CPI Card Group Inc. 10-Q

Item 1. Financial Statements ​ CPI Card Group Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Amounts in Thousands, Except Share and Per Share Amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ Assets ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 20,853 ​ $ 57,603 Accounts receivable, net of allowances of $ 226 and $ 289 , respectively ​ ​ 65,450 ​ ​ 54,592 Inventories ​ ​ 46,442 ​ ​ 24,796 Prepaid expenses and other current assets ​ ​ 5,097 ​ ​ 5,032 Income taxes receivable ​ ​ 116 ​ ​ 10,511 Total current assets ​ ​ 137,958 ​ ​ 152,534 Plant, equipment, leasehold improvements and operating lease right-of-use assets, net ​ ​ 38,347 ​ ​ 39,403 Intangible assets, net ​ ​ 22,821 ​ ​ 26,207 Goodwill ​ ​ 47,150 ​ ​ 47,150 Other assets ​ ​ 5,999 ​ ​ 857 Total assets ​ $ 252,275 ​ $ 266,151 Liabilities and stockholders’ deficit ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 18,795 ​ $ 18,883 Accrued expenses ​ ​ 32,097 ​ ​ 28,149 Current portion of long-term debt ​ ​ — ​ ​ 8,027 Deferred revenue and customer deposits ​ ​ 1,029 ​ ​ 1,868 Total current liabilities ​ ​ 51,921 ​ ​ 56,927 Long-term debt ​ ​ 303,251 ​ ​ 328,681 Deferred income taxes ​ ​ 6,657 ​ ​ 7,409 Other long-term liabilities ​ ​ 12,979 ​ ​ 11,171 Total liabilities ​ ​ 374,808 ​ ​ 404,188 Commitments and contingencies (Note 14) ​ ​ ​ ​ ​ ​ Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at September 30, 2021 and December 31, 2020 ​ ​ - ​ ​ - Stockholders’ deficit: ​ ​ ​ ​ ​ ​ Common stock; $ 0.001 par value— 100,000,000 shares authorized; 11,238,994 and 11,230,482 shares issued and outstanding at September 30, 2021 and December 31, 2020 ​ ​ 11 ​ ​ 11 Capital deficiency ​ ​ ( 111,622 ) ​ ​ ( 111,858 ) Accumulated loss ​ ​ ( 10,922 ) ​ ​ ( 26,190 ) Total stockholders’ deficit ​ ​ ( 122,533 ) ​ ​ ( 138,037 ) Total liabilities and stockholders’ deficit ​ $ 252,275 ​ $ 266,151 ​ See accompanying notes to condensed consolidated financial statements ​ ​ ​ 3 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income (Amounts in Thousands, Except Share and Per Share Amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2021 2020 2021 2020 Net sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products ​ $ 52,276 ​ $ 43,462 ​ $ 146,445 ​ $ 125,040 Services ​ ​ 47,326 ​ ​ 39,240 ​ ​ 135,468 ​ ​ 103,009 Total net sales ​ ​ 99,602 ​ ​ 82,702 ​ ​ 281,913 ​ ​ 228,049 Cost of sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products (exclusive of depreciation and amortization shown below) ​ ​ 31,493 ​ ​ 27,490 ​ ​ 86,708 ​ ​ 79,780 Services (exclusive of depreciation and amortization shown below) ​ ​ 28,368 ​ ​ 22,133 ​ ​ 77,975 ​ ​ 60,986 Depreciation and amortization ​ ​ 2,056 ​ ​ 2,472 ​ ​ 6,736 ​ ​ 7,938 Total cost of sales ​ ​ 61,917 ​ ​ 52,095 ​ ​ 171,419 ​ ​ 148,704 Gross profit ​ ​ 37,685 ​ ​ 30,607 ​ ​ 110,494 ​ ​ 79,345 Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative (exclusive of depreciation and amortization shown below) ​ ​ 19,469 ​ ​ 15,617 ​ ​ 55,363 ​ ​ 48,893 Depreciation and amortization ​ ​ 1,514 ​ ​ 1,508 ​ ​ 4,873 ​ ​ 4,498 Total operating expenses ​ ​ 20,983 ​ ​ 17,125 ​ ​ 60,236 ​ ​ 53,391 Income from operations ​ ​ 16,702 ​ ​ 13,482 ​ ​ 50,258 ​ ​ 25,954 Other expense, net: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest, net ​ ​ ( 7,183 ) ​ ​ ( 6,298 ) ​ ​ ( 23,196 ) ​ ​ ( 19,158 ) Other income (expense), net ​ ​ ( 6 ) ​ ​ 27 ​ ​ 23 ​ ​ ( 8 ) Loss on debt extinguishment ​ ​ — ​ ​ — ​ ​ ( 5,048 ) ​ ​ ( 92 ) Total other expense, net ​ ​ ( 7,189 ) ​ ​ ( 6,271 ) ​ ​ ( 28,221 ) ​ ​ ( 19,258 ) Income from continuing operations before income taxes ​ ​ 9,513 ​ ​ 7,211 ​ ​ 22,037 ​ ​ 6,696 Income tax (expense) benefit ​ ​ ( 2,887 ) ​ ​ ( 1,402 ) ​ ​ ( 6,769 ) ​ ​ 2,178 Net income from continuing operations ​ ​ 6,626 ​ ​ 5,809 ​ ​ 15,268 ​ ​ 8,874 Net loss from discontinued operations, net of tax (Note 1) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 30 ) Net income ​ $ 6,626 ​ $ 5,809 ​ $ 15,268 ​ $ 8,844 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share from continuing operations: ​ $ 0.59 ​ $ 0.52 ​ $ 1.36 ​ $ 0.79 Diluted earnings per share from continuing operations: ​ $ 0.56 ​ $ 0.52 ​ $ 1.30 ​ $ 0.79 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share: ​ $ 0.59 ​ $ 0.52 ​ $ 1.36 ​ $ 0.79 Diluted earnings per share: ​ $ 0.56 ​ $ 0.52 ​ $ 1.30 ​ $ 0.79 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average shares outstanding: ​ ​ 11,238,678 ​ ​ 11,230,028 ​ ​ 11,234,054 ​ ​ 11,228,116 Diluted weighted-average shares outstanding: ​ ​ 11,799,321 ​ ​ 11,231,821 ​ ​ 11,755,381 ​ ​ 11,235,098 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 6,626 ​ $ 5,809 ​ $ 15,268 ​ $ 8,844 Total comprehensive income ​ $ 6,626 ​ $ 5,809 ​ $ 15,268 ​ $ 8,844 See accompanying notes to condensed consolidated financial statements ​ 4 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders’ Deficit (Dollars in Thousands, Excludes per Share Amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total June 30, 2021 11,237,056 ​ ​ 11 ​ ​ ( 111,726 ) ​ ​ ( 17,548 ) ​ $ ( 129,263 ) Stock-based compensation ​ ​ ​ ​ — ​ ​ 116 ​ ​ — ​ ​ 116 Stock option exercises ​ 1,938 ​ ​ — ​ ​ ( 12 ) ​ ​ — ​ ​ ( 12 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ ​ ​ ​ — ​ ​ 6,626 ​ ​ 6,626 September 30, 2021 11,238,994 ​ $ 11 ​ $ ( 111,622 ) ​ $ ( 10,922 ) ​ $ ( 122,533 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total December 31, 2020 ​ 11,230,482 ​ ​ 11 ​ ​ ( 111,858 ) ​ ​ ( 26,190 ) ​ $ ( 138,037 ) Stock-based compensation ​ ​ ​ ​ — ​ ​ 214 ​ ​ — ​ ​ 214 Stock option exercises ​ 8,512 ​ ​ — ​ ​ 22 ​ ​ — ​ ​ 22 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ — ​ ​ — ​ ​ 15,268 ​ ​ 15,268 September 30, 2021 ​ 11,238,994 ​ $ 11 ​ $ ( 111,622 ) ​ $ ( 10,922 ) ​ $ ( 122,533 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total June 30, 2020 ​ 11,229,819 ​ ​ 11 ​ ​ ( 111,935 ) ​ ​ ( 39,284 ) ​ $ ( 151,208 ) Shares issued under stock-based compensation plans ​ 663 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation ​ ​ ​ ​ — ​ ​ 25 ​ ​ — ​ ​ 25 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ — ​ ​ — ​ ​ 5,809 ​ ​ 5,809 September 30, 2020 ​ 11,230,482 ​ $ 11 ​ $ ( 111,910 ) ​ $ ( 33,475 ) ​ $ ( 145,374 ) ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total December 31, 2019 ​ 11,224,191 ​ ​ 11 ​ ​ ( 111,988 ) ​ ​ ( 42,319 ) ​ $ ( 154,296 ) Shares issued under stock-based compensation plans ​ 6,291 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation ​ ​ ​ ​ — ​ ​ 78 ​ ​ — ​ ​ 78 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ ​ ​ — ​ ​ — ​ ​ 8,844 ​ ​ 8,844 September 30, 2020 ​ 11,230,482 ​ $ 11 ​ $ ( 111,910 ) ​ $ ( 33,475 ) ​ $ ( 145,374 ) ​ See accompanying notes to condensed consolidated financial statements ​ ​ 5 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Amounts in Thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2021 2020 Operating activities ​ ​ ​ ​ ​ ​ Net income $ 15,268 ​ $ 8,844 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Loss from discontinued operations ​ ​ — ​ ​ 30 Depreciation and amortization expense ​ ​ 11,609 ​ ​ 12,436 Stock-based compensation expense ​ ​ 214 ​ ​ 84 Amortization of debt issuance costs and debt discount ​ ​ 1,880 ​ ​ 2,503 Loss on debt extinguishment ​ ​ 5,048 ​ ​ 92 Deferred income taxes ​ ​ ( 752 ) ​ ​ 290 Other, net ​ ​ 210 ​ ​ 1,253 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 10,846 ) ​ ​ ( 16,165 ) Inventories ​ ​ ( 21,831 ) ​ ​ ( 1,109 ) Prepaid expenses and other assets ​ ​ ( 3,340 ) ​ ​ 49 Income taxes, net ​ ​ 10,603 ​ ​ ( 3,630 ) Accounts payable ​ ​ 83 ​ ​ 921 Accrued expenses ​ ​ 6,419 ​ ​ 4,112 Deferred revenue and customer deposits ​ ​ ( 843 ) ​ ​ 417 Other liabilities ​ ​ 793 ​ ​ 81 Cash provided by operating activities - continuing operations ​ ​ 14,515 ​ ​ 10,208 Cash used in operating activities - discontinued operations ​ ​ — ​ ​ ( 30 ) Investing activities ​ ​ ​ ​ ​ ​ Capital expenditures for plant, equipment and leasehold improvements ​ ​ ( 4,827 ) ​ ​ ( 3,320 ) Other ​ ​ 156 ​ ​ — Cash used in investing activities ​ ​ ( 4,671 ) ​ ​ ( 3,320 ) Financing activities ​ ​ ​ ​ ​ ​ Principal payments on First Lien Term loan ​ ​ ( 312,500 ) ​ ​ — Principal payments on Senior Credit Facility ​ ​ ( 30,000 ) ​ ​ — Principal payments on ABL Revolver ​ ​ ( 15,000 ) ​ ​ — Proceeds from Senior Notes ​ ​ 310,000 ​ ​ — Proceeds from ABL Revolver, net of discount ​ ​ 14,750 ​ ​ — Proceeds from Senior Credit Facility, net of discount ​ ​ — ​ ​ 29,100 Proceeds from exercises of stock options ​ ​ 34 ​ ​ — Taxes withheld and paid on stock compensation ​ ​ ( 12 ) ​ ​ — Debt issuance costs ​ ​ ( 9,452 ) ​ ​ ( 2,507 ) Payments on debt extinguishment ​ ​ ( 2,685 ) ​ ​ — Payments on finance lease obligations ​ ​ ( 1,725 ) ​ ​ ( 1,782 ) Cash (used in) provided by financing activities ​ ​ ( 46,590 ) ​ ​ 24,811 Effect of exchange rates on cash ​ ​ ( 4 ) ​ ​ ( 2 ) Net (decrease) increase in cash and cash equivalents ​ ​ ( 36,750 ) ​ ​ 31,667 Cash and cash equivalents, beginning of period ​ ​ 57,603 ​ ​ 18,682 Cash and cash equivalents, end of period $ 20,853 ​ $ 50,349 Supplemental disclosures of cash flow information ​ ​ ​ ​ ​ ​ Cash paid (refunded) during the period for: ​ ​ ​ ​ ​ ​ Interest $ 22,107 ​ $ 17,454 Income taxes paid ​ $ 4,708 ​ $ 1,205 Income taxes (refunded) $ ( 9,846 ) ​ $ ( 259 ) Right-to-use assets obtained in exchange for lease obligations: ​ ​ ​ ​ ​ ​ Operating leases ​ $ 3,666 ​ $ 141 Financing leases ​ $ 484 ​ $ 1,618 Accounts payable, and accrued expenses for capital expenditures for plant, equipment and leasehold improvements ​ $ 1,005 ​ $ 127 See accompanying notes to condensed consolidated financial statements 6 Table of Contents CPI Card Group Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated) (Unaudited) ​ 1. Business Overview and Summary of Significant Accounting Policies ​ Business Overview ​ CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of “Financial Payment Cards,” which the Company defines as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac in Canada). The Company defines “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands but not linked to a traditional bank account. CPI also offers an instant card issuance solution, which provides banks the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. CPI’s leading network of high-security production facilities allows the Company to optimize its solutions offerings and effectively meet customers’ needs. COVID-19 Update The COVID-19 pandemic has impacted economies and societies globally. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain. The health and safety of CPI employees remain paramount, and the Company continues to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention, as well as various state and local executive orders, health orders and guidelines.  All of CPI’s operations have remained open and continue to provide direct and essential support to the financial services industry. ​ The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs for, certain raw materials and components, as well as a global chip shortage, which are expected to continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints. The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays. On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) filed an Emergency Temporary Standard (“ETS”) with the Office of the Federal Register that will require employers with 100 or more employees to require their employees to be fully vaccinated with a COVID-19 vaccine or to produce a negative COVID-19 test result on at least a weekly basis, along with certain other requirements. Based on the pre-publication version of the ETS, the Company believes the proposed rule would apply to the Company. Compliance with the ETS could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company. ​ The Company expects the labor and supply chain challenges described above, and the associated costs, to continue to increase through the fourth quarter of 2021 and beyond. The Company may not be able to pass all of these costs through to its customers. The Company has also experienced increased demand for its products and services. The Company is experiencing increased production lead times, which it believes is likely to continue in the fourth quarter of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers. The Company will continue to monitor and respond as the situation evolves. ​ On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit 7 Table of Contents refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property. Refer to Note 11, Income Taxes for a discussion of the CARES Act income tax impacts on the Company. In addition, CPI deferred employer social security payments in 2020 in accordance with the CARES Act, which are allowed to be paid in two installments in 2021 and 2022. While the Company is participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to change. ​ Basis of Presentation ​ Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The condensed consolidated balance sheet as of December 31, 2020 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. ​ Discontinued Operations ​ On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produced retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provided personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations in accordance with GAAP. The Company did not retain significant continuing involvement with the discontinued operations subsequent to the disposal. The impact of the discontinued operations was insignificant to the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2021 and 2020. ​ Use of Estimates ​ Management uses estimates and assumptions relating to the reporting of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures in the preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions. Actual results could differ from those estimates. Recent Accounting Standards ​ Recently Issued Accounting Standards ​ In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates. Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted. The Company has elected not to early adopt this accounting standard in the current fiscal year 2021. The Company is evaluating the impact of adoption of this standard and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position and results of operations. ​ Adjustment of Prior Period Financial Statements for Immaterial Items In accordance with Securities and Exchange Commission Staff Accounting Bulletin 99, Materiality, codified in Accounting Standards Codification (“ASC”) 250, Presentation of Financial Statements , during the year ended December 31, 2020, the Company corrected two immaterial items relating to estimated sales tax expense and depreciation expense that related to prior periods. The condensed consolidated financial statements and other financial information for the 8 Table of Contents prior year period reflect the corrected balances which included sales tax expense in Selling, General and Administrative expenses (“SG&A”) of $ 293 and depreciation expense of $ 124 for the nine months ended September 30, 2020. Refer to Note 14, Commitments and Contingencies