Future cash payment with respect to lease obligations as of June 30, ~~2020~~2021 were as follows:


		Operating		Financing		Operating		Financing
		Lease		Leases		Lease		Leases
2020 (excluding six months ended June 30, 2020)		1,473	$	1,395
2021		2,700		2,256

2021 (excluding the six months ended June 30, 2021)						1,357		1,058
2022		1,428		1,745		2,344		2,136
2023		1,106		821		2,216		1,191
2024		583		68		2,014		390
2025						1,442		132
Thereafter		-		2		3,615		32
Total lease payments		7,290		6,287		12,988		4,939
Less imputed interest		(930)		(652)		(3,041)		(560)
Total	$	6,360	$	5,635	$	9,947	$	4,379

~~11.~~10. Long-Term Debt

At June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, long-term debt consisted of the following:


	Interest		June 30,		December 31,
	Rate ⁽¹⁾		2021		2020
Senior Notes	8.625	%	$	310,000	$	—
ABL Revolver	—	%		—		—
First Lien Term Loan	5.500	%		—		312,500
Senior Credit Facility	9.500	%		—		30,000
Unamortized deferred financing costs				(7,123)		(3,804)
Unamortized discount				—		(1,988)
Total long-term debt			$	302,877	$	336,708
Less current maturities				—		(8,027)
Long-term debt, net of current maturities			$	302,877	$	328,681

Interest


June 30,

December 31,


Rate ⁽¹⁾


2020

2019
First Lien Term Loan

6.38
%

$
312,500

$
312,500
Senior Credit Facility

9.50
%

30,000

—
Unamortized discount

(2,633)

(1,770)
Unamortized deferred financing costs

(5,048)

(2,952)
Total Long-term debt

$
334,819

$
307,778
Less current maturities

—

—
Long-term debt, net of current maturities

334,819

307,778

(1) The Senior Notes bear interest at a fixed rate. The variable interest rate on the First Lien Term Loan ~~was 6.38%,~~ and ~~6.71% as of June 30, 2020, and December 31, 2019, respectively. The interest rate on the~~ Senior Credit Facility ~~which~~ was 5.5%and 9.5%, respectively, as of December 31, 2020.

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $310,000 aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act. In addition, the Company and CPI CG Inc. as borrower entered into ona credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $50,000 (the “ABL Revolver”).

In connection with the issuance of the Senior Notes and entry into the ABL Revolver, the Company terminated its existing credit facilities consisting of a $30,000 senior credit agreement, dated as of March 6, 2020, ~~was 9.50% as of June 30, 2020.~~

~~On August 17, 2015,~~among the Company, ~~entered into a first lien credit facility~~CPI CG Inc., as borrower, the lenders party thereto and Guggenheim Credit Services, LLC as administrative agent and collateral agent (the ~~“First Lien~~“Senior Credit Facility”) ~~with a syndicate of lenders providing for~~, and a $435,000 first lien term loan, dated as of August 17, 2015 as amended, among the Company, the borrower, the lenders party thereto, GLAS USA LLC, as administrative agent and GLAS Americas LLC, as collateral agent (the “First Lien Term Loan”).

Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15,000 under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses. As of March 15, 2021, the Company had outstanding borrowings of $30,000, plus accrued and unpaid interest, under the Senior Credit Facility, and $304,746, plus accrued and unpaid interest, under the First Lien Term Loan. In addition, early termination of the Senior Credit Facility required payment of a ~~$40,000 revolving~~“make-whole” premium of $2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as

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~~credit facility (the “Revolving Credit Facility”).~~ interest expense on the condensed consolidated statement of comprehensive income for the six months ended June 30, 2021.

During the second quarter of 2021, the Company used $15,000 of cash on hand to pay down the ABL Revolver to 0 and had 0 borrowings outstanding thereunder as of June 30, 2021.

The ~~First Lien Term Loan~~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 ~~August 17, 2022~~the earliest to occur of March 15, 2026 and the ~~Revolving Credit Facility was terminated concurrently with~~date that is 90 days prior to the maturity of the Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The Company may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

The Senior Notes are guaranteed by the Company ~~entering into a new senior credit facility on March 6, 2020.~~

~~On March 6, 2020, the Company and its wholly owned subsidiary, CPI Acquisition, Inc. (now known as CPI CG Inc.) (the “Borrower”), entered into a super senior credit agreement~~ ~~with Guggenheim Credit Services, LLC (“Guggenheim”), Vector Capital Credit Opportunity Master Fund, L.P., Guggenheim, as administrative agent and collateral agent,~~ and certain ~~other lenders from time to time party thereto (the “Senior Credit Agreement”~~of its current and ~~together with all ancillary documents thereto,~~future wholly-owned domestic subsidiaries (other than the ~~“Senior Credit Facility”).~~ ~~The Senior Credit Facility matures on May 17, 2022,~~Issuer) that guarantee the ABL Revolver, andprovides for the extension of credit to the Borrower in the form of super senior term loans in an aggregate principal amount of $30,000, which ranks senior in priority to the Company’s First Lien Term Loan.

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

~~The Senior Credit Facility~~of the Issuer and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions andguarantors, subject to ~~certain~~customary exceptions. ~~In accordance with the Senior Credit Facility,~~The ABL Revolver is guaranteed by the Company and its subsidiaries (other than the Issuer and excluded subsidiaries), and is ~~also required~~secured by substantially all of the assets of the Issuer and the guarantors, subject to ~~have adjusted EBITDA, as defined in the agreement, of $25,000 for the previous four consecutive fiscal quarters in total, at the end of each quarterly period ending on or after~~ ~~March 31, 2020.~~customary exceptions.

The Senior ~~Credit Facility~~Notes and the ~~First Lien Term Loan also require~~ABL Revolver contain covenants limiting the ability of the Company, the Issuer and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Issuer and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements.

The Company may have obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain ~~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 ~~respective agreement,~~Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, 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%. ~~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 4.5%, or a base rate plus a margin of 3.5%.~~

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

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,~~

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Notes were $7,558and ~~financing costs were $3,215, and both were recorded~~are reported as a reduction to the long-term debt balance ~~in the quarter ended March 31, 2020.~~as of June 30, 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~~June 30, 2021.

During the six months ended June 30, ~~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.

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~~12.~~11. Income Taxes ~~– Continuing Operations~~

During the three months ended June 30, ~~2020,~~2021, the Company recognized an income tax ~~benefit~~expense of ~~$4,414~~$2,522 on a pre-tax ~~loss~~income of ~~$4,298,~~$8,754, compared to an income tax ~~expense~~benefit of ~~$777~~$3,115 on a pre-tax ~~income~~loss from continuing operations of ~~$2,329~~$1,832 for the prior year period. During the six months ended June 30, 2021, the Company recognized an income tax expense of $3,882 on pre-tax income of $12,524, representing an effective income tax rate of 31.0%. For the six months ended June 30, 2020, the Company recognized an income tax benefit of ~~$5,357~~$3,580 on a pre-tax loss from continuing operations of ~~$2,798,~~$515, representing an effective income tax rate of ~~191.5%. For the six months ended June 30, 2019, the Company recognized an income tax expense of $1,180 on a pre-tax loss of $365, representing an effective income tax rate of (323.3)%~~695.1%.

For the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:


	June 30,				June 30,
	2020		2019		2021		2020
Tax at federal statutory rate	21.0	%	21.0	%	21.0	%	21.0	%
State taxes, net	15.0		(60.1)		6.0		10.4
Valuation allowance	18.9		(206.2)		0.0		11.4
Permanent items	17.0		(7.4)		2.8		10.8
Tax benefit CARES Act	127.9		—		0.0		643.0
Other	(8.3)		(70.6)		1.2		(1.5)
Effective income tax rate	191.5	%	(323.3)	%	31.0	%	695.1	%

During the six months ended June 30, 2021, the Company received cash income tax refunds of $6,003 related primarily to U.S. federal income taxes for prior tax years, including net operating loss (“NOL”) carrybacks relating to the CARES Act. As of June 30, 2021, the Company has an income tax receivable on the condensed consolidated balance sheet relating to certain remaining U.S. federal income tax receivables including CARES Act income tax refunds, net of current income tax provisional amounts due.

The Company believes that it is reasonably possible that $317 of its unrecognized tax benefits may be recognized in the next one year period as a result of settlement with the taxing authorities. As such, this balance is reflected in “Accrued expenses” in the Company’s condensed consolidated balance sheet as of June 30, 2021.

In March 2020, the CARES Act was signed into law. The CARES Act ~~allows~~allowed companies with ~~net operating losses (“NOLs”)~~NOLs originating in 2018, 2019, or 2020 to carry back those losses for five years and temporarily ~~eliminates~~eliminated the tax law provision that limits the use of NOLs to 80% of taxable income. The CARES Act ~~increases~~increased the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and ~~allows~~allowed for the acceleration of refunds of alternative minimum tax credits. For the six months ended June 30, 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 ~~127.9%~~643.0%. In addition, the Company has recorded a partial valuation allowance due to the limitation on the deductibility of interest expense with an income tax rate impact of 18.9% for the six months ended June 30, 2020. The Company’s income tax receivable on the condensed consolidated balance sheet as of ~~June 30~~, 2020, relates primarily to U.S. federal income tax receivables relating to prior tax years, including NOL carrybacks relating to the CARES Act income tax refund. Additionally, the income tax receivable relates to tax benefits based on our pre-tax loss and income tax provision through June 30, 2020. In the six months ended ~~June 30, 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.

~~13.~~

12. Stockholders’ Deficit

Common Stock

Common Stock has a par value of $0.001 per share. Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of Preferred Stock. Upon any liquidation, dissolution or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock. Holders of Common Stock are entitled to ~~one~~1 vote per share.

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~~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				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Numerator:
Net income (loss) from continuing operations	$	116	$	1,552	$	2,559	$	(1,545)
Net (loss) income from discontinued operation		(4)		(30)		(30)		12
Net income (loss)	$	112	$	1,522	$	2,529	$	(1,533)
Net income from continuing operations										6,232		1,283		8,642		3,065
Net loss from discontinued operations										—		(4)		—		(30)
Net income									$	6,232	$	1,279	$	8,642	$	3,035

Denominator:
Basic weighted-average common shares outstanding		11,229,819		11,178,462		11,227,160		11,169,468		11,233,002		11,229,819		11,231,742		11,227,160
Dilutive shares		4,033		63,763		15,112		—		529,479		4,033		488,406		15,112
Diluted weighted-average common shares outstanding		11,233,852		11,242,225		11,242,272		11,169,468		11,762,481		11,233,852		11,720,148		11,242,272

Net income (loss) per share from continuing operations - Basic:	$	0.01	$	0.14	$	0.23	$	(0.14)
Net income (loss) per share from discontinued operations - Basic:		(0.00)		(0.00)		(0.00)		0.00
Net income (loss) per share - Basic:	$	0.01	$	0.14	$	0.23	$	(0.14)
Basic earnings per share from continuing operations:										0.55		0.11		0.77		0.27
Basic earnings per share from discontinued operations:										—		(0.00)		—		(0.00)
Basic earnings per share:									$	0.55	$	0.11	$	0.77	$	0.27

Net income (loss) per share from continuing operations - Diluted:	$	0.01	$	0.14	$	0.23	$	(0.14)
Net income (loss) per share from discontinued operations - Diluted:		(0.00)		(0.00)		(0.01)		0.00
Net income (loss) per share - Diluted:	$	0.01	$	0.14	$	0.22	$	(0.14)
Diluted earnings per share from continuing operations:										0.53		0.11		0.74		0.27
Diluted earnings per share from discontinued operations:										—		(0.00)		—		(0.00)
Diluted earnings per share:									$	0.53	$	0.11	$	0.74	$	0.27

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 ~~six months ended June 30, 2019. Accordingly, the potentially dilutive effect of 864,257 stock options~~Company to pay property taxes, insurance and ~~11,201 restricted stock units were excluded from the computation of diluted earnings per share as of June 30, 2019, as their inclusion would be anti-dilutive.~~normal maintenance costs.

