10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2019.

or

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

For the Transition Period from                            to

Commission File Number 001-37584

CPI Card Group Inc.

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

Delaware	26-0344657
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)
10026 West San Juan Way
Littleton, CO	80127
(Address of principal executive offices)	(Zip Code)

(303) 973-9311

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	PMTS	Nasdaq Capital Market

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

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

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

Yes☐     No☒

Number of shares of Common Stock, $0.001 par value, outstanding as of July 25, 2019: 11,223,528

Table of Contents

	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	23
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	34
Item 4 — Controls and Procedures	34
Part II — Other Information
Item 1 — Legal Proceedings	34
Item 1A — Risk Factors	35
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 5 — Other Information	36
Item 6 — Exhibits	36
Signatures	37

2

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

	June 30,		December 31,
	2019		2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,484	$	20,291
Accounts receivable, net of allowances of $290 and $211, respectively		42,220		43,794
Inventories		14,854		9,827
Prepaid expenses and other current assets		4,106		4,997
Income taxes receivable		5,305		5,564
Total current assets		83,969	$	84,473
Plant, equipment and leasehold improvements, net		45,515		39,110
Intangible assets, net		33,109		35,437
Goodwill		47,150		47,150
Other assets		549		1,034
Total assets	$	210,292	$	207,204
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	14,415	$	16,511
Accrued expenses		20,846		23,853
Deferred revenue and customer deposits		350		912
Total current liabilities		35,611	$	41,276
Long-term debt		306,796		305,818
Deferred income taxes		6,342		5,749
Other long-term liabilities		11,008		3,937
Total liabilities		359,757	$	356,780
Commitments and contingencies (Note 13)
Stockholders’ deficit:
Common stock; $0.001 par value—100,000,000 shares authorized; 11,223,528 and 11,160,377 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		11		11
Capital deficiency		(111,939)		(112,223)
Accumulated loss		(37,537)		(36,004)
Accumulated other comprehensive loss		—		(1,360)
Total stockholders’ deficit		(149,465)	$	(149,576)
Total liabilities and stockholders’ deficit	$	210,292	$	207,204

See accompanying notes to condensed consolidated financial statements

3

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

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

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Net sales:
Products	$	33,125	$	31,494	$	65,882	$	56,238
Services		33,776		29,960		67,885		60,073
Total net sales		66,901		61,454		133,767		116,311
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		22,098		18,962		43,587		35,280
Services (exclusive of depreciation and amortization shown below)		19,647		19,116		40,813		39,780
Depreciation and amortization		2,775		3,501		5,465		6,949
Total cost of sales		44,520		41,579		89,865		82,009
Gross profit		22,381		19,875		43,902		34,302
Operating expenses, net:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		16,792		15,756		33,210		31,084
Depreciation and amortization		1,493		1,465		3,026		2,927
Litigation settlement gain		(6,000)		—		(6,000)		—
Total operating expenses, net:		12,285		17,221		30,236		34,011
Income from operations		10,096		2,654		13,666		291
Other expense, net:
Interest, net		(6,438)		(5,586)		(12,762)		(11,092)
Foreign currency loss		(1,321)		(466)		(1,280)		(264)
Other income (expense), net		(8)		3		11		7
Total other expense, net		(7,767)		(6,049)		(14,031)		(11,349)
Income (loss) from continuing operations before income taxes		2,329		(3,395)		(365)		(11,058)
Income tax (expense) benefit		(777)		2,593		(1,180)		4,578
Net income (loss) from continuing operations		1,552		(802)		(1,545)		(6,480)
Net income (loss) from discontinued operation, net of tax (see Note 3)		(30)		(15,907)		12		(17,521)
Net income (loss)	$	1,522	$	(16,709)	$	(1,533)	$	(24,001)
Basic and diluted earnings (loss) per share:
Basic and diluted - Continuing operations	$	0.14	$	(0.07)	$	(0.14)	$	(0.58)
Basic and diluted  - Discontinued operation		—		(1.43)		—		(1.57)
Net earnings (loss) per share	$	0.14	$	(1.50)	$	(0.14)	$	(2.15)
Weighted-average common share outstanding:
Basic		11,178,462		11,143,230		11,169,468		11,138,972
Diluted		11,242,225		11,143,230		11,169,468		11,138,972
Comprehensive income/ (loss):
Net income (loss)	$	1,522	$	(16,709)	$	(1,533)	$	(24,001)
Currency translation adjustment		—		(494)		31		(185)
Reclassification adjustment to foreign currency loss		1,329		—		1,329		—
Total comprehensive income (loss)	$	2,851	$	(17,203)	$	(173)	$	(24,186)

See accompanying notes to condensed consolidated financial statements

4

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(Dollars in Thousands)

(Unaudited)

								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)
								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
March 31, 2018	11,134,714	$	11	$	(112,740)	$	(5,862)	$	(4,829)	$	(123,420)
Shares issued under stock-based compensation plans	25,000		—		—		—		—		—
Stock-based compensation	—		—		363		—		—		363
Components of comprehensive (loss) income:
Net loss	—		—		—		(16,709)		—		(16,709)
Currency translation adjustment	—		—		—		—		(494)		(494)
June 30, 2018	11,159,714	$	11	$	(112,377)	$	(22,571)	$	(5,323)	$	(140,260)
								Accumulated
								other
	Common Stock			Capital		Accumulated		comprehensive
	Shares	Amount		deficiency		earnings (loss)		loss		Total
December 31, 2017	11,134,714	$	11	$	(113,081)	$	(1,366)	$	(5,138)	$	(119,574)
Adoption of ASC 606	—		—		—		2,796		—		2,796
Shares issued under stock-based compensation plans	25,000		—		—		—		—		—
Stock-based compensation	—		—		704		—		—		704
Components of comprehensive (loss) income:											—
Net loss	—		—		—		(24,001)		—		(24,001)
Currency translation adjustment	—		—		—		—		(185)		(185)
June 30, 2018	11,159,714	$	11	$	(112,377)	$	(22,571)	$	(5,323)	$	(140,260)

See accompanying notes to condensed consolidated financial statements

5

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in Thousands)

(Unaudited)

	Six Months Ended June 30,
	2019		2018
Operating activities
Net loss	$	(1,533)	$	(24,001)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss (income) from discontinued operation		(12)		17,521
Depreciation and amortization expense		8,491		9,876
Stock-based compensation expense		308		784
Amortization of debt issuance costs and debt discount		979		972
Deferred income taxes		593		(4,782)
Reclassification adjustment to foreign currency loss		1,329		—
Other, net		(190)		158
Changes in operating assets and liabilities:
Accounts receivable		66		(6,577)
Inventories		(5,028)		(2,466)
Prepaid expenses and other assets		1,593		(299)
Income taxes		228		2,284
Accounts payable		(1,042)		2,271
Accrued expenses		(6,249)		3,093
Deferred revenue and customer deposits		(564)		25
Other liabilities		74		(212)
Cash used in operating activities - continuing operations		(957)		(1,353)
Cash provided by (used in) operating activities - discontinued operation		12		(1,152)
Investing activities
Acquisitions of plant, equipment and leasehold improvements		(2,686)		(2,109)
Cash received for sale of Canadian subsidiary		1,451		—
Cash used in investing activities - continuing operations		(1,235)		(2,109)
Cash used in investing activities - discontinued operation		—		(536)
Financing activities
Proceeds from revolving credit facility		11,500		—
Payments on revolving credit facility		(11,500)		—
Payments on financing leases		(663)		(306)
Cash used in financing activities		(663)		(306)
Effect of exchange rates on cash		36		1
Net decrease in cash and cash equivalents		(2,807)		(5,455)
Cash and cash equivalents, beginning of period		20,291		23,205
Cash and cash equivalents, end of period	$	17,484	$	17,750
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	11,660	$	9,783
Income taxes, net payments (refunds)	$	340	$	(1,504)
Right-to-use assets obtained in exchange for lease obligations:
Operating leases	$	8,533	$	—
Financing leases	$	3,366	$	821
Accounts payable for acquisitions of plant, equipment and leasehold improvements	$	841	$	970

See accompanying notes to condensed consolidated financial statements

6

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) in the United States. To a lesser extent, the Company is also engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards.