for additional discussion of the estimated sales tax liability recorded in “Accrued expenses” on the condensed consolidated balance sheet. ​ 2. Net Sales ​ The Company disaggregates its net sales by major source as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2021 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 52,292 ​ $ 23,829 ​ $ 76,121 Prepaid Debit ​ ​ — ​ ​ 23,498 ​ ​ 23,498 Intersegment eliminations ​ ​ ( 16 ) ​ ( 1 ) ​ ( 17 ) Total ​ $ 52,276 ​ $ 47,326 ​ $ 99,602 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2021 ​ ​ ​ Products ​ Services ​ Total Debit and Credit ​ ​ 146,651 ​ ​ 72,147 ​ ​ 218,798 Prepaid Debit ​ ​ — ​ ​ 63,339 ​ ​ 63,339 Intersegment eliminations ​ ​ ( 206 ) ​ ​ ( 18 ) ​ ​ ( 224 ) Total ​ $ 146,445 ​ $ 135,468 ​ $ 281,913 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2020 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 44,056 ​ $ 18,654 ​ $ 62,710 Prepaid Debit ​ ​ — ​ ​ 20,604 ​ ​ 20,604 Intersegment eliminations ​ ​ ( 594 ) ​ ( 18 ) ​ ( 612 ) Total ​ $ 43,462 ​ $ 39,240 ​ $ 82,702 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2020 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 126,507 ​ $ 54,348 ​ $ 180,855 Prepaid Debit ​ ​ — ​ ​ 48,680 ​ ​ 48,680 Intersegment eliminations ​ ​ ( 1,467 ) ​ ( 19 ) ​ ( 1,486 ) Total ​ $ 125,040 ​ $ 103,009 ​ $ 228,049 ​ Products Net Sales “Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including contact-EMV ® , contactless dual-interface EMV, contactless and magnetic stripe cards, our eco-focused solutions, including Second Wave ® and Earthwise TM cards made with upcycled plastic , metal cards, private label credit cards and retail gift cards. Card@Once ® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. EMV ® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMV Co, LLC . ​ 9 Table of Contents Services Net Sales ​ Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, including CPI On-Demand ® personalization, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software-as-a-service personalization of instant issuance debit and credit cards. The Company also generates “Services” net sales from usage-fees generated from the Company’s patented card design software, known as 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 The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASC 606, Revenue from Contracts with Customers , is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature. ​ ​ ​ 3. Accounts Receivable ​ Accounts receivable consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 ​ ​ ​ ​ ​ ​ Trade accounts receivable $ 53,668 $ 44,305 Unbilled accounts receivable ​ 12,008 ​ 10,576 ​ ​ 65,676 ​ 54,881 Less allowance for doubtful accounts ​ ​ ( 226 ) ​ ​ ( 289 ) ​ ​ $ 65,450 ​ $ 54,592 ​ ​ 4 . Inventories ​ Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 ​ ​ ​ ​ ​ ​ ​ Raw materials $ 43,734 $ 23,009 Finished goods ​ 5,741 ​ 4,635 Inventory reserve ​ ​ ( 3,033 ) ​ ​ ( 2,848 ) ​ $ 46,442 $ 24,796 ​ ​ 10 Table of Contents 5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets ​ Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 ​ ​ ​ ​ ​ ​ ​ Machinery and equipment $ 60,450 $ 55,459 Machinery and equipment under financing leases ​ ​ 7,676 ​ ​ 9,974 Furniture, fixtures and computer equipment ​ 4,583 ​ 4,410 Leasehold improvements ​ 13,967 ​ 15,083 Construction in progress ​ 2,264 ​ 2,386 ​ ​ ​ 88,940 ​ ​ 87,312 Less accumulated depreciation and amortization ​ ( 59,853 ) ​ ( 55,092 ) Operating lease right-of-use assets, net of accumulated amortization ​ 9,260 ​ 7,183 ​ $ 38,347 $ 39,403 ​ Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,482 and $ 2,831 for the three months ended September 30, 2021 and 2020, respectively, and $ 8,223 and $ 8,989 for the nine months ended September 30, 2021 and 2020, respectively. ​ Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, Financing and Operating Leases. ​ 6. Goodwill and Other Intangible Assets ​ The Company reports all of its goodwill in the Debit and Credit segment at September 30, 2021 and December 31, 2020. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of September 30 , 2021. ​ Intangible assets consist of customer relationships, technology and software, and trademarks. Intangible amortization expense was $ 1,088 and $ 1,149 for the three months ended September 30, 2021 and 2020, respectively, and $ 3,386 and $ 3,447 for the nine months ended September 30, 2021 and 2020, respectively. ​ At September 30, 2021 and December 31, 2020, intangible assets, excluding goodwill, were comprised of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 ​ December 31, 2020 ​ Weighted Average ​ ​ ​ ​ Accumulated ​ Net Book ​ ​ ​ ​ Accumulated ​ Net Book ​ Life (Years) Cost Amortization Value Cost Amortization Value ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Customer relationships 17.2 ​ $ 55,454 ​ $ ( 34,600 ) ​ $ 20,854 ​ $ 55,454 ​ ​ ( 32,141 ) ​ $ 23,313 Technology and software 8 ​ 7,101 ​ ​ ( 6,517 ) ​ 584 ​ 7,101 ​ ​ ( 5,881 ) ​ ​ 1,220 Trademarks 8.7 ​ 3,330 ​ ( 1,947 ) ​ 1,383 ​ 3,330 ​ ​ ( 1,656 ) ​ ​ 1,674 Intangible assets subject to amortization ​ ​ $ 65,885 ​ $ ( 43,064 ) ​ $ 22,821 ​ $ 65,885 ​ $ ( 39,678 ) ​ $ 26,207 ​ The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2021 was as follows: ​ ​ ​ ​ ​ 2021 (excluding the nine months ended September 30, 2021) ​ $ 966 2022 3,867 2023 ​ ​ 3,867 2024 ​ ​ 3,630 2025 ​ ​ 3,440 Thereafter ​ ​ 7,051 ​ $ 22,821 ​ 11 Table of Contents ​ 7. Fair Value of Financial Instruments ​ Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: ​ ● Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. ​ ● Level 2— Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. ​ ● Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. ​ The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the condensed consolidated balance sheets were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Estimated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Value as of ​ Fair Value as of ​ Fair Value Measurement at September 30, 2021 ​ ​ September 30, ​ September 30, ​ (Using Fair Value Hierarchy) ​ ​ 2021 ​ 2021 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes ​ $ 310,000 ​ $ 337,993 ​ $ — ​ $ 337,993 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Estimated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Value as of ​ Fair Value as of ​ Fair Value Measurement at December 31, 2020 ​ ​ December 31, ​ December 31, ​ (Using Fair Value Hierarchy) ​ ​ 2020 ​ 2020 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ First Lien Term Loan ​ $ 312,500 $ 287,500 ​ $ — $ 287,500 ​ $ — Senior Credit Facility ​ ​ 30,000 ​ ​ 30,000 ​ $ — ​ $ — ​ $ 30,000 ​ The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, Long-Term Debt) was based on bank quotes. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value. ​ 8. Accrued Expenses ​ Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 ​ ​ ​ ​ ​ ​ Accrued payroll and related employee expenses $ 8,018 $ 4,938 Accrued employee performance bonus ​ 7,194 ​ 4,873 Employer payroll tax, including social security deferral ​ 3,171 ​ 3,034 Accrued rebates ​ ​ 1,510 ​ ​ 1,178 Sales tax liability ​ ​ 1,228 ​ ​ 1,696 Accrued interest ​ ​ 1,197 ​ ​ 4,145 Operating and financing lease liability (current portion) ​ ​ 3,549 ​ ​ 4,407 Income taxes payable ​ ​ 2,015 ​ ​ - Other ​ ​ 4,215 ​ ​ 3,878 Total accrued expenses ​ $ 32,097 ​ $ 28,149 12 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ The estimated sales tax liability is further described in Note 14, Commitments and Contingencies and Note 1, Business Overview and Summary of Significant Accounting Policies. ​ 9. Financing and Operating Leases ​ Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets. ​ The components of operating and finance lease costs were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Three Months Ended ​ September 30, 2021 September 30, 2020 Operating lease costs $ 538 ​ $ 664 Variable lease costs ​ 181 ​ ​ 175 Short-term operating lease costs ​ 122 ​ ​ - Total expense from operating leases $ 841 ​ $ 839 ​ ​ ​ ​ ​ ​ Finance lease cost: ​ ​ ​ ​ ​ Right-of-use amortization expense ​ 256 ​ ​ 326 Interest on lease liabilities ​ 92 ​ ​ 110 Total financing lease costs $ 348 ​ $ 436 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ Nine Months Ended ​ September 30, 2021 September 30, 2020 Operating lease costs $ 1,580 ​ $ 2,006 Variable lease costs ​ 509 ​ ​ 524 Short-term operating lease costs ​ 416 ​ ​ - Total expense from operating leases $ 2,505 ​ $ 2,530 ​ ​ ​ ​ ​ ​ Finance lease cost: ​ ​ ​ ​ ​ Right-of-use amortization expense ​ 751 ​ ​ 982 Interest on lease liabilities ​ 297 ​ ​ 356 Total financing lease costs $ 1,048 ​ $ 1,338 ​ 13 Table of Contents The following table reflects balances for operating and financing leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 Operating leases ​ ​ ​ ​ ​ Operating lease right-of-use assets, net of amortization $ 9,260 ​ $ 7,183 ​ ​ ​ ​ ​ ​ Operating lease liability (current) $ 1,781 ​ $ 2,267 Long-term operating liability ​ 8,034 ​ ​ 5,491 Total operating lease liabilities $ 9,815 ​ $ 7,758 ​ ​ ​ ​ ​ ​ Financing leases ​ ​ ​ ​ ​ Property, equipment and leasehold improvements $ 7,676 ​ $ 9,974 Accumulated depreciation ​ ( 2,188 ) ​ ​ ( 2,422 ) Total property, equipment and leasehold improvements, net $ 5,488 ​ $ 7,552 ​ ​ ​ ​ ​ ​ Financing lease liability (current) $ 1,768 ​ $ 2,140 Long-term financing liability ​ 2,183 ​ ​ 3,052 Total financing lease liabilities $ 3,951 ​ $ 5,192 ​ ​ ​ ​ ​ ​ ​ ​ Finance and operating lease ROU assets are recorded in “Plant, equipment, leasehold improvements, and operating lease right-of-use assets, net.” Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term liabilities.” ​ Future cash payment with respect to lease obligations as of September 30, 2021 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating ​ ​ Financing ​ ​ ​ Lease ​ ​ Leases ​ ​ ​ ​ ​ ​ ​ 2021 (excluding the nine months ended September 30, 2021) ​ ​ 747 ​ ​ 518 2022 ​ ​ 2,377 ​ ​ 2,136 2023 ​ ​ 2,250 ​ ​ 1,188 2024 ​ ​ 2,049 ​ ​ 390 2025 ​ ​ 1,477 ​ ​ 132 Thereafter ​ ​ 3,706 ​ ​ 55 Total lease payments ​ ​ 12,606 ​ ​ 4,419 Less imputed interest ​ ​ ( 2,791 ) ​ ​ ( 468 ) Total ​ $ 9,815 ​ $ 3,951 ​ ​ ​ ​ ​ ​ ​ ​ ​ 10. Long-Term Debt ​ At September 30, 2021 and December 31, 2020, long-term debt consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest ​ September 30, December 31, ​ ​ Rate (1) ​ ​ 2021 ​ 2020 Senior Notes ​ 8.625 % ​ $ 310,000 ​ $ — ABL Revolver ​ — % ​ ​ — ​ ​ — First Lien Term Loan 5.500 % ​ ​ — ​ ​ 312,500 Senior Credit Facility ​ 9.500 % ​ ​ — ​ ​ 30,000 Unamortized deferred financing costs ​ ​ ​ ​ ( 6,749 ) ​ ( 3,804 ) Unamortized discount ​ ​ ​ ​ ​ — ​ ​ ( 1,988 ) Total long-term debt ​ ​ ​ ​ $ 303,251 ​ $ 336,708 Less current maturities ​ ​ ​ ​ ​ — ​ ​ ( 8,027 ) Long-term debt, net of current maturities ​ ​ ​ ​ $ 303,251 ​ $ 328,681 14 Table of Contents (1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the First Lien Term Loan and Senior Credit Facility was 5.5 % and 9.5 % , 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, dated as of August 17, 2015 as amended, among the Company, the borrower, the lenders party thereto, GLAS USA LLC, as administrative agent and GLAS Americas LLC, as collateral agent (the “First Lien Term Loan”) . ​ Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $ 15,000 under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company had outstanding borrowings of $ 30,000 , plus accrued and 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 nine months ended September 30, 2021. ​ During the second quarter of 2021, the Company used $ 15,000 of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of September 30, 2021. ​ The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021. The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25 % to the LIBOR Rate plus 1.75 % , or the Base Rate plus 0.25 % to the Base Rate plus 0.75 % , based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Base Rate as defined in the ABL Revolver is the greater of the Federal Funds Rate plus 0.5 % , the LIBOR Rate for a one month interest period plus 1.0 % , or the Wells Fargo Bank, National Association “prime rate”. The Company may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375 % to 0.50 % per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month. ​ The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than the Issuer) that guarantee the ABL Revolver, and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than the Issuer and excluded subsidiaries), and is secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. ​ The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements. ​ 15 Table of Contents The Company may have obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among Issuer, the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. ​ As of December 31, 2020, $ 8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan. The Company offered to prepay the balance, pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, which resulted in a required principal prepayment of $ 7,754 to the First Lien Term Loan lenders on March 4, 2021, plus accrued interest thereon. ​ Deferred Financing Costs and Discount ​ Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The debt issuance costs recorded on the Senior Notes were $ 7,558 and are reported as a reduction to the long-term debt balance as of September 30, 2021. The net discount and debt issuance costs on the ABL Revolver were $ 2,144 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of September 30, 2021. ​ During the nine months ended September 30, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan. ​ ​ 11. Income Taxes ​ During the three months ended September 30, 2021, the Company recognized an income tax expense of $ 2,887 on pre-tax income of $ 9,513 , compared to income tax expense of $ 1,402 on pre-tax income of $ 7,211 for the prior year period. During the nine months ended September 30, 2021, the Company recognized income tax expense of $ 6,769 on pre-tax income of $ 22,037 , representing an effective income tax rate of 30.7 %. For the nine months ended September 30, 2020, the Company recognized an income tax benefit of $ 2,178 on pre-tax income from continuing operations of $ 6,696 , representing an effective income tax rate of ( 32.5 %). ​ For the nine months ended September 30, 2021 and 2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ 2021 2020 ​ Tax at federal statutory rate ​ 21.0 % 21.0 % State taxes, net ​ 6.2 ​ 7.4 ​ Valuation allowance ​ 0.0 ​ ( 18.1 ) ​ Permanent items ​ 2.8 ​ 7.2 ​ Tax benefit CARES Act ​ 0.0 ​ ( 54.7 ) ​ Other ​ 0.7 ​ 4.7 ​ Effective income tax rate ​ 30.7 % ( 32.5 ) % ​ During the nine months ended September 30, 2021, the Company received cash income tax refunds of $ 9,846 related primarily to U.S. federal income taxes for prior tax years, including net operating loss (“NOL”) carrybacks relating to the CARES Act. In March 2020, the CARES Act was signed into law. The CARES Act allowed companies with NOLs originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminated the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increased the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allowed for the acceleration of refunds of alternative 16 Table of Contents minimum tax credits. For the nine months ended September 30, 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 54.7 % . The Company believes that it is reasonably possible that approximately $ 208 of its unrecognized tax benefits may be recognized within a year as a result of settlement with the taxing authorities. As such, this balance is reflected in “Accrued Expenses” in the Company’s consolidated balance sheet as of September 30, 2021. 