Continuing Operations

During the three months ended September 30, 2020, the Company recognized an income tax expense of $1,402 on a pre-tax income of $7,211, compared to an income tax expense of $2,258 on a pre-tax income of $1,629 for the prior year period.

During the nine months ended September 30, 2020, the Company recognized an income tax benefit of $2,178 on a pre-tax income of $6,696, representing an effective income tax rate of (32.5%).

For the nine months ended September 30, 2019, the Company recognized an income tax expense of $3,618 on a pre-tax income of $912, representing an effective income tax rate of 396.7%.

For the nine months ended September 30, 2020 and 2019, the effective tax rate differs from the U.S.

The debt issuance costs recorded on the Senior Notes were $7,558 and are reported as a reduction to the long-term debt balance in the quarter ended March 31, 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 March 31, 2021.

During the three months ended March 31, 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.

During the three months ended March 31, 2021, the Company recognized an income tax expense of $1,360 on a pre-tax income of $3,770, representing an effective income tax rate of 36.1%.

For the three months ended March 31, 2020, the Company recognized an income tax benefit of $465 on a pre-tax income of $1,317, representing an effective income tax rate of (35.3)%.

For the three months ended March 31, 2021 and 2020, the effective tax rate differs from the U.S.

federal statutory income tax rate as follows:

September 30,

Tax at federal statutory rate

7 unchanged sentences

The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits.

For the nine months ended September 30, 2020, the Company 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 54.7%.

In addition, the Company has adjusted the partial valuation allowance due to the limitation on the deductibility of interest expense with an income tax rate benefit during for the nine months ended September 30, 2020.

The Company’s income tax receivable on the condensed consolidated balance sheet as of September 30, 2020, relates primarily to U.S.

For the three months ended March 31, 2020 , the Company recorded an estimated 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%.

The Company’s income tax receivable on the condensed consolidated balance sheet as of March 31, 2021, relates primarily to U.S.

federal income tax receivables relating to prior tax years, including NOL carrybacks relating to the CARES Act income tax refund.

Additionally, the income tax receivable relates to tax benefits based on our pre-tax income and income tax provision through September 30, 2020.

In the nine months ended September 30, 2019, the effective tax rate differs from the federal U.S.

statutory rate primarily due to the impact of tax expense recorded related to the partial valuation allowance due to the limitation on the deductibility of interest expense.

The Company believes that it is reasonably possible that approximately $852 of its unrecognized tax benefits may be recognized in the next one year period as a result of settlement with the taxing authorities.

As such, this balance is reflected in “Accrued expenses” in the Company’s condensed consolidated balance sheet as of March 31, 2021.

Stockholders’ Deficit

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Holders of Common Stock are entitled to one vote per share.

Income (Loss) per Share

Basic and diluted income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted income (loss) per share:

Earnings per Share

Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended

Nine Months Ended

September 30,

Net income (loss) from continuing operations

Net (loss) income from discontinued operation

Net income (loss)

Net income from continuing operations

Net loss from discontinued operations

Basic weighted-average common shares outstanding

1 unchanged sentence

Diluted weighted-average common shares outstanding

Net income (loss) per share from continuing operations - Basic:

Net income (loss) per share from discontinued operations - Basic:

Net income (loss) per share - Basic:

Net income (loss) per share from continuing operations - Diluted:

Net income (loss) per share from discontinued operations - Diluted:

Net income (loss) per share - Diluted:

The Company reported a net loss for the three and nine months ended September 30, 2019.

Accordingly, the potentially dilutive effect of 840,819 stock options and 9,256 restricted stock units were excluded from the computation of diluted earnings per share as of September 30, 2019, as their inclusion would be anti-dilutive.

Earnings per share from continuing operations - Basic and Diluted:

Earnings (loss) per share from discontinued operations - Basic and Diluted:

Earnings per share - Basic and Diluted:

Commitments and Contingencies

Litigation Settlement

Refer to Note 9 “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases.

During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems.

The Company leases real property for its facilities under non-cancellable operating lease agreements.

Land and facility leases expire at various dates between 2022 and 2028 and contain various provisions for rental adjustments and renewals.

The leases typically require the Company to pay property taxes, insurance and normal maintenance costs.

Contingencies

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The Company expenses professional fees associated with litigation claims and assessments as incurred.

Derivative Suit

Heckermann v.

Montross et al.

1:17-CV-01673 (D.

Del.) (the “Derivative Suit”)

On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”).

CPI is also named as a nominal defendant.

The derivative complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs.

It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements.