As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.  After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale.  In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the three months ended June 30, 2019. This adjustment was $1,329 and is included in “Foreign Currency Loss” on the Statement of Operations.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

During February 2018, the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $1,332 for the three months ended June 30, 2018 and $2,132 for the six months ended June 30, 2018, and recorded severance charges of $223 and $552 for these same respective time periods. The Company recorded a lease termination charge of $432 in the three months ended June 30, 2018. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of Sales” and “Selling, General, and Administrative Expenses” on the Statement of Operations.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2018 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated,

7

information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. See Note 3 “Discontinued Operation” for further information.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property and equipment, the valuation of goodwill and intangible assets, valuation allowances for inventories and deferred tax assets, uncertain tax positions, discount rates used to determine right-to-use assets and lease liabilities, and revenue recognized for period-end work in process. Actual results could differ from those estimates.

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient.

The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.

Right-to-use assets (“ROU’) represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

As a result of the adoption of ASC 842 the Company recorded $8,025 of operating ROU, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

8

The components of operating and finance lease costs for the three and six months ended June 30, 2019 were as follows:

	Three Months Ended			Six Months Ended
	June 30, 2019			June 30, 2019
Total operating lease costs	$	665	$	1,308
Finance lease cost:
Amortization of right-to-use assets	$	178	$	301
Interest on lease liabilities		40		62
Total financing lease costs	$	218	$	363

The following table reflects balances for operating leases and financing leases:

	June 30, 2019
Operating leases
Operating lease right-to-use assets, net of amortization	$	7,271
		7,271
Operating lease liability (current)	$	2,104
Long-term operating liability		6,285
Total operating lease liabilities	$	8,389
Financing leases
Property, equipment and leasehold improvements	$	5,178
Accumulated depreciation		(512)
Total property, equipment and leasehold improvements, net	$	4,666
Financing lease liability	$	1,725
Long-term financing liability		2,525
Total	$	4,250

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

Components of lease expense were as follows:

	June 30, 2019
Weighted Average Remaining Lease Term
Operating Leases	3.82
Financing Leases	2.67
Weighted Average Discount Rate
Operating Leases	8.96%
Financing Leases	9.38%

9

Future cash payments with respect to lease obligations as of June 30, 2019 were as follows:

		Operating		Financing
		Lease		Leases
Year Ending
2019	$	1,389	$	959
2020		2,854		1,836
2021		2,646		1,220
2022		1,371		469
2023		1,097		73
Thereafter		605		-
Total lease payments		9,962		4,557
Less imputed interest		(1,573)		(307)
Total	$	8,389	$	4,250

Future cash payments with respect to lease obligations as of December 31, 2018 were as follows:

	Operating		Capital
	Leases		Leases
2019	$	2,927	$	521
2020		2,771		474
2021		2,512		243
2022		1,243		256
2023		971		71
Thereafter		652		—
Total	$	11,076	$	1,565

Cash paid on operating leases was $444 and $934 during the three and six months ended June 30, 2019, respectively.

As of January 1, 2018, the Company adopted Accounting Standards Update Codification ASC 606, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied ASC 606 as of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Condensed Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2 “Net Sales” for revenue recognition timing and methodology under ASC 606. 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The Company is currently reviewing the requirements of the standard and evaluating the impact on the Company’s consolidated financial position, results of operations, and cash flows.

10

2. Net Sales

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

	Three Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	33,276		17,810	$	51,086
U.S. Prepaid Debit		—		15,966		15,966
Intersegment eliminations		(151)		—		(151)
Total	$	33,125	$	33,776	$	66,901
	Six Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	66,120		33,895	$	100,015
U.S. Prepaid Debit		—		32,710		32,710
Other		397		1,282		1,679
Intersegment eliminations		(635)		(2)		(637)
Total	$	65,882	$	67,885	$	133,767
	Three Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	30,444		13,399	$	43,843
U.S. Prepaid Debit		—		15,427		15,427
Other		1,625		1,355		2,980
Intersegment eliminations		(575)		(221)		(796)
Total	$	31,494	$	29,960	$	61,454
	Six Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	54,164		26,827	$	80,991
U.S. Prepaid Debit		—		30,938		30,938
Other		3,000		2,679		5,679
Intersegment eliminations		(926)		(371)		(1,297)
Total	$	56,238	$	60,073	$	116,311

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” revenue are the design and production of Financial Payment Cards, including contact-EMV, Dual-Interface EMV®, metal, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping.

The Company includes gross shipping and handling revenue and cost in net sales and cost of sales respectively.

Services Net Sales

Revenue is recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Service” revenue click-fees from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet

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and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards historically in Canada prior to disposition. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

Customer Contracts

The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASU 2014-09 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

3. Discontinued Operation

On August 3, 2018, the Company completed the sale of its United Kingdom facilities that comprised the U.K. Limited reporting segment. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP.  The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal.

The major line items constituting the loss from the discontinued operation for the three and six months ended June 30, 2018 are presented in the table below.  The amounts relating to the discontinued operation for the three and six months ended June 30, 2019 were not significant.    

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Total net sales	$	4,587	$	8,799
Total cost of sales		4,300		8,498
Selling, general and administrative		1,446		3,066
Impairments		7,615		7,615
Other expense		21		29
Pretax (loss) from discontinued operation		(8,795)		(10,409)
Pretax loss on discontinued operation classification		(7,244)		(7,244)
Total pretax loss on discontinued operations		(16,039)		(17,653)
Income tax expense		132		132
Net (loss) from discontinued operation	$	(15,907)	$	(17,521)

4. Accounts Receivable

Accounts receivable consisted of the following:

	June 30, 2019		December 31, 2018
Trade accounts receivable	$	34,215	$	36,428
Unbilled accounts receivable		8,295		7,577
		42,510		44,005
Less allowance for doubtful accounts		(290)		(211)
	$	42,220	$	43,794

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5.  Inventories

Inventories are summarized below:

	June 30, 2019		December 31, 2018
Raw materials	$	10,917	$	8,235
Finished goods		5,427		2,991
Inventory reserve		(1,490)		(1,399)
	$	14,854	$	9,827

6. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consisted of the following:

	June 30, 2019		December 31, 2018
Machinery and equipment	$	55,714	$	62,067
Machinery and equipment under financing leases		5,178		1,812
Furniture, fixtures and computer equipment		5,539		7,730
Leasehold improvements		14,637		19,651
Construction in progress		1,662		1,596
		82,730		92,856
Less accumulated depreciation		(44,486)		(53,746)
Operating right-of-use assets, net of accumulated amortization		7,271		—
	$	45,515	$	39,110

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,104 and $3,802 for the three months ended June 30, 2019 and 2018, respectively, and $6,163 and $7,548 for the six months ended June 30, 2019 and 2018, respectively.

7. Goodwill and Other Intangible Assets

The Company reports all of its goodwill in its U.S. Debit and Credit segment at June 30, 2019 and December 31, 2018.

Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. Intangible amortization expense was $1,164 for each period ended for the three months and $2,328 for each period ended for the six months ended June 30, 2019 and 2018. 

At June 30, 2019 and December 31, 2018, intangible assets, excluding goodwill, were comprised of the following:

				June 30, 2019						December 31, 2018
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	55,454	$	(27,226)	$	28,228	$	55,454		(25,587)	$	29,867
Technology and software	7	to	10		7,101		(4,489)		2,612		7,101		(4,024)		3,077
Trademarks	7.5	to	10		3,330		(1,071)		2,259		3,330		(877)		2,453
Non-compete agreements	5	to	8		491		(481)		10		491		(451)		40
Intangible assets subject to amortization				$	66,376	$	(33,267)	$	33,109	$	66,376	$	(30,939)	$	35,437

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The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2019 was as follows:

2019	$	2,308
2020		4,595
2021		4,352
2022		3,867
2023		3,867
Thereafter		14,120
	$	33,109

8. Fair Value of Financial Instruments

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

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

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

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

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

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2019
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2019		2019		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	246,875	$	—	$	246,875	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2018
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2018		2018		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	203,125	$	—	$	203,125	$	—

The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 10 “Long-Term Debt and Credit Facility,” was based on bank quotes.

