CPI Card Group Inc. 10-Q

Item 1. Financial Statements ​ CPI Card Group Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share and per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 ​ 2021 Assets ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 9,051 ​ $ 20,683 Accounts receivable, net of allowances of $ 162 and $ 86 , respectively ​ ​ 73,157 ​ ​ 60,953 Inventories ​ ​ 75,797 ​ ​ 58,009 Prepaid expenses and other current assets ​ ​ 5,070 ​ ​ 5,522 Income taxes receivable ​ ​ 278 ​ ​ 534 Total current assets ​ ​ 163,353 ​ ​ 145,701 Plant, equipment, leasehold improvements and operating lease right-of-use assets, net ​ ​ 52,203 ​ ​ 47,251 Intangible assets, net ​ ​ 19,921 ​ ​ 21,854 Goodwill ​ ​ 47,150 ​ ​ 47,150 Other assets ​ ​ 7,057 ​ ​ 6,184 Total assets ​ $ 289,684 ​ $ 268,140 Liabilities and stockholders’ deficit ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 28,815 ​ $ 26,443 Accrued expenses ​ ​ 34,288 ​ ​ 37,150 Deferred revenue and customer deposits ​ ​ 834 ​ ​ 1,182 Total current liabilities ​ ​ 63,937 ​ ​ 64,775 Long-term debt ​ ​ 309,739 ​ ​ 303,626 Deferred income taxes ​ ​ 5,558 ​ ​ 5,253 Other long-term liabilities ​ ​ 17,415 ​ ​ 15,506 Total liabilities ​ ​ 396,649 ​ ​ 389,160 Commitments and contingencies (Note 14) ​ ​ ​ ​ ​ ​ Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at June 30, 2022 and December 31, 2021 ​ ​ — ​ ​ — Stockholders’ deficit: ​ ​ ​ ​ ​ ​ Common stock; $ 0.001 par value— 100,000,000 shares authorized; 11,262,688 and 11,255,466 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively ​ ​ 11 ​ ​ 11 Capital deficiency ​ ​ ( 108,880 ) ​ ​ ( 110,782 ) Accumulated earnings (loss) ​ ​ 1,904 ​ ​ ( 10,249 ) Total stockholders’ deficit ​ ​ ( 106,965 ) ​ ​ ( 121,020 ) Total liabilities and stockholders’ deficit ​ $ 289,684 ​ $ 268,140 ​ 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 (in thousands, except share and per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, ​ ​ 2022 2021 2022 2021 Net sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products ​ $ 68,945 ​ $ 47,156 ​ $ 137,261 ​ $ 94,169 Services ​ ​ 44,363 ​ ​ 46,063 ​ ​ 87,471 ​ ​ 88,142 Total net sales ​ ​ 113,308 ​ ​ 93,219 ​ ​ 224,732 ​ ​ 182,311 Cost of sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products (exclusive of depreciation and amortization shown below) ​ ​ 43,055 ​ ​ 27,928 ​ ​ 86,149 ​ ​ 55,215 Services (exclusive of depreciation and amortization shown below) ​ ​ 27,578 ​ ​ 25,939 ​ ​ 54,435 ​ ​ 49,607 Depreciation and amortization ​ ​ 2,124 ​ ​ 2,264 ​ ​ 4,319 ​ ​ 4,680 Total cost of sales ​ ​ 72,757 ​ ​ 56,131 ​ ​ 144,903 ​ ​ 109,502 Gross profit ​ ​ 40,551 ​ ​ 37,088 ​ ​ 79,829 ​ ​ 72,809 Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative (exclusive of depreciation and amortization shown below) ​ ​ 24,050 ​ ​ 19,748 ​ ​ 43,932 ​ ​ 35,894 Depreciation and amortization ​ ​ 1,447 ​ ​ 1,553 ​ ​ 2,862 ​ ​ 3,359 Total operating expenses ​ ​ 25,497 ​ ​ 21,301 ​ ​ 46,794 ​ ​ 39,253 Income from operations ​ ​ 15,054 ​ ​ 15,787 ​ ​ 33,035 ​ ​ 33,556 Other expense, net: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest, net ​ ​ ( 7,146 ) ​ ​ ( 7,037 ) ​ ​ ( 15,011 ) ​ ​ ( 16,013 ) Other (expense) income, net ​ ​ ( 15 ) ​ ​ 4 ​ ​ ( 16 ) ​ ​ 29 Loss on debt extinguishment ​ ​ — ​ ​ — ​ ​ ( 395 ) ​ ​ ( 5,048 ) Total other expense, net ​ ​ ( 7,161 ) ​ ​ ( 7,033 ) ​ ​ ( 15,422 ) ​ ​ ( 21,032 ) Income before income taxes ​ ​ 7,893 ​ ​ 8,754 ​ ​ 17,613 ​ ​ 12,524 Income tax expense ​ ​ ( 1,742 ) ​ ​ ( 2,522 ) ​ ​ ( 5,460 ) ​ ​ ( 3,882 ) Net income ​ $ 6,151 ​ $ 6,232 ​ $ 12,153 ​ $ 8,642 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 0.55 ​ $ 0.55 ​ $ 1.08 ​ $ 0.77 Diluted earnings per share ​ $ 0.52 ​ $ 0.53 ​ $ 1.04 ​ $ 0.74 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average shares outstanding ​ ​ 11,257,733 ​ ​ 11,233,002 ​ ​ 11,256,600 ​ ​ 11,231,742 Diluted weighted-average shares outstanding ​ ​ 11,721,744 ​ ​ 11,762,481 ​ ​ 11,718,836 ​ ​ 11,720,148 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 6,151 ​ $ 