The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed with prejudice all claims (the “Settlement”).

Under the Settlement, (i) all claims that were or could have been asserted in the Derivative Suit were resolved and discharged, (ii) the Company agreed to implement certain corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount.

There was no liability necessary to be recorded for the Settlement as of September 30, 2020, or December 31, 2019.

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

Smart Packaging Solutions SA v.

CPI Card Group Inc.

On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief.

In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta.

The patents all relate to antenna technology.

SPS alleges that the Company incorporates the patented technology into its products that use contactless communication.

The Company does not manufacture antennas;

it purchases certain antenna-related components from SPS and a number of other suppliers.

The Company has not been formally served with the complaint and thus has not yet filed an answer.

The Company intends to investigate and pursue its rights relating to the claims and to defend the suit vigorously.

However, no assurance can be

given that this matter will be resolved favorably.

Accordingly, it is not yet possible to reliably determine any potential liability that could result from this matter in the event of an adverse determination, and no liability has been recorded as of March 31, 2021 or December 31, 2020.

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

The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations.

2 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 liability for sales tax was estimated and recorded during the quarter ended June 30, 2020, and the Company has estimated a liability of $2,100 as of September 30, 2020, which is recorded in a ccrued expenses in the condensed consolidated balance sheets.

Due to the estimates involved in the analysis, the Company expects that the estimated liability will change in the future, and could exceed the original estimate.

Additionally, the liability may be reduced by the payment of sales tax directly to the applicable states.

A mounts that are recovered from customers will reduce the estimated expense when probable of collection.

Future changes to the liability estimate that impact the condensed consolidated statements of operations will be recorded within selling, general, and administrative expenses.

Litigation Settlement

CPI Card Group Inc.

Multi Packaging Solutions, Inc., et al.

During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc.

(together, the “Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a former employee, Multi Packaging Solutions, Inc.

(“MPS”), and two MPS employees as individuals (collectively, the “Defendants”).

On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to the Company.

The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded the gain within income from operations, in the Other segment.

The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019.

The estimated liability for sales tax as of March 31, 2021 and December 31, 2020 was $1,805 and $1,696, respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets.

The liability increased from the estimate recorded in the prior period due to ongoing activity.

In addition, as the Company remits cash to the applicable state tax authorities for historical sales tax and interest, the liability balance will decrease.

Due to the estimates involved in the analysis, the Company expects that the estimated liability will change in the future, and may exceed the current estimate.

The Company also may be subject to examination by the relevant state tax authorities.

Sales tax recovered from customers reduces the estimated expense when it is received or probable of collection .

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

Stock-Based Compensation

4 unchanged sentences

The Company had reserved 1,200,000 shares of common stock for issuance under the Omnibus Plan.

Effective March 25,

2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000.

The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance.

As of September 30, 2020, there were 365,967 shares available for grant under the Omnibus Plan.

During the nine months ended September 30, 2020, and during the fiscal year ended December 31, 2019, the Company did not grant any awards of non-qualified stock options.

As of March 31, 2021, there were 185,113 shares available for grant under the Omnibus Plan.

During the three months ended March 31, 2021, and during the fiscal year ended December 31, 2020, the Company did not grant any awards of non-qualified stock options.

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

1 unchanged sentence

Outstanding as of December 31, 2020

Outstanding as of September 30, 2020

Options vested and exercisable as of September 30, 2020

Options vested and expected to vest as of September 30, 2020

Outstanding as of March 31, 2021

Options vested and exercisable as of March 31, 2021

Options vested and expected to vest as of March 31, 2021

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

2 unchanged sentences

Unvested as of December 31, 2020

Unvested as of September 30, 2020

Unvested options as of September 30, 2020, will vest as follows:

2020 (excluding nine months ended September 30, 2020)

Total unvested options as of September 30, 2020

Unvested as of March 31, 2021

Unvested stock options of 35,496 as of March 31, 2021 will vest entirely in 2021.

The following table summarizes the changes in the number of outstanding restricted stock units:

Outstanding as of December 31, 2020

Outstanding as of September 30, 2020

During the nine months ended September 30, 2020, and during the fiscal year ended December 31, 2019, the Company did not grant any awards of restricted stock units.

Outstanding restricted stock units have vested entirely as of September 30, 2020.

On October 2, 2020, the Company granted 180,001 restricted stock units to employees.

The restricted stock unit awards contain conditions associated with continued employment or service, and generally vest two years from the date of grant.

Outstanding as of March 31, 2021

The Company granted 180,001 restricted stock units to employees on October 2, 2020.

