UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒⌧Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

For the Quarterly Period Ended March 31, ~~2020.~~2021.

◻

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

☐~~Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934~~

For the Transition Period from to

Commission File ~~Number~~Number: 001-37584

CPI Card Group Inc.

(Exact name of the registrant as specified in its charter)



Delaware		26-0344657
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

~~10026 West San Juan Way~~10368 W. Centennial Road
Littleton, CO		80127
(Address of principal executive offices)		(Zip Code)

(720) 681-6304

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities ~~Exchange Act~~registered pursuant to Section 12(g) of ~~1934:~~the Act: Common Stock $0.001 par value


~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~Common Stock, $0.001 par value~~	~~PMTS~~	~~OTC Markets Group Inc.~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~Yes☒ No~~Yes ⌧ No ☐◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes☒ No☐~~Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐◻	Accelerated filer	☐◻

Non-accelerated filer	☒⌧	Smaller reporting company	☒

		Emerging growth company	☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

~~Yes~~Yes ☐ No ~~No☒~~⌧

Number of shares of Common Stock, $0.001 par value, outstanding as of April ~~23, 2020: 11,229,819~~22, 2021: 11,230,482

PART I - Financial Information

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)


	March 31,		December 31,
	2020		2019


					March 31,		December 31,
					2021		2020

Assets
Current assets:
Cash and cash equivalents	$	46,904	$	18,682	$	24,884	$	57,603
Accounts receivable, net of allowances of $338 and $395, respectively		43,790		42,832
Accounts receivable, net of allowances of $237 and $289, respectively						60,479		54,592
Inventories		19,146		20,192		33,490		24,796
Prepaid expenses and other current assets		4,548		6,345		5,193		5,032
Income taxes receivable		5,590		4,164		9,152		10,511
Total current assets		119,978		92,215		133,198		152,534
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net		39,928		42,088		38,188		39,403
Intangible assets, net		29,653		30,802		25,058		26,207
Goodwill		47,150		47,150		47,150		47,150
Other assets		681		1,232		2,700		857
Total assets	$	237,390	$	213,487	$	246,294	$	266,151
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	13,772	$	16,482	$	21,792	$	18,883
Accrued expenses		20,973		22,820		22,618		28,149
Current portion of long-term debt						—		8,027
Deferred revenue and customer deposits		645		468		1,316		1,868
Total current liabilities		35,390		39,770		45,726		56,927
Long-term debt		333,890		307,778		317,503		328,681
Deferred income taxes		7,495		6,896		7,232		7,409
Other long-term liabilities		10,598		11,478		11,409		11,171
Total liabilities		387,373		365,922		381,870		404,188
Commitments and contingencies (Note 15)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at March 31, 2020 and December 31, 2019		-		-
Commitments and contingencies (Note 14)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at March 31, 2021 and December 31, 2020						-		-
Stockholders’ deficit:
Common stock; $0.001 par value—100,000,000 shares authorized; 11,229,819 and 11,224,191 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		11		11
Common stock; $0.001 par value—100,000,000 shares authorized; 11,230,482 shares issued and outstanding at March 31, 2021 and December 31, 2020						11		11
Capital deficiency		(111,953)		(111,988)		(111,807)		(111,858)
Accumulated loss		(38,041)		(40,458)		(23,780)		(26,190)
Total stockholders’ deficit		(149,983)		(152,435)		(135,576)		(138,037)
Total liabilities and stockholders’ deficit	$	237,390	$	213,487	$	246,294	$	266,151

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income ~~(Loss)~~

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

(Unaudited)


	Three Months Ended March 31,
	2020		2019

					Three Months Ended March 31,
					2021		2020
Net sales:
Products	$	42,501	$	32,757	$	47,013	$	42,501
Services		31,468		34,109		42,079		31,468
Total net sales		73,969		66,866		89,092		73,969
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		26,379		21,489		27,287		26,379
Services (exclusive of depreciation and amortization shown below)		19,187		21,166		23,668		19,187
Depreciation and amortization		2,693		2,690		2,416		2,755
Total cost of sales		48,259		45,345		53,371		48,321
Gross profit		25,710		21,521		35,721		25,648
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		16,542		16,418		16,146		16,663
Depreciation and amortization		1,485		1,533		1,806		1,485
Total operating expenses		18,027		17,951		17,952		18,148
Income from operations		7,683		3,570		17,769		7,500
Other expense, net:
Interest, net		(6,088)		(6,324)		(8,976)		(6,088)
Foreign currency (loss) gain		(8)		41
Other (expense) income, net		(87)		19
Other income (expense), net						25		(3)
Loss on debt extinguishment						(5,048)		(92)
Total other expense, net		(6,183)		(6,264)		(13,999)		(6,183)
Income (loss) from continuing operations before income taxes		1,500		(2,694)
Income tax benefit (expense)		943		(403)
Net income (loss) from continuing operations		2,443		(3,097)
Net (loss) income from discontinued operation, net of tax (Note 3)		(26)		42
Net income (loss)	$	2,417	$	(3,055)

Basic and diluted earnings (loss) per share:
Net income (loss) per share from continuing operations - Basic:	$	0.22	$	(0.28)
Net income (loss) per share from continuing operations - Diluted:	$	0.22	$	(0.28)

Net income (loss) per share - Basic:	$	0.22	$	(0.27)
Net income (loss) per share - Diluted:	$	0.21	$	(0.27)

Income from continuing operations before income taxes						3,770		1,317
Income tax (expense) benefit						(1,360)		465
Net income from continuing operations						2,410		1,782
Net loss from discontinued operations, net of tax (Note 1)						—		(26)
Net income					$	2,410	$	1,756

Basic and diluted earnings per share:
Earnings per share from continuing operations - Basic and Diluted:					$	0.21	$	0.16
Earnings per share - Basic and Diluted:					$	0.21	$	0.16

Basic weighted-average shares outstanding:		11,224,500		11,160,473		11,230,482		11,224,500
Diluted weighted-average shares outstanding:		11,262,359		11,160,473		11,639,015		11,262,359

Comprehensive income (loss):
Net income (loss)	$	2,417	$	(3,055)
Currency translation adjustment		—		31
Total comprehensive income (loss)	$	2,417	$	(3,024)

Comprehensive income:
Net income					$	2,410	$	1,756
Total comprehensive income					$	2,410	$	1,756

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in ~~Thousands)~~Thousands, Excludes per Share Amounts)

(Unaudited)


								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total



												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														—		51		—		51
Components of comprehensive income:
Net income														—		—		2,410		2,410
March 31, 2021												11,230,482	$	11	$	(111,807)	$	(23,780)	$	(135,576)



December 31, 2019	11,224,191	$	11		(111,988)	$	(40,458)	$	—	$	(152,435)	11,224,191	$	11	$	(111,988)	$	(42,319)	$	(154,296)
Shares issued under stock-based compensation plans	5,628		—		—		—		—		—	5,628		—		—		—		—
Stock-based compensation					35		—		—		35			—		35		—		35
Components of comprehensive (loss) income:
Components of comprehensive income:
Net income					—		2,417		—		2,417			—		—		1,756		1,756
March 31, 2020	11,229,819	$	11	$	(111,953)	$	(38,041)	$	—	$	(149,983)	11,229,819	$	11	$	(111,953)	$	(40,563)	$	(152,505)



December 31, 2018	11,160,377		11		(112,223)		(36,004)		(1,360)		(149,576)
Shares issued under stock-based compensation plans	160		—		—		—		—		—
Stock-based compensation					132		—		—		132
Components of comprehensive (loss) income:
Net loss					—		(3,055)		—		(3,055)
Currency translation adjustment					—		—		31		31
March 31, 2019	11,160,537	$	11	$	(112,091)	$	(39,059)	$	(1,329)	$	(152,468)

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)


	Three Months Ended March 31,
	2020		2019

					Three Months Ended March 31,
					2021		2020
Operating activities
Net income (loss)	$	2,417	$	(3,055)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Loss (income) from discontinued operation		26		(42)
Net income					$	2,410	$	1,756
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations						—		26
Depreciation and amortization expense		4,178		4,223		4,222		4,240
Stock-based compensation expense		41		147		51		41
Amortization of debt issuance costs and debt discount		634		489		887		634
Loss on debt extinguishment						5,048		92
Deferred income taxes		599		250		(177)		537
Other, net		582		(45)		200		488
Changes in operating assets and liabilities:
Accounts receivable		(911)		(1,420)		(5,884)		(911)
Inventories		521		(4,382)		(8,885)		521
Prepaid expenses and other assets		1,138		309		107		1,138
Income taxes receivable, net		(1,384)		114		1,359		(846)
Accounts payable		(2,747)		403		3,705		(2,747)
Accrued expenses		(1,981)		(6,716)		(2,790)		(1,856)
Deferred revenue and customer deposits		177		(551)		(556)		177
Other liabilities		(86)		80		447		(86)
Cash provided by (used in) operating activities - continuing operations		3,204		(10,196)
Cash provided by (used in) operating activities - discontinued operation		(26)		42
Cash provided by operating activities - continuing operations						144		3,204
Cash used in operating activities - discontinued operations						—		(26)
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(938)		(2,146)
Cash used in investing activities - continuing operations		(938)		(2,146)
Capital expenditures for plant, equipment and leasehold improvements						(2,524)		(938)
Other						155		—
Cash used in investing activities						(2,369)		(938)
Financing activities
Principal payments on First Lien Term loan						(312,500)		—
Principal payments on Senior Credit Facility						(30,000)		—
Proceeds from Senior Notes						310,000		—
Proceeds from ABL Revolver, net of discount						14,750		—
Proceeds from Senior Credit Facility, net of discount		29,100		—		—		29,100
Debt issuance costs		(2,507)		—		(9,452)		(2,507)
Proceeds from Revolving Credit Facility		—		5,000
Payments on Revolving Credit Facility		—		(5,000)
Payments on debt extinguishment						(2,685)		—
Payments on finance lease obligations		(593)		(143)		(610)		(593)
Cash provided by (used in) financing activities		26,000		(143)
Cash (used in) provided by financing activities						(30,497)		26,000
Effect of exchange rates on cash		(18)		34		3		(18)
Net increase (decrease) in cash and cash equivalents		28,222		(12,409)
Net (decrease) increase in cash and cash equivalents						(32,719)		28,222
Cash and cash equivalents, beginning of period		18,682		20,291		57,603		18,682
Cash and cash equivalents, end of period	$	46,904	$	7,882	$	24,884	$	46,904
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest	$	5,538	$	5,736	$	8,382	$	5,538
Income taxes, net refunds	$	(232)	$	(41)
Income taxes					$	1	$	(232)
Right-to-use assets obtained in exchange for lease obligations:
Operating leases	$	141	$	—	$	432	$	141
Financing leases	$	251	$	—	$	526	$	251
Accounts payable, and accrued expenses for acquisitions of plant, equipment and leasehold improvements	$	345	$	1,238
Accounts payable, and accrued expenses for capital expenditures for plant, equipment and leasehold improvements					$	256	$	345