Contingencies

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

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~~Derivative Suit~~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”)~~

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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~~complaint and thus has not yet filed an answer. The Company intends to investigate and pursue its rights relating to the claims and to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Accordingly, it is also named as a nominal defendant. The derivative complaint asserts claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissionsnot yet possible to reliably determine any potential liability that could result from this matter in the ~~Registration Statement filed by CPI in connection with its IPO~~event of an adverse determination, and ~~subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.~~

On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement to resolve and dismiss the Derivative Suit, and on April 1, 2020, the Court granted final approval of the settlement set forth therein and dismissed with prejudice all claims (the “Settlement”). Under the Settlement, (i) all claims that were or could have0 liability has been asserted in the Derivative Suit were resolved and discharged, (ii) the Company agreed to implement certain corporate governance reforms, and (iii) the Company’s insurer agreed to pay fees and expenses awarded to the plaintiff’s counsel in the amount of $343 and a service award to the plaintiff of a nominal amount. There was no liability necessary to be recorded ~~for the Settlement~~ as of June 30, ~~2020, or December 31, 2019.~~2021.

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.

Estimated Sales Tax Liability

The Company ~~is in the process of evaluating and finalizing~~has continued to evaluate a state sales tax liability analysis for states in which it has economic nexus and ~~collecting~~to collect exemption documentation from its customers. It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain ~~states and therefore has~~states. The estimated a liability ~~of $2,700~~for sales tax as of June 30, 2021 and December 31, 2020 ~~which~~was $1,549 and $1,696, respectively, and is ~~included~~recorded in ~~accrued~~accrued expenses in the condensed consolidated balance ~~sheets, and selling, general, and administrative expenses~~sheets. The liability decreased from the estimate recorded in the ~~condensed consolidated statements of operations.~~ prior period due to ongoing activity. As the Company remits cash to the applicable state tax authorities for historical sales tax and interest, the liability balance decreases. Due to the ~~complexity of~~estimates involved in the analysis, ~~and remaining information needed from customers,~~ the Company expects that ~~this estimate~~the estimated liability will change in the future, and ~~could~~may exceed the ~~original estimate. In addition, any amounts related~~current estimate. The Company also may be subject to ~~prior sales taxes that are~~examination by the relevant state tax authorities. Sales tax recovered from customers ~~would~~reduces the estimated expense when it is received or probable of collection. Future changes to the liability that impact the condensed consolidated statements of operations will be recorded ~~in future periods~~within SG&A. During the six months ended June 30, 2021, the Company recorded a sales tax benefit of $465 within SG&A for current activity relating to sales tax recovered from customers and ~~reduce~~net changes to the estimated ~~expense.~~liability.

~~Litigation Settlement~~

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

During the summer of 2017, the Company and its subsidiary, CPI Card Group – Minnesota, Inc. (together, the “Company Plaintiffs”), commenced a lawsuit in the United States District Court for the District of Minnesota against a former employee, Multi Packaging Solutions, Inc. (“MPS”), and two MPS employees as individuals (collectively, the “Defendants”). On June 12, 2019, the Company Plaintiffs and the Defendants reached a settlement pursuant to which the case was resolved and dismissed by mutual agreement on terms that provided for, among other things, a cash payment to the Company. The Company received a $6,000 cash settlement payment during the second quarter of 2019, and recorded the gain within income from operations, in the Other segment. The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019.

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

CPI Card Group Inc. Omnibus Incentive Plan

In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity based incentives may be granted to participating employees, advisors and directors. ~~The Company had reserved 800,000~~On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of ~~common stock~~the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan. ~~Effective March 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number~~As of June 30, 2021, there were 1,185,113 shares of Common Stock

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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 June 30, 2020, there were 367,703 shares available for grant under the Omnibus Plan.

During the six months ended June 30, ~~2020,~~2021, and during the fiscal year ended December 31, ~~2019,~~2020, the Company did ~~not~~0t grant any awards of non-qualified stock options. The following is a summary of the activity in outstanding stock options under the Omnibus Plan:


				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2020	706,372	$	15.20	6.44
Exercised	(6,574)		5.25	-
Forfeited	—		-	-
Outstanding as of June 30, 2021	699,798	$	15.29	5.91
Options vested and exercisable as of June 30, 2021	666,498	$	15.95	5.85
Options vested and expected to vest as of June 30, 2021	699,798	$	15.29	5.91

Weighted-

Weighted-

Average

Average

Remaining

Exercise

Contractual Term

Options

Price

(in Years)
Outstanding as of December 31, 2019

793,084

$
14.91

Forfeited

(80,790)

$
12.26

Outstanding as of June 30, 2020

712,294

$
15.21

6.70
Options vested and exercisable as of June 30, 2020

507,938

$
19.46

6.50
Options vested and expected to vest as of June 30, 2020

712,294

$
15.21

6.70

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


		Weighted-Average			Weighted-Average
	Options	Grant-Date Fair Value		Options	Grant-Date Fair Value

Unvested as of December 31, 2019	250,571	$	1.90
Forfeited	(16,028)		2.33
Unvested as of December 31, 2020				45,319	$	1.10
Vested	(30,187)		3.39	(12,019)		1.70
Unvested as of June 30, 2020	204,356	$	1.64
Unvested as of June 30, 2021				33,300	$	0.98

Unvested stock options of 33,300 as of June 30, ~~2020, will~~2021 are expected to vest ~~as follows:~~entirely in the second half of 2021.

2020

157,895
2021

46,461
Total unvested options as of June 30, 2020

204,356

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


				Weighted-				Weighted-
				Average				Average
		Weighted-		Remaining		Weighted-		Remaining
		Average		Amortization		Average		Amortization
		Grant-Date		Period		Grant-Date		Period
	Units	Fair Value		(in Years)	Shares	Fair Value		(in Years)
Outstanding as of December 31, 2019	7,347	$	22.49
Vested	(6,216)		21.75
Outstanding as of December 31, 2020					180,001	$	2.12
Forfeited	(203)		21.75		(4,499)		2.12
Outstanding as of June 30, 2020	928	$	27.60	0.24
Outstanding as of June 30, 2021					175,502	$	2.12	1.26

~~During the six months ended June 30, 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~~175,502 as of June 30, ~~2020, will~~2021 are expected to vest entirely ~~by the end of 2020.~~in 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

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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 six months ended June 30, 2020, the third tranche of the cash performance units vested and the Company made a cash payment of $68 to the award recipients.~~ ~~There are no outstanding cash performance units as of~~ ~~June 30, 2020.~~

Compensation expense for the Omnibus Plan for the three months ended June 30, 2021 and 2020 was $47 and ~~2019 was~~ $18, ~~and $161,~~ respectively. Compensation expense for the Omnibus Plan for the six months ended June 30, 2021 and 2020 was $98 and ~~2019 was~~ $59~~and $308,~~, respectively. As of June 30, ~~2020,~~2021, the total unrecognized compensation expense related to unvested options and restricted stock units is ~~not significant, and~~$238, which the ~~expense is expected~~Company expects to ~~be recognized~~recognize over an estimated weighted-average period of ~~less than one year.~~approximately 1.3 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 June 30, 2020. ~~There was no compensation expense related to options previously granted under the Option Plan, for the three and six months ended~~ ~~June 30, 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~~“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.

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As of June 30, ~~2020,~~2021, the Company’s reportable segments were as follows:

● Debit and ~~Credit,~~Credit;

● Prepaid Debit; and

● Other.

Debit and Credit Segment

● ~~Other.~~

The Other category includes the Company’s corporate office and, for the three and six months ended June 30, 2019, a less significant operating segment that historically derived its revenue from the production of financial payment cards and retail gift cards in Canada. The Company’s Canadian subsidiary was sold on April 1, 2019. The sale did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the Debit and Credit segment 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 cards made with upcycled plastic. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Cards Brands. The Company provides CPI On-Demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on-demand basis for customers. The Debit and Credit segment facilities are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands.

Prepaid Debit Segment

The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card providers in ~~2019.~~

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

Other

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

Performance Measures of Reportable Segments

Net Sales and EBITDA of the Company’s reportable segments for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, were as follows:


	Net Sales								Net Sales
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Debit and Credit	$	58,306	$	51,086	$	118,145	$	100,015	$	72,860	$	58,306	$	142,677	$	118,145
Prepaid Debit		13,536		15,966		28,076		32,710		20,383		13,536		39,841		28,076
Other		—		—		—		1,679
Intersegment eliminations		(464)		(151)		(874)		(637)		(24)		(464)		(207)		(874)
Total	$	71,378	$	66,901	$	145,347	$	133,767	$	93,219	$	71,378	$	182,311	$	145,347


	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Debit and Credit	$	22,322	$	13,121	$	44,722	$	28,080
Prepaid Debit		8,106		3,982		15,679		8,642
Other		(10,820)		(7,947)		(23,825)		(15,921)
Total	$	19,608	$	9,156	$	36,576	$	20,801

EBITDA

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019
Debit and Credit

$
10,593

$
10,590

$
25,673

$
20,970
Prepaid Debit

3,982

5,880

8,642

11,659
Other

(7,947)

(3,435)

(15,921)

(11,741)
Total

$
6,628

$
13,035

$
18,394

$
20,888

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The following table provides a reconciliation of total segment EBITDA ~~from continuing operations~~ to net income ~~(loss) from continuing operations~~ for the three and six months ended June 30, ~~2020~~2021 and ~~2019:~~2020:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Total segment EBITDA from continuing operations	$	6,628	$	13,035	$	18,394	$	20,888
Total segment EBITDA									$	19,608	$	9,156	$	36,576	$	20,801
Interest, net		(6,772)		(6,438)		(12,860)		(12,762)		(7,037)		(6,772)		(16,013)		(12,860)
Income tax benefit (expense)		4,414		(777)		5,357		(1,180)
Income tax (expense) benefit										(2,522)		3,115		(3,882)		3,580
Depreciation and amortization		(4,154)		(4,268)		(8,332)		(8,491)		(3,817)		(4,216)		(8,039)		(8,456)
Net income (loss) from continuing operations	$	116	$	1,552	$	2,559	$	(1,545)
Net loss from discontinued operations										—		(4)		—		(30)
Net income									$	6,232	$	1,279	$	8,642	$	3,035