6,232 ​ $ 12,153 ​ $ 8,642 Total comprehensive income ​ $ 6,151 ​ $ 6,232 ​ $ 12,153 ​ $ 8,642 See accompanying notes to condensed consolidated financial statements ​ ​ ​ ​ 4 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders’ Deficit (in thousands, except per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total March 31, 2022 ​ 11,255,466 ​ $ 11 ​ $ ( 109,821 ) ​ $ ( 4,247 ) ​ $ ( 114,057 ) Stock-based compensation ​ — ​ ​ — ​ ​ 1,001 ​ ​ — ​ ​ 1,001 Stock option exercises ​ 7,222 ​ ​ — ​ ​ ( 60 ) ​ ​ — ​ ​ ( 60 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 6,151 ​ ​ 6,151 June 30, 2022 ​ 11,262,688 ​ $ 11 ​ $ ( 108,880 ) ​ $ 1,904 ​ $ ( 106,965 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total December 31, 2021 ​ 11,255,466 ​ $ 11 ​ $ ( 110,782 ) ​ $ ( 10,249 ) ​ $ ( 121,020 ) Stock-based compensation ​ — ​ ​ — ​ ​ 1,962 ​ ​ — ​ ​ 1,962 Stock option exercises ​ 7,222 ​ ​ — ​ ​ ( 60 ) ​ ​ — ​ ​ ( 60 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 12,153 ​ ​ 12,153 June 30, 2022 ​ 11,262,688 ​ $ 11 ​ $ ( 108,880 ) ​ $ 1,904 ​ $ ( 106,965 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings (loss) ​ Total March 31, 2021 ​ 11,230,482 ​ $ 11 ​ $ ( 111,807 ) ​ $ ( 23,780 ) ​ $ ( 135,576 ) Stock-based compensation ​ — ​ ​ — ​ ​ 47 ​ ​ — ​ ​ 47 Stock option exercises ​ 6,574 ​ ​ — ​ ​ 34 ​ ​ — ​ ​ 34 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 6,232 ​ ​ 6,232 June 30, 2021 ​ 11,237,056 ​ $ 11 ​ $ ( 111,726 ) ​ $ ( 17,548 ) ​ $ ( 129,263 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ — ​ ​ — ​ ​ 98 ​ ​ — ​ ​ 98 Stock option exercises ​ 6,574 ​ ​ — ​ ​ 34 ​ ​ — ​ ​ 34 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 8,642 ​ ​ 8,642 June 30, 2021 ​ 11,237,056 ​ $ 11 ​ $ ( 111,726 ) ​ $ ( 17,548 ) ​ $ ( 129,263 ) ​ See accompanying notes to condensed consolidated financial statements ​ ​ 5 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, ​ 2022 2021 Operating activities ​ ​ ​ ​ ​ ​ Net income $ 12,153 ​ $ 8,642 Adjustments to reconcile net income to net cash (used in) provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization expense ​ ​ 7,181 ​ ​ 8,039 Stock-based compensation expense ​ ​ 1,962 ​ ​ 98 Amortization of debt issuance costs and debt discount ​ ​ 967 ​ ​ 1,393 Loss on debt extinguishment ​ ​ 395 ​ ​ 5,048 Deferred income taxes ​ ​ 305 ​ ​ 38 Other, net ​ ​ 788 ​ ​ 142 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 12,280 ) ​ ​ ( 1,384 ) Inventories ​ ​ ( 17,853 ) ​ ​ ( 15,600 ) Prepaid expenses and other assets ​ ​ ( 409 ) ​ ​ ( 752 ) Income taxes, net ​ ​ 256 ​ ​ 7,989 Accounts payable ​ ​ 1,690 ​ ​ 2,548 Accrued expenses and other liabilities ​ ​ ( 2,955 ) ​ ​ 7,260 Deferred revenue and customer deposits ​ ​ ( 348 ) ​ ​ ( 715 ) Cash (used in) provided by operating activities ​ ​ ( 8,148 ) ​ ​ 22,746 Investing activities ​ ​ ​ ​ ​ ​ Capital expenditures for plant, equipment and leasehold improvements ​ ​ ( 8,179 ) ​ ​ ( 3,703 ) Other ​ ​ 15 ​ ​ 156 Cash used in investing activities ​ ​ ( 8,164 ) ​ ​ ( 3,547 ) Financing activities ​ ​ ​ ​ ​ ​ Principal payments on First Lien Term Loan ​ ​ — ​ ​ ( 312,500 ) Principal payments on Senior Credit Facility ​ ​ — ​ ​ ( 30,000 ) Principal payments on Senior Notes ​ ​ ( 20,000 ) ​ ​ — Principal payments on ABL Revolver ​ ​ ( 10,000 ) ​ ​ ( 15,000 ) Proceeds from Senior Notes ​ ​ — ​ ​ 310,000 Proceeds from ABL Revolver, net of discount ​ ​ 35,000 ​ ​ 14,750 Proceeds from exercises of stock options ​ ​ — ​ ​ 34 Debt issuance costs ​ ​ ( 262 ) ​ ​ ( 9,452 ) Payments on debt extinguishment and other ​ ​ ( 660 ) ​ ​ ( 2,685 ) Proceeds from finance lease financing ​ ​ 2,074 ​ ​ — Payments on finance lease obligations ​ ​ ( 1,435 ) ​ ​ ( 1,287 ) Cash provided by (used in) financing activities ​ ​ 4,717 ​ ​ ( 46,140 ) Effect of exchange rates on cash ​ ​ ( 37 ) ​ ​ 5 Net decrease in cash and cash equivalents ​ ​ ( 11,632 ) ​ ​ ( 26,936 ) Cash and cash equivalents, beginning of period ​ ​ 20,683 ​ ​ 57,603 Cash and cash equivalents, end of period $ 9,051 ​ $ 30,667 