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

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9. Accrued Liabilities

Accrued liabilities consisted of the following:

	June 30, 2019		December 31, 2018
Accrued payroll and related employee expenses	$	4,853	$	4,040
Accrued employee performance bonus		3,247		7,137
Accrued Interest		5,191		5,058
Short term operating and financing leases		3,829		521
Other		3,726		7,097
Total accrued expenses	$	20,846	$	23,853

10. Long-Term Debt and Credit Facility

At June 30, 2019 and December 31, 2018, long-term debt and credit facilities consisted of the following:

	Interest		June 30,		December 31,
	Rate (1)		2019		2018
First Lien Term Loan (1)	7.35	%	$	312,500	$	312,500
Unamortized discount				(2,109)		(2,448)
Unamortized deferred financing costs				(3,595)		(4,234)
Total Long-term debt			$	306,796	$	305,818

(1)   Interest rate at June 30, 2019.  Interest rate at December 31, 2018 was 7.02%.

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.

The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

Interest rates under the First Lien 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 4.50%, or a base rate plus a margin of 3.50%.  

The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times trailing twelve month Adjusted EBITDA, as defined in the agreement. As of June 30, 2019, the Company was in compliance with all covenants under the First Lien Credit Facility.

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company was not required to make any prepayments of the First Lien Term Loan with respect to our 2018 annual financial statements.

At June 30, 2019, the Company did not have any outstanding amounts under the Revolving Credit Facility and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0

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times Adjusted EBITDA, as defined in the agreement. The interest rate on the Revolving Credit Facility is the Federal base rate plus 3.5%. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of June 30, 2019 and December 31, 2018, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

Deferred Financing Costs

Certain costs 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.

11. Income Taxes – Continuing Operations

During the three months ended June, 2019, the Company recognized an income tax expense of $777 on a pre-tax income of $2,329 compared to an income tax benefit of $2,593 on a pre-tax loss of $3,395 for the prior period. During the six months ended June 30, 2019, the Company recognized an income tax expense of $1,180 on pre-tax loss of $365, representing an effective income tax rate of (323.3%).  For the six months ended June 30, 2018, the Company recognized an income tax benefit of $4,578 on a pre-tax loss of $11,058, representing an effective income tax rate of 41.4%.

For the six months ended June 30, 2019 and 2018, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

	June 30,
	2019		2018
Tax at federal statutory rate	20.3	%	21.0	%
State Taxes, net	(60.1)		2.1
Valuation allowance	(206.2)		(8.3)
Tax benefit U.K. discontinued operation	—		27.2
Other	(77.3)		(0.6)
Effective income tax rate	(323.3)	%	41.4	%

The effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to a partial valuation allowance of $752 on certain U.S. deferred tax assets at an effective income tax rate impact of (206.2%) for the six months ended June 30, 2019.  The partial valuation allowance is due to the limitation on the deductibility of business interest expense which is a provision of U.S. government tax reform legislation enacted in December 2017.  For the six months ended June 30, 2018, the primary reason that the effective tax rate differs from the federal U.S. statutory rate is due to a tax benefit recorded in connection with the U.K. Limited discontinued operation. The Company’s income tax receivable on the condensed consolidated balance sheet as of June 30, 2019, is primarily comprised of U.S. federal income tax receivable relating to a prior tax year.

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12. Income (loss) per Share

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

The following table sets forth the computation of basic and diluted loss per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Numerator:
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)
Net income (loss) from discontinued operation		(30)		(15,907)		12		(17,521)
Net income (loss)	$	1,522	$	(16,709)	$	(1,533)	$	(24,001)
Denominator:
Basic weighted-average common shares outstanding		11,178,462		11,143,230		11,169,468		11,138,972
Dilutive shares		63,763		—		—		—
Diluted weighted-average shares outstanding		11,242,225		11,143,230		11,169,468		11,138,972
Basic and diluted-Continuing operations	$	0.14	$	(0.07)	$	(0.14)	$	(0.58)
Basic and diluted-Discontinued operation		—		(1.43)		—		(1.57)
Basic and diluted net earnings (loss) per share	$	0.14	$	(1.50)	$	(0.14)	$	(2.15)

The Company reported a net loss for the three months ended June 30, 2018, six months ended June 30, 2019 and 2018. Accordingly, the potentially dilutive effect of 864,257 and 957,840 stock options and 11,201 and 98,535 restricted stock units were excluded from the computation of diluted earnings per share as of June 30, 2019 and 2018, respectively, as their inclusion would be anti-dilutive.

13. Commitments and Contingencies; Litigation Settlement

Contingencies

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

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

On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI 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 SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

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On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final determination of In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”), which was dismissed in its entirety, with prejudice, on February 25, 2019.  Under its terms, the stay of the Derivative Suit was lifted 30 days after the entry of final judgment in the Class Action which was entered on February 25, 2019.  The Derivative Suit litigation is ongoing.

Given the current stage of this matter, the range of any potential loss is not probable or estimable and no liability has been recorded as of June 30, 2019 and December 31, 2018.

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.  For further information see Part II-Item 1. Legal Proceedings.

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

14. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

During 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 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of June 30, 2019, there were 204,100 shares available for grant under the Omnibus Plan. 

During the six months ended June 30, 2019, the Company did not grant any awards of non-qualified stock options.

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

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2018	910,627	$	14.99
Granted	—		0.00
Forfeited	(46,370)		11.52
Outstanding as of June 30, 2019	864,257	$	15.17	7.88
Options vested and exercisable as of June 30, 2019	344,148		22.23	7.47
Options vested and expected to vest	864,257		15.17	7.88

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The following is a summary of the activity in non-vested stock options under the Omnibus Plan:

		Weighted-Average
	Number	Grant-Date Fair Value
Non-vested as of December 31, 2018	605,352	$	3.14
Granted	-
Forfeited	(28,791)		2.51
Vested	(56,452)		3.76
Non-vested as of June 30, 2019	520,109	$	3.11

Unvested options as of June 30, 2019, will vest as follows:

2019	231,906
2020	236,503
2021	51,700
Total unvested options as of June 30, 2019	520,109

 The weighted-average grant-date fair value of options granted was as follows:

	Three Months Ended June 30,
	2019		2018
Weighted-average grant-date fair value of options granted	$	n/a	$	1.65

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

				Weighted-
				Average
		Weighted-		Remaining
		Average		Amortization
		Grant-Date		Period
	Units	Fair Value		(in Years)
Outstanding as of December 31, 2018	68,649	$	6.25
Granted	—
Vested	(56,635)		2.75
Forfeited	(813)		21.75
Outstanding as of June 30, 2019	11,201	$	22.81	0.84

During the six months ended June 30, 2019, the Company did not grant any awards of restricted stock units.

Unvested restricted stock units as of June 30, 2019, will vest as follows:

2019	928
2020	10,030
2021	243
Total unvested restricted stock units as of June 30, 2019	11,201

The following table summarizes the changes in the number of outstanding cash performance units:

	Units
Outstanding as of December 31, 2018	425,012
Granted	—
Vested	(212,505)
Forfeited	(17,858)
Outstanding as of June 30, 2019	194,649

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These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are 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 of March 22, 2017, compared to the Company’s stock price on the date of grant. During the first six months of 2019, the second tranche of the cash performance units vested. Accordingly, the Company made a cash payment of $106 to the award recipients. 

The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and re-measured to fair value at the end of each reporting period. As of June 30, 2019, the Company recognized a liability of $74 in “Accrued expenses” in the Condensed Consolidated Balance Sheet for unsettled cash performance units.

Compensation expense for the Omnibus Plan for the three months ended June 30, 2019 and 2018 was $161 and $389, respectively. Compensation expense for the six months ended June 30, 2019 and 2018 was $308 and $784, respectively. As of June 30, 2019, the total unrecognized compensation expense related to unvested options, restricted stock units and cash performance unit awards under the Omnibus Plan was $354, which the Company expects to recognize over an estimated weighted-average period of 1.0 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 may 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 is granted.

As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of June 30, 2019. 

During the three months ended June  30, 2019, the remaining 6,600 outstanding shares were exercised.  As such, there were no outstanding shares remaining as of June 30, 2019.

Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the three months ended June 30, 2019 and 2018, were de minimis.  