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments at June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, were as follows:


	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020

Debit and Credit	$	205,266	$	176,496	$	204,881	$	215,846
Prepaid Debit		27,238		25,259		39,213		34,734
Other		14,000		11,732		4,274		15,571
Total assets	$	246,504	$	213,487	$	248,368	$	266,151

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

~~Subsequent to the sale~~Each of ~~the Company’s U.K. Limited segment and reclassification to discontinued operations, and the sale of the Company’s Canada operations on April 1, 2019,~~ the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived ~~assets~~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

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 Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2020.~~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 June 30, ~~2020~~2021 (as well as information included in other written or oral 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, and Section 21E of the Securities Exchange Act of 1934, as ~~amended.~~amended (the “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 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 or other events may vary materially from those described herein. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important 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,~~supply chain, customer demand, workforce, operations and ability to comply with certain covenants related to our indebtedness; a disruption or other failure in our ~~credit facilities; a decline~~supply chain or labor pool resulting in ~~U.S.~~increased costs and ~~global market~~inability to pass those costs on to our customers; our inability to recruit, retain and ~~economic conditions and resulting decreases in consumer and business spending;~~develop qualified personnel, including key personnel; our lack of eligibility to participate in 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 indebtedness 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; 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; interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; our transition to being an accelerated filer and complying with Section 404 of the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; 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 adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; defects in our software; problems in production quality, materials and process; a loss of market share or a decline in profitability resulting from competition; our inability to develop, introduce and commercialize new products; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; 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 potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; 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; 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 IT systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely; disruptions in production at one or more of our facilities; 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, 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 and regulatory proceedings; failure to meet the continued listing standards of the Toronto Stock Exchange or the ~~rules of the OTCQX® Best~~Nasdaq Global Market; a ~~continued~~ decrease in the value of our common stock combined with our common stock ~~no longer~~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; ~~developing technologies that make our existing technology solutions and products obsolete or less relevant or a 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 Payment Card Industry ~~(“PCI”)~~ 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; ~~maintenance and further imposition of tariffs~~our dependence on licensing

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~~and/or trade restrictions on, or slow-downs or interruptions in our ability to obtain, goods imported into the United States; 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 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 ~~Securities and Exchange Commission (the “SEC”)~~SEC on ~~March 6, 2020,~~February 25, 2021, in Part II, Item 1A – Risk Factors inof this Quarterly Report on Form 10-Q ~~for the quarter ended~~ ~~June 30, 2020,~~ and our other reports filed from time to time with the 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. 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 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 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 did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our

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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 cash, and no significant loss on sale was recorded. In connection with the disposition of the Canadian subsidiary, the Company released the related cumulative translation adjustment of $1.3 million from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the six months ended June 30, 2019. The Canadian subsidiary was not a significant operating segment and the financial results of this business through the transaction closing date were presented as part of the Other reportable segment.

COVID-19 Update

~~On March 11, 2020, WHOcharacterized COVID-19 as a pandemic. Further, on March 13, 2020, the President of the United States declared the~~The COVID-19 pandemic ~~a national emergency, invoking powers under the Stafford Act – the legislation that directs federal emergency disaster response.~~has impacted economies and societies globally. The ~~broader and~~ 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~~CPI employees ~~remains~~remain paramount, and ~~we continue~~the Company continues 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.  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~~

The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply ~~curtailed customer demand or impacts on our workforce that could materially adversely impact our business, results of operations~~chain, including increased lead times for, and ~~overall financial performance in future periods.~~ ~~While CPI’s net sales~~higher costs for, certain raw materials and components, as well as a global chip shortage, which are expected to continue in the ~~second quarter~~future. CPI closely monitors its supply chain and ~~first~~has purchased and may continue to purchase additional inventory to help mitigate potential supply chain constraints. The current economic environment has also affected the available labor pool in the areas in which the Company operates which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays.

The Company believes the related cost impacts of all of the foregoing will increase through the second half of ~~2020~~2021 and beyond. The Company may not be able to pass some or all of these costs through to its customers. The Company has also experienced increased ~~over~~demand for its products and services. The Company is experiencing increased production lead times, which is likely to continue through the ~~prior year, we experienced lower customer~~second half of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand ~~than expected (which we believe is primarily attributable~~from its customers. The Company will continue to monitor and respond as the ~~COVID-19 pandemic)~~situation evolves. See Item 1A, Risk Factors, ~~and we may experience further effects~~ in the Company’s results of operations and overall financial performance in future periods. There can be no assurance that the Company’s strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 pandemic on our business and operating results. See Part II, Item 1A – Risk Factors in this QuarterlyAnnual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~June 30,~~December 31, 2020 filed with the SEC for further discussion of the possible impact of the COVID-19 pandemic on the ~~business.~~Company.

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. ~~CPI is continuing to evaluate the applicability of the CARES Act to the Company, and the potential impacts on the business.~~ Refer to Part I, Item 1, Financial Statements,Note ~~12,~~11, Income Taxes ~~– Continuing Operations,~~for a discussion of the CARES Act income tax ~~refund~~impacts on the ~~Company has applied for.~~Company. In addition, we ~~have applied for the deferment of~~deferred employer ~~side~~ social security payments ~~during~~in 2020 in accordance with the ~~second quarter of 2020.~~CARES Act, which are required to be paid in 2021 and 2022. While we are participating in certain programs under the CARES Act, the CARES Act and its guidance are subject to ~~change,~~change.

Trends and ~~there is no guarantee that CPI will continue to meet eligibility requirements or that such programs will provide~~Key Factors Affecting our Financial Performance

We believe the following key factors may have a meaningful ~~benefit to~~impact on our ~~business.~~ business performance and negatively influence our financial and operating results:

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 potential negative implications of COVID-19, and a related potential 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. ~~As of~~ ~~June 30, 2020, all of the Company’s $47.2 million of goodwill is included within reporting units in the Debit and Credit segment.~~

●

We have experienced, and expect to continue to experience, labor availability issues, particularly in the Company’s production facilities. In the second quarter, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales, which we expect to continue to increase for the remainder of 2021 and beyond as the Company continues to actively recruit additional employees. Also as a result of labor shortages and supply chain constraints, as described below, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customer’s delivery expectations. We continue to proactively monitor, assess and take steps to minimize disruptions and delays in production; however, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities.

●

Generally, surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in price increases to the Company, carrier delays, longer lead times and unpredictability. In particular, a global shortage of chips that we use in many of our products is expected to continue for the foreseeable future. Additionally, certain chip manufacturers recently indicated they plan to limit the types of chips that they manufacture, which will affect our ability to continue to provide lower-cost contact chips for certain of our

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customers. This could cause us and affected customers to migrate programs to more expensive chip options or to contactless cards at a faster pace than expected, which may be costly and disruptive for the Company and affected customers. While we may be able to pass on some of our increased labor and material costs to our customers, we expect these factors will impact profitability for the remainder of 2021 and beyond.

●

Our Second Wave payment cards feature a core made with recovered ocean-bound plastic (“ROBP”), which we source from Haiti and process using single source suppliers. Due to the recent increased political unrest in Haiti as well as the supply chain constraints described above, there is an increased likelihood that we may face challenges in obtaining an adequate supply of ROBP, which is necessary to meet customer demand for our Second Wave cards. The Company actively monitors and manages its supply chain, including compiling buffer stock of materials and seeking alternative suppliers, but it is uncertain how the current political climate in Haiti and other factors in the ROBP supply chain will affect our ability to continue obtaining sufficient ROBP.

●

As of June 30, 2021, the market capitalization of outstanding shares of our Common Stock owned by non-affiliates exceeded $75 million, which triggered the Company being classified as an accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2021. As a result, our annual assessment of the effectiveness of our internal control over financial reporting must be audited by our external audit firm, and the result of that audit will be included in our next Annual Report on Form 10-K in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Preparations to comply and continued compliance with this new requirement will significantly increase our compensation expense, professional fees and other administrative costs.

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

Six Months Ended

June 30,

June 30,


2020

2019

2020

2019

(dollars in thousands)
Net sales:

Products

$
39,077

$
33,125

$
81,578

$
65,882
Services

32,301

33,776

63,769

67,885
Total net sales

71,378

66,901

145,347

133,767
Cost of sales

48,226

44,520

96,485

89,865
Gross profit

23,152

22,381

48,862

43,902
Operating expenses⁽¹⁾

20,646

18,285

38,673

36,236
Litigation settlement gain ⁽²⁾

—

(6,000)

—

(6,000)
Income from operations

2,506

10,096

10,189

13,666
Other expense, net:

Interest, net

(6,772)

(6,438)

(12,860)

(12,762)
Foreign currency (loss) gain

(25)

(1,321)

(33)

(1,280)
Other income (expense), net

(7)

(8)

(94)

11
Income (loss) from continuing operations before income taxes

(4,298)

2,329

(2,798)

(365)
Income tax benefit (expense)

4,414

(777)

5,357

(1,180)
Net income (loss) from continuing operations

$
116

$
1,552

$
2,559

$
(1,545)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020

	(dollars in thousands)
Net sales:
Products	$	47,156	$	39,077	$	94,169	$	81,578
Services		46,063		32,301		88,142		63,769
Total net sales		93,219		71,378		182,311		145,347
Cost of sales		56,131		48,288		109,502		96,609
Gross profit		37,088		23,090		72,809		48,738
Operating expenses		21,301		18,118		39,253		36,266
Income from operations		15,787		4,972		33,556		12,472
Other expense, net:
Interest, net		(7,037)		(6,772)		(16,013)		(12,860)
Other income (expense), net		4		(32)		29		(35)
Loss on debt extinguishment		—		—		(5,048)		(92)
Income (loss) before taxes		8,754		(1,832)		12,524		(515)
Income tax (expense) benefit		(2,522)		3,115		(3,882)		3,580
Net income from continuing operations		6,232		1,283		8,642		3,065
Net loss from discontinued operations		—		(4)		—		(30)
Net income	$	6,232	$	1,279	$	8,642	$	3,035

⁽¹⁾ ~~Includes an~~

Note: The Company revised its prior year financial statements to adjust immaterial items, relating to estimated sales tax expense ~~of $2.7 million recorded during the second quarter of 2020.~~

⁽²⁾and depreciation expense. Refer to Note ~~15. Commitments~~1, Business Overview and ~~Contingencies; Litigation Settlement,~~Summary of Significant Accounting Policies, for ~~further information regarding~~an explanation of the ~~cash litigation settlement gain.~~immaterial prior period adjustments.