12. Stockholders’ Deficit ​ Common Stock ​ Common Stock has a par value of $ 0.001 per share. Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to one vote per share. ​ 13. 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, ​ September 30, ​ 2021 2020 2021 ​ 2020 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income from continuing operations ​ ​ 6,626 ​ ​ 5,809 ​ ​ 15,268 ​ ​ 8,874 Net loss from discontinued operations ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 30 ) Net income ​ $ 6,626 ​ $ 5,809 ​ $ 15,268 ​ $ 8,844 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average common shares outstanding ​ 11,238,678 ​ 11,230,028 ​ 11,234,054 ​ 11,228,116 Dilutive shares ​ ​ 560,643 ​ ​ 1,793 ​ ​ 521,327 ​ ​ 6,982 Diluted weighted-average common shares outstanding ​ ​ 11,799,321 ​ ​ 11,231,821 ​ ​ 11,755,381 ​ ​ 11,235,098 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share from continuing operations: ​ ​ 0.59 ​ ​ 0.52 ​ ​ 1.36 ​ ​ 0.79 Basic earnings per share from discontinued operations: ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 0.00 ) Basic earnings per share: ​ $ 0.59 ​ $ 0.52 ​ $ 1.36 ​ $ 0.79 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share from continuing operations: ​ ​ 0.56 ​ ​ 0.52 ​ ​ 1.30 ​ ​ 0.79 Diluted earnings per share from discontinued operations: ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 0.00 ) Diluted earnings per share: ​ ​ 0.56 ​ $ 0.52 ​ $ 1.30 ​ $ 0.79 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 14. Commitments and Contingencies ​ Commitments 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- 17 Table of Contents 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 In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of expense. The Company expenses professional fees associated with litigation claims and assessments as incurred. 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 was served with the complaint and is in the process of preparing 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. 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 September 30, 2021. ​ In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. ​ Estimated Sales Tax Liability The Company has continued to evaluate a state sales tax liability analysis for states in which it has economic nexus and to collect exemption documentation from its customers. It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states. The estimated liability for sales tax as of September 30, 2021 and December 31, 2020 was $ 1,228 and $ 1,696 , 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. The Company may be subject to examination by the relevant state tax authorities. Due to the estimates involved in the analysis, the liability may change in the future. The Company is unable to predict a range of additional loss that is reasonably possible. 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 SG&A. During the nine months ended September 30, 2021, the Company recorded a sales tax benefit of $ 465 within SG&A for current activity relating to sales tax recovered from customers and net changes to the estimated liability. ​ 15. Stock-Based Compensation ​ CPI Card Group Inc. Omnibus Incentive Plan ​ In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors and directors. 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 18 Table of Contents 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 September 30, 2021, there were 970,832 shares of Common Stock available for grant under the Omnibus Plan. During the nine months ended September 30, 2021, the Company granted 115,659 awards of non-qualified stock options, and during the fiscal year ended December 31, 2020, the Company did no t grant any awards of non-qualified stock options. The following is a summary of the activity in outstanding stock options under the Omnibus Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ Weighted- ​ Average ​ ​ ​ ​ Average ​ Remaining ​ ​ ​ ​ Exercise ​ Contractual Term ​ ​ Options ​ Price ​ (in Years) Outstanding as of December 31, 2020 706,372 ​ $ 15.20 ​ 6.44 Granted ​ 115,659 ​ ​ 29.62 ​ 6.98 Exercised ​ ( 10,513 ) ​ ​ 5.25 ​ ​ Forfeited ​ ( 19,381 ) ​ ​ 23.03 ​ ​ Outstanding as of September 30, 2021 ​ 792,137 ​ $ 17.35 ​ 5.65 Options vested and exercisable as of September 30, 2021 ​ 676,478 ​ $ 15.25 ​ 5.42 Options vested and expected to vest as of September 30, 2021 ​ 792,137 ​ $ 17.35 ​ 5.65 ​ The following is a summary of the activity in unvested stock options under the