15. Segment Reporting

The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, 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 revenue and EBITDA.

EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available 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 identify strategies to improve the allocation of resources amongst segments.

On August 3, 2018, the Company completed the sale of the U.K. Limited segment. See Note 3 “Discontinued Operation” for further information. The Company has restated all historical periods presented within these financial statements and has not included U.K. Limited as a reportable segment. 

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As of June 30, 2019, the Company’s reportable segments were as follows:

    U.S. Debit and Credit,

    U.S. Prepaid Debit, and

    Other.

The Other category includes the Company’s corporate headquarters and a less significant operating segment that historically derived its revenue from the production of financial payment cards and retail gift cards in Canada. The Canadian subsidiary was sold on April 1, 2019. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019.

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2019, and 2018, were as follows:

	Net Sales
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	51,086	$	43,843	$	100,015	$	80,991
U.S. Prepaid Debit		15,966		15,427		32,710		30,938
Other		—		2,980		1,679		5,679
Intersegment eliminations		(151)		(796)		(637)		(1,297)
Total	$	66,901	$	61,454	$	133,767	$	116,311

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	10,590	$	9,933	$	20,970	$	15,651
U.S. Prepaid Debit		5,880		4,687		11,659		9,506
Other		(3,435)		(7,463)		(11,741)		(15,247)
Total	$	13,035	$	7,157	$	20,888	$	9,910

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, 2019, and 2018:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Total segment EBITDA from continuing operations	$	13,035	$	7,157	$	20,888	$	9,910
Interest, net		(6,438)		(5,586)		(12,762)		(11,092)
Income tax (expense) benefit		(777)		2,593		(1,180)		4,578
Depreciation and amortization		(4,268)		(4,966)		(8,491)		(9,876)
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments at June 30, 2019, and December 31, 2018, were as follows:

	June 30, 2019		December 31, 2018
U.S. Debit and Credit	$	173,565	$	169,567
U.S. Prepaid Debit		29,462		25,117
Other		7,265		12,520
Total assets	$	210,292	$	207,204

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Net Sales by Products and Services

Net sales from products and services sold by the Company for the three and six months ended June 30, 2019 and 2018 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Products net sales (a)	$	33,125	$	31,494	$	65,882	$	56,238
Services net sales (b)		33,776		29,960		67,885		60,073
Total net sales	$	66,901	$	61,454	$	133,767	$	116,311

(a)   “Products” net sales include the design and production of Financial Payment Cards in contact-EMV®, Dual-Interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once® printers and consumables, private label credit cards and retail gift cards.

(b)   “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Services” revenue from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards, historically generated in Canada prior to the disposition.

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

Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations, and the sale of the Canada operations on April 1, 2019, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant.

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

References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. 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, 2018 filed with the Securities and Exchange Commission (“SEC”).

Cautionary Statement Regarding Forward-Looking Information

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

These risks and uncertainties include, but are not limited to: our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facility 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 and possible exposure to litigation and/or regulatory penalties under applicable data privacy and other laws for failure to prevent such incidents; 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 failure to maintain our listing on the NASDAQ Capital Market; 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 and process; 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; developing technologies that make our existing technology solutions and products less relevant or a failure to introduce new products and services in a timely manner; quarterly variation in our operating results; infringement of our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; our inability to realize the full value of our long-lived assets; our failure to operate our business in accordance with the PCI Security Standards Council (“PCI”) security standards or other industry standards such as Payment Card Brand certification standards; costs 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; disruption or delays in our manufacturing operations or supply chain; 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 and/or trade restrictions on goods imported into the United States; our dependence on licensing arrangements; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products; risks associated with the controlling stockholders’ ownership of our stock; 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, 2018 filed with the SEC on March 6, 2019 and our other reports filed from time to time with the Securities and Exchange Commission (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 to differ materially from the expectations and beliefs contained herein. We

23

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 engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which we define as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover in the United States). To a lesser extent, the Company is also engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards.

As a producer and provider of services for Financial Payment Cards, each of our secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, we entered into a definitive agreement to sell the Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the U.S. 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 sale did not have a significant impact on cash, and no significant loss on sale.  In connection with the disposition of the foreign entity, we released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the three months ended June 30, 2019. This adjustment was $1.3 million and is included in “Foreign Currency Loss” on the Statement of Operations.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

On August 3, 2018, we completed the sale of the U.K. Limited segment. The historical financial position, results of operations and cash flows for the U.K. segment have been restated for all periods to conform with discontinued operations presentation. Unless otherwise indicated, information in Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to continuing operations.

The major line items constituting the loss from the discontinued operation for the three and six months ended June 30, 2018 are presented in the table below.  The amounts relating to the discontinued operation for the six months ended June 30, 2019 were not significant.

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Total net sales	$	4,587	$	8,799
Total cost of sales		4,300		8,498
Selling, general and administrative		1,446		3,066
Impairments		7,615		7,615
Other expense		21		29
Pretax (loss) from discontinued operation		(8,795)		(10,409)
Pretax loss on discontinued operation classification		(7,244)		(7,244)
Total pretax loss on discontinued operations		(16,039)		(17,653)
Income tax expense		132		132
Net (loss) from discontinued operation	$	(15,907)	$	(17,521)

U.K. Limited incurred losses from operations during the three and six months ended June 2018 due to the softness in the U.K. retail sector and a decline in sales relating to certain customers. Additionally, we recorded impairment charges of $7.6 million associated with goodwill and customer relationship intangible assets, and recorded a $7.2 million loss on the discontinued operation classification.

During February 2018, we made the decision to consolidate three personalization operations in the United States into two facilities to better enable us to optimize operations and achieve market-leading quality and service with a cost-competitive business model. In conjunction with this decision, we accelerated the depreciation of certain related

24

assets, which totaled $1.3 million for the three months ended June 30, 2018, and $2.1 million for the six months ended June 30, 2018, and recorded severance charges of $0.2 million, and $0.6 million for these same respective time periods.

We recorded a lease termination charge of $0.4 million in the three months ended June 30, 2018. The charges were recorded in our U.S. Debit and Credit segment.

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,
	2019		2018		2019		2018
	(dollars in thousands)
Net sales:
Products	$	33,125	$	31,494	$	65,882	$	56,238
Services		33,776		29,960		67,885		60,073
Total net sales		66,901		61,454		133,767		116,311
Cost of sales		44,520		41,579		89,865		82,009
Gross profit		22,381		19,875		43,902		34,302
Operating expenses		18,285		17,221		36,236		34,011
Litigation settlement gain		(6,000)		—		(6,000)		—
Income from operations		10,096		2,654		13,666		291
Other expense, net:
Interest, net		(6,438)		(5,586)		(12,762)		(11,092)
Foreign exchange loss		(1,321)		(466)		(1,280)		(264)
Other income, net		(8)		3		11		7
Income (loss) from continuing operations before taxes		2,329		(3,395)		(365)		(11,058)
Income tax (expense) benefit		(777)		2,593		(1,180)		4,578
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)

Refer to Part II, Item 1, Legal Proceedings, for further information regarding the cash litigation settlement gain.

Segment Discussion

Three Months Ended June 30, 2019 Compared With Three Months Ended June 30, 2018

Net Sales

	Three Months Ended  June 30,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	51,086	$	43,843	$	7,243	16.5	%
U.S. Prepaid Debit		15,966		15,427		539	3.5	%
Other		—		2,980		(2,980)	(100.0)	%
Eliminations		(151)		(796)		645	*	%
Total	$	66,901	$	61,454	$	5,447	8.9	%

* Not meaningful

Net sales for the three months ended June 30, 2019, increased $5.4 million, or 8.9%, to $66.9 million compared to $61.5 million for the three months ended June 30, 2018. 

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the three months ended June 30, 2019, increased $7.2 million, or 16.5%, to $51.1 million compared to $43.8 million for the three months ended June 30, 2018. The net sales increase was

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primarily due to higher volumes of EMV® financial payment card manufacturing, including dual interface EMV® cards, as well as card personalization and fulfillment.  Dual interface EMV® cards have additional technology to process contactless transactions and generally have a higher selling price than other contact-only EMV cards, which benefitted the current year period sales increase as compared to the prior year period. 