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Segment Discussion

Three Months Ended June 30, ~~2020~~2021 Compared With Three Months Ended June 30, ~~2019~~2020

Net Sales

Three Months Ended June 30,

2020

2019

$ Change

% Change

(dollars in thousands)

Net sales by segment:

Debit and Credit

$
58,306

$
51,086

$
7,220

14.1
%
Prepaid Debit

13,536

15,966

(2,430)

(15.2)
%
Other

—

—

—

—
%
Eliminations

(464)

(151)

(313)

*
%
Total

$
71,378

$
66,901

$
4,477

6.7
%



	Three Months Ended June 30,
	2021		2020		$ Change		% Change


	(dollars in thousands)
Net sales by segment:
Debit and Credit	$	72,860	$	58,306	$	14,554	25.0	%
Prepaid Debit		20,383		13,536		6,847	50.6	%
Eliminations		(24)		(464)		440	*
Total	$	93,219	$	71,378	$	21,841	30.6	%

* Not meaningful

Net sales for the three months ended June 30, ~~2020~~2021 increased ~~$4.5~~$21.8 million, or ~~6.7%~~30.6%, to ~~$71.4~~$93.2 million compared to ~~$66.9~~$71.4 million for the three months ended June 30, ~~2019.~~2020.

Debit and Credit:

Net sales for Debit and Credit for the three months ended June 30, ~~2020~~2021 increased ~~$7.2~~$14.6 million, or ~~14.1%~~25.0%, to ~~$58.3~~$72.9 million compared to ~~$51.1~~$58.3 million for the three months ended June 30, ~~2019.~~2020. The net sales increase was due primarily to new customer growth and the ongoing transition to contactless cards. During the second quarter of 2021, product net sales increased due to higher volumes of ~~dual-interface EMV® card sales,~~contactless cards including ~~a significant amount of Second Wave~~^® ~~cards~~

~~Table of Contents~~

~~featuring a core made with recovered ocean bound plastic~~.new customer growth. In addition, net sales increased from ~~CPI on-Demand~~ card personalization service sales due to new ~~customer wins~~customers, and higher volumes ~~from our existing customers,~~of contactless cards including higher CPI On-Demand and ~~from COVID-19 related wins of government disbursement work. Dual-interface EMV~~Card@Once instant issuance personalization sales. Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV ~~cards, which benefitted the current year~~^® cards. CPI’s net sales ~~increase compared to~~in the prior year ~~period. Partially offsetting these increases were reductions in volumes from card personalization and Card@Once instant issuance product sales in the~~ second quarter ~~of 2020. The decline in volumes~~were impacted by lower customer demand than expected, which we believe was primarily ~~as a result of impacts from~~attributable to the COVID-19 ~~and governmental stay-at-home orders, including fewer new accounts and replacement cards, and the closure of certain bank branches or reduced hours of operation.~~pandemic.

Prepaid Debit:

Net sales for Prepaid Debit for the three months ended June 30, ~~2020, decreased $2.4~~2021 increased $6.8 million, or ~~15.2%~~50.6%, to ~~$13.5~~$20.4 million, compared to ~~$16.0~~$13.5 million for the three months ended June 30, ~~2019.~~2020. Net sales increased from higher volumes from existing customers which included the replenishment of inventory by our customers which had been maintained at lower levels in the prior year due to COVID-19 uncertainties.

Eliminations:

This includes the elimination of intercompany sales between segments in the consolidation of our financial statements. The decrease ~~was primarily a result of reduced~~in eliminations is due to lower sales ~~volumes primarily associated with COVID-19 impacts, including lower retail store traffic resulting from governmental stay-at-home orders~~between the segments during ~~the second quarter of 2020.~~

~~Other:~~

~~During~~ the three months ended June 30,~~, 2020, and 2019, there were no sales in~~ 2021 compared to the ~~Other segment. In April 2019, we sold the Canadian subsidiary, which was the only operation contributing to Other segment net sales.~~prior year.

Table of Contents

Gross Profit and Gross Profit Margin

Three Months Ended June 30,

% of 2020

% of 2019




2020

Net Sales

2019

Net Sales

$ Change

% Change

(dollars in thousands)

Gross profit by segment:

Debit and Credit

$
18,615

31.9
%
$
15,872

31.1
%
$
2,743

17.3
%

Prepaid Debit

4,537

33.5
%

6,509

40.8
%

(1,972)

(30.3)
%

Other

—

—
%

—

—
%

—

—
%

Total

$
23,152

32.4
%
$
22,381

33.5
%
$
771

3.4
%


	Three Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

	(dollars in thousands)
Gross profit by segment:
Debit and Credit	$	28,263	38.8	%	$	18,553	31.8	%	$	9,710	52.3	%
Prepaid Debit		8,825	43.3	%		4,537	33.5	%		4,288	94.5	%
Total	$	37,088	39.8	%	$	23,090	32.3	%	$	13,998	60.6	%

Gross profit for the three months ended June 30, ~~2020,~~2021 increased ~~$0.8~~$14.0 million, or ~~3.4%~~60.6%, to ~~$23.2~~$37.1 million compared to ~~$22.4~~$23.1 million for the three months ended June 30, ~~2019.~~2020. Gross profit margin for the three months ended June 30, ~~2020 decreased~~2021 increased to ~~32.4%~~39.8% compared to ~~33.5%~~32.3% for the three months ended June 30, ~~2019, primarily due to the decline in the Prepaid Debit segment.~~2020.

Debit and Credit:

Gross profit for Debit and Credit for the three months ended June 30, ~~2020,~~2021 increased ~~$2.7~~$9.7 million, or ~~17.3%~~52.3%, to ~~$18.6~~$28.3 million compared to ~~$15.9~~$18.6 million during the three months ended June 30, ~~2019.~~2020. The increase in gross profit for the Debit and Credit segment was driven primarily by the net sales increase from new customer growth and the ongoing transition to contactless cards. Gross profit increased from higher product net sales due to higher volumes ~~and pricing~~ of ~~dual interface EMV~~contactless cards including ~~Second Wave~~^®~~cards.~~new customer growth. In addition, ~~higher sales~~gross profit increased from ~~CPI on-Demand~~ card personalization service sales due to new customers, and ~~government disbursement work contributed~~higher volumes of contactless cards including higher CPI On-Demand and Card@Once instant issuance personalization sales. Contactless cards have additional technology to ~~an improvement in~~process contactless transactions and generally have a higher selling price than contact-only EMV^® cards, which also benefitted gross profit ~~compared to~~in the ~~prior~~current year. Gross profit margin increased to ~~31.9%~~38.8% during the three months ended June 30, ~~2020,~~2021, compared to ~~31.1%~~31.8% in the prior year period, due primarily ~~due~~ to ~~favorable~~ operating leverage from higher ~~dual interface card sales volumes including Second Wave~~^®~~cards, card personalization sales mix from dual interface EMV cards and higher CPI on-Demand~~ net sales.

Prepaid Debit:

Gross profit for Prepaid Debit during the three months ended June 30, ~~2020 decreased 30.3%~~2021 increased $4.3 million, or 94.5%, to $8.8 million compared to $4.5 million ~~compared to $6.5 million for~~during the three months ended June 30, ~~2019.~~2020. Gross profit margin for Prepaid Debit for the three months ended June 30, ~~2020, decreased~~2021, increased to ~~33.5%~~43.3% compared to ~~40.8%~~33.5% for the three months ended June 30, ~~2019.~~2020. The ~~decrease~~increase in gross profit and margin was primarily attributed to ~~lower~~higher net sales ~~resulting in unfavorable~~and favorable overhead cost absorption.

~~Table of Contents~~

~~Other:~~

For the three months ended June 30, 2020 and 2019, there was no gross profit in the Other segment. In April 2019, we sold our Canadian subsidiary and no longer have any operations contributing to Other segment net sales or gross profit.

Operating Expenses ~~net~~

Three Months Ended June 30,

% of 2020

% of 2019


2020

Net Sales

2019

Net Sales

$ Change

% Change

(dollars in thousands)

Operating expenses, net, by segment:

Debit and Credit

$
10,377

17.8
%
$
7,883

15.4
%
$
2,494

31.6
%
Prepaid Debit

1,103

8.1
%

1,135

7.1
%

(32)

(2.8)
%
Other

9,166

*
%

9,267

*
%

(101)

(1.1)
%
Other-litigation settlement

—

—
%

(6,000)

*

6,000

*
%
Total

$
20,646

28.9
%
$
12,285

18.4
%
$
8,361

68.1
%



	Three Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

	(dollars in thousands)
Operating expenses by segment:
Debit and Credit	$	8,004	11.0	%	$	7,849	13.5	%	$	155	2.0	%
Prepaid Debit		1,274	6.3	%		1,103	8.1	%		171	15.5	%
Other		12,023	*	%		9,166	*	%		2,857	31.2	%
Total	$	21,301	22.9	%	$	18,118	25.4	%	$	3,183	17.6	%

* Not meaningful

Operating expenses ~~net, for the three months ended June 30, 2020,~~ increased ~~$8.4~~$3.2 million ~~or 68.1%,~~ to ~~$20.6 million compared to $12.3~~$21.3 million for the three months ended June 30, ~~2019. The increase was primarily due~~2021, compared to $18.1 million for the ~~cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019,~~ ~~which was a reduction to net operating expenses, and an estimated sales tax expense of $2.7 million recorded in the second quarter of 2020 within the Debit and Credit segment~~. The Company is in the process of evaluating and finalizing a state sales tax analysis and recorded an estimated expense. Due to the complexity of the analysis and remaining information needed from customers, we expect this estimate will change in the future. ~~Refer to Item 1 Financial Statements, Note 15, Commitments and Contingencies, for further discussion regarding the sales tax liability.~~three months ended June 30, 2020.

Debit and Credit:

Debit and Credit operating expenses increased ~~$2.5~~$0.2 million to ~~$10.4~~$8.0 million in the three months ended June 30, ~~2020~~2021 compared to ~~$7.9~~$7.8 million in the three months ended June 30,~~, 2019,~~ 2020. The increase was due primarily to increased

Table of Contents

selling and compensation costs due to ~~the $2.7 million estimated sales tax expense~~strong business performance, partially offset by a benefit recorded in the second quarter of ~~2020.~~2021 relating to estimated sales taxes which are further described in Item 1 - Financial Statements, Note 14, Commitments and Contingencies.

Prepaid Debit:

Prepaid Debit operating expenses ~~decreased slightly for~~increased $0.2 million to $1.3 million in the three months ended June 30, ~~2020 when~~2021 compared to $1.1 million in the three months ended June 30, ~~2019~~2020. The increase was due primarily to increased selling and compensation costs due to ~~certain cost reductions.~~strong business performance.

Other:

Other operating expenses ~~during~~increased $2.9 million to $12.0 million in the three months ended June 30, ~~2020 decreased $0.1~~2021 compared to $9.2 million ~~compared to~~in the three months ended June 30,~~, 2019.~~ 2020. The ~~reduction in operating~~$2.9 million increase was due primarily to $1.6 million of increased employee performance incentive compensation from strong business performance, $0.8 million of increased healthcare expenses, ~~was primarily due to certain cost reductions.~~ ~~During the three months ended June 30, 2019, we received $6.0 million cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement.~~and other compliance costs.

