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) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ ​ 2022 ​ 2021 Assets ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 21,507 ​ $ 20,683 Accounts receivable, net of allowances of $ 169 and $ 86 , respectively ​ ​ 75,749 ​ ​ 60,953 Inventories ​ ​ 72,219 ​ ​ 58,009 Prepaid expenses and other current assets ​ ​ 5,080 ​ ​ 5,522 Income taxes receivable ​ ​ 2,112 ​ ​ 534 Total current assets ​ ​ 176,667 ​ ​ 145,701 Plant, equipment, leasehold improvements and operating lease right-of-use assets, net ​ ​ 57,268 ​ ​ 47,251 Intangible assets, net ​ ​ 18,954 ​ ​ 21,854 Goodwill ​ ​ 47,150 ​ ​ 47,150 Other assets ​ ​ 5,008 ​ ​ 6,184 Total assets ​ $ 305,047 ​ $ 268,140 Liabilities and stockholders’ deficit ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 25,703 ​ $ 26,443 Accrued expenses ​ ​ 34,384 ​ ​ 37,150 Deferred revenue and customer deposits ​ ​ 3,915 ​ ​ 1,182 Total current liabilities ​ ​ 64,002 ​ ​ 64,775 Long-term debt ​ ​ 310,091 ​ ​ 303,626 Deferred income taxes ​ ​ 6,445 ​ ​ 5,253 Other long-term liabilities ​ ​ 18,769 ​ ​ 15,506 Total liabilities ​ ​ 399,307 ​ ​ 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 September 30, 2022 and December 31, 2021 ​ ​ — ​ ​ — Stockholders’ deficit: ​ ​ ​ ​ ​ ​ Common stock; $ 0.001 par value— 100,000,000 shares authorized; 11,287,909 and 11,255,466 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively ​ ​ 11 ​ ​ 11 Capital deficiency ​ ​ ( 108,085 ) ​ ​ ( 110,782 ) Accumulated earnings (loss) ​ ​ 13,814 ​ ​ ( 10,249 ) Total stockholders’ deficit ​ ​ ( 94,260 ) ​ ​ ( 121,020 ) Total liabilities and stockholders’ deficit ​ $ 305,047 ​ $ 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 September 30, ​ Nine Months Ended September 30, ​ ​ 2022 2021 2022 2021 Net sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products ​ $ 71,606 ​ $ 52,276 ​ $ 208,867 ​ $ 146,445 Services ​ ​ 52,971 ​ ​ 47,326 ​ ​ 140,442 ​ ​ 135,468 Total net sales ​ ​ 124,577 ​ ​ 99,602 ​ ​ 349,309 ​ ​ 281,913 Cost of sales: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Products (exclusive of depreciation and amortization shown below) ​ ​ 42,702 ​ ​ 31,493 ​ ​ 128,851 ​ ​ 86,708 Services (exclusive of depreciation and amortization shown below) ​ ​ 31,190 ​ ​ 28,368 ​ ​ 85,625 ​ ​ 77,975 Depreciation and amortization ​ ​ 2,245 ​ ​ 2,056 ​ ​ 6,564 ​ ​ 6,736 Total cost of sales ​ ​ 76,137 ​ ​ 61,917 ​ ​ 221,040 ​ ​ 171,419 Gross profit ​ ​ 48,440 ​ ​ 37,685 ​ ​ 128,269 ​ ​ 110,494 Operating expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling, general and administrative (exclusive of depreciation and amortization shown below) ​ ​ 23,403 ​ ​ 19,469 ​ ​ 67,335 ​ ​ 55,363 Depreciation and amortization ​ ​ 1,592 ​ ​ 1,514 ​ ​ 4,454 ​ ​ 4,873 Total operating expenses ​ ​ 24,995 ​ ​ 20,983 ​ ​ 71,789 ​ ​ 60,236 Income from operations ​ ​ 23,445 ​ ​ 16,702 ​ ​ 56,480 ​ ​ 50,258 Other expense, net: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest, net ​ ​ ( 7,323 ) ​ ​ ( 7,183 ) ​ ​ ( 22,334 ) ​ ​ ( 23,196 ) Other (expense) income, net ​ ​ ( 63 ) ​ ​ ( 6 ) ​ ​ ( 79 ) ​ ​ 23 Loss on debt extinguishment ​ ​ — ​ ​ — ​ ​ ( 395 ) ​ ​ ( 5,048 ) Total other expense, net ​ ​ ( 7,386 ) ​ ​ ( 7,189 ) ​ ​ ( 22,808 ) ​ ​ ( 28,221 ) Income before income taxes ​ ​ 16,059 ​ ​ 9,513 ​ ​ 33,672 ​ ​ 22,037 Income tax expense ​ ​ ( 4,149 ) ​ ​ ( 2,887 ) ​ ​ ( 9,609 ) ​ ​ ( 6,769 ) Net income ​ $ 11,910 ​ $ 6,626 ​ $ 24,063 ​ $ 15,268 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 1.06 ​ $ 0.59 ​ $ 2.14 ​ $ 1.36 Diluted earnings per share ​ $ 1.01 ​ $ 0.56 ​ $ 2.05 ​ $ 1.30 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average shares outstanding ​ ​ 11,265,767 ​ ​ 11,238,678 ​ ​ 11,259,655 ​ ​ 11,234,054 Diluted weighted-average shares outstanding ​ ​ 11,788,921 ​ ​ 11,799,321 ​ ​ 11,730,668 ​ ​ 11,755,381 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 11,910 ​ $ 6,626 ​ $ 24,063 ​ $ 15,268 Total comprehensive income ​ $ 11,910 ​ $ 6,626 ​ $ 24,063 ​ $ 15,268 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 June 30, 2022 ​ 11,262,688 ​ $ 11 ​ $ ( 108,880 ) ​ $ 1,904 ​ $ ( 106,965 ) Stock-based compensation ​ — ​ ​ — ​ ​ 966 ​ ​ — ​ ​ 966 Shares issued under stock-based compensation plans ​ 25,221 ​ ​ — ​ ​ ( 171 ) ​ ​ — ​ ​ ( 171 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 11,910 ​ ​ 11,910 September 30, 2022 ​ 11,287,909 ​ $ 11 ​ $ ( 108,085 ) ​ $ 13,814 ​ $ ( 94,260 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ — ​ ​ — ​ ​ 2,928 ​ ​ — ​ ​ 2,928 Shares issued under stock-based compensation plans ​ 32,443 ​ ​ — ​ ​ ( 231 ) ​ ​ — ​ ​ ( 231 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 24,063 ​ ​ 24,063 September 30, 2022 ​ 11,287,909 ​ $ 11 ​ $ ( 108,085 ) ​ $ 13,814 ​ $ ( 94,260 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 Shares issued under stock-based compensation plans ​ 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 Shares issued under stock-based compensation plans ​ 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 ) ​ 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) ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ 2022 2021 Operating activities ​ ​ ​ ​ ​ ​ Net income $ 24,063 ​ $ 15,268 Adjustments to reconcile net income to net cash (used in) provided by operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization expense ​ ​ 11,018 ​ ​ 11,609 Stock-based compensation expense ​ ​ 2,928 ​ ​ 214 Amortization of debt issuance costs and debt discount ​ ​ 1,449 ​ ​ 1,880 Loss on debt extinguishment ​ ​ 395 ​ ​ 5,048 Deferred income taxes ​ ​ 1,192 ​ ​ ( 752 ) Other, net ​ ​ 437 ​ ​ 210 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ ​ Accounts receivable ​ ​ ( 14,862 ) ​ ​ ( 10,846 ) Inventories ​ ​ ( 13,916 ) ​ ​ ( 21,831 ) Prepaid expenses and other assets ​ ​ 1,501 ​ ​ ( 3,340 ) Income taxes, net ​ ​ ( 1,577 ) ​ ​ 10,603 Accounts payable ​ ​ ( 440 ) ​ ​ 83 Accrued expenses and other liabilities ​ ​ ( 3,208 ) ​ ​ 7,212 Deferred revenue and customer deposits ​ ​ 2,733 ​ ​ ( 843 ) Cash provided by operating activities ​ ​ 11,713 ​ ​ 14,515 Investing activities ​ ​ ​ ​ ​ ​ Capital expenditures for plant, equipment and leasehold improvements ​ ​ ( 14,440 ) ​ ​ ( 4,827 ) Other ​ ​ 95 ​ ​ 156 Cash used in investing activities ​ ​ ( 14,345 ) ​ ​ ( 4,671 ) 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 Debt issuance costs ​ ​ ( 262 ) ​ ​ ( 9,452 ) Payments on debt extinguishment and other ​ ​ ( 831 ) ​ ​ ( 2,663 ) Proceeds from finance lease financing ​ ​ 2,074 ​ ​ — Payments on finance lease obligations ​ ​ ( 2,457 ) ​ ​ ( 1,725 ) Cash provided by (used in) financing activities ​ ​ 3,524 ​ ​ ( 46,590 ) Effect of exchange rates on cash ​ ​ ( 68 ) ​ ​ ( 4 ) Net decrease in cash and cash equivalents ​ ​ 824 ​ ​ ( 36,750 ) Cash and cash equivalents, beginning of period ​ ​ 20,683 ​ ​ 57,603 Cash and cash equivalents, end of period $ 21,507 ​ $ 20,853 Supplemental disclosures of cash flow information ​ ​ ​ ​ ​ ​ Cash paid during the period for: ​ ​ ​ ​ ​ ​ Interest $ 27,026 ​ $ 22,107 Income taxes paid ​ $ 10,859 ​ $ 4,708 Income taxes (refunded) ​ $ ( 449 ) ​ $ ( 9,846 ) Right-of-use assets obtained in exchange for lease obligations: ​ ​ ​ ​ ​ ​ Operating leases ​ $ 816 ​ $ 3,666 Financing leases ​ $ 7,783 ​ $ 484 Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements ​ $ 1,781 ​ $ 1,005 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 throughout 2022 and 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 September 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 or results of operations. ​ 8 Table of Contents 2. Net Sales ​ The Company disaggregates its net sales by major source as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2022 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 71,857 ​ $ 27,655 ​ $ 99,512 Prepaid Debit ​ ​ - ​ ​ 25,335 ​ ​ 25,335 Intersegment eliminations ​ ​ ( 251 ) ​ ( 19 ) ​ ( 270 ) Total ​ $ 71,606 ​ $ 52,971 ​ $ 124,577 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2022 ​ ​ Products ​ Services ​ Total Debit and Credit ​ $ 209,236 ​ $ 76,472 ​ $ 285,708 Prepaid Debit ​ ​ — ​ ​ 64,010 ​ ​ 64,010 Intersegment eliminations ​ ​ ( 369 ) ​ ( 40 ) ​ ( 409 ) Total ​ $ 208,867 ​ $ 140,442 ​ $ 349,309 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ December 31, ​ ​ 2022 ​ ​ 2021 Trade accounts receivable $ 62,561 $ 50,042 Unbilled accounts receivable ​ 13,357 ​ 10,997 ​ ​ 75,918 ​ 61,039 Less allowance for doubtful accounts ​ ​ ( 169 ) ​ ​ ( 86 ) ​ ​ $ 75,749 ​ $ 60,953 ​ ​ 4 . Inventories ​ Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ December 31, ​ ​ 2022 ​ ​ 2021 Raw materials $ 64,924 $ 54,254 Finished goods ​ 10,024 ​ 6,778 Inventory reserve ​ ​ ( 2,729 ) ​ ​ ( 3,023 ) ​ $ 72,219 $ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ December 31, ​ ​ 2022 ​ ​ 2021 Machinery and equipment $ 61,302 $ 64,051 Machinery and equipment under financing leases ​ ​ 14,375 ​ ​ 9,088 Furniture, fixtures and computer equipment ​ 2,774 ​ 4,570 Leasehold improvements ​ 14,508 ​ 14,142 Construction in progress ​ 5,208 ​ 5,268 ​ ​ ​ 98,167 ​ ​ 97,119 Less accumulated depreciation and amortization ​ ( 52,240 ) ​ ( 61,937 ) Operating lease right-of-use assets, net of accumulated amortization ​ 11,341 ​ 12,069 ​ $ 57,268 $ 47,251 ​ Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,870 and $ 2,482 for the three months ended September 30, 2022 and 2021, respectively, and $ 8,118 and $ 8,223 for the nine months ended September 30, 2022 and 2021, respectively. ​ Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.” ​ 10 Table of Contents 6. Goodwill and Other Intangible Assets ​ The Company reports all of its goodwill in the Debit and Credit segment at September 30, 2022 and December 31, 2021. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of September 30, 2022. ​ Intangible assets consist of customer relationships, technology, and trademarks. Intangible amortization expense was $ 967 and $ 1,088 for the three months ended September 30, 2022 and 2021, respectively, and $ 2,900 and $ 3,386 for the nine months ended September 30, 2022 and 2021, respectively. ​ At September 30, 2022 and December 31, 2021, intangible assets, excluding goodwill, were comprised of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ 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 ​ $ ( 37,877 ) ​ $ 17,577 ​ $ 55,454 ​ $ ( 35,419 ) ​ $ 20,035 Technology 10 ​ 7,101 ​ ​ ( 6,717 ) ​ 384 ​ 7,101 ​ ​ ( 6,567 ) ​ ​ 534 Trademarks 8.7 ​ 3,330 ​ ( 2,337 ) ​ 993 ​ 3,330 ​ ​ ( 2,045 ) ​ ​ 1,285 Intangible assets subject to amortization ​ ​ $ 65,885 ​ $ ( 46,931 ) ​ $ 18,954 ​ $ 65,885 ​ $ ( 44,031 ) ​ $ 21,854 ​ The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2022 was as follows: ​ ​ ​ ​ ​ 2022 (excluding the nine months ended September 30, 2022) ​ $ 966 2023 3,867 2024 ​ ​ 3,630 2025 ​ ​ 3,440 2026 ​ ​ 2,471 Thereafter ​ ​ 4,580 ​ $ 18,954 ​ ​ 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 September 30, 2022 ​ ​ September 30, ​ September 30, ​ (Using Fair Value Hierarchy) ​ ​ 2022 ​ 2022 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes ​ $ 290,000 ​ $ 279,125 ​ $ — ​ $ 279,125 ​ $ — 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 September 30, 2022, given the applicable variable interest rates and nature of the security interest in Company assets. ​ The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. ​ 8. Accrued Expenses ​ Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2022 ​ 2021 Accrued payroll and related employee expenses $ 8,697 $ 7,558 Accrued employee performance bonuses ​ 6,975 ​ 6,900 Employer payroll taxes, including social security deferral ​ 2,277 ​ 1,910 Accrued rebates ​ ​ 2,040 ​ ​ 1,423 Estimated sales tax liability ​ ​ 762 ​ ​ 1,019 Accrued interest ​ ​ 1,105 ​ ​ 7,955 Current operating and financing lease liabilities ​ ​ 5,445 ​ ​ 4,114 Other ​ ​ 7,083 ​ ​ 6,271 Total accrued expenses ​ $ 34,384 ​ $ 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 ​ September 30, 2022 September 30, 2021 Operating lease costs $ 783 ​ $ 538 Variable lease costs ​ 184 ​ ​ 181 Short-term operating lease costs ​ — ​ ​ 122 Total expense from operating leases $ 967 ​ $ 841 ​ ​ ​ ​ ​ ​ Finance lease costs: ​ ​ ​ ​ ​ Right-of-use amortization expense $ 449 ​ $ 256 Interest on lease liabilities ​ 116 ​ ​ 92 Total financing lease costs $ 565 ​ $ 348 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ Nine Months Ended ​ September 30, 2022 September 30, 2021 Operating lease costs $ 2,282 ​ $ 1,580 Variable lease costs ​ 470 ​ ​ 509 Short-term operating lease costs ​ — ​ ​ 416 Total expense from operating leases $ 2,752 ​ $ 2,505 ​ ​ ​ ​ ​ ​ Finance lease costs: ​ ​ ​ ​ ​ Right-of-use amortization expense $ 1,233 ​ $ 751 Interest on lease liabilities ​ 334 ​ ​ 297 Total financing lease costs $ 1,567 ​ $ 1,048 ​ The following table reflects balances for operating and financing leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ December 31, ​ ​ 2022 ​ 2021 Operating leases: ​ ​ ​ ​ ​ Operating lease right-of-use assets, net of amortization $ 11,341 ​ $ 12,069 ​ ​ ​ ​ ​ ​ Current operating lease liabilities $ 2,304 ​ $ 1,857 Non-current operating lease liabilities ​ 9,514 ​ ​ 