Table of Contents

2. Net Sales

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


	Three Months Ended March 31, 2020
	Products		Services		Total

							Three Months Ended March 31, 2021
							Products		Services		Total
Debit and Credit	$	42,911	$	16,928	$	59,839	$	47,179	$	22,638	$	69,817
Prepaid Debit		—		14,540		14,540		—		19,458		19,458
Other		—		—		—
Intersegment eliminations		(410)		—		(410)		(166)		(17)		(183)
Total	$	42,501	$	31,468	$	73,969	$	47,013	$	42,079	$	89,092


	Three Months Ended March 31, 2019
	Products		Services		Total


							Three Months Ended March 31, 2020
							Products		Services		Total
Debit and Credit	$	32,844	$	16,085	$	48,929	$	42,911	$	16,928	$	59,839
Prepaid Debit		—		16,744		16,744		—		14,540		14,540
Other		397		1,282		1,679
Intersegment eliminations		(484)		(2)		(486)		(410)		—		(410)
Total	$	32,757	$	34,109	$	66,866	$	42,501	$	31,468	$	73,969

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are manufactured Financial Payment Cards, including ~~contact-EMV®~~contact-EMV^®, ~~Dual-Interface~~contactless dual-interface EMV, contactless and magnetic stripe cards, our eco-focused solutions including Second Wave and Earthwise^TMTM “high content” upcycled plastic cards,, metal cards, private label credit cards and retail gift cards. ~~Card@Once®~~Card@Once^® printers and consumables are also included in “Products” net sales, and their ~~associate~~dassociated 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®~~EMV^® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by ~~EMVCo, L~~LCEMVCo, 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, including CPI On-Demand^® personalization, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and ~~software as a service~~software-as-a-service personalization of instant issuance debit and credit cards. The Company also generates “Services” net sales from usage-fees generated from the Company’s patented card design software, known as ~~MYCA®~~MYCA^TM, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. ~~For~~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.

6.5. 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:


	March 31, 2020		December 31, 2019


					March 31, 2021		December 31, 2020

Machinery and equipment	$	52,270	$	52,212	$	57,714	$	55,459
Machinery and equipment under financing leases		8,507		8,256		9,858		9,974
Furniture, fixtures and computer equipment		4,646		4,749		4,331		4,410
Leasehold improvements		14,914		14,905		13,896		15,083
Construction in progress		756		455		1,381		2,386
		81,093		80,577
						87,180		87,312
Less accumulated depreciation and amortization		(47,121)		(44,801)		(55,925)		(55,092)
Operating lease right-of-use assets, net of accumulated amortization		5,956		6,312		6,933		7,183
	$	39,928	$	42,088
					$	38,188	$	39,403

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was ~~$3,029~~$3,073 and ~~$3,059~~$3,091 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Operating lease right-of-use assets, net of accumulated amortization, are further described in Note ~~10,~~9, Financing and Operating Leases.

The Company reports all of its goodwill in ~~its~~the Debit and Credit segment at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable. The Company did not identify a triggering event requiring a quantitative test for impairment as of March 31 2020. The implications of COVID-19, and a decline in the Company’s total fair value of invested capital and financial performance for reporting units with goodwill, could require the Company to perform a quantitative test for goodwill impairment in future quarters. , 2021.

Intangible assets consist of customer relationships, technology and software ~~trademarks~~ and ~~non-compete agreements.~~trademarks. Intangible amortization expense was $1,149 and ~~$1,164~~$1,149 for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

Table of Contents

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, intangible assets, excluding goodwill, were comprised of the following:


		March 31, 2020						December 31, 2019
	Weighted Average			Accumulated		Net Book				Accumulated		Net Book
	Life (Years)	Cost		Amortization		Value		Cost		Amortization		Value


															March 31, 2021						December 31, 2020
														Weighted Average			Accumulated		Net Book				Accumulated		Net Book
														Life (Years)	Cost		Amortization		Value		Cost		Amortization		Value

Customer relationships	17.2	$	55,454	$	(29,684)	$	25,770	$	55,454		(28,865)	$	26,589	17.2	$	55,454	$	(32,961)	$	22,493	$	55,454		(32,141)	$	23,313
Technology and software	8		7,101		(5,184)		1,917		7,101		(4,952)		2,149	8		7,101		(6,113)		988		7,101		(5,881)		1,220
Trademarks	8.7		3,330		(1,364)		1,966		3,330		(1,266)		2,064	8.7		3,330		(1,753)		1,577		3,330		(1,656)		1,674
Non-compete agreements	5		491		(491)		—		491		(491)		—
Intangible assets subject to amortization		$	66,376	$	(36,723)	$	29,653	$	66,376	$	(35,574)	$	30,802		$	65,885	$	(40,827)	$	25,058	$	65,885	$	(39,678)	$	26,207

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

● Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

● Level 2— Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities.

● Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The Company’s financial assets and liabilities that are not required to be re-measured at fair value in the ~~Condensed Consolidated Balance Sheets~~condensed consolidated balance sheets were as follows:

Carrying

Value as of

Fair Value as of

Fair Value Measurement at March 31, 2020

March 31,

March 31,

(Using Fair Value Hierarchy)

2020

2020

Level 1

Level 2

Level 3
Liabilities:










First Lien Term Loan

$
312,500

$
201,563

$
—

$
201,563

$
—
Senior Credit Facility

$
30,000

$
30,000

$

$

$
30,000


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at March 31, 2021
	March 31,		March 31,		(Using Fair Value Hierarchy)
	2021		2021		Level 1		Level 2		Level 3
Liabilities:
Senior Notes	$	310,000	$	324,725	$	—	$	324,725	$	—
ABL Revolver	$	15,000	$	15,000	$	—	$	15,000	$	—

Table of Contents


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2020
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2020		2020		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	287,500	$	—	$	287,500	$	—
Senior Credit Facility		30,000		30,000	$	—	$	—	$	30,000

The aggregate fair value of the Company’s ~~First Lien Term Loan, as~~Senior Notes (as defined in Note ~~11,~~10, Long-Term ~~Debt,~~Debt) was based on bank quotes. The fair value measurement associated with the ~~Senior Credit Facility is based on significant unobservable Level 3 inputs,~~ ABL Revolver (as defined in Note 10, Long-Term Debt) ~~which require significant management judgment and estimation. The fair value~~ approximates its carrying value as of March 31, ~~2020,~~2021, given the ~~facility ranks~~ ~~senior in priority to the Company’s First Lien Term Loan, and the~~ close proximity to the date the Company entered into the ~~Senior Credit Facility~~credit facility on March ~~6, 2020~~15, 2021, and the applicable interest rates and nature of the . security interest in Company assets.

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value.

~~Table of Contents~~

8. Accrued Expenses

~~9. Accrued Liabilities~~

Accrued ~~liabilities~~expenses consisted of the following:


	March 31, 2020		December 31, 2019


					March 31, 2021		December 31, 2020

Accrued payroll and related employee expenses	$	4,743	$	3,954	$	5,007	$	4,938
Accrued employee performance bonus		1,497		3,920		2,117		4,873
Employer payroll tax, including social security deferral						2,794		3,034
Accrued rebates						1,668		1,178
Sales tax liability						1,805		1,696
Accrued interest		4,740		4,951		1,262		4,145
Operating and financing lease liability (current portion)		4,675		4,494		4,016		4,407
Other		5,318		5,501		3,949		3,878
Total accrued expenses	$	20,973	$	22,820	$	22,618	$	28,149

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.

~~10.~~9. Financing and Operating Leases

CPI adopted ASC 842 effective January 1, 2019. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. Right-of-use (“~~ROU’~~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. ~~As a result~~

The following table reflects balances for operating and financing leases:



	March 31, 2020		December 31, 2019


					March 31, 2021		December 31, 2020
Operating leases
Operating lease right-of-use assets, net of amortization	$	5,956	$	6,312	$	6,933	$	7,183


Operating lease liability (current)	$	2,401	$	2,283	$	1,958	$	2,267
Long-term operating liability		4,548		5,067		5,540		5,491
Total operating lease liabilities	$	6,949	$	7,350	$	7,498	$	7,758


Financing leases
Property, equipment and leasehold improvements	$	8,507	$	8,256	$	9,858	$	9,974
Accumulated depreciation		(1,421)		(1,094)		(2,086)		(2,422)
Total property, equipment and leasehold improvements, net	$	7,086	$	7,162	$	7,772	$	7,552


Financing lease liability (current)	$	2,274	$	2,211	$	2,058	$	2,140
Long-term financing liability		3,460		3,886		3,050		3,052
Total financing lease liabilities	$	5,734	$	6,097	$	5,108	$	5,192

Finance and operating lease ~~right-of-use~~ROU assets are recorded in “Plant, equipment, leasehold improvements, and operating lease right-of-use assets, ~~net”.~~net.” Financing and operating lease liabilities are recorded in “Accrued expenses” and “Other long-term ~~liabilities”.~~liabilities.”

Future cash payment with respect to lease obligations as of March 31, ~~2020~~2021 were as follows:

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10. Long-Term Debt

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, long-term debt consisted of the following:


	Interest		March 31,		December 31,
	Rate (1)		2020		2019

							Interest		March 31,		December 31,
							Rate ⁽¹⁾		2021		2020
Senior Notes							8.625	%	$	310,000	$	—
ABL Revolver							1.356	%		15,000		—
First Lien Term Loan	6.38	%	$	312,500	$	312,500	5.500	%		—		312,500
Senior Credit Facility	9.50	%		30,000		—	9.500	%		—		30,000
Unamortized deferred financing costs										(7,497)		(3,804)
Unamortized discount				(2,951)		(1,770)				—		(1,988)
Unamortized deferred financing costs				(5,659)		(2,952)
Total Long-term debt			$	333,890	$	307,778
Total long-term debt									$	317,503	$	336,708
Less current maturities				—		—				—		(8,027)
Long-term debt, net of current maturities				333,890		307,778			$	317,503	$	328,681

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subsidiaries (other than the Issuer and excluded subsidiaries), and is secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions.