~~Table of Contents~~

Income from Operations and Operating Margin

Three Months Ended June 30,

% of 2020

% of 2019


2020

Net Sales

2019

Net Sales

$ Change

% Change


(dollars in thousands)

Income (loss) from operations by segment:

Debit and Credit

$
8,238

14.1
%
$
7,985

15.6
%
$
253

3.2
%
Prepaid Debit

3,434

25.4
%

5,374

33.7
%

(1,940)

(36.1)
%
Other

(9,166)

*
%

(3,263)

*
%

(5,903)

(180.9)
%
Total

$
2,506

3.5
%
$
10,096

15.1
%
$
(7,590)

(75.2)
%
* Not meaningful


	Three Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

	(dollars in thousands)
Income from operations by segment:
Debit and Credit	$	20,258	27.8	%	$	10,704	18.4	%	$	9,554	89.3	%
Prepaid Debit		7,550	37.0	%		3,434	25.4	%		4,116	119.9	%
Other		(12,021)	*	%		(9,166)	*	%		(2,855)	31.1	%
Total	$	15,787	16.9	%	$	4,972	7.0	%	$	10,815	217.5	%
* Not meaningful

Income from operations for the three months ended June 30, ~~2020~~2021 was ~~$2.5~~$15.8 million compared to income from operations of ~~$10.1~~$5.0 million for the three months ended June 30, ~~2019.~~2020. The Company’s operating income margin for the three months ended June 30, ~~2020 decreased~~2021 increased to ~~3.5%~~16.9% compared to ~~15.1%~~7.0% for the three months ended June 30,~~, 2019.~~ ~~In the prior year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment. In the second quarter of~~ 2020 ~~we recorded an estimated sales tax expense of $2.7 million~~ ~~within the Debit and Credit segment.~~.

Debit and Credit:

Income from operations for Debit and Credit for the three months ended June 30, ~~2020 increased $0.3~~2021 was $20.3 million, ~~to $8.2 million~~an increase of 89.3% compared to ~~$8.0~~$10.7 million for the three months ended June 30, ~~2019~~2020 due primarily to higher net sales ~~volumes~~ and ~~pricing of dual interface~~gross profit from new customer growth and the ongoing transition to contactless cards which generally have a higher selling price than contact-only EMV ~~cards including Second Wave~~^®cards, CPI on-Demand card personalization, and government disbursement work. The impact of these improvements to income from operations were partially offset by higher operating expenses as a result of the $2.7 million estimated sales tax expense recorded in the second quarter of 2020.cards. Operating margins for the three months ended June 30, ~~2020 decreased~~2021 increased to ~~14.1%~~27.8% compared to ~~15.6%~~18.4% for the three months ended June 30,~~, 2019, primarily~~ 2020 due to the ~~estimated~~higher net sales ~~tax expense recorded in the second quarter of 2020.~~and operating leverage.

Prepaid Debit:

Income from operations for Prepaid Debit for the three months ended June 30, ~~2020 decreased~~2021 was $7.6 million, an increase of 119.9% compared to $3.4 ~~million compared to $5.4 million for the three months ended June 30, 2019, due to reduced sales volumes primarily from COVID-19 impacts from lower retail store traffic. Operating income margin for the three months ended~~ ~~June 30, 2020 decreased to 25.4% from 33.7% for the same period in 2019, primarily as a result of unfavorable cost absorption from lower sales, which impacted gross profit and operating expenses.~~

~~Other~~:

~~The loss from operations in Other was $9.2~~ million for the three months ended June 30, 2020. The increase was the result of higher volumes from existing customers. Operating income margin for the three months ended June 30, 2021 increased to 37.0% from 25.4% for the same period in 2020, due to higher net sales and favorable overhead cost absorption.

Other:

The loss from operations in Other was $12.0 million for the three months ended June 30, 2021, compared to a loss from operations of ~~$3.3~~$9.2 million for the same ~~time~~ period in ~~2019.~~2020. The loss from operations was higher in the second quarter of ~~2020~~2021 by ~~$5.9~~$2.9 million, primarily due to ~~the $6.0 million~~ ~~litigation settlement gain recorded during the second quarter of 2019, partially offset by lower current period~~ an increase in operating expenses from ~~certain cost reductions~~.employee performance incentive compensation, healthcare expenses, and other compliance costs.

Table of Contents

Interest, net:

Interest expense for the three months ended June 30, ~~2020~~2021 increased to ~~$6.8~~$7.0 million compared to ~~$6.4~~$6.8 million for the three months ended June 30,~~, 2019.~~ 2020. Interest expense iswas higher in the second quarter of 2020 as a result of interest incurred the new $30.0 million Senior Credit Facility entered into on March 6, 2020. Partially offsetting this additional expense is a decline in the interest incurred on our First Lien Term Loan2021 primarily due ~~to lower average~~higher interest rates ~~for~~on the ~~three months ended~~ ~~June 30, 2020~~Senior Notes issued in 2021, compared to the ~~same~~interest rates on the debt facilities in the prior year period. This increase was partially offset by less debt principal outstanding in the current year period ~~in 2019.~~compared to the prior year.

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

During the three months ended June 30, ~~2020,~~2021, we recorded an income tax ~~benefit~~expense of ~~$4.4~~$2.5 million on pre-tax ~~loss~~income of ~~$4.3~~$8.8 million, representing an effective income tax rate of ~~102.7%~~28.8%. During the three months ended June 30, ~~2019,~~ 2020, we

~~Table of Contents~~

recorded an income tax ~~expense~~benefit of ~~$0.8~~$3.1 million on pre-tax ~~income~~loss of ~~$2.3~~$1.8 million, representing an effective income tax rate of ~~33.4%~~170.0%. For the quarter ended June 30, ~~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 June 30, 2020, the effective income 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, and due to tax expense for a partial valuation allowance for the limitation on the deductibility of interest ~~expense in 2020, permanent items, and state taxes.~~expense.

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

During the three months ended June 30, ~~2020,~~2021, net income ~~from continuing operations~~ was ~~$0.1~~$6.2 million, compared to ~~$1.6~~net income of $1.3 million during the three months ended June 30,~~, 2019.~~ 2020. The ~~change~~increase was primarily due to higher operating expenses, net, as a result of the cash litigation settlement gain of $6 million recorded in the prior year, and the current year estimated sales tax expense of $2.7 million. This was partially offset by higher net sales and gross profit, partially offset by higher operating expenses and ~~a larger~~ income tax ~~benefit for~~expense during the ~~second quarter of 2020.~~three months ended June 30, 2021, compared to the prior year period.

Six Months Ended June 30, ~~2020~~2021 Compared With Six Months Ended June 30, ~~2019~~2020

Net Sales

Six Months Ended June 30,


2020

2019

$ Change

% Change

(dollars in thousands)

Net sales by segment:

Debit and Credit

$
118,145

$
100,015

$
18,130

18.1
%
Prepaid Debit

28,076

32,710

(4,634)

(14.2)
%
Other

—

1,679

(1,679)

(100.0)
%
Eliminations

(874)

(637)

(237)

*
%
Total

$
145,347

$
133,767

$
11,580

8.7
%


	Six Months Ended June 30,
	2021		2020		$ Change		% Change

	(dollars in thousands)
Net sales by segment:
Debit and Credit	$	142,677	$	118,145	$	24,532	20.8	%
Prepaid Debit		39,841		28,076		11,765	41.9	%
Eliminations		(207)		(874)		667	*	%
Total	$	182,311	$	145,347	$	36,964	25.4	%

* Not meaningful

Net sales for the six months ended June 30, ~~2020~~2021 increased ~~$11.6~~$37.0 million, or ~~8.7%~~25.4%, to ~~$145.3~~$182.3 million compared to ~~$133.8~~$145.3 million for the six months ended June 30, ~~2019.~~2020.

Debit and Credit:

Net sales for Debit and Credit for the six months ended June 30, ~~2020~~2021 increased ~~$18.1~~$24.5 million, or ~~18.1%~~20.8%, to ~~$118.1~~$142.7 million compared to ~~$100.0~~$118.1 million for the six months ended June 30, ~~2019.~~2020. The net sales increase was due primarily to new customer growth, and the ongoing transition to contactless cards. During the six months ended June 30, 2021, product net sales increased due to higher volumes of ~~dual-interface EMV~~^® ~~card sales,~~contactless cards including ~~a significant amount of Second Wave~~^® ~~cards featuring a core made with recovered ocean bound plastic~~.new customer growth. In addition, net sales increased from ~~CPI on-Demand~~ card personalization service sales due to new ~~customer wins~~customers and higher volumes ~~from our existing customers,~~of contactless cards, including higher CPI On-Demand and ~~from COVID-19 related wins of government disbursement work. Dual-interface EMV~~Card@Once instant issuance personalization sales. Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV ~~cards, which benefitted the current year~~^® cards. CPI’s net sales ~~increase compared to~~in the prior year ~~period. Partially offsetting these increases~~period were ~~reductions in volumes from card personalization and Card@Once instant issuance product sales in the second quarter of 2020. The decline in volumes~~impacted by lower customer demand than expected, which we believe was primarily ~~as a result~~attributable to the COVID-19 pandemic.

Table of ~~impacts from COVID-19 and governmental stay-at-home orders, including fewer new accounts and replacement cards, and the closure of certain bank branches or reduced hours of operation.~~ Contents

Prepaid Debit:

Net sales for Prepaid Debit for the six months ended June 30, ~~2020 decreased $4.6~~2021 increased $11.8 million, or ~~14.2%~~41.9%, to ~~$28.1~~$39.8 million, compared to ~~$32.7~~$28.1 million for the six months ended June 30, ~~2019. The decrease was a result~~2020. Net sales increased from higher volumes from existing customers which included the acquisition of ~~reduced sales volumes primarily from COVID-19 impacts, including~~new customer portfolios and the replenishment of inventory by our customers which had been maintained at lower ~~retail store traffic resulting from governmental stay-at-home orders during the second quarter of 2020. In addition,~~ levels in the prior year ~~period, we benefited from higher~~due to COVID-19 uncertainties.

Eliminations:

This includes the elimination of intercompany sales ~~as the Company supported customers through changing regulatory requirements~~between segments in the ~~industry.~~

~~Table~~consolidation of ~~Contents~~

~~Other:~~

~~There were no Other net~~our financial statements. The decrease in eliminations is due to lower sales ~~for~~between the segments during the six months ended June 30, ~~2020,~~2021 compared to ~~$1.7 million for~~ the ~~six months ended June 30, 2019. In April 2019, we sold the Canadian subsidiary, which was the only operation contributing to Other segment net sales.~~ prior year.

Gross Profit and Gross Profit Margin

Six Months Ended June 30,

% of 2020

% of 2019

2020

Net Sales

2019

Net Sales

$ Change

% Change


(dollars in thousands)

Gross profit by segment:


Debit and Credit

$
39,085

33.1
%
$
31,144

31.1
%
$
7,941

25.5
%

Prepaid Debit

9,777

34.8
%

12,855

39.3
%

(3,078)

(23.9)
%

Other

—

—
%

(97)

*
%

97

*
%

Total

$
48,862

33.6
%
$
43,902

32.8
%
$
4,960

11.3
%


	Six Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

	(dollars in thousands)
Gross profit by segment:
Debit and Credit	$	55,812	39.1	%	$	38,961	33.0	%	$	16,851	43.3	%
Prepaid Debit		16,997	42.7	%		9,777	34.8	%		7,220	73.8	%
Total	$	72,809	39.9	%	$	48,738	33.5	%	$	24,071	49.4	%

* Not meaningful

Gross profit for the six months ended June 30, ~~2020~~2021 increased ~~$5.0~~$24.1 million, or ~~11.3%~~49.4%, to ~~$48.9~~$72.8 million compared to ~~$43.9~~$48.7 million for the six months ended June 30, ~~2019.~~2020. Gross profit margin for the six months ended June 30, ~~2019~~2021 increased to ~~33.6%~~39.9% compared to ~~32.8%~~33.5% for the six months ended June 30, ~~2019.~~2020.