10,703 Total operating lease liabilities $ 11,818 ​ $ 12,560 ​ ​ ​ ​ ​ ​ Financing leases: ​ ​ ​ ​ ​ Property, equipment and leasehold improvements $ 14,375 ​ $ 9,088 Accumulated depreciation ​ ( 2,644 ) ​ ​ ( 2,451 ) Total financing leases in property, equipment and leasehold ___ improvements, net $ 11,731 ​ $ 6,637 ​ ​ ​ ​ ​ ​ Current financing lease liabilities $ 3,141 ​ $ 2,257 Non-current financing lease liabilities ​ 7,110 ​ ​ 2,668 Total financing lease liabilities $ 10,251 ​ $ 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 September 30, 2022 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating ​ ​ Financing ​ ​ ​ Leases ​ ​ Leases 2022 (excluding the nine months ended September 30, 2022) ​ $ 788 ​ $ 1,040 2023 ​ ​ 3,164 ​ ​ 3,626 2024 ​ ​ 2,896 ​ ​ 2,828 2025 ​ ​ 2,090 ​ ​ 2,537 2026 ​ ​ 1,958 ​ ​ 1,175 Thereafter ​ ​ 3,657 ​ ​ 271 Total lease payments ​ ​ 14,553 ​ ​ 11,477 Less imputed interest ​ ​ ( 2,735 ) ​ ​ ( 1,226 ) Total ​ $ 11,818 ​ $ 10,251 ​ ​ 10. Long-Term Debt ​ At September 30, 2022 and December 31, 2021, long-term debt consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest ​ September 30, December 31, ​ ​ Rate (1) ​ ​ 2022 ​ 2021 Senior Notes ​ 8.625 % ​ $ 290,000 ​ $ 310,000 ABL Revolver ​ 4.701 % ​ ​ 25,000 ​ ​ — Unamortized deferred financing costs ​ ​ ​ ​ ( 4,909 ) ​ ( 6,374 ) Total long-term debt ​ ​ ​ ​ ​ 310,091 ​ ​ 303,626 Less current maturities ​ ​ ​ ​ ​ — ​ ​ — Long-term debt, net of current maturities ​ ​ ​ ​ $ 310,091 ​ $ 303,626 ​ (1) The Senior Notes bear interest at a fixed rate. The interest rate on the ABL Revolver represents the average effective variable interest rate on outstanding borrowings as of September 30, 2022. ​ On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310,000 aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. 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. On October 11, 2022, the Company and CPI CG Inc. entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. ​ Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected. For each quarter through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average unused capacity of the facility for the previous quarter. The unused portion of the ABL Revolver commitment accrues a monthly commitment fee, 0.50 % per annum through March 31, 2023, based on the average daily borrowing capacity under the ABL Revolver over the previous month. Unused commitment fee expense was $ 179 and $ 118 for the nine months ended September 30, 2022 and 2021, respectively. The interest rate margin and unused commitment fee percentage changes, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused commitment fee). ​ 14 Table of Contents The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $ 7,500 . The 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 $ 4,909 and is reported as a reduction to the long-term debt balance as of September 30, 2022. The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,670 and are recorded as other assets (current and long-term) on the condensed consolidated balance sheet as of September 30, 2022. ​ 15 Table of Contents During the nine months ended September 30, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan, as described earlier. ​ ​ 11. Income Taxes ​ The Company’s effective tax rates on pre-tax