Supplemental disclosures of cash flow information ​ ​ ​ ​ ​ ​ Cash paid during the period for: ​ ​ ​ ​ ​ ​ Interest $ 13,985 ​ $ 8,604 Income taxes paid ​ $ 5,746 ​ $ 2,284 Income taxes (refunded) ​ $ ( 449 ) ​ $ ( 6,003 ) Right-of-use assets obtained in exchange for lease obligations: ​ ​ ​ ​ ​ ​ Operating leases ​ $ 816 ​ $ 3,363 Financing leases ​ $ 3,077 ​ $ 484 Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements ​ $ 3,110 ​ $ 399 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 (defined below) issued on the networks of the Payment Card Brands (Visa, Mastercard ® , American Express ® and Discover ® ). CPI 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 bank customers 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 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 serve its customers . COVID-19 Update The COVID-19 pandemic and associated counteracting measures implemented by governments and businesses around the world have impacted, and continue to impact, economies and societies globally, including the locations where CPI, its customers and suppliers conduct business. The Company believes the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on its supply chain, production lead times, labor availability, employee absenteeism and costs. Though the Company has implemented measures to attempt to mitigate the impacts of the challenges described above, the Company believes that such impacts, and the associated costs, may continue to increase throughout 2022 and possibly beyond. The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain, though the health and safety of CPI employees remains paramount. ​ On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, included 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. The Company deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021. The second installment payment is permitted to be paid no later than the fourth quarter of 2022 and had not been paid as of June 30, 2022. ​ 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, 2021 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, 2021. ​ 7 Table of Contents 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. 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. ​ 8 Table of Contents 2. Net Sales ​ The Company disaggregates its net sales by major source as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, 2022 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 69,031 ​ $ 25,150 ​ $ 94,181 Prepaid Debit ​ ​ — ​ ​ 19,214 ​ ​ 19,214 Intersegment eliminations ​ ​ ( 86 ) ​ ( 1 ) ​ ( 87 ) Total ​ $ 68,945 ​ $ 44,363 ​ $ 113,308 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, 2022 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 137,379 ​ $ 48,817 ​ $ 186,196 Prepaid Debit ​ ​ — ​ ​ 38,675 ​ ​ 38,675 Intersegment eliminations ​ ​ ( 118 ) ​ ( 21 ) ​ ( 139 ) Total ​ $ 137,261 ​ $ 87,471 ​ $ 224,732 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended June 30, 2021 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 47,180 ​ $ 25,680 ​ $ 72,860 Prepaid Debit ​ ​ — ​ ​ 20,383 ​ ​ 20,383 Intersegment eliminations ​ ​ ( 24 ) ​ — ​ ( 24 ) Total ​ $ 47,156 ​ $ 46,063 ​ $ 93,219 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, 2021 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 94,359 ​ ​ 48,318 ​ $ 142,677 Prepaid Debit ​ ​ — ​ ​ 39,841 ​ ​ 39,841 Intersegment eliminations ​ ​ ( 190 ) ​ ​ ( 17 ) ​ ( 207 ) Total ​ $ 94,169 ​ $ 88,142 ​ $ 182,311 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 produced 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 produced Financial Payment Cards, including contact-EMV ® , contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s 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 . ​ 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 cards. 