The Senior ~~Credit Facility~~Notes and the ~~First Lien Term Loan~~ABL Revolver contain ~~customary representations,~~ covenants ~~and events~~limiting the ability of ~~default, including certain covenants that limit or restrict~~the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and ~~certain of~~ its ~~subsidiaries’ ability~~restricted subsidiaries to ~~incur indebtedness, grant certain types of security interests, incur certain types of liens,~~pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or ~~transfer assets or~~consolidate; and enter into ~~a merger or consolidate~~certain transactions with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions andaffiliates, subject to ~~certain exceptions. In accordance with~~a number of important exceptions and qualifications as set forth in the respective agreements.

The Company may have obligations to make an offer to repay the Senior Credit Facility, the Company is also required to maintain adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, as measured each quarterly period ending on or after March 31, 2020. ~~As of March 31, 2020, the Company was in compliance with all covenants under the First Lien Term Loan and the Senior Credit Facility.~~

~~The Senior Credit Facility and the First Lien Term Loan also require~~Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain ~~customary~~ events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among Issuer, the ~~agreement,~~Company, the subsidiary guarantors and U.S. Bank National Association, with any required ~~payments~~prepayments to be made after the issuance of the Company’s annual financial statements.

As of December 31, 2020, $8,027 of debt principal was classified as a current liability as a result of an excess free cash flow calculation for 2020 pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan. The Company ~~was not required~~offered to ~~make any prepayments~~prepay the balance, pursuant to the terms of the Senior Credit Facility and the First Lien Term Loan, ~~with respect~~which resulted in a required principal prepayment of $7,754 to ~~our 2019 annual financial statements.~~

~~Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate,~~ ~~subject to an interest rate floor of 1.0%,~~ plus a margin of 8.5% or a base rate plus a margin of 7.5%. The maturity date of the Senior Credit Facility is May 17, 2022, and prepayments made prior to February 15, 2022 are subject to a make-whole premium. ~~Interest rates under~~ the First Lien Term Loan ~~are based, at the Company’s election,~~lenders on ~~a Eurodollar rate, subject to an interest rate floor of 1.0%,~~March 4, 2021, plus ~~a margin of 4.50%, or a base rate plus a margin of 3.50%.~~

~~The term loans made under the Senior Credit Facility would be accelerated and become immediately due and payable if an event of default (as defined in the Senior Credit Agreement) were to occur.~~ Tricor Pacific Capital Partners (Fund IV), Limited Partnership and Tricor Pacific Capital Partners (Fund IV) US, Limited Partnership (collectively, the “Tricor Funds”), own approximately 37% and 22% of the Company’s common stock, respectively, as of December 31, 2019. If the Tricor Funds were to sell or otherwise dispose of more than 25% of CPI’s outstanding common stock, or otherwise cease to own at least 30% of CPI’s outstanding common stock, other than by means of distributing CPI common stock to the participants in Tricor Funds, a “change of control” event of default would occur. Additionally, certain proposed changes to the Senior Credit Facility require the consent of lenders representing more than 50% of the outstanding term loans, and if a lender does not consent to such proposed changes, then, among other options, CPI may be required to pre-pay the non-consenting lender’s portion of the loan, including accrued interest ~~fees and other amounts payable, as well as a make-whole premium.~~thereon.

~~Table of Contents~~

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

Deferred Financing Costs and Discount

Certain costs and discounts incurred with borrowings or the establishment or modification of credit facilities are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The ~~discount~~debt issuance costs recorded on the Senior ~~Credit Facility was $1,400,~~Notes were $7,558 and ~~financing costs were $3,215, and were recorded~~are reported as a reduction to the long-term debt balance in the quarter ended March 31, ~~2020.~~2021. The net discount and debt issuance costs on the ~~Senior Credit Facility~~ABL Revolver were $2,144 and are recorded as ~~included within financing activities~~other assets (current and long term) on the condensed consolidated ~~statement~~balance sheet as of ~~cash flows relates to cash flows during~~March 31, 2021.

During the ~~quarter~~three months ended March 31, ~~2020.~~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.

~~12.~~

11. Income Taxes ~~– Continuing Operations~~

During the three months ended March 31, 2021, the Company recognized an income tax expense of $1,360 on a pre-tax income of $3,770, representing an effective income tax rate of 36.1%. For the three months ended March 31, 2020, the Company recognized an income tax benefit of ~~$943~~$465 on a pre-tax income of ~~$1,500, compared to~~$1,317, representing an effective income tax ~~expense~~rate of ~~$403 on a pre-tax loss~~(35.3)%.

Table of ~~$2,694 for the prior year period~~. Contents

For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:


	March 31,
	2020		2019

					March 31,
					2021		2020
Tax at federal statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State Taxes, net	33.9		(0.8)
State taxes, net					11.8		46.0
Valuation allowance	70.4		(31.2)		0.0		100.6
Permanent Items	34.6		(2.1)
Permanent items					3.9		47.9
Tax benefit CARES Act	(238.6)		—		0.0		(250.9)
Other	15.8		(1.9)		(0.6)		0.1
Effective income tax rate	(62.9)	%	(15.0)	%	36.1	%	(35.3)	%

In March 2020, the CARES Act was signed into law. The CARES Act allows companies with net operating losses ~~(NOLs)~~(“NOLs”) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits. For the ~~quarter~~three months ended March 31, 2020, the Company recorded an estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of ~~238.6%~~250.9%.~~. In addition, the Company recorded a partial valuation allowance with a tax rate impact of 70.4%, due to the limitation on the deductibility of interest expense.~~

The Company’s income tax receivable on the condensed consolidated balance sheet as of March 31, ~~2020,~~2021, relates primarily to U.S. federal income tax receivables relating to prior tax years, including NOL ~~carrybacks. In~~carrybacks relating to the ~~prior~~CARES Act income tax refund.

The Company believes that it is reasonably possible that approximately $852 of its unrecognized tax benefits may be recognized in the next one year ~~quarter ended~~period as a result of settlement with the taxing authorities. As such, this balance is reflected in “Accrued expenses” in the Company’s condensed consolidated balance sheet as of March 31, ~~2019, t~~he effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to the partial valuation allowance due to the limitation on the deductibility of interest expense. 2021.

~~13.~~12. Stockholders’ Deficit

Common Stock

Common Stock has a par value of $0.001 per share. Holders of ~~common stock~~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.

~~14. Income (Loss)~~13. Earnings per Share

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

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

Three Months Ended

March 31,

2020

2019
Numerator:

Net income (loss) from continuing operations

$
2,443

$
(3,097)
Net (loss) income from discontinued operation

(26)

42
Net income (loss)

$
2,417

$
(3,055)

Denominator:

Basic weighted-average common shares outstanding

11,224,500

11,160,473
Dilutive shares

37,859

—
Diluted weighted-average common shares outstanding

11,262,359

11,160,473

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

$
0.22

$
(0.28)
Net income (loss) per share from discontinued operations - Basic:

(0.00)

0.01
Net income (loss) per share - Basic:

$
0.22

$
(0.27)

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

$
0.22

$
(0.28)
Net income (loss) per share from discontinued operations - Diluted:

(0.01)

0.01
Net income (loss) per share - Diluted:

$
0.21

$
(0.27)


	Three Months Ended
	March 31,
	2021		2020
Numerator:
Net income from continuing operations		2,410		1,782
Net loss from discontinued operations		—		(26)
Net income	$	2,410	$	1,756

Denominator:
Basic weighted-average common shares outstanding		11,230,482		11,224,500
Dilutive shares		408,533		37,859
Diluted weighted-average common shares outstanding		11,639,015		11,262,359

Earnings per share from continuing operations - Basic and Diluted:		0.21		0.16
Earnings (loss) per share from discontinued operations - Basic and Diluted:		—		(0.00)
Earnings per share - Basic and Diluted:	$	0.21	$	0.16

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 ~~reported a net loss~~leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2022 and 2028 and contain various provisions for rental adjustments and renewals. The leases typically require the ~~three months ended March 31, 2019. Accordingly, the potentially dilutive effect of 893,238 stock options~~Company to pay property taxes, insurance and ~~67,592 restricted stock units were excluded from the computation of diluted earnings per share as of March 31, 2019, as their inclusion would be anti-dilutive.~~normal maintenance costs.

~~15. Commitments and Contingencies; Litigation Settlement~~

Contingencies

In accordance with applicable accounting guidance, the Company establishes an accrued liability when loss contingencies are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, the Company will establish an accrued liability and record a corresponding amount of ~~litigation-related~~ expense. The Company expenses professional fees associated with litigation claims and assessments as incurred.

Smart Packaging Solutions SA v. CPI Card Group Inc.

~~Heckermann v. Montross et al., Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)~~

On ~~November~~April 20, ~~2017, a purported CPI stockholder~~2021, Smart Packaging Solutions, SA (“SPS”) filed a ~~stockholder derivative complaint~~patent infringement lawsuit against the Company in the United States District Court for the District of Delaware ~~(the “Court”) against~~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 ~~CPI’s former officers and current and former directors, along~~other suppliers. The Company has not been formally served with the ~~sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI is also named as a nominal defendant.~~complaint and thus has not yet filed an answer. The ~~derivative complaint asserts~~Company intends to investigate and pursue its rights relating to the claims ~~under §§10(b)~~ and ~~20(a) of~~to defend the Securities Exchange Act of 1934 and SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

suit vigorously. However, no assurance can be

O~~n December 18, 2019, the parties filed a Stipulation and Agreement of Settlement~~given that this matter will be resolved favorably. Accordingly, it is not yet possible to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed with prejudice all claims (the “Settlement”). Under the Settlement, (i) all claimsreliably determine any potential liability that ~~were or~~ could ~~have been asserted~~result from this matter in the ~~Derivative Suit were resolved~~event of an adverse determination, and discharged, (ii) the Company agreed to implement certain corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount. Nono liability ~~associated with the Settlement~~ has been recorded ~~by the Company~~ as of March 31, ~~2020,~~2021 or December 31, ~~2019.~~2020.

In addition to the ~~matters~~matter described above, the Company ismay be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of ~~these~~any such matters will not have a material adverse effect on its business, financial condition or results of operations.

~~Litigation Settlement~~Estimated Sales Tax Liability

~~CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case~~

~~During the summer of 2017,~~The Company is evaluating a state sales tax liability analysis for states in which it has economic nexus and collecting exemption documentation from its customers. It is probable that the Company will be subject to sales tax liabilities plus interest and ~~its subsidiary, CPI Card Group – Minnesota, Inc. (together, the “Company Plaintiffs”), commenced~~penalties relating to historical activity in certain states. The estimated liability for sales tax as of March 31, 2021 and December 31, 2020 was $1,805 and $1,696, respectively, and is recorded in a ~~lawsuit~~ccrued expenses in the ~~United States District Court for~~condensed consolidated balance sheets. The liability increased from the ~~District of Minnesota against a former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees~~estimate recorded in the prior period due to ongoing activity. In addition, as ~~individuals (collectively, the Defendants). On June 12, 2019,~~ the Company ~~Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a~~remits cash ~~payment~~ to the ~~Company.~~ applicable state tax authorities for historical sales tax and interest, the liability balance will decrease. Due to the estimates involved in the analysis, the Company expects that the estimated liability will change in the future, and may exceed the current estimate. The Company also may be subject to examination by the relevant state tax authorities. Sales tax recovered from customers reduces the estimated expense when it is received ~~a $6,000 cash settlement payment during~~or probable of collection. Future changes to the ~~second quarter~~liability that impact the condensed consolidated statements of ~~2019,~~operations will be recorded within “Selling, general, and ~~recorded the gain within income from operations, in the Other segment. The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019.~~administrative expenses.”