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the three months ended June 30, 2019, increased $0.5 million, or 3.5%, to $16.0 million, compared to $15.4 million for the three months ended June 30, 2018. The increase was the result of additional sales volumes from our existing customer base.

Other:

In the three months ended June 30, 2018, Other net sales were $3.0 million.  During the three months ended June 30, 2019, there were no sales in the Other segment.  In April 2019, we sold the Canadian subsidiary and no longer have any operations contributing to Other net sales. 

Gross Profit and Gross Profit Margin

	Three Months Ended  June 30,
			% of 2019				% of 2018
	2019		Net Sales		2018		Net Sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	15,872	31.1	%	$	13,856	31.6	%	$	2,016	14.5	%
U.S. Prepaid Debit		6,509	40.8	%		5,305	34.4	%		1,204	22.7	%
Other		—	*	%		714	24.0	%		(714)	*	%
Total	$	22,381	33.5	%	$	19,875	32.3	%	$	2,506	12.6	%

* Not meaningful;

Gross profit for the three months ended June 30, 2019, increased $2.5 million, or 12.6%, to $22.4 million compared to $19.9 million for the three months ended June 30, 2018. Gross profit margin for the three months ended June 30, 2019 increased to 33.5% compared to 32.3% for the three months ended June 30, 2018.

U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the three months ended June 30, 2019, increased $2.0 million, or 14.5%, to $15.9 million compared to $13.9 million during the three months ended June 30, 2018. The increase in gross profit for U.S. Debit and Credit was driven primarily by higher card personalization and fulfillment sales, and increased sales volumes from EMV® financial payment card manufacturing, in addition to lower depreciation expense in 2019 due to the consolidation of our personalization operations in the prior year.  Gross profit margin declined to 31.1% during the three months ended June 30, 2019, compared to 31.6% in the prior year period.  This decrease was a result of higher card manufacturing material costs driven primarily by a mix of certain products.  

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the three months ended June 30, 2019, increased 22.7% to $6.5 million compared to $5.3 million for the three months ended July 30, 2018. Gross profit margin for U.S. Prepaid Debit for the three months ended June 30, 2019, increased to 40.8% compared to 34.4% for the three months ended June 30, 2018. The increase in gross profit and margin was attributed to higher sales volumes, and product mix.

Other:

In the three months ended June 30, 2018, Other gross profit was $0.7 million.  During the three months ended June 30, 2019, there was no gross profit in the Other segment.  In April 2019, we sold the Canadian subsidiary and no longer have any operations contributing to Other net sales or gross profit.

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Operating Expenses, net

	Three Months Ended  June 30,
			% of 2019				% of 2018
	2019		Net Sales		2018		Net Sales		$ Change		% Change
	(dollars in thousands)
Operating expenses, net,  by segment:
U.S. Debit and Credit	$	7,883	15.4	%	$	7,220	16.5	%	$	663	9.2	%
U.S. Prepaid Debit		1,135	7.1	%		1,087	7.0	%		48	4.4	%
Other		9,267	*	%		8,914	*	%		353	4.0	%
Other-litigation settlement		(6,000)	*	%		—	*	%		(6,000)	*
Total	$	12,285	18.4	%	$	17,221	28.0	%	$	(4,936)	(28.7)	%

* Not meaningful;

Operating expenses, net, for the three months ended June 30, 2019, decreased $4.9 million, or 28.7%, to $12.3 million compared to $17.2 million for the three months ended June 30, 2018.  The cash litigation settlement gain contributed $6.0 million to the decline in operating expenses, net, for the three months ended June 30, 2019, compared to the prior year period, and was partially offset by an increase in operating expenses of $1.1 million.  Refer to Part II, Item 1, Legal Proceedings for further information regarding the cash litigation settlement gain.

U.S. Debit and Credit:

U.S. Debit and Credit operating expenses increased $0.7 million to $7.9 million in the three months ended June 30, 2019 compared to $7.2 million in the three months ended June 30, 2018, due to increased selling and compensation costs, consistent with the increase in net sales.  This increase was partially offset by the impact of charges relating to the consolidation of our personalization operations incurred in 2018.

U.S. Prepaid Debit:

U.S. Prepaid Debit operating expenses increased 4.4% for the three months ended June 30, 2019 when compared to the three months ended June 30, 2018, consistent with the increase in net sales.  The total operating expenses were $1.1 million in both of the three months ended June 30, 2019, and June 30, 2018. 

Other:

Other operating expenses during the three months ended June 30, 2019 increased $0.4 million compared to the three months ended June 30, 2018, primarily from an increase in employee performance incentive compensation, partially offset by a decrease due to the sale of our Canadian subsidiary.  During the three months ended June 30, 2019, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment. 

Income from Operations and Operating Margin

	Three Months Ended  June 30,
			% of 2019				% of 2018
	2019		Net Sales		2018		Net Sales		$ Change		% Change
	(dollars in thousands)
Income (loss) from operations by segment:
U.S. Debit and Credit	$	7,985	15.6	%	$	6,636	15.1	%	$	1,349	20.3	%
U.S. Prepaid Debit		5,374	33.7	%		4,218	27.3	%		1,156	27.4	%
Other		(3,263)	*	%		(8,200)	*	%		4,937	60.2	%
Total	$	10,096	15.1	%	$	2,654	4.3	%	$	7,442	280.4	%
* Not meaningful

Income from operations for the three months ended June 30, 2019 was $10.1 million compared to income from operations of $2.7 million for the three months ended June 30, 2018. The Company’s operating profit margin for the three months ended June 30, 2019 increased to 15.1% compared to an operating income margin of 4.3% for the three

27

months ended June 30, 2018.  In the current year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment.  

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the three months ended June 30, 2019 increased $1.3 million, to $8.0 million compared to $6.6 million for the three months ended June 30, 2018 due primarily to higher card personalization and fulfillment sales, and higher volumes of EMV® financial payment card manufacturing, including dual interface EMV® cards.  In addition, second quarter 2019 expenses declined due to the consolidation of our personalization operations in the prior year.  The impact of these improvements to income from operations were partially offset by higher card manufacturing material costs driven primarily by a mix of certain products, and higher operating expenses.  Operating margins for the three months ended June 30, 2019 increased to 15.6% compared to 15.1% for the three months ended June 30, 2018. 

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the three months ended June 30, 2019 increased to $5.4 million compared to $4.2 million for the three months ended June 30, 2018 primarily due to increased sales volumes,  and product mix. U.S. Prepaid Debit operating income margin for the three months ended June 30, 2019 increased to 33.7% from 27.3% for the same period in 2018.

Other:

The loss from operations in Other was $3.3 million for the three months ended June 30, 2019 compared to a loss from operations of $8.2 million for the same time period in 2018. The 2019 loss benefited from the $6.0 million cash litigation settlement gain, the impact of which was partially offset by higher operating expenses as described above. 

Interest, net:  

Interest expense for the three months ended June 30, 2019 increased to $6.4 million compared to $5.6 million for the three months ended June 30, 2018. The additional interest expense resulted primarily from a higher average interest rate on the First Lien Term Loan for the three months ended June 30, 2019 compared to the same period ended 2018. 

Income tax benefit (expense):

During the three months ended June 30, 2019, there was an income tax expense of $0.8 million on pre-tax income of $2.3 million, representing an effective income tax rate of 33.4%.  During the three months ended June 30, 2018, we recorded an income tax benefit of $2.6 million on pre-tax loss of $3.4 million, representing an effective tax rate of 76.4%. For the quarter ended June 30, 2019, the effective tax rate differs from the federal U.S. statutory rate of 21.0% primarily due to the impact of state tax expense of $0.2 million at an effective income tax rate impact of 7.9%.  For the quarter ended June 30, 2018, the primary reason that the effective tax rate differs from the federal U.S. statutory rate is due to a tax benefit recorded in connection with the U.K. Limited discontinued operation. 

Net income (loss) from continuing operations:

During the three months ended June 30, 2019, net income from continuing operations was $1.6 million, compared to a $0.8 million net loss during the three months ended June 30, 2018. The change was primarily due to higher net sales and gross profit, and the $6.0 million cash litigation settlement gain, which were partially offset by higher card manufacturing material costs driven primarily by a mix of certain products, higher selling, general, and administrative expenses, and interest expenses as described above.