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. ​ 9 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 ​ 2021 Trade accounts receivable $ 62,284 $ 50,042 Unbilled accounts receivable ​ 11,035 ​ 10,997 ​ ​ ​ 73,319 ​ 61,039 Less allowance for doubtful accounts ​ ​ ( 162 ) ​ ​ ( 86 ) ​ ​ ​ $ 73,157 ​ $ 60,953 ​ ​ ​ 4 . Inventories ​ Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 ​ 2021 Raw materials $ 67,319 $ 54,254 Finished goods ​ 11,566 ​ 6,778 ​ Inventory reserve ​ ​ ( 3,088 ) ​ ​ ( 3,023 ) ​ ​ $ 75,797 $ 58,009 ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ 2022 ​ 2021 Machinery and equipment $ 68,631 $ 64,051 ​ Machinery and equipment under financing leases ​ ​ 12,166 ​ ​ 9,088 ​ Furniture, fixtures and computer equipment ​ 5,273 ​ 4,570 ​ Leasehold improvements ​ 14,651 ​ 14,142 ​ Construction in progress ​ 5,953 ​ 5,268 ​ ​ ​ ​ 106,674 ​ ​ 97,119 ​ Less accumulated depreciation and amortization ​ ( 66,354 ) ​ ( 61,937 ) ​ Operating lease right-of-use assets, net of accumulated amortization ​ 11,883 ​ 12,069 ​ ​ $ 52,203 $ 47,251 ​ Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,604 and $ 2,668 for the three months ended June 30, 2022 and 2021, respectively, and $ 5,248 and $ 5,741 for the six months ended June 30, 2022 and 2021, respectively. ​ Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.” ​ 10 Table of Contents 6. Goodwill and Other Intangible Assets ​ The Company reports all of its goodwill in the Debit and Credit segment at June 30, 2022 and December 31, 2021. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of June 30, 2022. ​ Intangible assets consist of customer relationships, technology and software, and trademarks. Intangible amortization expense was $ 967 and $ 1,149 for the three months ended June 30, 2022 and 2021, respectively, and $ 1,933 and $ 2,298 for the six months ended June 30, 2022 and 2021, respectively. ​ At June 30, 2022 and December 31, 2021, intangible assets, excluding goodwill, were comprised of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ Weighted Average ​ ​ ​ ​ Accumulated ​ Net Book ​ ​ ​ ​ Accumulated ​ Net Book ​ Life (Years) Cost Amortization Value Cost Amortization Value Customer relationships 17.2 ​ $ 55,454 ​ $ ( 37,058 ) ​ $ 18,396 ​ $ 55,454 ​ $ ( 35,419 ) ​ $ 20,035 Technology and software 8 ​ 7,101 ​ ​ ( 6,667 ) ​ 434 ​ 7,101 ​ ​ ( 6,567 ) ​ ​ 534 Trademarks 8.7 ​ 3,330 ​ ( 2,239 ) ​ 1,091 ​ 3,330 ​ ​ ( 2,045 ) ​ ​ 1,285 Intangible assets subject to amortization ​ ​ $ 65,885 ​ $ ( 45,964 ) ​ $ 19,921 ​ $ 65,885 ​ $ ( 44,031 ) ​ $ 21,854 ​ The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2022 was as follows: ​ ​ ​ ​ ​ 2022 (excluding the six months ended June 30, 2022) ​ $ 1,933 2023 3,867 2024 ​ ​ 3,630 2025 ​ ​ 3,440 2026 ​ ​ 2,471 Thereafter ​ ​ 4,580 ​ $ 19,921 ​ ​ 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. ​ 11 Table of Contents 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 June 30, 2022 ​ ​ June 30, ​ June 30, ​ (Using Fair Value Hierarchy) ​ ​ 2022 ​ 2022 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes ​ $ 290,000 ​ $ 273,371 ​ $ — ​ $ 273,371 ​ $ — ABL Revolver ​ $ 25,000 ​ $ 25,000 ​ $ — ​ $ 25,000 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Carrying ​ Estimated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Value as of ​ Fair Value as of ​ Fair Value Measurement at December 31, 2021 ​ ​ December 31, ​ December 31, ​ (Using Fair Value Hierarchy) ​ ​ 2021 ​ 2021 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes ​ $ 310,000 $ 327,050 ​ $ — $ 327,050 ​ $ — ​ The aggregate fair value of the Company’s Senior Notes (as defined in Note 10, “Long-Term Debt”) was based on bank quotes. The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of June 30, 2022, given the applicable variable interest rates and nature of the security interest in Company assets. ​ The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. ​ 8. Accrued Expenses ​ Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, ​ 2022 ​ 2021 Accrued payroll and related employee expenses $ 6,115 $ 7,558 Accrued employee performance bonuses ​ 4,671 ​ 6,900 Employer payroll taxes, including social security deferral ​ 1,856 ​ 1,910 Accrued rebates ​ ​ 2,061 ​ ​ 1,423 Estimated sales tax liability ​ ​ 936 ​ ​ 1,019 Accrued interest ​ ​ 7,440 ​ ​ 7,955 Current operating and financing lease liabilities ​ ​ 4,749 ​ ​ 4,114 Other ​ ​ 6,460 ​ ​ 6,271 Total accrued expenses ​ $ 34,288 ​ $ 37,150 ​ 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. ​ 12 Table of Contents The components of operating and finance lease costs were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Three Months Ended ​ June 30, 2022 June 30, 2021 Operating lease costs $ 783 ​ $ 532 Variable lease costs ​ 147 ​ ​ 165 Short-term operating lease costs ​ — ​ ​ 122 Total expense from operating leases $ 930 ​ $ 819 ​ ​ ​ ​ ​ ​ Finance lease costs: ​ ​ ​ ​ ​ Right-of-use amortization expense $ 394 ​ $ 309 Interest on lease liabilities ​ 128 ​ ​ 99 Total financing lease costs $ 522 ​ $ 408 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ Six Months Ended ​ June 30, 2022 June 30, 2021 Operating lease costs $ 1,499 ​ $ 1,041 Variable lease costs ​ 286 ​ ​ 329 Short-term operating lease costs ​ — ​ ​ 294 Total expense from operating leases $ 1,785 ​ $ 1,664 ​ ​ ​ ​ ​ ​ Finance lease costs: ​ ​ ​ ​ ​ Right-of-use amortization expense $ 784 ​ $ 602 Interest on lease liabilities ​ 218 ​ ​ 205 Total financing lease costs $ 1,002 ​ $ 807 ​ The following table reflects balances for operating and financing leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ ​ December 31, ​ ​ 2022 ​ 2021 Operating leases: ​ ​ ​ ​ ​ Operating lease right-of-use assets, net of amortization $ 11,883 ​ $ 12,069 ​ ​ ​ ​ ​ ​ Current operating lease liabilities $ 2,255 ​ $ 1,857 Non-current operating lease liabilities ​ 10,109 ​ ​ 10,703 Total operating lease liabilities $ 12,364 ​ $ 12,560 ​ ​ ​ ​ ​ ​ Financing leases: ​ ​ ​ ​ ​ Property, equipment and leasehold improvements $ 12,166 ​ $ 9,088 Accumulated depreciation ​ ( 3,221 ) ​ ​ ( 2,451 ) Total financing leases in property, equipment and leasehold ___ improvements, net $ 8,945 ​ $ 6,637 ​ ​ ​ ​ ​ ​ Current financing lease liabilities $ 2,494 ​ $ 2,257 Non-current financing lease liabilities ​ 4,078 ​ ​ 2,668 Total financing lease liabilities $ 6,572 ​ $ 4,925 ​ ​ ​ 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.” ​ 13 Table of Contents Future cash payment with respect to lease obligations as of June 30, 2022 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating ​ ​ Financing ​ ​ ​ Leases ​ ​ Leases 2022 (excluding the six months ended June 30, 2022) ​ $ 1,576 ​ $ 1,696 2023 ​ ​ 3,164 ​ ​ 2,381 2024 ​ ​ 2,896 ​ ​ 1,583 2025 ​ ​ 2,090 ​ ​ 1,292 2026 ​ ​ 1,958 ​ ​ 318 Thereafter ​ ​ 3,657 ​ ​ 41 Total lease payments ​ ​ 15,341 ​ ​ 7,311 Less imputed interest ​ ​ ( 2,977 ) ​ ​ ( 739 ) Total ​ $ 12,364 ​ $ 6,572 ​ ​ 10. Long-Term Debt ​ At June 30, 2022 and December 31, 2021, long-term debt consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest ​ June 30, December 31, ​ ​ Rate ​ ​ 2022 ​ 2021 Senior Notes ​ 8.625 % ​ $ 290,000 ​ $ 310,000 ABL Revolver (1) ​ 2.997 % ​ ​ 25,000 ​ ​ — Unamortized deferred financing costs ​ ​ ​ ​ ( 5,261 ) ​ ( 6,374 ) Total long-term debt ​ ​ ​ ​ ​ 309,739 ​ ​ 303,626 Less current maturities ​ ​ ​ ​ ​ — ​ ​ — Long-term debt, net of current maturities ​ ​ ​ ​ $ 309,739 ​ $ 303,626 ​ (1) The Senior Notes bear interest at a fixed rate. The average effective variable interest rate on outstanding borrowings under the ABL Revolver was 2.997 % as of June 30, 2022. ​ On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310,000 aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. 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. ​ On March 15, 2021, 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”). 