The restricted stock unit awards contain conditions associated with continued employment or service and vest two years from the date of grant.

On the vesting date, shares of common stock will be issued to the award recipients.

During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663.

These awards settled in cash in three annual payments on the first, second and third anniversaries of the date of grant.

The cash performance units were based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant.

The Company recognized compensation expense on a straight-line basis for each annual performance period.

The cash performance units were accounted for as a liability and remeasured to fair value at the end of each reporting period.

During the nine months ended September 30, 2020, the third tranche of the cash performance units vested and the Company made a cash payment of $68 to the award recipients.

There are no outstanding cash performance units as of September 30 , 2020.

Compensation expense for the Omnibus Plan for the three months ended September 30, 2020 and 2019 was $25 and $9, respectively.

Compensation expense for the nine months ended September 30, 2020 and 2019 was $84 and $317, respectively.

As of September 30, 2020, the total unrecognized compensation expense related to unvested options, and restricted stock units is not significant, and the expense is expected to be recognized over an estimated weighted-average period of less than one year.

CPI Holdings I, Inc.

Amended and Restated 2007 Stock Option Plan

In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc.

Amended and Restated 2007 Stock Option Plan (the “Option Plan”).

Under the provisions of the Option Plan, stock options could be granted to employees, directors and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option was granted.

Following the Company’s adoption of its Omnibus Plan, no awards have been made under the Option Plan.

All options under the Option Plan were exercised, and there were no outstanding shares remaining.

As such, there were no outstanding shares remaining as of December 31, 2019 or September 30, 2020.

There was no compensation expense related to options previously granted under the Option Plan, for the three and nine months ended September 30 , 2020 and 2019.

Unvested restricted stock units of 180,001 as of March 31, 2021 will vest entirely in October 2022.

Compensation expense for the Omnibus Plan for the three months ended March 31, 2021 and 2020 was $51 and $41, respectively.

As of March 31, 2021, the total unrecognized compensation expense related to unvested options and restricted stock units is $289, which the Company expects to recognize over an estimated weighted-average period of approximately 1.5 years.

Segment Reporting

5 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 September 30, 2020, the Company’s reportable segments were as follows:

As of March 31, 2021, the Company’s reportable segments were as follows:

● Debit and Credit;

● Prepaid Debit, and

The Other category includes the Company’s corporate office and, for the three and nine months ended September 30, 2019, a less significant operating segment that historically derived its revenue from the production of financial payment cards and retail gift cards in Canada.

The Company’s Canadian subsidiary was sold on April 1, 2019.

The sale did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the Debit and Credit segment or to other service providers in 2019.

● Prepaid Debit;

Debit and Credit Segment

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services, including card personalization and fulfilment services, to card-issuing banks primarily in the United States.

Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards, and plastic and encased metal cards, and our eco-focused solutions including Second Wave payment cards featuring a core made with recovered ocean bound plastic and Earthwise “high content” plastic cards .

The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Cards Brands.

The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers.

The Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands.

Prepaid Debit Segment

The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in the United States, including tamper-evident security packaging.

This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages.

The Prepaid Debit segment facilities are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands.

The Other segment includes corporate expenses and the loss on debt extinguishment.

Performance Measures of Reportable Segments

Net Sales and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2020 and 2019, were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Net Sales and EBITDA of the Company’s reportable segments for the three months ended March 31, 2021 and 2020, were as follows:

Three Months Ended March 31,

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Debit and Credit

Prepaid Debit

The following table provides a reconciliation of total segment EBITDA from continuing operations to net income (loss) from continuing operations for the three and nine months ended September 30, 2020 and 2019:

The following table provides a reconciliation of total segment EBITDA to net income for the three months ended March 31, 2021 and 2020:

Three Months Ended

Nine Months Ended

September 30,

Total segment EBITDA from continuing operations

Total segment EBITDA

Interest, net

Income tax benefit (expense)

Income tax (expense) benefit

Depreciation and amortization

Net income (loss) from continuing operations

Net loss from discontinued operations

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments at September 30, 2020 and December 31, 2019, were as follows:

September 30, 2020

Total assets of the Company’s reportable segments at March 31, 2021 and December 31, 2020, were as follows:

March 31, 2021

December 31, 2020

2 unchanged sentences

Net Sales to Geographic Locations, Property, Equipment and Leasehold Improvements and Long-Lived Assets

Subsequent to the sale of the Company’s U.K.

Limited segment and reclassification to discontinued operations, and the sale of the Company’s Canada operations on April 1, 2019, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant.

The Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant.

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