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Six Months Ended June 30, 2019 Compared With Six Months Ended June 30, 2018

Net Sales

	Six Months Ended June 30,
	2019		2018		$ Change		% Change
	(dollars in thousands)
Net sales by segment:
U.S. Debit and Credit	$	100,015	$	80,991	$	19,024	23.5	%
U.S. Prepaid Debit		32,710		30,938		1,772	5.7	%
Other		1,679		5,679		(4,000)	(70.4)	%
Eliminations		(637)		(1,297)		660	*	%
Total	$	133,767	$	116,311	$	17,456	15.0	%

Net sales for the six months ended June 30, 2019 increased $17.5 million, or 15.0%, to $133.8 million compared to $116.3 million for the six months ended June 30, 2018.

U.S. Debit and Credit:

Net sales for U.S. Debit and Credit for the six months ended June 30, 2019, increased $19.0 million, or 23.5%, to $100.0 million compared to $81.0 million for the six months ended June 30, 2018. The net sales increase was primarily due to higher volumes of EMV® financial payment card manufacturing, including dual interface EMV® cards, as well as card personalization and fulfillment.  Dual interface EMV® cards have additional technology to process contactless transactions and generally have a higher selling price than other contact-only EMV cards.    

U.S. Prepaid Debit:

Net sales for U.S. Prepaid Debit for the six months ended June 30, 2019, increased $1.8 million, or 5.7%, to $32.7 million, compared to $30.9 million for the six months ended June 30, 2018. The increase was the result of additional sales volumes from our existing customer base.

Other:

Other net sales were $1.7 million for the six months ended June 30, 2019, compared to $5.7 million for the six months ended June 30, 2018. The decrease was a result of lower sales volumes during the first quarter of 2019, and the closure of the Canada subsidiary disposition on April 1, 2019. 

Gross Profit and Gross Profit Margin

	Six Months Ended  June 30,
			% of 2019				% of 2018
	2019		Net Sales		2018		Net Sales		$ Change		% Change
	(dollars in thousands)
Gross profit by segment:
U.S. Debit and Credit	$	31,144	31.1	%	$	22,340	27.6	%	$	8,804	39.4	%
U.S. Prepaid Debit		12,855	39.3	%		10,673	34.5	%		2,182	20.4	%
Other		(97)	(5.8)	%		1,289	22.7	%		(1,386)	*	%
Total	$	43,902	32.8	%	$	34,302	29.5	%	$	9,600	28.0	%

Gross profit for the six months ended June 30, 2019, increased $9.6 million, or 28.0%, to $43.9 million compared to $34.3 million for the six months ended June 30, 2018. Gross profit margin for the six months ended June 30, 2019 increased to 32.8% compared to 29.5% for the six months ended June 30, 2018.

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U.S. Debit and Credit:

Gross profit for U.S. Debit and Credit for the six months ended June 30, 2019, increased $8.8 million, or 39.4%, to $31.1 million compared to $22.3 million during the six months ended June 30, 2018. The increase in gross profit and gross profit margin for U.S. Debit and Credit was driven primarily by increased sales volumes and favorable overhead cost absorption primarily in the first quarter of 2019, and a reduction in depreciation expense due to the consolidation of our personalization operations in the prior year.  Partially offsetting the gross profit margin increase compared to the prior year-to-date period were higher card manufacturing material costs driven primarily by a mix of certain products in the second quarter of 2019.

U.S. Prepaid Debit:

Gross profit for U.S. Prepaid Debit during the six months ended June 30, 2019 increased 20.4% to $12.9 million compared to $10.7 million for the six months ended June 30, 2018. Gross profit margin for U.S. Prepaid Debit for the six months ended June 30, 2019 increased to 39.3% compared to 34.5% for the six months ended June 30, 2018. The increase in gross profit and margin was attributed to higher sales volumes from our existing customer base, product mix, and favorable cost absorption due to higher sales.

Other:

Other gross loss was $0.1 million for the six months ended June 30, 2019 compared to gross profit of $1.3 million for the six months ended June 30, 2018.  The decrease was a result of lower sales volumes during the first quarter of 2019, and the closure of the Canada subsidiary disposition on April 1, 2019. 

Operating Expenses, net

	Six Months Ended  June 30,
	2019				2018				$ Change		% Change
	(dollars in thousands)
Operating expenses, net,  by segment:
U.S. Debit and Credit	$	15,378	15.4	%	$	13,182	16.3	%	$	2,196	16.7	%
U.S. Prepaid Debit		2,166	6.6	%		2,129	6.9	%		37	1.7	%
Other		18,692	*	%		18,700	*	%		(8)	(0.0)	%
Other-litigation settlement		(6,000)	*	%		—	*	%		(6,000)	*	%
Total	$	30,236	22.6	%	$	34,011	29.2	%	$	(3,775)	(11.1)	%

Operating expenses, net, for the six months ended June 30, 2019 decreased $3.8 million, or 11.1%, to $30.2 million compared to $34.0 million for the six months ended June 30, 2018.  The cash litigation settlement gain contributed $6.0 million to the decline in operating expenses, net, for the six months ended June 30, 2019, compared to the prior year period, and was partially offset by an increase in operating expenses of $2.2 million. 

U.S. Debit and Credit:

U.S. Debit and Credit operating expenses increased $2.2 million to $15.4 million in the six months ended June 30, 2019 compared to $13.2 million in the six months ended June 30, 2018, due to increased selling and compensation costs, consistent with the increase in net sales.  This increase was partially offset by the impact of charges relating to the consolidation of our personalization operations incurred in 2018.

U.S. Prepaid Debit:

U.S. Prepaid Debit operating expenses were essentially flat for the six months ended June 30, 2019 when compared to the six months ended June 30, 2018.

30

Other:

Other operating expenses were flat for the six months ended June 30, 2019, when compared to the six months ended June 30, 2018.  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 as described previously.

Income from Operations and Operating Margin

	Six Months Ended  June 30,
			% of 2019				% of 2018
	2019		Net Sales		2018		Net Sales		$ Change		% Change
	(dollars in thousands)
Income (loss) from operations by segment:
U.S. Debit and Credit	$	15,761	15.8	%	$	9,158	11.3	%	$	6,603	72.1	%
U.S. Prepaid Debit		10,690	32.7	%		8,543	27.6	%		2,147	25.1	%
Other		(12,785)	*	%		(17,410)	*	%		4,625	26.6	%
Total	$	13,666	10.2	%	$	291	0.3	%	$	13,375	4,596.2	%

Income from operations for the six months ended June 30, 2019 was $13.7 million compared to income from operations of $0.3 million for the six months ended June 30, 2019. The Company’s operating profit margin for the six months ended June 30, 2019, increased to 10.2% compared to an operating profit margin of 0.3% for the six months ended June 30, 2018.  In the current year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment.  

U.S. Debit and Credit:

Income from operations for U.S. Debit and Credit for the six months ended June 30, 2019 increased $6.6 million, to $15.8 million compared to $9.2 million for the six months ended June 30, 2018. The increase in income from operations was driven primarily by increased sales volumes,  favorable overhead cost absorption, and a reduction in depreciation expense due to the consolidation of our personalization operations in the prior year. The impact of these improvements to income from operations were partially offset by higher card manufacturing material costs driven primarily by a mix of certain products, and higher operating expenses. Operating margins for the six months ended June 30, 2019, increased to 15.8% compared to 11.3% for the six months ended June 30, 2018. 

U.S. Prepaid Debit:

Income from operations for U.S. Prepaid Debit for the six months ended June 30, 2019, increased to $10.7 million compared to $8.5 million for the six months ended June 30, 2018. The increase in income from operations was attributed to higher sales volumes from our existing customer base, product mix, and favorable cost absorption due to higher sales. U.S. Prepaid Debit operating income margin for the six months ended June 30, 2019 increased to 32.7% from 27.6% for the same period in 2018.

Other:

The loss from operations in Other was $12.8 million for the six months ended June 30, 2019, compared to a loss from operations of $17.4 million for the same time period in 2018. The 2019 loss benefited from the $6.0 million cash litigation settlement gain, the impact of which was partially offset by the Canada subsidiary disposition in the second quarter of 2019.