Omnibus Plan: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-Average ​ Options Grant-Date Fair Value ​ ​ ​ ​ ​ ​ Unvested as of December 31, 2020 45,319 $ 1.10 Granted ​ 115,659 ​ ​ 17.43 Vested ( 45,319 ) ​ 1.10 Unvested as of September 30, 2021 115,659 ​ $ 17.43 ​ Unvested stock options of 115,659 as of September 30, 2021 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, 2021, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: ​ ​ ​ ​ ​ ​ ​ Nine Months ​ ​ Ended ​ ​ September 30 ​ ​ 2021 Expected term in years (1) ​ 4.3 ​ Volatility (2) ​ 78.6 % Risk-free interest rate (3) ​ 0.7 % Dividend yield (4) ​ — % ​ (1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards. (2) Volatility was based on a weighting of the Company’s historical volatility and its peer group, which is comprised of companies with similar industry, size, and financial leverage. (3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected option term described above. (4) The Company’s expected annual dividend yield was zero based on current practice. ​ 19 Table of Contents The following table summarizes the changes in the number of outstanding restricted stock units: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted- ​ ​ ​ ​ ​ ​ ​ ​ Average ​ ​ ​ ​ ​ Weighted- ​ Remaining ​ ​ Average ​ Amortization ​ ​ ​ ​ Grant-Date ​ Period ​ ​ Shares ​ Fair Value ​ (in Years) Outstanding as of December 31, 2020 180,001 ​ $ 2.12 ​ ​ ​ Granted ​ 98,622 ​ ​ 29.62 ​ ​ ​ Forfeited ( 22,485 ) ​ ​ 2.12 ​ ​ ​ Outstanding as of September 30, 2021 256,138 ​ $ 12.71 ​ 1.77 ​ ​ The Company granted 98,622 restricted stock units to employees and directors on September 21, 2021, and 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. The restricted stock units granted in 2021 are expected to either vest ratably over a two-year period on each anniversary of the grant date or vest entirely on the year-and-a-half anniversary of the grant date . The restricted stock units granted in 2020 are expected to vest on the two-year anniversary of the date of grant. 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 September 30, 2021 and 2020 was $ 116 and $ 25 , respectively. Compensation expense for the Omnibus Plan for the nine months ended September 30, 2021 and 2020 was $ 214 and $ 84 , respectively. As of September 30, 2021, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 5,015 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.9 years. ​ ​ 16. 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. ​ EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, “EBITDA” is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments. ​ As of September 30, 2021, the Company’s reportable segments were as follows: ​ ● Debit and Credit; ● Prepaid Debit; and ● Other. ​ 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 cards made with upcycled plastic . 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 20 Table of Contents 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 facilities are audited for compliance with the standards of the PCI Security Standards Council 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. Other 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, 2021 and 2020, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Sales ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 Debit and Credit $ 76,121 $ 62,710 $ 218,798 $ 180,855 Prepaid Debit ​ 23,498 ​ 20,604 ​ ​ 63,339 ​ ​ 48,680 Intersegment eliminations ​ ( 17 ) ​ ( 612 ) ​ ​ ( 224 ) ​ ​ ( 1,486 ) Total ​ $ 99,602 ​ $ 82,702 ​ $ 281,913 ​ $ 228,049 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EBITDA ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 Debit and Credit $ 22,356 $ 16,993 $ 67,078 $ 45,073 Prepaid Debit ​ 9,040 ​ 8,332 ​ 24,719 ​ 16,974 Other ​ ( 11,130 ) ​ ( 7,836 ) ​ ( 34,955 ) ​ ( 23,757 ) Total ​ $ 20,266 ​ $ 17,489 ​ $ 56,842 ​ $ 38,290 ​ The following table provides a reconciliation of total segment EBITDA to net income for the three and nine months ended September 30, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2021 2020 2021 2020 Total segment EBITDA ​ $ 20,266 ​ $ 17,489 ​ $ 56,842 ​ $ 38,290 Interest, net ​ ​ ( 7,183 ) ​ ​ ( 6,298 ) ​ ​ ( 23,196 ) ​ ​ ( 19,158 ) Income tax (expense) benefit ​ ( 2,887 ) ​ ( 1,402 ) ​ ( 6,769 ) ​ 2,178 Depreciation and amortization ​ ( 3,570 ) ​ ( 3,980 ) ​ ( 11,609 ) ​ ( 12,436 ) Net loss from discontinued operations ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 30 ) Net income ​ $ 6,626 ​ $ 5,809 ​ $ 15,268 ​ $ 8,844 ​ 21 Table of Contents Balance Sheet Data of Reportable Segments ​ Total assets of the Company’s reportable segments at September 30, 2021 and December 31, 2020, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 ​ ​ ​ ​ ​ ​ ​ Debit and Credit ​ $ 190,534 ​ $ 215,846 Prepaid Debit ​ 35,753 ​ 34,734 Other ​ 25,988 ​ 15,571 Total assets ​ $ 252,275 ​ $ 266,151 ​ Net Sales to Geographic Locations, Property, Equipment and Leasehold Improvements and Long-Lived Assets ​ Each of 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. ​ ​ ​ ​ 22 Table of Contents