~~16.~~15. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

~~During~~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. The Company had reserved ~~800,000~~1,200,000 shares of common stock for issuance under the Omnibus Plan. Effective March 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of March 31, ~~2020,~~2021, there were ~~336,731~~185,113 shares available for grant under the Omnibus Plan.

During the three months ended March 31, ~~2020,~~2021, and during the fiscal year ended December 31, ~~2019,~~2020, the Company did not grant any awards of non-qualified stock options. The following is a summary of the activity in outstanding stock options under the Omnibus Plan:

Weighted-

Weighted-

Average

Average

Remaining

Exercise

Contractual Term

Options

Price

(in Years)
Outstanding as of December 31, 2019

793,084

$
14.91

Forfeited

(57,741)

$
13.20

Outstanding as of March 31, 2020

735,343

$
15.05

7.16
Options vested and exercisable as of March 31, 2020

515,964

$
19.24

6.93
Options vested and expected to vest as of March 31, 2020

735,343

$
15.05

7.16


				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2020	706,372	$	15.20	6.44
Forfeited	—		-	-
Outstanding as of March 31, 2021	706,372	$	15.20	6.19
Options vested and exercisable as of March 31, 2021	670,876	$	15.92	6.12
Options vested and expected to vest as of March 31, 2021	706,372	$	15.20	6.19

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

Units

Fair Value

(in Years)

Outstanding as of December 31, 2019

7,347

$
22.49

Vested

(6,216)

21.75

Forfeited

(203)

21.75

Outstanding as of March 31, 2020

928

$
27.60

0.42


				Weighted-
				Average
		Weighted-		Remaining
		Average		Amortization
		Grant-Date		Period
	Shares	Fair Value		(in Years)
Outstanding as of December 31, 2020	180,001	$	2.12
Forfeited	—
Outstanding as of March 31, 2021	180,001	$	2.12	1.50

~~During the three months ended March 31, 2020, and during the fiscal year ended December 31, 2019, the~~The Company ~~did not grant any awards of~~granted 180,001 restricted stock ~~units.~~units to employees on October 2, 2020. The restricted stock unit awards contain conditions associated with continued employment or service and vest two years from the date of grant. On the vesting date, shares of common stock will be issued to the award recipients. Unvested restricted stock units of ~~928~~180,001 as of March 31, ~~2020,~~2021 will vest entirely in ~~2020.~~October 2022.

During the year ended December 31, 2017, the Company granted awards of 932,837 cash performance units with a grant-date fair value of $663. These awards settled in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units were based on the performance of the Company’s stock, measured based on the Company’s stock price at each of the first, second, and third anniversaries of the grant date compared to the Company’s stock price on the date of grant. The Company recognized compensation expense on a straight-line basis for each annual performance period. The cash performance units were accounted for as a liability and remeasured to fair value at the end of each reporting period. ~~During the three months ended March 31, 2020, the third tranche of the cash performance units vested and the Company made a cash payment of $68 to the award recipients.~~ ~~There are no outstanding cash performance units as of March 31, 2020.~~

Compensation expense for the Omnibus Plan for the three months ended March 31, 2021 and 2020 was $51 and ~~2019 was~~ $41, ~~and $147,~~ respectively. As of March 31, ~~2020,~~2021, the total unrecognized compensation expense related to unvested options and restricted stock units is ~~not significant, and~~$289, which the ~~expense is expected~~Company expects to ~~be recognized~~recognize over an estimated weighted-average period of ~~less than one year.~~approximately 1.5 years.

~~CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan~~

In 2007, the Company’s Board of Directors adopted the CPI Holdings I, Inc. Amended and Restated 2007 Stock Option Plan (the “Option Plan”). Under the provisions of the Option Plan, stock options could be granted to employees, directors and consultants at an exercise price greater than or equal to (and not less than) the fair market value of a share on the date the option was granted. ~~As a result of the Company’s adoption of its Omnibus Plan, no further awards will be made under the Option Plan.~~ During the year ended December 31, 2019, the remaining 6,600 outstanding shares in the Option Plan were exercised. As such, there were no outstanding shares remaining as of December 31, 2019, or March 31,

~~Table of Contents~~

~~2020.~~ ~~There was no compensation expense related to options previously granted under the Option Plan, for quarters ended March 31, 2020, and 2019.~~

~~17.~~16. Segment Reporting

The Company has identified reportable segments as those consolidated subsidiaries 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 March 31, ~~2020,~~2021, the Company’s reportable segments were as follows:

● Debit and ~~Credit,~~Credit;

● Prepaid ~~Debit,~~Debit; and

● Other.

~~The Other category includes the Company’s corporate office~~Debit and ~~a less significant operating segment that historically derived its revenue from the production of financial payment cards and retail gift cards in Canada.~~ Credit Segment

The ~~Company’s Canadian subsidiary was sold on April 1, 2019.~~ The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the Debit and Credit segment orprimarily produces Financial Payment Cards and provides integrated card services, including card personalization and fulfilment services, to ~~other service~~card-issuing banks primarily in the United States. Products manufactured by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless dual-interface cards, and plastic and encased metal cards, and our eco-focused solutions including Second Wave payment cards featuring a core made with recovered ocean bound plastic and Earthwise “high content” plastic cards. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. The Debit and Credit segment operations are each audited for compliance by multiple Payment Card Brands.

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Prepaid Debit Segment

The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in ~~2019.~~the United States, including tamper-evident security packaging. This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident security packages. The Prepaid Debit segment facilities are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands.

Other

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

Performance Measures of Reportable Segments

Net Sales and EBITDA of the Company’s reportable segments for the three months ended March 31, ~~2020,~~2021 and ~~2019,~~2020, were as follows:


	Net Sales
	Three Months Ended March 31,
	2020		2019

					Net Sales
					Three Months Ended March 31,
					2021		2020
Debit and Credit	$	59,839	$	48,929	$	69,817	$	59,839
Prepaid Debit		14,540		16,744		19,458		14,540
Other		—		1,679
Intersegment eliminations		(410)		(486)		(183)		(410)
Total	$	73,969	$	66,866	$	89,092	$	73,969


	EBITDA
	Three Months Ended March 31,
	2020		2019

					EBITDA
					Three Months Ended March 31,
					2021		2020
Debit and Credit	$	15,080	$	10,380	$	22,400	$	14,959
Prepaid Debit		4,660		5,779		7,573		4,660
Other		(7,974)		(8,306)		(13,005)		(7,974)
Total	$	11,766	$	7,853	$	16,968	$	11,645

The following table provides a reconciliation of total segment EBITDA ~~from continuing operations~~ to net income ~~(loss) from continuing operations~~ for the three months ended March 31, ~~2020,~~2021 and ~~2019:~~2020:

Three Months Ended

March 31,

2020

2019
Total segment EBITDA from continuing operations

$
11,766

$
7,853
Interest, net

(6,088)

(6,324)
Income tax benefit (expense)

943

(403)
Depreciation and amortization

(4,178)

(4,223)
Net income (loss) from continuing operations

$
2,443

$
(3,097)


	Three Months Ended
	March 31,
	2021		2020
Total segment EBITDA	$	16,968	$	11,645
Interest, net		(8,976)		(6,088)
Income tax (expense) benefit		(1,360)		465
Depreciation and amortization		(4,222)		(4,240)
Net loss from discontinued operations		—		(26)
Net income	$	2,410	$	1,756

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments at March 31, ~~2020,~~2021 and December 31, ~~2019,~~2020, were as follows:


	March 31, 2020		December 31, 2019


					March 31, 2021		December 31, 2020

Debit and Credit	$	200,578	$	176,496	$	200,341	$	215,846
Prepaid Debit		26,023		25,259		37,926		34,734
Other		10,789		11,732		8,027		15,571
Total assets	$	237,390	$	213,487	$	246,294	$	266,151

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

~~Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations, and the sale of the Company’s Canada operations on April 1, 2019, the~~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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operations

References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this ~~report.~~Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed with the Securities and Exchange Commission (“SEC”).

Cautionary Statement Regarding Forward-Looking Information

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (as well as information included in ~~our~~other written or oral ~~statements)~~statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, ~~(the “1933 Act”)~~ and Section 21E of the Securities Exchange Act of 1934, as amended (the ~~“1934~~“Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “guides,” “provides guidance,” “provides ~~outlook,”~~outlook” or other similar expressions are intended to identify forward-looking statements, which are ~~generally~~ not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important ~~factors~~risks and uncertainties that could cause actual results or other events to differ materially from those contemplated.