income were 25.8 % and 30.3 % for the three months ended September 30, 2022 and 2021, respectively, and 28.5 % and 30.7 % for the nine months ended September 2022 and 2021, respectively. The decrease in the Company’s effective tax rate for the three and nine months compared to the corresponding periods in the prior year was primarily due to a greater proportion of pre-tax income in relation to the impact of permanent items. The effective tax rate for the three months ended September 30, 2022 also decreased as a result of the release of a federal valuation allowance for increased deductibility of interest costs due to a tax election made in the current year. ​ For the nine months ended September 30, 2022 and 2021, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ 2022 2021 ​ Tax at federal statutory rate ​ 21.0 % 21.0 % State taxes, net ​ 5.5 ​ 6.2 ​ Valuation allowance ​ — ​ — ​ Permanent items ​ 1.3 ​ 2.8 ​ Other ​ 0.7 ​ 0.7 ​ Effective income tax rate ​ 28.5 % 30.7 % ​ ​ 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 ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 ​ 2021 Numerator: ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income ​ $ 11,910 ​ $ 6,626 ​ $ 24,063 ​ $ 15,268 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic weighted-average common shares outstanding ​ 11,265,767 ​ 11,238,678 ​ 11,259,655 ​ 11,234,054 Dilutive shares ​ ​ 523,154 ​ ​ 560,643 ​ ​ 471,013 ​ ​ 521,327 Diluted weighted-average common shares outstanding ​ ​ 11,788,921 ​ ​ 11,799,321 ​ ​ 11,730,668 ​ ​ 11,755,381 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 1.06 ​ $ 0.59 ​ $ 2.14 ​ $ 1.36 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share ​ $ 1.01 ​ $ 0.56 ​ $ 2.05 ​ $ 1.30 ​ ​ 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 Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. Thus far, the United States Patent Office has instituted proceedings with respect to three of the IPR requests and the other remains pending. The current proceedings 17 Table of Contents in the patent office are scheduled to run through June 22, 2023. Should the remaining IPR request be denied or should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of September 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 September 30, 2022 and December 31, 2021 was $ 762 and $ 1,019 , respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets. The liability decreased from the estimate recorded in the prior period primarily due to the Company remitting cash to the applicable state tax authorities for historical sales tax and interest. 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 nine months ended September 30, 2022 and 2021, the Company recorded sales tax expense of $ 74 and sales tax benefit of $ 465 , respectively, within SG&A for current activity relating to updates to the estimated liability. Voluntary Disclosure Program The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable. ​ 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 September 30, 2022, there were 879,197 shares of Common Stock available for grant under the Omnibus Plan. During the nine months ended September 30, 2022, the Company granted 44,905 awards of non-qualified stock options. The Company granted 115,659 awards of non-qualified stock options of during the nine months