Interest, net:  

Interest expense for the six months ended June 30, 2019, increased to $12.8 million compared to $11.1 million for the six months ended June 30, 2018. The additional interest expense resulted primarily from a higher average interest rate on the First Lien Term Loan for the six months ended June 30, 2019 compared to the same period ended 2018. 

31

Income tax benefit (expense):

During the six months ended June 30, 2019, there was an income tax expense of $1.2 million on pre-tax loss of $0.4 million, representing an effective income tax rate of (323.3%).  During the six months ended June 30, 2018, we recorded an income tax benefit of $4.6 million on pre-tax loss of $11.1 million, representing an effective tax rate of 41.4%. The effective tax rate differs from the federal U.S. statutory rate in 2019 primarily due to the impact of tax expense recorded related to a partial valuation allowance of $0.8 million on certain U.S. deferred tax assets at an effective income tax rate impact of (206.2%) for the six months ended June 30, 2019.  The partial valuation allowance is due to the limitation on the deductibility of business interest expense which is a provision of U.S. government tax reform legislation enacted in December 2017.  In the prior year period, the effective tax rate differs from the federal U.S. statutory rate primarily due to a tax benefit recorded in connection with the U.K. Limited discontinued operation. 

Net loss from continuing operations:

During the six months ended June 30, 2019, net loss from continuing operations was $1.5 million, compared to a $6.5 million loss during the six months ended June 30, 2018. The change was primarily due to the $6.0 million cash litigation settlement gain, higher net sales and gross profit, offset partially by higher interest expenses and operating expenses as described above.

Liquidity and Capital Resources

At June 30, 2019, we had $17.5 million of cash and cash equivalents. Of this amount, $0.3 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 and available borrowing capacity, 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 to a First Lien Credit Facility, dated as of August 17, 2015, that includes both a Term Loan facility and a $40.0 million Revolving Credit Facility, of which $20.0 million was available for borrowing as of June 30, 2019.  Additional amounts may be available for borrowing during the term of the Revolving Credit Facility, up to the full $40.0 million, to the extent our net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement.  As of June 30, 2019, our net leverage ratio was 9.8 times Adjusted EBITDA. The First Lien Term Loan and Revolving Credit Facility mature on August 17, 2022 and August 17, 2020, respectively. We may also be required to make prepayments on the First Lien Term Loan in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required prepayments to be made after the issuance of our annual financial statements. We were not required to make any prepayments of the First Lien Term Loans with respect to our 2018 annual financial statements.

At June 30, 2019, $312.5 million of First Lien Term Loan was outstanding and no loans were outstanding under the Revolving Credit Facility. 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, 2019, the interest rate on our First Lien Term Loan was 7.35%. The interest rate on the Revolving Credit Facility is the Federal base rate plus 3.5%.

 The First Lien Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of our assets and affiliate transactions. As of June 30, 2019, we were in compliance with all covenants under the First Lien Credit Facility.

32

Operating Activities – Continuing Operations

Cash used in operating activities – continuing operations for the six months ended June 30, 2019, was $1.0 million compared to a usage of $1.4 million during the six months ended June 30, 2018. The year over year fluctuation was due primarily to an improvement in net loss from continuing operations of $4.9 million, including the $6 million cash received from the litigation settlement, offset by working capital cash flow changes compared to the prior year.  For the six months ended June 30, 2019, we had cash usage related 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, 2019, was $11.7 million, which was higher than the prior year comparable period by $1.9 million. 

Investing Activities – Continuing Operations

Cash used in investing activities – continuing operations for the six months ended June 30, 2019 was $1.2 million, compared to a usage of $2.1 million during the six months ended June 30, 2018. Cash used in investing activities – continuing operations was related to capital expenditures, including investments to support the growth of the business in 2019, such as machinery and information technology equipment.  Partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of our Canadian subsidiary in the second quarter of 2019.  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-to-use machinery and equipment assets totaling $3.3 million, and $0.8 million during the six months ended June 30, 2019, and 2018, respectively.

Financing Activities

During the six months ended June 30, 2019 and 2018, cash used in financing activities was $0.7 million and $0.3 million, respectively, and related to principal payments on finance lease obligations.  For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility during the six months ended June 30, 2019. Note that the $11.5 million represents gross borrowings and repayments.  The average amount outstanding on the Revolving Credit Facility during the six months ended June 30, 2019, was $1.6 million.

Contractual Obligations

During the six months ended June 30, 2019, there were no material changes in our contractual obligations from those reported in our Annual Report on Form 10-K for the year ended December 31, 2018.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2019.

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, 2018, for which there were no material changes as of June 30, 2019, included:

· Impairment Assessments of Goodwill and Long-Lived Assets,

· Inventory Valuation,

· Revenue recognition

· Stock-Based Compensation and

· Income Taxes. 

Since  the date of our annual report we adopted ASC 842 Leases, and record lease liabilities and assets as the present value of future minimum lease payments using a discount rate that is either implicit in the lease or our incremental borrowing rate. We estimate our incremental borrowing rate by using market data from companies similar to us, having publically traded debt instruments and similar credit ratings. Our estimated incremental borrowing rate

33

utilizes judgements, including selection of comparable companies, our credit risk, sensitivity analysis and valuation estimates for inclusion in the calculated rate.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required due to smaller reporting company status. 

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")) 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, 2019.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting that occurred during the second quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company implemented changes to internal controls due to the adoption of Accounting Standard Update No. 2016-02, Leases (Accounting Standard Codification Topic 842) effective January 1, 2019. These changes include processes to evaluate and account for contracts under the new accounting standard. There were no significant changes to the Company’s internal control over financial reporting due to the adoption of the new standard.

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

On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and

34

former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI 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 SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final determination of In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”), which was dismissed in its entirety, with prejudice, on February 25, 2019.  Under its terms, the stay of the Derivative Suit was lifted 30 days after the entry of final judgment in the Class Action which was entered on February 25, 2019.  The Derivative Suit litigation is ongoing.

CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. (2 cases)

First case.  On October 11, 2016, the Company filed a patent infringement suit against Multi Packaging Solutions, Inc. (“MPS”) in the United States District Court for the District of Colorado. The complaint asserts that MPS ultra-secure gift card packages sold to at least one customer infringe a Company patent on ultra-secure gift card packages. MPS answered the complaint and counterclaimed for invalidity and non-infringement. The Company’s preliminary injunction request was denied without prejudice after MPS represented that it had voluntarily ceased using the accused technology and will notify CPI before it re-starts. MPS’s early motion for summary judgment was denied in August 2017 and its motion to dismiss on jurisdictional grounds was denied in July 2018. The Company’s subsidiary CPI Card Group-Minnesota, Inc., has been added to the case as plaintiff. The Company’s patent will expire in 2028.

In June 2017, MPS filed an Inter Partes Review (“IPR”) petition with the United States Patent & Trademark Office’s Patent Trial & Appeal Board (“PTAB”) to review the patent at issue in the patent infringement suit. The PTAB instituted the IPR on January 9, 2018. The PTAB entered its final written decision on January 4, 2019, determining that all of the claims in the patent are unpatentable. The Company filed an appeal of this decision to the federal circuit court on March 1, 2019.  The patent infringement suit is administratively dismissed pending the final determination of the patent validity.

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).  MPS is a competitor of the Company Plaintiffs and the former employee was a sales executive who left the Company Plaintiffs in 2017 to join MPS.  In the lawsuit, the Company Plaintiffs alleged, among other things, that the Defendants misappropriated the Company Plaintiffs’ trade secrets and confidential information and that the former employee violated his employment agreements with the Company Plaintiffs.  After some early discovery, the Company Plaintiffs moved for a preliminary injunction, which the Court granted in December, 2017. The Company Plaintiffs received a second preliminary injunction in August 2018.  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 and ongoing protections of the Company Plaintiffs’ trade secrets and confidential information, together with certain restrictions on the former employee and another individual defendant to protect the Company’s customer relationships. The case was dismissed in its entirety, with prejudice, by court order on July 12, 2019.  For further information see Part I-Financial Information, Note 13.