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. On March 3, 2022, the Company and CPI CG Inc. entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver. The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75,000 , increased the uncommitted accordion feature to $ 25,000 from $ 15,000 , and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York. ​ Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to SOFR and adjusted for a credit spread, plus an interest rate margin. The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected. For each quarter through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average unused capacity of the facility for the previous quarter. The unused portion of the ABL Revolver commitment accrues a monthly commitment fee, which ranges from 0.375 % to 0.50 % per annum, based on the average daily borrowing capacity under the ABL Revolver over the previous month. Unused commitment fee expense was $ 115 and $ 54 for the six months ended June 30, 2022 and 2021, respectively. The fee percentage and calculation of the unused commitment fee changes, effective April 1, 2023, to between 0.375 % and 0.50 % (determined based on the average revolver usage over a specified period of time) of the unused portion of the facility. ​ The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount 14 Table of Contents available to borrow under the ABL Revolver is less than $ 7,500 . The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $ 75,000 of available borrowing capacity under the ABL Revolver (“Borrowing Base”). The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below $ 7,500 and until such time that borrowing capacity equals or exceeds $ 7,500 for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00 , calculated for the trailing 12 months, in order to borrow under the ABL Revolver. ​ On March 15, 2021, the Company used net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $ 15,000 under the ABL Revolver, to pay in full and terminate a previous Senior Credit Facility and a previous First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. 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 year ended December 31, 2021. ​ On March 11, 2022, the Company used the available borrowing capacity under the ABL Revolver to fund the redemption of $ 20,000 aggregate principal amount of the Senior Notes at a redemption price equal to 103 % of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date. ​ The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than CPI CG Inc. as the issuer of the Senior Notes) that guarantee the ABL Revolver. The Senior Notes are secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. The ABL Revolver is guaranteed by the Company and its subsidiaries (other than CPI CG Inc. as borrower and excluded subsidiaries), and is secured by substantially all of the assets of CPI CG Inc. and the guarantors, subject to customary exceptions. ​ The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, CPI CG Inc. 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 CPI CG Inc. 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 has 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 CPI CG Inc., 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. No such payment was required to be made in 2022 based on the Company’s operating results for the year ended December 31, 2021. ​ Deferred Financing Costs and Discount ​ Certain costs and discounts incurred with borrowings 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 remaining unamortized debt issuance costs recorded on the Senior Notes were $ 5,261 and is reported as a reduction to the long-term debt balance as of June 30, 2022. The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,800 and are recorded as other assets (current and long term) on the condensed consolidated balance sheet as of June 30, 2022. ​ During the six months ended June 30, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan, as described earlier. ​ 15 Table of Contents ​ 11. Income Taxes ​ During the three months ended June 30, 2022, the Company recognized an income tax expense of $ 1,742 on pre-tax income of $ 7,893 , compared to income tax expense of $ 2,522 on pre-tax income of $ 8,754 for the prior year period. During the six months ended June 30, 2022, the Company recognized an income tax expense of $ 5,460 on pre-tax income of $ 17,613 , representing an effective income tax rate of 31.0 %. For the six months ended June 30, 2021, the