ended September 30, 2021. The following is a summary of the activity in outstanding stock options under the Omnibus Plan: ​ 18 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ 44,905 ​ ​ 14.95 ​ 6.47 Exercised ​ ( 18,186 ) ​ ​ 4.31 ​ ​ Expired ​ ( 1,320 ) ​ ​ 21.75 ​ ​ Forfeited ​ ( 10,457 ) ​ ​ 28.03 ​ ​ Outstanding as of September 30, 2022 ​ 793,777 ​ $ 18.02 ​ 4.92 Options vested and exercisable as of September 30, 2022 ​ 684,927 ​ $ 17.12 ​ 4.71 Options vested and expected to vest as of September 30, 2022 ​ 793,777 ​ $ 18.02 ​ 4.92 ​ 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 ​ 44,905 ​ ​ 8.99 Vested ​ ( 52,955 ) ​ ​ 17.43 Forfeited ( 10,457 ) ​ 16.52 Unvested as of September 30, 2022 108,850 ​ $ 14.03 ​ Unvested stock options of 108,850 as of September 30, 2022 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date. ​ The fair value of the stock option awards granted during the nine months ended September 30, 2022, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ September 30, ​ ​ 2022 ​ 2021 Expected term in years (1) ​ 4.3 ​ ​ 4.3 ​ Volatility (2) ​ 77.6 % ​ 78.6 % Risk-free interest rate (3) ​ 2.9 % ​ 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, 2021 261,982 ​ $ 13.19 ​ ​ Granted ​ 27,007 ​ ​ 14.95 ​ ​ Vested ​ ( 31,258 ) ​ ​ 29.62 ​ ​ Forfeited ( 18,247 ) ​ ​ 10.89 ​ ​ Outstanding as of September 30, 2022 239,484 ​ $ 11.42 ​ 1.26 ​ 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 September 30, 2022 and 2021 was $ 966 and $ 116 , respectively. Compensation expense for the Omnibus Plan for the nine months ended September 30, 2022 and 2021 was $ 2,928 and $ 214 , respectively. As of September 30, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 1,892 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.14 years. ​ ​ 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, 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. 20 Table of Contents 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. Performance Measures of Reportable Segments ​ Net Sales and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Sales ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Debit and Credit $ 99,512 $ 76,121 $ 285,708 $ 218,798 Prepaid Debit ​ 25,335 ​ 23,498 ​ ​ 64,010 ​ ​ 63,339 Intersegment eliminations ​ ( 270 ) ​ ( 17 ) ​ ​ ( 409 ) ​ ​ ( 224 ) Total ​ $ 124,577 ​ $ 99,602 ​ $ 349,309 ​ $ 281,913 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EBITDA ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 Debit and Credit $ 31,675 $ 22,356 $ 85,042 $ 67,078 Prepaid Debit ​ 9,638 ​ 9,040 ​ 22,101 ​ 24,719 Other ​ ( 14,094 ) ​ ( 11,130 ) ​ ( 40,119 ) ​ ( 34,955 ) Total ​ $ 27,219 ​ $ 20,266 ​ $ 67,024 ​ $ 56,842 ​ The following table provides a reconciliation of total segment EBITDA to net income for the three and nine months ended September 30, 2022 and 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ 2022 2021 2022 2021 Total segment EBITDA ​ $ 27,219 ​ $ 20,266 ​ $ 67,024 ​ $ 56,842 Interest, net ​ ​ ( 7,323 ) ​ ​ ( 7,183 ) ​ ​ ( 22,334 ) ​ ​ ( 23,196 ) Income tax expense ​ ( 4,149 ) ​ ( 2,887 ) ​ ( 9,609 ) ​ ( 6,769 ) Depreciation and amortization ​ ( 3,837 ) ​ ( 3,570 ) ​ ( 11,018 ) ​ ( 11,609 ) Net income ​ $ 11,910 ​ $ 6,626 ​ $ 24,063 ​ $ 15,268 ​ 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