Debit and Credit:

Gross profit for Debit and ~~Credit~~Credit for the six months ended June 30, ~~2020~~2021 increased ~~$7.9~~$16.9 million, or ~~25.5%~~43.3%, to ~~$39.1~~$55.8 million compared to ~~$31.1~~$39.0 million during the six months ended June 30, ~~2019.~~2020. The increase in gross profit for the Debit and Credit segment was driven primarily by the net sales increase from new customer growth and the ongoing transition to contactless cards. Gross profit increased from higher product net sales due to higher volumes ~~and pricing~~ of ~~dual interface EMV~~contactless cards including ~~Second Wave~~^® ~~cards.~~new customer growth. In addition, ~~higher sales~~gross profit increased from ~~CPI on-Demand~~ card personalization service sales due to new customers, and ~~government disbursement work contributed~~higher volumes of contactless cards including higher CPI On-Demand and Card@Once instant issuance personalization sales. Contactless cards have additional technology to ~~an improvement in~~process contactless transactions and generally have a higher selling price than contact-only EMV^® cards, which also benefitted gross profit ~~compared to~~in the ~~prior~~current year. Gross profit margin increased to ~~33.1%~~39.1% during the six months ended June 30, ~~2020,~~2021, compared to ~~31.1%~~33.0% in the prior year period, due primarily to ~~favorable~~ operating leverage from higher ~~dual interface card sales volumes, card personalization sales mix from dual interface EMV cards and higher CPI on-Demand~~ net sales.

Prepaid Debit:

Gross profit for Prepaid Debit during the six months ended June 30, ~~2020 decreased 23.9%~~2021 increased 73.8% to ~~$9.8~~$17.0 million compared to ~~$12.9~~$9.8 million for the six months ended June 30, ~~2019.~~2020. Gross profit margin for Prepaid Debit for the six months ended June 30, 2020 ~~decreased~~increased to ~~34.8%~~42.7% compared to ~~39.3%~~34.8% for the six months ended June 30, ~~2019.~~2020. The ~~decrease~~increase in gross profit and margin was primarily attributed to ~~lower~~higher net sales ~~described previously which resulted in unfavorable~~and favorable overhead cost absorption.

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~~Other:~~Operating Expenses, net


	Six Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

Operating expenses by segment:	(dollars in thousands)
Debit and Credit	$	15,399	10.8	%	$	15,781	13.4	%	$	(382)	(2.4)	%
Prepaid Debit		2,428	6.1	%		2,227	7.9	%		201	9.0	%
Other		21,426	*	%		18,258	*	%		3,168	17.4	%
Total	$	39,253	21.5	%	$	36,266	25.0	%	$	2,987	8.2	%

* Not meaningful

~~There was no gross profit~~

Operating expenses for the six months ended June 30, ~~2020~~2021 increased $3.0 million, or 8.2%, to $39.3 million compared to ~~gross loss of $0.1~~$36.3 million for the six months ended June 30, ~~2019.~~ ~~In April 2019, we sold our Canadian subsidiary and no longer have any operations contributing to Other segment net sales or gross profit.~~2020.

~~Table of Contents~~

~~Operating Expenses, net~~

Six Months Ended June 30,

% of 2020

% of 2019

2020

Net Sales

2019

Net Sales

$ Change

% Change

(dollars in thousands)

Operating expenses, net, by segment:

Debit and Credit

$
18,188

15.4
%
$
15,378

15.4
%
$
2,810

18.3
%
Prepaid Debit

2,227

7.9
%

2,166

6.6
%

61

2.8
%
Other

18,258

*
%

18,692

*
%

(434)

(2.3)
%
Other-litigation settlement

—

—

(6,000)

*

6,000

*
%
Total

$
38,673

26.6
%
$
30,236

22.6
%
$
8,437

27.9
%

* Not meaningful

Operating expenses, net, for the six months ended June 30, 2020 increased $8.4 million, or 27.9%, to $38.7 million compared to $30.2 million for the six months ended June 30, 2019. The increase was primarily due to the ~~cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019,~~ ~~which was a reduction to net operating expenses,~~ ~~and the estimated sales tax expense of $2.7 million recorded in the second quarter of 2020 within the Debit and Credit segment.~~The Company is in the process of evaluating and finalizing a state sales tax analysis and recorded an estimated expense. Due to the complexity of the analysis and remaining information needed from customers, we expect this estimate will change in the future. ~~Refer to Item 1 Financial Statements, Note 15, Commitments and Contingencies, for further disclosure regarding the sales tax liability.~~

Debit and Credit:

Debit and Credit operating expenses ~~increased $2.8~~decreased $0.4 million ~~to $18.2 million in the six months ended June 30, 2020 compared~~ to $15.4 million in the six months ended June 30, ~~2019, primarily~~2021 compared to $15.8 million in the six months ended June 30, 2020, due to ~~the $2.7 million~~a benefit recorded in 2021 relating to estimated sales ~~tax expense recorded~~taxes which are further described in ~~the second quarter of 2020.~~Item 1 - Financial Statements, Note 14, Commitments and Contingencies, and from cost reductions. These net decreases to operating expenses were partially offset by increased selling and compensation costs due to strong business performance.

Prepaid Debit:

Prepaid Debit operating expenses increased ~~slightly by $0.1~~$0.2 million to $2.4 million in the six months ended June 30, 2021 compared to $2.2 million in the six months ended June 30, 2020. The increase was due primarily to increased selling and compensation costs due to strong business performance in the current period.

Other:

Other operating expenses increased $3.2 million for the six months ended June 30, ~~2020~~2021, when compared to the six months ended June 30, ~~2019.~~

~~Other:~~

~~Other operating expenses were down $0.4~~2020. The $3.2 million ~~for the six months ended June 30, 2020, when compared~~increase was due primarily to ~~the six months ended June 30, 2019. The reduction in operating expenses was primarily~~$2.0 million of increased employee performance incentive compensation from strong business performance, and due to ~~certain cost reductions~~ ~~and expense savings from the sale~~$1.2 million of ~~our Canadian subsidiary, partially offset by restructuring severance charges incurred in 2020~~. ~~During the six months ended June 30, 2019, we received $6.0 million cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement.~~increased healthcare expenses.

~~Table of Contents~~

Income from Operations and Operating Margin

Six Months Ended June 30,

% of 2020

% of 2019

2020

Net Sales

2019

Net Sales

$ Change

% Change


(dollars in thousands)

Income (loss) from operations by segment:

Debit and Credit

$
20,897

17.7
%
$
15,761

15.8
%
$
5,136

32.6
%
Prepaid Debit

7,550

26.9
%

10,690

32.7
%

(3,140)

(29.4)
%
Other

(18,258)

*
%

(12,785)

*
%

(5,473)

(42.8)
%
Total

$
10,189

7.0
%
$
13,666

10.2
%
$
(3,477)

(25.4)
%
* Not meaningful


	Six Months Ended June 30,
			% of 2021				% of 2020
	2021		Net Sales		2020		Net Sales		$ Change		% Change

	(dollars in thousands)
Income (loss) from operations by segment:
Debit and Credit	$	40,412	28.3	%	$	23,180	19.6	%	$	17,232	74.3	%
Prepaid Debit		14,568	36.6	%		7,550	26.9	%		7,018	93.0	%
Other		(21,424)	*	%		(18,258)	*	%		(3,166)	17.3	%
Total	$	33,556	18.4	%	$	12,472	8.6	%	$	21,084	169.1	%

* Not meaningful

Income from operations for the six months ended June 30, ~~2020~~2021 was ~~$10.2~~$33.6 million compared to income from operations of ~~$13.7~~$12.5 million for the six months ended June 30, ~~2019.~~2020. The Company’s operating profit margin for the six months ended June 30, ~~2020 decreased~~2021 increased to ~~7.0%~~18.4% compared to an operating profit margin of ~~10.2%~~8.6% for the six months ended June 30, ~~2019.~~ In the prior year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment. In the second quarter of 2020, we recorded an estimated sales tax expense of $2.7 million within the Debit and Credit segment.2020.

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Debit and Credit:

Income from operations for Debit and Credit for the six months ended June 30, ~~2020~~2021 increased ~~$5.1~~$17.2 million, to ~~$20.9~~$40.4 million compared to ~~$15.8~~$23.2 million for the six months ended June 30, ~~2019.~~2020. The increase in income from operations was driven primarily by higher net sales ~~volumes~~ and ~~pricing of dual interface~~gross profit from new customer growth and the ongoing transition to contactless cards which generally have a higher selling price than contact-only EMV ~~cards~~ ~~including Second Wave~~^® ~~cards,~~ ~~and CPI on-Demand card personalization and government disbursement work. The impact of these improvements~~cards. In addition, lower operating expenses during the six months ended June 30, 2021, contributed to an improvement in income from ~~operations were partially offset by higher operating expenses as a result of the $2.7 million estimated sales tax expense recorded in the second quarter of 2020.~~ operations. Operating margins for the six months ended June 30, ~~2020~~2021 increased to ~~17.7%~~28.3% compared to ~~15.8%~~19.6% for the six months ended June 30, ~~2019.~~2020, due to the higher net sales and operating leverage.

Prepaid Debit:

Income from operations for Prepaid Debit for the six months ended June 30, ~~2020 decreased~~2021 increased to ~~$7.6~~$14.6 million compared to ~~$10.7~~$7.6 million for the six months ended June 30, ~~2019.~~ 2020. The ~~decrease in income from operations~~increase was ~~due to reduced~~the result of higher net sales volumes ~~primarily due to COVID-19 impacts~~ from ~~lower retail store traffic.~~existing customers. Operating income margin for the six months ended June 30, ~~2020 decreased~~2021 increased to ~~26.9%~~36.6% from ~~32.7%~~26.9% for the same period in ~~2019, primarily as a result of unfavorable~~2020, due to higher net sales and favorable overhead cost ~~absorption from lower sales, impacting gross profit and operating expenses.~~absorption.

Other:

The loss from operations in Other was ~~$18.3~~$21.4 million for the six months ended June 30, ~~2020,~~2021, compared to a loss from operations of ~~$12.8~~$18.3 million for the same ~~time~~ period in ~~2019.~~2020. The ~~2019~~ loss ~~benefited~~ from ~~the $6.0~~operations was higher in 2021 by $3.2 million, ~~cash litigation settlement gain, and was~~ ~~partially offset by lower current period~~ primarily due to an increase in operating expenses from ~~certain cost reductions~~employee performance incentive compensation and ~~cost savings from the sale of our Canadian subsidiary.~~higher healthcare expenses.