Company recognized an income tax expense of $ 3,882 on pre-tax income of $ 12,524 , representing an effective income tax rate of 31.0 %. ​ For the six months ended June 30, 2022 and 2021, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ ​ ​ 2022 2021 ​ Tax at federal statutory rate ​ 21.0 % 21.0 % State taxes, net ​ 5.5 ​ 6.0 ​ Valuation allowance ​ 2.5 ​ 0.0 ​ Permanent items ​ 1.4 ​ 2.8 ​ Other ​ 0.6 ​ 1.2 ​ Effective income tax rate ​ 31.0 % 31.0 % ​ The net change in the valuation allowance during the six months ended June 30, 2022 was an increase of $ 432 . The increase was due to the more restrictive interest deduction limitation in Section 163(j) of the Internal Revenue Code that took effect in 2022. 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. ​ 16 Table of Contents 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 ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2022 2021 2022 ​ 2021 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 6,151 ​ $ 6,232 ​ $ 12,153 ​ $ 8,642 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average common shares outstanding ​ 11,257,733 ​ 11,233,002 ​ 11,256,600 ​ 11,231,742 Dilutive shares ​ ​ 464,011 ​ ​ 529,479 ​ ​ 462,236 ​ ​ 488,406 Diluted weighted-average common shares outstanding ​ ​ 11,721,744 ​ ​ 11,762,481 ​ ​ 11,718,836 ​ ​ 11,720,148 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 0.55 ​ $ 0.55 ​ $ 1.08 ​ $ 0.77 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 0.52 ​ $ 0.53 ​ $ 1.04 ​ $ 0.74 ​ ​ 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-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 2023 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2022 and 2027 and contain purchase options which the Company may exercise to keep the machinery in use. Contingencies In accordance with applicable accounting guidance, the Company establishes an accrued expense 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 expense 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’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, has filed requests for Inter Parties Reexamination (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for reexamination. Thus far, the United States Patent Office has instituted proceedings with respect to two of the IPR requests and the others remain pending. The current 17 Table of Contents proceedings in the patent office are scheduled to run through April 6, 2023. Should the remaining reexamination requests be denied or should the patents survive reexamination by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of June 30, 2022 . ​ In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. 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 June 30, 2022 and December 31, 2021 was $ 936 and $ 1,019 , respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets. The 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 “Selling, general and administrative” (“SG&A”). During the six months ended June 30, 2022 and 2021, the Company recorded sales tax expense of $ 52 and sales tax benefit of $ 465 , respectively, within SG&A for current activity relating to updates to the estimated liability. ​ 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 thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan. As of June 30, 2022, there were 920,657 shares of Common Stock available for grant under the Omnibus Plan. During the six months ended June 30, 2022, the Company granted 30,452 awards of non-qualified stock options. The Company did no t grant any awards of non-qualified stock options during the six months ended June 30, 2021. 