These risks and uncertainties include, but are not limited to: the potential effects of COVID-19 on our business, including our supply-chain, customer demand, workforce, operations and ability to comply with certain covenants in our credit facilities; ~~a decline~~our lack of eligibility to participate in ~~U.S. and global market and economic conditions and resulting decreases in consumer and business spending;~~government relief programs related to COVID-19 or inability to realize material benefits from such programs; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facilities and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our limited ability to raise capital in the future; a disruption or other failure in our supply chain; the effects of current or additional U.S. government tariffs as well as economic downturns or disruptions, including delays or interruptions in our ability to source raw materials and components used in our products; system security risks, data protection breaches and cyber-attacks; failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security, including with respect to possible exposure to litigation and/or regulatory penalties under applicable data privacy and other laws for failure to so comply; interruptions in our operations, including our ITinformation technology systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; disruptions in production at one or more of our facilities; our failure to retain our existing customers or identify and attract new customers; our inability to recruit, retain and develop qualified personnel, including key personnel; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, or infringement claims ~~that our technology is infringing on the intellectual property of others,~~brought against us and risks related to open source software; defects in our software; problems in production quality, materials and process; a ~~disruption or other failure in our supply chain; our failure to retain our existing customers or identify and attract new customers; a~~ loss of market share or a decline in profitability resulting from competition; our inability to recruit, retain and develop qualified personnel, including key personnel; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our inability to develop, introduce and commercialize new products; ~~the effect of legal~~new and regulatory proceedings; failure to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market; a continued decrease in the value of our common stock combined with our common stock no longer being traded on a United States national securities exchange, which may prevent investors from investing or achieving a meaningful degree of liquidity; developing technologies that make our existing technology solutions and products obsolete or less relevant or aour failure to introduce new products and services in a timely manner; quarterly variation in our operating results; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the PCI Security Standards Council security standards or other industry standards; costs relating to product defects and any related product liability and/or warranty claims; maintenance and further imposition of tariffs and/or trade restrictions on, or slow-downs or interruptions in our ability to obtain, goods imported into the United States; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state ~~retailers,~~businesses, as well as new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; failure to meet the continued listing standards of the Toronto Stock Exchange or the rules of the OTCQX® Best Market; a decrease in the value of our common stock combined with our common stock not being traded on a United States national securities exchange, which may prevent investors or potential investors from investing or achieving a meaningful degree of liquidity; quarterly variation in our operating results; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; a decline in U.S. and global market and economic conditions and resulting decreases in consumer and business spending; costs relating to product defects and any related product liability and/or warranty claims; our dependence on licensing arrangements; risks associated with international operations; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our ~~products;~~products and services; the effect of legal and regulatory proceedings; our ability to comply with a wide variety of ~~environmental, health and safety~~

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environmental, health and safety laws and regulations and the exposure to liability for any failure to comply; risks associated with the ~~controlling~~majority stockholders’ ownership of our stock; the influence of securities analysts over the trading market for and price of our common stock; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our ~~largest stockholder;~~majority stockholders; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors; and other risks that are described in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 filed with the SEC on ~~March 6, 2020, Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,~~February 25, 2021 and our other reports filed from time to time with the ~~Securities and Exchange Commission (the “SEC”).~~SEC.

We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

Overview

We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard^®, American Express^® and Discover^® in the United ~~States)~~States and Interac ~~(in~~in Canada). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which ~~provide~~provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card market through more than 20 years of experience. Our customers include leading national and regional banks, independent community banks, credit unions, managers of prepaid debit programs, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors. We serve a diverse set of ~~over~~approximately 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, ~~Group~~“Group Service ~~Providers~~Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors.

We serve our customers through a network of high-security production and card services facilities ~~including high-security facilities~~ in the United States, each of which ~~are~~is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. Many of our customers require us to comply with ~~the standards of the~~ PCI Security Standards ~~Council. This~~Council requirements that relate to the provision of our products and services. Our leading network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base.

Driven by a combination of our strong relationships, quality, technology and innovation, we believe we have strong positions in the following markets:

●

the U.S. prepaid debit market, serving several of the top U.S. Prepaid Debit Card program managers;

●

the U.S. small to mid-sized issuer market, which includes independent community banks and credit unions; and

●

the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers.

Our business consists of the following reportable segments: Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card ~~program managers primarily~~providers in the United States. ~~Businesses not considered part of these segments are considered~~Our “Other” ~~and included our operations in Canada prior to the sale and disposition of our Canadian operations and~~segment includes corporate expenses.

In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the Debit and Credit segment or to other service providers in 2019. The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million. After the payment of liabilities and transaction costs, including employee termination costs the majority of which were expensed in 2018, the sale did not have a significant impact on

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cash and no significant loss on sale. The Canadian subsidiary was not a significant operating segment and the results of this business through the transaction closing date were presented as part of the Other reportable segment.

COVID-19 Update

In December 2019, COVID-19 was reported and in January 2020, the WHO declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. Further, on March 13, 2020, the President of the United States declared the COVID-19 pandemic a national emergency, invoking powers under the Stafford Act – the legislation that directs federal emergency disaster response.

The ~~broader~~COVID-19 pandemic has impacted economies and societies globally. The long-term implications of COVID-19 on ~~our~~the Company’s results of operations and overall financial performance remain uncertain. ~~The adverse effects of the COVID-19 pandemic have become widespread, including in the locations where we, our customers and our suppliers conduct business.~~ The health and safety of our employees ~~remains~~remain paramount, and we continue to follow ~~the safety~~response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and ~~Prevention.~~  Prevention, as well as various state and local executive orders, health orders and guidelines. The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain including access to, and higher pricing of, certain raw materials which may continue in the future. CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to address potential supply chain constraints.The current economic environment has affected the available labor pool in the areas in which the Company operates which may result in increased labor cost and turnover in our facilities. The Company will continue to monitor and respond as the situation evolves. All of CPI’s operations ~~remain~~have remained open and continue to provide direct and essential support to the financial services industry. However, we may experience constrained supply or curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods. While our net sales and net incomeSee Item 1A, Risk Factors, in the ~~first quarter of~~Company’s Annual Report on Form 10-K for the year ended December 31, 2020 ~~have increased over~~filed with the ~~first quarter of 2019, the effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See~~ ~~Risk Factors~~ SEC for further discussion of the possible impact of the COVID-19 pandemic on our business.

~~As the COVID-19 pandemic unfolds, we continue to provide essential support to our customers and execute on our strategic plan, while carefully managing spending.~~ However, there can be no assurance that such strategies will be successful in effectively managing our resources and mitigating the negative impact of the COVID-19 on the business and operating results.

On March 27, 2020, ~~the President of the United States signed~~ the Coronavirus Aid, Relief, and Economic Security ~~(CARES)~~ Act (the “CARES Act”) was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer ~~side~~ social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction ~~limitations~~limitation and technical corrections to tax depreciation methods for qualified improvement property. ~~We are evaluating the applicability~~Refer to Part I, Item 1, Financial Statements, Note 11 “Income Taxes”for a discussion of the CARES Act ~~to the Company, and the potential~~income tax impacts on ~~our business.~~the Company. In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act. While we ~~may determine to apply for, or otherwise participate in, such programs, there is no guarantee that we will meet any eligibility requirements to participate~~are participating in certain programs ~~or, even if we~~under the CARES Act, the CARES Act and its guidance are ~~able~~subject to ~~participate, that such programs will provide meaningful benefit to our business.~~

The Company evaluates goodwill for impairment at least annually on October 1, or more frequently when an event occurs or circumstances change such that the carrying value may not be recoverable. The implications of COVID-19, and a decline in the Company’s total fair value of invested capital and decline in our results of operations and financial performance, could result in a goodwill impairment to one or more of our reporting units. ~~As of March 31, 2020, all of the Company’s $47.2 million of goodwill is included within reporting units in the Debit and Credit segment. The adverse effects of the~~ ~~COVID-19 pandemic on our reporting units that generate sales and income from card personalization and Card@Once instant issuance solutions, could result in~~ ~~a goodwill impairment.~~change.

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Results of ~~Continuing~~ Operations

The following table presents the components of our condensed consolidated statements of ~~continuing~~ operations for each of the periods presented:


					Three Months Ended
					March 31,
					2021		2020

	Three Months Ended
	March 31,
	2020		2019
	(dollars in thousands)
					(dollars in thousands)
Net sales:
Products	$	42,501	$	32,757	$	47,013	$	42,501
Services		31,468		34,109		42,079		31,468
Total net sales		73,969		66,866		89,092		73,969
Cost of sales		48,259		45,345		53,371		48,321
Gross profit		25,710		21,521		35,721		25,648
Operating expenses		18,027		17,951		17,952		18,148
Income from operations		7,683		3,570		17,769		7,500
Other expense, net:
Interest, net		(6,088)		(6,324)		(8,976)		(6,088)
Foreign currency (loss) gain		(8)		41
Other income (expense), net		(87)		19		25		(3)
Income (loss) from continuing operations before taxes		1,500		(2,694)
Income tax benefit (expense)		943		(403)
Net income (loss) from continuing operations	$	2,443	$	(3,097)
Loss on debt extinguishment						(5,048)		(92)
Income before taxes						3,770		1,317
Income tax (expense) benefit						(1,360)		465
Net income from continuing operations						2,410		1,782
Net loss from discontinued operations						—		(26)
Net income					$	2,410	$	1,756

Note: The Company revised its prior year financial statements to adjust immaterial items, relating to estimated sales tax expense and depreciation expense. Refer to Note 1, Business Overview and Summary of Significant Accounting Policies, for an explanation of the immaterial prior period adjustments.

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Segment Discussion

Three Months Ended March 31, ~~2020~~2021 Compared With Three Months Ended March 31, ~~2019~~2020

Net Sales



									Three Months Ended March 31,
									2021		2020		$ Change		% Change


	Three Months Ended March 31,
	2020		2019		$ Change		% Change

	(dollars in thousands)

									(dollars in thousands)
Net sales by segment:
Debit and Credit	$	59,839	$	48,929	$	10,910	22.3	%	$	69,817	$	59,839	$	9,978	16.7	%
Prepaid Debit		14,540		16,744		(2,204)	(13.2)	%		19,458		14,540		4,918	33.8	%
Other		—		1,679		(1,679)	(100.0)	%
Eliminations		(410)		(486)		76	*	%		(183)		(410)		227	*
Total	$	73,969	$	66,866	$	7,103	10.6	%	$	89,092	$	73,969	$	15,123	20.4	%

* Not meaningful

Net sales for the three months ended March 31, ~~2020,~~2021 increased ~~$7.1~~$15.1 million, or ~~10.6%~~20.4%, to ~~$74.0~~$89.1 million compared to ~~$66.9~~$74.0 million for the three months ended March 31, ~~2019.~~2020.

Debit and Credit:

Net sales for Debit and Credit for the three months ended March 31, ~~2020,~~2021 increased ~~$10.9~~$10.0 million, or ~~22.3%~~16.7%, to ~~$59.8~~$69.8 million compared to ~~$48.9~~$59.8 million for the three months ended March 31, ~~2019.~~2020. The net sales increase was primarily due to higher volumes of contactless dual-interface EMV card sales, including ~~a significant amount of Second Wave~~® ~~cards featuring a core made with recovered ocean bound plastic~~.new customer growth. In addition, ~~and to a lesser extent,~~ net sales increased from card personalization due to new customers, higher volumes from our existing customers including ~~sales~~ from a transition to contactless dual interface cards, and from our CPI ~~on-Demand~~On-Demand and ~~our~~ Card@Onceinstant issuance ~~solution. Dual-interface~~solutions. Contactless dual-interface EMV cards have additional technology to process contactless transactions and generally have a higher selling price to produce and personalize than contact-only EMV cards, which benefitted the current year sales increase compared to the prior year period. Net sales also benefitted from government disbursement work during the first quarter of 2021.