Interest, net:

Interest expense for the six months ended June 30, ~~2020~~2021 increased to ~~$12.9~~$16.0 million compared to ~~$12.8~~$12.9 million for the six months ended June 30, ~~2019.~~ 2020. Interest expense was higher in ~~2020~~2021 primarily asdue to $2.6 million of “make-whole” premium interest expense incurred a result of ~~interest incurred on~~ the ~~new $30.0 million~~termination of our Senior Credit Facility ~~entered into~~ on March ~~6, 2020. This additional expense was partially offset by~~15, 2021.

Loss on debt extinguishment:

During the six months ended June 30, 2021, we recorded a ~~decline in~~$5.0 million loss on debt extinguishment relating to the ~~interest incurred on~~termination of our Senior Credit Facility and First Lien Term Loan ~~due to lower average interest rates for~~as we expensed the ~~six months ended~~ ~~June 30, 2020 compared to~~unamortized deferred financing costs and debt discount. This was completed in connection with the ~~same period in 2019.~~issuance of new Senior Notes and entrance into the new ABL Revolver on March 15, 2021.

~~Table of Contents~~

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

During the six months ended June 30, ~~2020, there was~~2021, we recorded an income tax ~~benefit~~expense of ~~$5.4~~$3.9 million on pre-tax ~~loss~~income of ~~$2.8~~$12.5 million, representing an effective income tax rate of ~~191.5%~~31.0%. During the six months ended June 30, ~~2019,~~2020, we recorded an income tax ~~expense~~benefit of ~~$1.2~~$3.6 million on pre-tax loss of ~~$0.4~~$0.5 million, representing an effective income tax rate of ~~(323.3)%~~695.1%. The effective income tax rate differs from the federal U.S. statutory rate in ~~2020~~2021 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 yearsstate taxes 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 six months ended June 30, 2020, the ~~Company estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a~~ ~~tax rate benefit of 127.9%~~. ~~In addition, the effective tax rate differs from the federal U.S. statutory rate of 21.0% due to the impact of~~ ~~a partial valuation allowance for the~~ ~~limitation on the deductibility of interest expense,~~ permanent ~~items, and state taxes.~~ items. In the prior year period, the effective income tax rate differs from the federal U.S. statutory rate primarily due to the impact of the CARES Act which was signed into law in March 2020, and due to tax expense for a partial valuation allowance for the limitation on the deductibility of interest expense.

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

During the six months ended June 30, ~~2020,~~2021, net income ~~from continuing operations~~ was ~~$2.6~~$8.6 million, compared to ~~a $1.5~~$3.0 million ~~loss~~ during the six months ended June 30, ~~2019.~~ 2020. The ~~change~~increase was primarily due to higher net sales and gross profit, partially offset by the loss on debt extinguishment, and ~~a larger~~higher operating expenses, interest expense and income tax ~~benefit for~~expense during the six months ended June 30, ~~2020, partially offset by the cash litigation settlement gain recorded in~~2021, compared to the prior year ~~and the current year estimated sales tax expense.~~period.

Table of Contents

Liquidity and Capital Resources

At June 30, ~~2020,~~2021, we had ~~$54.4~~$30.7 million of cash and cash equivalents. Of this amount, $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 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~~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 (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 ~~dated as of August 17, 2015, that includes a~~and First Lien Term Loan ~~that matures~~ on ~~August 17, 2022. On~~ March ~~6, 2020,~~15, 2021, and to pay related fees and expenses. During the ~~Company entered into a new $30 million Senior Credit Facility which matures on May 17, 2022.~~ ~~The Senior Credit Facility ranks senior in priority~~three months ended March 31, 2021, prior to the ~~Company’s First Lien Term Loan, which had $312.5 million outstanding as~~termination of ~~June 30, 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 Senior Credit Facility and~~ the First Lien Term Loan, ~~contain customary representations, covenants~~we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements. As of June 30, 2021, the Company had $310 million aggregate principal amount outstanding on the Senior Notes, plus accrued and ~~events~~unpaid interest. As of ~~default, including certain covenants that limit or restrict~~June 30, 2021, the ~~Company’s~~Company had no borrowings outstanding and ~~certain of its subsidiaries’~~$50 million available for borrowing under the ABL Revolver.

While not impacting the second quarter ended June 30, 2021, the ABL Revolver includes limitations on our 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, engageborrow in certain ~~affiliate transactions, or modify organizational documents, among other restrictions and subject~~situations, including during periods in which the amount available to ~~certain exceptions. In accordance~~borrow under the ABL Revolver is less than $5 million. Commencing with the ~~Senior Credit Facility,~~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 ~~Company is also required to have adjusted EBITDA, as~~ABL Revolver, we must maintain a fixed charge coverage ratio (as defined in the credit agreement ~~of $25 million~~ for the ~~previous four consecutive fiscal quarters in total~~ABL Revolver) of at least 1.00 to 1.00, calculated for the ~~end of each quarterly period ending~~trailing 12 months, tested monthly during such period. Borrowings under the ABL Revolver are also subject to limitations based on ~~or after~~ ~~March 31, 2020.~~the borrowing base.

The Senior ~~Credit Facility~~Notes and the ~~First Lien Term Loan~~ABL Revolver also ~~require~~contain covenants limiting the ability of the Company, the borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional indebtedness or issue 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 has obligations to make an offer to repay the Senior 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 ~~respective~~ 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~~Senior Notes. Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to ~~our 2019 annual financial statements.~~the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month. The borrower may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

Table of Contents

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%. As of June 30, 2020, the interest rate on our Senior Credit Facility was 9.5%. Interest rates under the First Lien Term Loan, at the Company’s election, are 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 June 30, 2020, the interest rate on our First Lien Term Loan was 6.38%.

Operating Activities ~~– Continuing Operations~~

Cash provided by operating activities ~~– continuing operations~~ for the six months ended June 30, ~~2020~~2021 was $22.7 million compared to cash provided by operating activities of $12.0 million during the six months ended June 30, 2020. The year over year increase was due primarily to higher net income and profitability, and working capital cash improvements, including the net collection of $3.7 million of income tax refunds during the six months ended June 30, 2021. These increases were partially offset by cash used in operating activities to increase inventory, including EMV dual interface chips to support our business, and to maintain certain levels of inventory in anticipation of future customer demand and supply chain constraints.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2021 was $3.5 million, compared to a usage of ~~$1.0~~$1.6 million during the six months ended June 30,, 2019. The year over year improvement was due to net income during the six months ended June 30, 2020 of $2.5 million compared to a net loss of $1.5 million in the prior year period, in addition to working capital cash benefits, primarily in accrued expense and inventories. For the six months ended ~~June 30, 2019, we had a working capital cash usage relating primarily to payments for~~ ~~employee performance incentive compensation earned in 2018 and increases in inventory to support the growth of our business. Cash interest paid during the six months ended~~ ~~June 30, 2020 was $11.5 million, which was lower than the prior year period by $0.1 million, primarily as a result of lower interest rates on our First Lien Term Loan.~~

~~Investing Activities – Continuing Operations~~

2020. Cash used in investing activities ~~– continuing operations for the six months ended June 30, 2020 was $1.6 million, compared to a usage of $1.2 million during the six months ended June 30, 2019. 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. ~~In the prior year period, partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of our Canadian subsidiary.~~ 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 ~~$0.8~~$0.5 million during the six months ended June 30, ~~2020,~~2021, compared to ~~$3.4~~$0.8 million during the prior year period.

Financing Activities

During the six months ended June 30, 2021, ~~2020,~~ cash ~~provided by~~used in financing activities was ~~$25.4~~$46.1 million. ~~The~~Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million, respectively. 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 million on March 15, 2021. During the six months ended June 30, 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. During the six months ended June 30, 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.

During the second quarter of 2021 we used $15 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of June 30, 2021.

During the six months ended June 30, 2020, 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 six months ended~~ ~~June 30, 2020. The Company~~costs. We also paid ~~$1.2~~$1.3 million and ~~$0.7~~$1.2 million of principal on finance leases during the six months ended June 30,, 2021 and 2020, ~~and 2019,~~ respectively. ~~For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility during the six months ended~~ ~~June 30, 2019.~~

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, ~~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 June 30, ~~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.

~~Table of Contents~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required due to smaller reporting company status.

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Item 4. Controls and 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"))~~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 June 30, ~~2020.~~2021.

Changes in Internal Control over Financial Reporting

~~Except as noted in the following sentence, there~~There have not been any changes in the Company’s internal control over financial reporting that occurred during the second quarter of ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. During the second quarter of 2020, the Company began implementing enhanced internal controls to appropriately determine compliance with, and accounting for, certain state and local sales tax regulations.

~~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 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.~~CPI Card Group Inc.~~, 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~~suit vigorously. However, no assurance can be given that this matter will be resolved favorably.

In addition to the ~~Registration Statement filed by CPI in connection with its IPO and~~

~~Table of Contents~~

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

On December 18, 2019, the parties filed a Stipulation and Agreement of Settlement (the “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)matter described above, 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 $0.3 million and a service award to the plaintiff of a nominal amount.

~~The Company is~~may 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.

Item 1A. Risk Factors

The risk factors disclosed in 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.

Our transition to being an accelerated filer and compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will be time consuming and costly, and our inability to maintain effective internal control over financial reporting in the future could result in investors losing confidence in the accuracy and completeness of our financial reports and negatively affect the market price of our common stock.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Because we will become an accelerated filer effective December 31, 2021, Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our independent registered public

Table of Contents

accounting firm to attest to the effectiveness of our internal control over financial reporting. Our transition to becoming subject to additional requirements of Section 404 of the Sarbanes-Oxley Act will be time-consuming, and there is a risk of noncompliance. Further, the costs associated with the compliance with and implementation of procedures under these and future laws and related rules could have a material impact on our results of operations.

If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, if we are unable to assert that our internal controls over financial reporting is effective or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, and the market price of our common stock could be negatively affected. In addition, we could become subject to investigations by any stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources, which could have an adverse impact on our business.