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, 2021 778,835 ​ $ 18.02 ​ 5.59 Granted ​ 30,452 ​ ​ 14.42 ​ 6.80 Exercised ​ ( 14,075 ) ​ ​ 4.04 ​ — Expired ​ ( 1,320 ) ​ ​ 21.75 ​ — Forfeited ​ ( 6,460 ) ​ ​ 29.62 ​ — Outstanding as of June 30, 2022 ​ 787,432 ​ $ 18.03 ​ 5.15 Options vested and exercisable as of June 30, 2022 ​ 636,083 ​ $ 16.00 ​ 4.86 Options vested and expected to vest as of June 30, 2022 ​ 787,432 ​ $ 18.03 ​ 5.15 ​ 18 Table of Contents 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, 2021 127,357 $ 17.42 Granted ​ 30,452 ​ ​ 8.62 Forfeited ( 6,460 ) ​ 17.43 Unvested as of June 30, 2022 151,349 ​ $ 15.65 ​ Unvested stock options of 151,349 as of June 30, 2022 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. ​ The fair value of the stock option awards granted during the six months ended June 30, 2022, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: ​ ​ ​ ​ ​ ​ ​ Six Months Ended ​ ​ June 30, 2022 Expected term in years (1) ​ 4.25 ​ Volatility (2) ​ 77.50 % Risk-free interest rate (3) ​ 2.44 % 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. ​ 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, 2021 261,982 ​ $ 13.19 ​ ​ Granted ​ 18,194 ​ ​ 14.42 ​ ​ Forfeited ( 13,493 ) ​ ​ 9.89 ​ ​ Outstanding as of June 30, 2022 266,683 ​ $ 13.44 ​ 1.15 ​ The restricted stock unit awards contain conditions associated with continued employment or service. Restricted stock units granted in 2022 are expected to vest ratably over a two-year period on each anniversary of the grant date. On the vesting date, shares of Common Stock will be issued to the award recipients. ​ Compensation expense for the Omnibus Plan for the three months ended June 30, 2022 and 2021 was $ 1,001 and $ 47 , respectively. Compensation expense for the Omnibus Plan for the six months ended June 30, 2022 and 2021 was $ 1,962 and $ 98 , respectively. As of June 30, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 2,701 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.23 years. ​ ​ 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 19 Table of Contents 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 June 30, 2022, 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 to card-issuing banks primarily in the United States. Products produced by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and Earth Elements TM Eco-Focused 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 Card 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. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The Debit and Credit segment facilities and operations are audited for compliance with the standards of the Payment Card Industry Security Standards Counsel by multiple Payment Card Brands. Prepaid Debit Segment The Prepaid Debit segment primarily provides integrated prepaid 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 and operations are audited for compliance with the standards of the Payment Card Industry Security Standards Counsel by multiple Payment Card Brands. Other The Other segment includes corporate expenses. 20 Table of Contents Performance Measures of Reportable Segments ​ Net Sales and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Sales ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Debit and Credit $ 94,181 $ 72,860 $ 186,196 $ 142,677 Prepaid Debit ​ 19,214 ​ 20,383 ​ ​ 38,675 ​ ​ 39,841 Intersegment eliminations ​ ( 87 ) ​ ( 24 ) ​ ​ ( 139 ) ​ ​ ( 207 ) Total ​ $ 113,308 ​ $ 93,219 ​ $ 224,732 ​ $ 182,311 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EBITDA ​ ​ Three Months Ended June 30, ​ Six Months Ended June 30, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Debit and Credit $ 27,273 $ 22,322 $ 53,367 $ 44,722 Prepaid Debit ​ 5,899 ​ 8,106 ​ 12,463 ​ 15,679 Other ​ ( 14,562 ) ​ ( 10,820 ) ​ ( 26,025 ) ​ ( 23,825 ) Total ​ $ 18,610 ​ $ 19,608 ​ $ 39,805 ​ $ 36,576 ​ The following table provides a reconciliation of total segment EBITDA to net income for the three and six months ended June 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, ​ 2022 2021 2022 2021 Total segment EBITDA ​ $ 18,610 ​ $ 19,608 ​ $ 39,805 ​ $ 36,576 Interest, net ​ ​ ( 7,146 ) ​ ​ ( 7,037 ) ​ ​ ( 15,011 ) ​ ​ ( 16,013 ) Income tax expense ​ ( 1,742 ) ​ ( 2,522 ) ​ ( 5,460 ) ​ ( 3,882 ) Depreciation and amortization ​ ( 3,571 ) ​ ( 3,817 ) ​ ( 7,181 ) ​ ( 8,039 ) Net income ​ $ 6,151 ​ $ 6,232 ​ $ 12,153 ​ $ 8,642 ​ 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. ​ ​ 21 Table of Contents