Prepaid Debit:

Net sales for Prepaid Debit for the three months ended March 31, ~~2020, decreased $2.2~~2021, increased $4.9 million, or ~~13.2%~~33.8%, to ~~$14.5~~$19.5 million, compared to ~~$16.7~~$14.5 million for the three months ended March 31, ~~2019. The decrease was the result of~~2020. Net sales ~~mix and reduced volumes. In~~increased from higher volumes from an existing customer which included new portfolio wins, as compared to the prior year ~~period, we benefited from stronger sales as the Company supported customers through changing regulatory requirements in the industry.~~period.

~~Other:~~

In the three months ended March 31, 2019, Other net sales were $1.7 million. During the three months ended March 31, 2020, there were no sales in the Other segment. In April 2019, we sold the Canadian subsidiary, which was the only operation contributing to Other segment net sales.

Gross Profit and Gross Profit Margin


													Three Months Ended March 31,
															% of 2021				% of 2020
													2021		Net Sales		2020		Net Sales		$ Change		% Change

	Three Months Ended March 31,
			% of 2020				% of 2019
	2020		Net Sales		2019		Net Sales		$ Change		% Change
	(dollars in thousands)
													(dollars in thousands)
Gross profit by segment:
Debit and Credit	$	20,470	34.2	%	$	15,272	31.2	%	$	5,198	34.0	%	$	27,549	39.5	%	$	20,408	34.1	%	$	7,141	35.0	%
Prepaid Debit		5,240	36.0	%		6,346	37.9	%		(1,106)	(17.4)	%		8,172	42.0	%		5,240	36.0	%		2,932	56.0	%
Other		—	0.0	%		(97)	(5.8)	%		97	*	%
Total	$	25,710	34.8	%	$	21,521	32.2	%	$	4,189	19.5	%	$	35,721	40.1	%	$	25,648	34.7	%	$	10,073	39.3	%

Gross profit for the three months ended March 31, ~~2020,~~2021, increased ~~$4.2~~$10.1 million, or ~~19.5%~~39.3%, to ~~$25.7~~$35.7 million compared to ~~$21.5~~$25.7 million for the three months ended March 31, ~~2019.~~2020. Gross profit margin for the three months ended March 31, ~~2020~~2021 increased to ~~34.8%~~40.1% compared to ~~32.2%~~34.7% for the three months ended March 31, ~~2019.~~2020.

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Debit and Credit:

Gross profit for Debit and Credit for the three months ended March 31, ~~2020,~~2021, increased ~~$5.2~~$7.1 million, or ~~34.0%~~35.0%, to ~~$20.5~~$27.5 million compared to ~~$15.3~~$20.4 million during the three months ended March 31, ~~2019.~~2020. The increase in gross profit for the Debit and Credit segment was driven primarily by higher sales volumes ~~and pricing~~ of ~~dual interface~~contactless EMV ~~cards, including Second Wave~~ cards. In addition, the net sales increase from new customers and higher ~~sales from~~volumes of card personalization, including contactless cards, CPI On-Demand and ~~fulfillment, including CPI on-Demand and our~~ Card@Onceinstant issuance ~~solution,~~solutions, contributed to an improvement in gross profit compared to the prior ~~year. Partially offsetting these increases was higher card manufacturing material costs.~~year period. Gross profit margin increased to ~~34.2%~~39.5% during the three months ended March 31, ~~2020,~~2021, compared to ~~31.2%~~34.1% in the prior year period, due primarily to ~~favorable~~ operating leverage from higher sales volumes from a transition to contactless dual interface ~~card manufacturing sales and card personalization sales mix.~~ cards.

Prepaid Debit:

Gross profit for Prepaid Debit during the three months ended March 31, ~~2020, decreased 17.4%~~2021, increased $2.9 million, or 56.0%, to $8.2 million compared to $5.2 million ~~compared to $6.3 million for~~during the three months ended March 31, ~~2019.~~2020. Gross profit margin for Prepaid Debit for the three months ended March 31, ~~2020, decreased~~2021, increased to ~~36.0%~~42.0% compared to ~~37.9%~~36.0% for the three months ended March 31, ~~2019.~~2020. The ~~decrease~~increase in gross profit and margin was primarily attributed to ~~lower~~favorable overhead cost absorption from higher sales ~~resulting in unfavorable cost absorption.~~volumes.

~~Other:~~

In the three months ended March 31, 2019, Other gross loss was $0.1 million. In April 2019, we sold our Canadian subsidiary and no longer have any operations contributing to Other segment net sales or gross profit.

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Operating Expenses ~~net~~



													Three Months Ended March 31,
															% of 2021				% of 2020
													2021		Net Sales		2020		Net Sales		$ Change		% Change


	Three Months Ended March 31,
			% of 2020				% of 2019
	2020		Net Sales		2019		Net Sales		$ Change		% Change
	(dollars in thousands)
													(dollars in thousands)
Operating expenses by segment:
Debit and Credit	$	7,811	13.1	%	$	7,495	15.3	%	$	316	4.2	%	$	7,395	10.6	%	$	7,932	13.3	%	$	(537)	(6.8)	%
Prepaid Debit		1,124	7.7	%		1,031	6.2	%		93	9.0	%		1,154	5.9	%		1,124	7.7	%		30	2.7	%
Other		9,092	*	%		9,425	*	%		(333)	(3.5)	%		9,403	*	%		9,092	*	%		311	3.4	%
Total	$	18,027	24.4	%	$	17,951	26.8	%	$	76	0.4	%	$	17,952	20.1	%	$	18,148	24.5	%	$	(196)	(1.1)	%

* Not meaningful

Operating expenses ~~net, for the three months ended March 31, 2020, increased $0.1~~declined $0.2 million ~~or 0.4%, to $18.0 million compared~~ to $18.0 million for the three months ended March 31, ~~2019.~~2021, compared to $18.1 million for the three months ended March 31, 2020.

Debit and Credit:

Debit and Credit operating expenses ~~increased $0.3~~decreased $0.5 million to ~~$7.8~~$7.4 million in the three months ended March 31, ~~2020~~2021 compared to ~~$7.5~~$7.9 million in the three months ended March 31, ~~2019,~~2020. The decrease was due primarily to ~~increased selling and compensation costs.~~ cost reductions compared to the prior year period.

Prepaid Debit:

Prepaid Debit operating expenses ~~increased $0.1 million~~remained relatively flat for the three months ended March 31, ~~2020 when compared to the three months ended March 31, 2019, due primarily to an increase in compensation cost.~~ 2021 and 2020.

Other:

Other operating expenses during the three months ended March 31, ~~2020 decreased~~2021 increased $0.3 million compared to the three months ended March 31, ~~2019.~~2020. The ~~reduction~~increase in operating expenses was ~~primarily~~ due to ~~lower legal fees~~higher self insurance medical expense and ~~expense savings from the sale~~accelerated depreciation in connection with a reduction in leased corporate office space.

Table of ~~our Canadian subsidiary, partially offset by restructuring severance charges incurred in the first quarter of 2020.~~ Contents

Income from Operations and Operating Margin


													Three Months Ended March 31,
															% of 2021				% of 2020
													2021		Net Sales		2020		Net Sales		$ Change		% Change

	Three Months Ended March 31,
			% of 2020				% of 2019
	2020		Net Sales		2019		Net Sales		$ Change		% Change
	(dollars in thousands)
													(dollars in thousands)
Income from operations by segment:
Debit and Credit	$	12,659	21.2	%	$	7,776	15.9	%	$	4,883	62.8	%	$	20,154	28.9	%	$	12,476	20.8	%	$	7,678	61.5	%
Prepaid Debit		4,116	28.3	%		5,316	31.7	%		(1,200)	(22.6)	%		7,018	36.1	%		4,116	28.3	%		2,902	70.5	%
Other		(9,092)	*	%		(9,522)	*	%		430	(4.5)	%		(9,403)	*	%		(9,092)	*	%		(311)	3.4	%
Total	$	7,683	10.4	%	$	3,570	5.3	%	$	4,113	115.2	%	$	17,769	19.9	%	$	7,500	10.1	%	$	10,269	136.9	%
* Not meaningful

Income from operations for the three months ended March 31, ~~2020~~2021 was ~~$7.7~~$17.8 million compared to income from operations of ~~$3.6~~$7.5 million for the three months ended March 31, ~~2019.~~2020. The Company’s operating income margin for the three months ended March 31, ~~2020~~2021 increased to ~~10.4%~~19.9% compared to ~~5.3%~~10.1% for the three months ended March 31, ~~2019.~~ 2020.

Debit and Credit:

Income from operations for Debit and Credit for the three months ended March 31, ~~2020 increased $4.9~~2021 was $20.2 million, ~~to $12.7 million~~an increase of 61.5% compared to ~~$7.8~~$12.5 million for the three months ended March 31, ~~2019~~2020 due primarily to higher volumes of contactless dual-interface EMV card sales, ~~volumes and pricing of~~higher card personalization sales, including from contactless dual interface ~~EMV~~ cards, our CPI On-Demand and ~~card personalization sales. The impact~~Card@Once instant issuance solutions, and from government disbursement work. In addition, lower operating expenses as a result of ~~these improvements~~cost reductions during the three months ended March 31, 2021 contributed to an improvement in income from ~~operations were partially offset by~~ ~~higher card manufacturing material costs and higher~~

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Income tax ~~benefit~~ (expense): benefit:

During the three months ended March 31, 2021, we recorded an income tax expense of $1.4 million on pre-tax income of $3.8 million, representing an effective income tax rate of 36.1%. During the three months ended March 31, 2020, we recorded an income tax benefit of ~~$0.9~~$0.5 million on pre-tax income of ~~$1.5~~$1.3 million~~representing an effective income tax rate of negative (62.9%). During the three months ended March 31, 2019,~~ ~~we recorded an income tax expense of $0.4 million on pre-tax loss of $2.7 million~~, representing an effective tax rate of ~~negative (15.0%)~~(35.3)%. For the quarter ended March 31, ~~2020,~~2021, the effective tax rate differs from the federal U.S. statutory rate of 21.0% primarily due to the impact of state taxes and permanent items. For the quarter ended March 31, 2020, the effective tax rate differs from the federal U.S. statutory rate of 21.0% primarily due to the impact of the CARES Act which was signed into law in March 2020. The CARES Act allows companies with net operating losses (NOLs) originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily eliminates the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits. For the quarter ended March 31, 2020, the ~~Company~~We estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of ~~238.6%~~250.9%. In addition, ~~we continue to record~~partially offsetting the CARES Act tax rate benefit in the prior year was tax expense for a partial valuation allowance for the limitation on the deductibility of interest expense, ~~in 2020. For the three months ended March 31, 2019, the partial valuation allowance impacted the tax rate by 31.2%, resulting in a negative (15.0%) effective tax rate for the quarter.~~ permanent items and states taxes.