The ~~ongoing COVID-19 pandemic~~failure to effectively recruit, retain and ~~responses thereto may, or may continue to,~~develop qualified personnel and implement effective succession processes could adversely affect our ~~supply chain, workforce, overall operations~~success and ~~financial condition, and our ability to access capital markets and refinance indebtedness, each of which may~~could have a material adverse effect on our ~~business.~~

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, earlier this year almost all U.S. states and many local jurisdictions issued “stay-at-home” orders, quarantine requirements, and executive and other governmental orders, restrictions and recommendations for residents and businesses (some of which are still in place) in an effort to control the spread of COVID-19, including mandating closures of certain businesses not deemed “essential.” CPI was deemed essential in all jurisdictions where we operate and thus was not required to suspend any of our operations. Nevertheless, it is possible that those orders, restrictions or recommendations that are currently no longer in effect may be reinstated and/or that additional orders, restrictions or recommendations may be issued due to the continued outbreak of COVID-19. Such orders, restrictions and recommendations may again result in widespread closures of businesses, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions and cancellations of events, as well as adverse impacts on the national and global economies. Disruptions to our activities and operations resulting from such governmental orders, restrictions and recommendations would 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 long-term negative impact on the national and world economies, 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 may 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 actual and potential governmental orders, restrictions and recommendations described above (which may include travel and import restrictions) in response to COVID-19 have resulted in delays in certain of our suppliers’ deliveries to us and could continue to 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,~~

Our business functions are complex and require wide-ranging expertise and intellectual capital. If we fail to recruit, retain and develop personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs, then the ability of our business to successfully compete and grow may be adversely affected. In addition, the loss of key personnel without adequate succession plans in place may cause a failure to maintain continuity in key business functions. The market for qualified personnel is highly competitive, particularly in the states in which our operations are concentrated, and we have experienced labor availability issues in several of our facilities. This shortage of labor has resulted, and may continue to result, in increased compensation and recruiting expenses, which could have a material adverse effect on our profitability, particularly if we are unable to pass some or all of such ~~orders, restrictions and recommendations~~expenses on to our customers. We may not succeed in recruiting sufficient personnel to support our production needs or may fail to effectively replace current personnel who depart with qualified or effective successors. Personnel shortages have resulted, and may continue to result, in ~~increased transportation costs for materials from our suppliers (for~~extended production lead times and difficulty in meeting customers’ delivery expectations, which ~~we are responsible), which may negatively impact our cash flows, as well as increased transportation costs for our products that we ship~~could result in the loss of customers and damage 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 ordersreputation and ~~may~~ have a material adverse ~~impact~~effect on ~~our revenues and increase our costs and expenses. In the~~

~~Table of Contents~~

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, earlier this year state and local governments imposed orders, restrictions and recommendations resulting in closures of businesses, work stoppages, travel restrictions, social distancing practices and cancellations of gatherings and events, some of which are still in place. The reinstating of those orders, restrictions and recommendations that are currently no longer in effect and/or the issuance of additional 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 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 orders, restrictions and recommendations that are in place or may be put in place will be relaxed or lifted. There can be no assurances that our customers will resume purchases of our products and services upon termination of 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 continuing to evaluate 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 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.~~operations.

~~Table of Contents~~

Item 6. Exhibits



Exhibit Number		Exhibit Description
10.1		~~Amendment~~Amended and Restated CPI Card Group Inc. Omnibus Incentive Plan (as amended and restated effective May 27, 2021) (incorporated by reference to ~~Credit Agreement~~the Company’s Current Report on Form 8-K filed May 28, 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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

3836

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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.


August ~~5, 2020~~12, 2021	/s/ John Lowe
	John Lowe
	Chief Financial Officer
	(Principal Financial Officer)

3937



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)


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.~~Nasdaq Global Market



Large accelerated filer	◻☐	Accelerated filer	◻☐

Non-accelerated filer	⌧☒	Smaller reporting company	☒

		Emerging growth company	☒☐


		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		3534

Item 4 — Controls and Procedures		35


Part II — Other Information

Item 1 — Legal Proceedings		35

Item 1A — Risk Factors		35

Item 6 — Exhibits		36

~~Item 6 — Exhibits~~		38

Signatures		3937


	June 30,		December 31,
	2020		2019

Assets
Current assets:
Cash and cash equivalents	$	54,445	$	18,682
Accounts receivable, net of allowances of $281 and $395, respectively		45,317		42,832
Inventories		18,895		20,192
Prepaid expenses and other current assets		4,172		6,345
Income taxes receivable		9,404		4,164
Total current assets		132,233		92,215
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net		37,558		42,088
Intangible assets, net		28,504		30,802
Goodwill		47,150		47,150
Other assets		1,059		1,232
Total assets	$	246,504	$	213,487
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	15,042	$	16,482
Accrued expenses		28,718		22,820
Deferred revenue and customer deposits		1,097		468
Total current liabilities		44,857		39,770
Long-term debt		334,819		307,778
Deferred income taxes		6,924		6,896
Other long-term liabilities		9,757		11,478
Total liabilities		396,357		365,922
Commitments and contingencies (Note 15)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at June 30, 2020 and December 31, 2019		-		-
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 June 30, 2020 and December 31, 2019, respectively		11		11
Capital deficiency		(111,935)		(111,988)
Accumulated loss		(37,929)		(40,458)
Total stockholders’ deficit		(149,853)		(152,435)
Total liabilities and stockholders’ deficit	$	246,504	$	213,487


								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
March 31, 2020	11,229,819	$	11	$	(111,953)	$	(38,041)	$	—	$	(149,983)
Stock-based compensation			—		18		—		—		18
Components of comprehensive (loss) income:
Net income			—		—		112		—		112
June 30, 2020	11,229,819	$	11	$	(111,935)	$	(37,929)	$	—	$	(149,853)

								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
December 31, 2019	11,224,191	$	11	$	(111,988)	$	(40,458)	$	—	$	(152,435)
Shares issued under stock-based compensation plans	5,628		—		—		—		—		—
Stock-based compensation			—		53		—		—		53
Components of comprehensive (loss) income:											—
Net income			—		—		2,529		—		2,529
June 30, 2020	11,229,819	$	11	$	(111,935)	$	(37,929)	$	—	$	(149,853)

								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
March 31, 2019	11,160,537	$	11	$	(112,091)	$	(39,059)	$	(1,329)	$	(152,468)
Shares issued under stock-based compensation plans	62,991		—		—		—		—		—
Stock-based compensation			—		152		—		—		152
Components of comprehensive (loss) income:											—
Net income			—		—		1,522		—		1,522
Reclassification adjustment to foreign currency loss			—		—		—		1,329		1,329
June 30, 2019	11,223,528	$	11	$	(111,939)	$	(37,537)	$	—	$	(149,465)

								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
December 31, 2018	11,160,377	$	11	$	(112,223)	$	(36,004)	$	(1,360)	$	(149,576)
Shares issued under stock-based compensation plans	63,151		—		—		—		—		—
Stock-based compensation			—		284		—		—		284
Components of comprehensive (loss) income:
Net loss			—		—		(1,533)		—		(1,533)
Currency translation adjustment			—		—		—		31		31
Reclassification adjustment to foreign currency loss			—		—		—		1,329		1,329
June 30, 2019	11,223,528	$	11	$	(111,939)	$	(37,537)	$	—	$	(149,465)


	Three Months Ended June 30, 2020						Three Months Ended June 30, 2021
	Products		Services		Total		Products		Services		Total
Debit and Credit	$	39,541	$	18,765	$	58,306	$	47,180	$	25,680	$	72,860
Prepaid Debit		—		13,536		13,536		—		20,383		20,383
Other		—		—		—
Intersegment eliminations		(464)		—		(464)		(24)		—		(24)
Total	$	39,077	$	32,301	$	71,378	$	47,156	$	46,063	$	93,219

	Six Months Ended June 30, 2020							Six Months Ended June 30, 2021
	Products		Services		Total			Products		Services		Total
Debit and Credit	$	82,452	$	35,693	$	118,145		94,359		48,318		142,677
Prepaid Debit		—		28,076		28,076		—		39,841		39,841
Other		—		—		—
Intersegment eliminations		(874)		—		(874)		(190)		(17)		(207)
Total	$	81,578	$	63,769	$	145,347	$	94,169	$	88,142	$	182,311

	Three Months Ended June 30, 2019						Three Months Ended June 30, 2020
	Products		Services		Total		Products		Services		Total
Debit and Credit	$	33,276		17,810	$	51,086	$	39,541	$	18,765	$	58,306
Prepaid Debit		—		15,966		15,966		—		13,536		13,536
Other		—		—		—
Intersegment eliminations		(151)		—		(151)		(464)		—		(464)
Total	$	33,125	$	33,776	$	66,901	$	39,077	$	32,301	$	71,378

	Six Months Ended June 30, 2019						Six Months Ended June 30, 2020
	Products		Services		Total		Products		Services		Total
Debit and Credit	$	66,120		33,895	$	100,015	$	82,452	$	35,693	$	118,145
Prepaid Debit		—		32,710		32,710		—		28,076		28,076
Other		397		1,282		1,679
Intersegment eliminations		(635)		(2)		(637)		(874)		—		(874)
Total	$	65,882	$	67,885	$	133,767	$	81,578	$	63,769	$	145,347


	June 30, 2021		December 31, 2020

Machinery and equipment	$	60,555	$	55,459
Machinery and equipment under financing leases		7,676		9,974
Furniture, fixtures and computer equipment		4,420		4,410
Leasehold improvements		13,879		15,083
Construction in progress		1,523		2,386
		88,053		87,312
Less accumulated depreciation and amortization		(58,206)		(55,092)
Operating lease right-of-use assets, net of accumulated amortization		9,410		7,183
	$	39,257	$	39,403


2020 (excluding the six months ended June 30, 2020)	$	2,297
2021		4,352
2021 (excluding the six months ended June 30, 2021)			$	2,054
2022		3,867		3,867
2023		3,867		3,867
2024		3,530		3,630
2025				3,440
Thereafter		10,591		7,051
	$	28,504	$	23,909


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2021
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2021		2021		Level 1		Level 2		Level 3
Liabilities:
Senior Notes	$	310,000	$	329,375	$	—	$	329,375	$	—



2020		157,895
2021		46,461
Total unvested options as of June 30, 2020		204,356


	Three Months Ended June 30,
			% of 2020				% of 2019
	2020		Net Sales		2019		Net Sales		$ Change		% Change

	(dollars in thousands)
Gross profit by segment:
Debit and Credit	$	18,615	31.9	%	$	15,872	31.1	%	$	2,743	17.3	%
Prepaid Debit		4,537	33.5	%		6,509	40.8	%		(1,972)	(30.3)	%
Other		—	—	%		—	—	%		—	—	%
Total	$	23,152	32.4	%	$	22,381	33.5	%	$	771	3.4	%


	June 30, 2020		December 31, 2019		June 30, 2021		December 31, 2020

Raw materials	$	16,602	$	16,492	$	38,021	$	23,009
Finished goods		4,679		5,047		5,223		4,635
Inventory reserve		(2,386)		(1,347)		(2,971)		(2,848)
	$	18,895	$	20,192	$	40,273	$	24,796


		June 30, 2020						December 31, 2019							June 30, 2021						December 31, 2020
	Weighted Average	Gross Book		Accumulated		Net Book		Gross Book		Accumulated		Net Book		Weighted Average			Accumulated		Net Book				Accumulated		Net Book
	Life (Years)	Value		Amortization		Value		Value		Amortization		Value		Life (Years)	Cost		Amortization		Value		Cost		Amortization		Value

Customer relationships	17.2	$	55,454	$	(30,504)	$	24,950	$	55,454		(28,865)	$	26,589	17.2	$	55,454	$	(33,780)	$	21,674	$	55,454		(32,141)	$	23,313
Technology and software	8		7,101		(5,416)		1,685		7,101		(4,952)		2,149	8		7,101		(6,345)		756		7,101		(5,881)		1,220
Trademarks	8.7		3,330		(1,461)		1,869		3,330		(1,266)		2,064	8.7		3,330		(1,851)		1,479		3,330		(1,656)		1,674
Non-compete agreements	5		491		(491)		—		491		(491)		—
Intangible assets subject to amortization		$	66,376	$	(37,872)	$	28,504	$	66,376	$	(35,574)	$	30,802		$	65,885	$	(41,976)	$	23,909	$	65,885	$	(39,678)	$	26,207