Net ~~income (loss) from continuing operations:~~income:

During the three months ended March 31, ~~2020,~~2021, net income ~~from continuing operations~~ was $2.4 million, compared to ~~a $3.1~~net income of $1.8 million ~~net loss~~ during the three months ended March 31, ~~2019.~~2020. The ~~change~~increase was primarily due to higher net sales and gross profit, ~~lower~~partially offset by the loss on debt extinguishment, higher interest expense and an income tax ~~benefit for~~expense during the ~~first quarter of 2020 due~~three months ended March 31, 2021, compared to the ~~CARES Act provisions.~~prior year period.

Liquidity and Capital Resources

At March 31, ~~2020,~~2021, we had ~~$46.9~~$24.9 million of cash and cash equivalents. Of this amount, ~~$0.3~~$0.4 million was held in accounts outside of the United States.

Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through

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our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs.

~~The Company is party~~On March 15, 2021, we completed a private offering of $310 million aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees at an issue price of 100%. In addition, we entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an ABL revolver of up to $50 million (the “ABL Revolver”), subject to a ~~First Lien Credit Facility,~~borrowing base.

In connection with the issuance of the Senior Notes and entrance into the ABL Revolver, we terminated our existing credit facilities consisting of a $30 million senior credit agreement, dated as of ~~August 17, 2015, that includes~~March 6, 2020, among the Company, the borrower as CPI CG Inc., the lenders party thereto and Guggenheim Credit Services, LLC as administrative agent and collateral agent (the “Senior Credit Facility”), and a $435,000 first lien term loan (the “First Lien Term Loan”). Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15 million under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan ~~that matures~~ on ~~August 17, 2022. On~~ March ~~6, 2020,~~15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company ~~entered into a new~~had outstanding borrowings of $30 million, ~~Senior Credit Facility which matures on May 17, 2022.~~ ~~The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, which has $312.5 million outstanding as of March 31, 2020.~~ ~~The Company’s Revolving Credit Facility was terminated concurrently with the new Senior Credit Facility on March 6, 2020. The Revolving Credit Facility had no borrowings outstanding~~ ~~as of the termination date.~~

~~The First Lien Term Loan~~plus accrued and unpaid interest, under the Senior Credit Facility, ~~contains~~ ~~customary representations, covenants~~ and ~~events of default, including certain covenants that limit or restrict the Company’s~~$304.7 million, plus accrued and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions. In accordance with the Senior Credit Facility, the Company is also required to maintain adjusted EBITDA, as defined in the agreement, of $25 million for the previous four consecutive fiscal quarters in total as measured for each quarterly period ending on or after March 31, 2020. ~~As of March 31, 2020, the Company was in compliance with all covenants~~unpaid interest, under the First Lien Term ~~Loan and~~Loan. During the ~~Senior Credit Facility.~~ ~~As of~~three months ended March 31, ~~2020, our net leverage ratio was 7.2 times Adjusted EBITDA.~~

~~The~~2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.

Our ability to borrow under the ABL Revolver is also limited during periods in which the amount available to borrow under the ABL Revolver is less than $5 million. Commencing with the month immediately following a date on which borrowing availability is below $5 million until such time that borrowing availability equals or exceeds $5 million for 30 consecutive days, in order to borrow under the ABL Revolver, we must maintain a fixed charge coverage ratio (as defined in the credit agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, tested monthly during such period.

The Senior Notes and the ABL Revolver also contain covenants limiting the ability of the Company, the borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue

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disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements.

The Company may have obligations to make an offer to repay the Senior ~~Credit Facility also require~~Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain ~~customary~~ 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 the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.

The ~~Company was not required~~Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021. The ABL Revolver matures on the earliest to ~~make any prepayments~~occur of March 15, 2026 and the date that is 90 days prior to the maturity of the ~~First Lien Term Loan with respect to our 2019 annual financial statements.~~

~~Interest rates~~Senior Notes. Borrowings under the ~~Senior Credit Facility are~~ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based aton the Company's election, on a Eurodollar rate subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%. As of March 31, 2020, the interest rate on our Senior Credit Facility was 9.5%. Interest ratesaverage daily borrowing capacity under the ~~First Lien Term Loan,~~ABL Revolver over the most recently completed month. The borrower may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ~~Company’s election, are~~ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on ~~either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%. As of March 31, 2020,~~ the ~~interest rate on our First Lien Term Loan was 6.38%.~~average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

Operating Activities ~~– Continuing Operations~~

Cash provided by operating activities ~~– continuing operations~~ for the three months ended March 31, ~~2020,~~2021 was ~~$3.2~~$0.1 million compared to ~~a usage~~cash provided by operating activities of ~~$10.2~~$3.2 million during the three months ended March 31, ~~2019.~~2020. The year over year ~~improvement~~decrease was due primarily to working capital cash used in accounts receivable and inventory, partially offset by the increase in accounts payable and higher net income and profitability. The increase in accounts receivable is due to higher net sales during the first quarter of ~~2020~~2021. In addition, the increase in inventory during the first quarter of ~~$2.4 million compared~~2021 included EMV dual interface chips to ~~a net loss~~support our business, including to maintain certain levels of ~~$3.1 million~~inventory in anticipation of future customer demand and potential supply chain constraints.

During the ~~prior year, in addition to working capital cash benefits, primarily in inventories and accrued expenses.~~ ~~For the~~ three months ended March 31, ~~2019,~~2021, we ~~had a working capital cash usage relating primarily to payments for employee performance incentive compensation earned~~paid in ~~2018~~full and ~~increases in inventory to support~~terminated our existing Senior Credit Facility and First Lien Term Loan. In connection with the ~~growth of our business.~~ debt extinguishment, we paid all accrued interest on the terminated credit facilities. Cash interest paid during the three months ended March 31, ~~2020,~~2021, was ~~$5.5~~$8.4 million, which was ~~lower~~higher than the prior year period by ~~$0.2~~$2.8 million, asand includes a ~~result of lower interest rates on our First Lien Term Loan.~~ $2.6 million “make-whole” premium included in cash flows used in financing activities.

Investing Activities ~~– Continuing Operations~~

Cash used in investing activities ~~– continuing operations~~ for the three months ended March 31, ~~2020~~2021 was ~~$0.9~~$2.4 million, compared to a usage of ~~$2.1~~$0.9 million during the three months ended March 31, ~~2019.~~2020. Cash used in investing activities ~~– continuing operations~~ was related primarily to capital expenditures, including investments to support the growth of the business, such as machinery and information technology equipment. As presented in our supplemental disclosures of non-cash information on the statement of cash flows,, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling ~~$0.3~~$0.5 million during the three months ended March 31, ~~2020.~~2021, compared to $0.3 million during the prior year period.

Financing Activities

During the three months ended March 31, 2021, cash used in financing activities was $30.5 million. Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million, respectively. During the three months ended March 31, 2021, we paid $9.5 million of debt issuance costs and $2.7 million of debt extinguishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility.

We used proceeds from the Senior Notes and ABL Revolver, plus cash on hand from our balance sheet, to pay in full and terminate the Senior Credit Facility balance of $30 million and the First Lien Term Loan balance of $304.7

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million on March 15, 2021. During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.

~~Financing Activities~~

During the three months ended March 31, 2020, ~~cash provided by financing activities was $26.0 million. The~~we entered into the Senior Credit Facility which provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance ~~costs during the three months ended March 31, 2020. The Company~~costs. We also paid $0.6 ~~million and $0.1~~ million of principal on finance leases during both the three months ended March 31, ~~2020~~2021 and ~~2019, respectively. For working capital purposes, we borrowed and repaid $5.0 million on the Revolving Credit Facility during the three months ended March 31, 2019.~~ 2020.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at March 31, ~~2020.~~2021.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, ~~2019,~~2020, for which there were no material changes as of March 31, ~~2020,~~2021, included:

●

~~Impairment Assessments of Goodwill and Long-Lived Assets,~~

Revenue ~~Recognition,~~recognition, including estimates of work performed but not completed,

●

~~Inventory Valuation,~~

Income ~~Taxes,~~taxes, including valuation allowances and uncertain tax positions, and

●

~~Lease accounting,~~Sales tax, including ~~incremental borrowing rate estimates.~~

an estimated contingent liability.

Item 3. Quantitative and Qualitative Disclosures about Market ~~Risk~~Risk

Not required due to smaller reporting company status.

Item 4. Controls and ~~Procedures~~Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the ~~Securities~~ Exchange Act ~~of 1934, as amended, (the "Exchange Act"))~~ that are designed to assure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, ~~2020.~~ 2021.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting that occurred during the first quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Limitations on Effectiveness of Controls~~

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls

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and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect resource constraints, which require management to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II – Other Information

Item 1. Legal Proceedings

~~Heckermann~~Smart Packaging Solutions SA v. ~~Montross et al.~~~~, Case No. 1:17-CV-01673 (D. Del.) (the “Derivative Suit”)~~CPI Card Group Inc.

On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the Settlement, whereby (i) all claims that ~~were or could have been asserted in the Derivative Suit were resolved and discharged, (ii)~~ the Company ~~agreed~~infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to ~~implement~~antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not

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manufacture antennas; it purchases certain ~~corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $0.3 million~~antenna-related components from SPS and a ~~service award to the plaintiff~~number of ~~a nominal amount.~~

~~CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al.~~

~~On October 11, 2016, the~~other suppliers. The Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserted that MPS ultra-secure gift card packages sold to at least one customer infringe a Company patent on ultra-secure gift card packages. MPS answeredhas not been formally served with the complaint and ~~counterclaimed for invalidity~~thus has not yet filed an answer. The Company intends to investigate and ~~non-infringement. The Company’s subsidiary, CPI Card Group-Minnesota, Inc., was added~~pursue its rights relating to the ~~case as plaintiff.~~claims and to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably.

In June 2017, MPS filed an Inter Partes Review (“IPR”) petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”) to review the patent at issue in the patent infringement suit. The PTAB instituted the IPR on January 9, 2018. The PTAB entered its final written decision on January 4, 2019, determining that all of the claims in the patent are unpatentable. The Company filed an appeal of this decision to the federal circuit court on March 1, 2019, and a hearing regarding the Company’s appeal was held on March 3, 2020. On March 16, the federal circuit court affirmed the PTAB decision. The Company did not appeal the federal circuit court decision, and the patent infringement suit is administratively dismissed.

In addition to the ~~matters~~matter described above, the Company ismay be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of ~~these~~any such matters will not have a material adverse effect on our business, financial condition or results of operations.

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Item 1A. Risk ~~Factors~~Factors

The risk factors disclosed in ~~the section entitled “Risk Factors”~~Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. ~~As of the date of this Quarterly Report on Form 10-Q, there have been the following material changes with respect to such risk factors.~~

The ongoing COVID-19 pandemic and responses thereto may adversely affect our supply chain, workforce, overall operations and financial condition, and our ability to access capital markets and refinance indebtedness, each of which may have a material adverse effect on our business.

As discussed above, since December 2019, COVID-19 has spread to multiple countries, including the United States and all of the primary markets where we conduct business. As a result, almost all U.S. states and many local jurisdictions have issued, and others in the future may issue, “stay-at-home” orders, quarantines, and executive and other governmental orders, restrictions and recommendations for residents and businesses in an effort to control the spread of COVID-19, including mandating closures of certain businesses not deemded “essential”. While CPI is currently deemed essential in all jurisdictions where we operate, such orders, restrictions or recommendations, and the perception that additional orders, restrictions or recommendations could occur, have resulted in widespread work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellations of events, as well as record declines in stock prices, among other effects. Disruptions to our activities and operations resulting from such governmental orders, restrictions and recommendations may negatively impact our business, operating results and financial condition. There is also a risk that government actions will not be effective at containing COVID-19 and that government actions intended to contain the spread of COVID-19 will have a devastating negative impact on the world economy at large, in which case the risks to our sales, operating results and financial condition described herein would be elevated significantly.

The duration of COVID-19's impact on our business may be difficult to assess or predict. The widespread pandemic has resulted, and may continue to result for an extended period, in significant disruption of global financial markets, which may reduce or eliminate our ability to access capital markets and/or to refinance our existing indebtedness, which would negatively affect our liquidity. Further, the governmental orders, restrictions and recommendations described above (which may include travel and import restrictions) in response to COVID-19 could disrupt our supply chain and thus our ability to obtain materials needed to manufacture our products. Any import or other cargo restrictions related to our products or the materials used to manufacture our products would restrict our ability to manufacture products and thereby harm our business, financial condition and results of operations. Also, such orders, restrictions and recommendations have resulted and may continue to result in increased transportation costs for materials from our suppliers (for which we are responsible), which may negatively impact our cash flows, as well as increased transportation costs for our products that we ship to our customers (for which our customers are responsible), which may adversely affect customer demand. Additionally, if we are required to disrupt operations at or to close any of our facilities, or if we elect to do so to protect our employees from an actual or potential outbreak of COVID-19 at any facility, such disruption or closure could impair our ability to fulfill customer orders and may have a material adverse impact on our revenues and increase our costs and expenses. In the event of such a disruption or closure at one of our facilities, our other facilities may not be able to effectively assume the production activities of such impacted facility due to insufficient capacity, lack of necessary specialized equipment, higher production costs and/or significant time needed to increase production, any of which may result in failure to meet our customers’ requirements, resulting in negative impact to our business, results of operations and/or financial condition. Moreover, our key personnel and other employees could be affected by COVID-19, potentially reducing their availability. We may also delay or reduce certain capital spending and related projects until the impacts of COVID-19 begin to abate, which would delay the completion of such projects.

~~Customer demand for and our ability to sell and market our products may be adversely affected by the COVID-19 pandemic and responses thereto.~~

As discussed above, state and local governments have imposed orders, restrictions and recommendations resulting in closures of businesses, work stoppages, travel restrictions, social distancing practices and cancellations of gatherings and events. Such orders, restrictions and recommendations, combined with fears of the spreading of COVID-19, may cause certain of our customers to delay, cancel or reduce orders of our products and services. ~~A sustained deterioration in general economic conditions may adversely affect our profits, revenue and financial performance if~~

~~Table of Contents~~

~~credit card issuers reduce credit limits, close accounts, and become more selective with respect to whom they issue credit cards as a result thereof.~~ We are unable to accurately predict how these factors will reduce our sales going forward and when these orders, restrictions and recommendations will be relaxed or lifted. There can be no assurances that our customers will resume purchases of our products and services upon termination of these orders, restrictions and recommendations, particularly if there remains any continued community outbreak of COVID-19. A prolonged economic contraction or recession may also result in our customers seeking to reduce their costs and expenditures, which could result in lower demand for our products or a shift to demand for lower margin products. If our sales decline, or if such lost sales are not recoverable in the future, our business and results of operations will be significantly adversely affected. Additionally, our sales and marketing personnel often rely on in-person meetings and interaction with our customers. COVID-19 related restrictions have thus harmed our sales and marketing efforts, and continued restrictions could have a negative impact on our sales and results of operations.

As a result of all of the foregoing, we may, in the future, take actions including reductions to salary and work hours, furloughs, restructuring or layoffs, which may negatively impact our workforce and our business.

We may not be eligible to participate in the relief programs provided under the recently adopted Coronavirus Aid Relief, and Economic Security (CARES) Act, and even if we are eligible we may not realize any material benefits from participating in such programs.

On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We are evaluating the applicability of the CARES Act to the Company, and the potential impacts on our business. While we may determine to apply for, or otherwise participate in, such programs, there is no guarantee that we will meet any eligibility requirements to participate in such programs or, even if we are able to participate, that such programs will provide meaningful benefit to our business.

The global outbreak of COVID-19 continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business or the global economy as a whole. However, these effects may harm our business, financial condition and results of operations in the near term and could have a continuing material impact on our operations, sales and ability to continue as a going concern.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Unregistered Sales of Equity Securities~~

~~None.~~

~~Issuer Purchases of Equity Securities~~

~~None.~~

~~Item 5. Other Information~~

~~None.~~

~~Table of Contents~~

Item 6. ~~Exhibits~~ Exhibits



Exhibit Number		Exhibit Description
4.1		Indenture, dated as of March 15, 2021, by and among CPI CG Inc., as issuer, CPI Card Group Inc., as a guarantor, the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee and notes collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021).
4.2		Form of 8.625% Senior Secured Notes due 2026 (included as Exhibit A to the Indenture included herewith as Exhibit 4.1).
10.1		~~First Lien Amending~~Credit Agreement, dated as of March ~~6, 2020 between~~15, 2021, among CPI Card Group Inc., CPI CG Inc., the lenders from time to time party thereto and ~~Guggenheim Credit Services, LLC.~~Wells Fargo Bank, National Association, as administrative agent and collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March 16, 2021).
10.2		~~Intercreditor~~Guaranty and Security Agreement, dated as of March ~~6, 2020 between~~15, 2021, among CPI Card Group Inc. and ~~Guggenheim Credit Services, LLC.~~
~~10.3~~		~~Super Senior Credit Agreement, dated~~certain of its subsidiaries from time to time party thereto and Wells Fargo Bank, National Association, as collateral agent (incorporated by reference to the Company’s Current Report on Form 8-K filed March ~~6, 2020 between CPI Card Group Inc. and Guggenheim Credit Services, LLC.~~16, 2021).
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance ~~Document.~~Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the XBRL document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

3431

Table of Contents

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	CPI CARD GROUP INC.


May ~~6, 2020~~11, 2021	/s/ John Lowe
	John Lowe
	Chief Financial Officer
	(Principal Financial Officer)

3532


		Page
		~~Page~~
Part I — Financial Information

Item 1 — Financial Statements (Unaudited)		3

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3 — Quantitative and Qualitative Disclosures About Market Risk		30

Item 4 — Controls and Procedures		30


Part II — Other Information

Item 1 — Legal Proceedings		3130

Item 1A — Risk Factors		3231

~~Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds~~		33

~~Item 5 — Other Information~~		33

Item 6 — Exhibits		3431

Signatures		3532


	March 31, 2020		December 31, 2019


					March 31, 2021		December 31,��2020

Trade accounts receivable	$	38,525	$	39,004	$	49,708	$	44,305
Unbilled accounts receivable		5,603		4,223		11,008		10,576
		44,128		43,227
						60,716		54,881
Less allowance for doubtful accounts		(338)		(395)		(237)		(289)
	$	43,790	$	42,832
					$	60,479	$	54,592


	March 31, 2020		December 31, 2019


					March 31, 2021		December 31, 2020

Raw materials	$	16,634	$	16,492	$	31,802	$	23,009
Finished goods		4,384		5,047		4,727		4,635
Inventory reserve		(1,872)		(1,347)		(3,039)		(2,848)
	$	19,146	$	20,192
					$	33,490	$	24,796


2020	$	3,446
2021		4,352

2021 (excluding the three months ended March 31, 2021)			$	3,203
2022		3,867		3,867
2023		3,867		3,867
2024		3,530		3,630
2025				3,440
Thereafter		10,591		7,051
	$	29,653
			$	25,058



	Three Months Ended		Three Months Ended
	March 31, 2020		March 31, 2019
Total operating lease costs		671		643



					Three Months Ended		Three Months Ended
					March 31, 2021		March 31, 2020
Operating lease costs					$	509	$	671
Variable lease costs						164		173
Short-term operating lease costs						172		-
Total expense from operating leases					$	845	$	844

Finance lease cost:
Right-of-use amortization expense	$	327	$	123		293		327
Interest on lease liabilities		129		22		213		129
Total financing lease costs	$	456	$	145	$	506	$	456


	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at March 31, 2020
	March 31,		March 31,		(Using Fair Value Hierarchy)
	2020		2020		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	201,563	$	—	$	201,563	$	—
Senior Credit Facility	$	30,000	$	30,000	$		$		$	30,000


		Operating		Financing
		Lease		Leases
Year Ended
2020		2,186	$	2,038
2021		2,700		2,128

						Operating		Financing
						Lease		Leases

2021 (excluding the three months ended March 31, 2021)						2,022		1,856
2022		1,428		1,641		1,782		2,112
2023		1,106		693		1,643		1,176
2024		607		—		1,442		366
2025						862		107
Thereafter						1,808		26
Total lease payments		8,027		6,500		9,559		5,643
Less imputed interest		(1,078)		(766)		(2,061)		(535)
Total	$	6,949	$	5,734	$	7,498	$	5,108


				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2019	793,084	$	14.91
Forfeited	(57,741)	$	13.20
Outstanding as of March 31, 2020	735,343	$	15.05	7.16
Options vested and exercisable as of March 31, 2020	515,964	$	19.24	6.93
Options vested and expected to vest as of March 31, 2020	735,343	$	15.05	7.16


		Weighted-Average
	Options	Grant-Date Fair Value

Unvested as of December 31, 2019	250,571	$	1.90
Forfeited	(7,923)		1.60
Vested	(23,269)		3.49
Unvested as of March 31, 2020	219,379	$	1.74


		Weighted-Average
	Options	Grant-Date Fair Value

Unvested as of December 31, 2020	45,319	$	1.10
Vested	(9,823)		1.79
Unvested as of March 31, 2021	35,496	$	0.91



2020		172,502
2021		46,877
Total unvested options as of March 31, 2020		219,379