In addition to the matters described above, the Company is subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of these 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 the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 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 no material changes with respect to such risk factors.

35

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

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Number	Exhibit Description
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.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.

36

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 7, 2019	/s/ John Lowe
	John Lowe
	Chief Financial Officer
	(Principal Financial Officer)

37

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Scott Scheirman, certify that:

1.I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019

/s/ Scott Scheirman

Scott Scheirman

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, John Lowe, certify that:

1.I have reviewed this quarterly report on Form 10-Q of CPI Card Group Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 7, 2019 

/s/ John Lowe

John Lowe 

Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott Scheirman, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Scott Scheirman
	Scott Scheirman
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 7, 2019

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended June 30,  2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Lowe, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John Lowe

John Lowe 

Chief Financial Officer

(Principal Financial Officer)

Date: August 7, 2019 

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2019	Jul. 25, 2019
Document and Entity Information
Entity Registrant Name	CPI Card Group Inc.
Entity Central Index Key	0001641614
Document Type	10-Q
Document Period End Date	Jun. 30, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		11,223,528
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Shell Company	false
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q2

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Current assets:
Cash and cash equivalents	$ 17,484	$ 20,291
Accounts receivable, net of allowances of $290 and $211, respectively	42,220	43,794
Inventories	14,854	9,827
Prepaid expenses and other current assets	4,106	4,997
Income taxes receivable	5,305	5,564
Total current assets	83,969	84,473
Plant, equipment and leasehold improvements, net	45,515	39,110
Intangible assets, net	33,109	35,437
Goodwill	47,150	47,150
Other assets	549	1,034
Total assets	210,292	207,204
Current liabilities:
Accounts payable	14,415	16,511
Accrued expenses	20,846	23,853
Deferred revenue and customer deposits	350	912
Total current liabilities	35,611	41,276
Long-term debt	306,796	305,818
Deferred income taxes	6,342	5,749
Other long-term liabilities	11,008	3,937
Total liabilities	359,757	356,780
Commitments and contingencies (Note 13)
Stockholders' deficit:
Common Stock; $0.001 par value—100,000,000 shares authorized; 11,223,528 and 11,160,537 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	11	11
Capital deficiency	(111,939)	(112,223)
Accumulated loss	(37,537)	(36,004)
Accumulated other comprehensive loss		(1,360)
Total stockholders' deficit	(149,465)	(149,576)
Total liabilities and stockholders' deficit	$ 210,292	$ 207,204

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Condensed Consolidated Balance Sheets
Allowance on accounts receivable	$ 290	$ 211
Common shares, par value (in dollars per share)	$ 0.001	$ 0.001
Common shares, authorized shares (in shares)	100,000,000	100,000,000
Common shares, issued shares (in shares)	11,223,528	11,160,377
Common shares, outstanding shares (in shares)	11,223,528	11,160,377

XML

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Net sales:
Net Sales	$ 66,901	$ 61,454	$ 133,767	$ 116,311
Cost of sales:
Depreciation and amortization	2,775	3,501	5,465	6,949
Total cost of sales	44,520	41,579	89,865	82,009
Gross profit	22,381	19,875	43,902	34,302
Operating expenses, net:
Selling, general and administrative (exclusive of depreciation and amortization shown below)	16,792	15,756	33,210	31,084
Depreciation and amortization	1,493	1,465	3,026	2,927
Litigation settlement gain	(6,000)		(6,000)
Total operating expenses, net	12,285	17,221	30,236	34,011
Income from operations	10,096	2,654	13,666	291
Other expense, net:
Interest, net	(6,438)	(5,586)	(12,762)	(11,092)
Foreign currency loss	(1,321)	(466)	(1,280)	(264)
Other income (expense), net	(8)	3	11	7
Total other expense, net	(7,767)	(6,049)	(14,031)	(11,349)
Income (loss) from continuing operations before income taxes	2,329	(3,395)	(365)	(11,058)
Income tax (expense) benefit	(777)	2,593	(1,180)	4,578
Net income (loss) from continuing operations	1,552	(802)	(1,545)	(6,480)
Net income (loss) from discontinued operation, net of tax (see Note 3)	(30)	(15,907)	12	(17,521)
Net income (loss)	$ 1,522	$ (16,709)	$ (1,533)	$ (24,001)
Basic and diluted earnings (loss) per share:
Basic and diluted earnings (loss) per share Basic and diluted - Continuing operations (in dollar per share)	$ 0.14	$ (0.07)	$ (0.14)	$ (0.58)
Basic and diluted earnings (loss) per share Basic and diluted - Discontinuing operations (in dollar per share)		(1.43)		(1.57)
Net earnings (loss) per share (in dollars per share)	$ 0.14	$ (1.50)	$ (0.14)	$ (2.15)
Weighted average common shares outstanding - Basic (in shares)	11,178,462	11,143,230	11,169,468	11,138,972
Diluted weighted-average common shares outstanding (in shares)	11,242,225	11,143,230	11,169,468	11,138,972
Comprehensive income/ (loss):
Net income (loss)	$ 1,522	$ (16,709)	$ (1,533)	$ (24,001)
Currency translation adjustment		(494)	31	(185)
Reclassification adjustment to foreign currency loss	1,329		1,329
Total comprehensive income (loss)	2,851	(17,203)	(173)	(24,186)
Products
Net sales:
Net Sales	33,125	31,494	65,882	56,238
Cost of sales:
Products (exclusive of depreciation and amortization shown below)	22,098	18,962	43,587	35,280
Services
Net sales:
Net Sales	33,776	29,960	67,885	60,073
Cost of sales:
Services (exclusive of depreciation and amortization shown below)	$ 19,647	$ 19,116	$ 40,813	$ 39,780

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Condensed Consolidated Statements of Stockholders' Deficit - USD ($) $ in Thousands	Common Stock	Capital deficiency	Accumulated earnings (loss)	Accumulated other comprehensive loss	Total
Beginning balance at Dec. 31, 2017	$ 11	$ (113,081)	$ (1,366)	$ (5,138)	$ (119,574)
Beginning balance (in shares) at Dec. 31, 2017	11,134,714
Adoption of ASC 606			2,796		2,796
Shares issued under stock-based compensation plans (in shares)	25,000
Stock-based compensation		704			704
Components of comprehensive (loss) income:
Net income (loss)			(24,001)		(24,001)
Currency translation adjustment				(185)	(185)
Ending balance at Jun. 30, 2018	$ 11	(112,377)	(22,571)	(5,323)	(140,260)
Ending balance (in shares) at Jun. 30, 2018	11,159,714
Beginning balance at Mar. 31, 2018	$ 11	(112,740)	(5,862)	(4,829)	(123,420)
Beginning balance (in shares) at Mar. 31, 2018	11,134,714
Shares issued under stock-based compensation plans (in shares)	25,000
Stock-based compensation		363			363
Components of comprehensive (loss) income:
Net income (loss)			(16,709)		(16,709)
Currency translation adjustment				(494)	(494)
Ending balance at Jun. 30, 2018	$ 11	(112,377)	(22,571)	(5,323)	(140,260)
Ending balance (in shares) at Jun. 30, 2018	11,159,714
Beginning balance at Dec. 31, 2018	$ 11	(112,223)	(36,004)	(1,360)	$ (149,576)
Beginning balance (in shares) at Dec. 31, 2018	11,160,377				11,160,377
Shares issued under stock-based compensation plans (in shares)	63,151
Stock-based compensation		284			$ 284
Components of comprehensive (loss) income:
Net income (loss)			(1,533)		(1,533)
Currency translation adjustment				31	31
Reclassification adjustment to foreign currency loss				1,329	1,329
Ending balance at Jun. 30, 2019	$ 11	(111,939)	(37,537)		$ (149,465)
Ending balance (in shares) at Jun. 30, 2019	11,223,528				11,223,528
Beginning balance at Mar. 31, 2019	$ 11	(112,091)	(39,059)	(1,329)	$ (152,468)
Beginning balance (in shares) at Mar. 31, 2019	11,160,537
Shares issued under stock-based compensation plans (in shares)	62,991
Stock-based compensation		152			152
Components of comprehensive (loss) income:
Net income (loss)			1,522		1,522
Reclassification adjustment to foreign currency loss				$ 1,329	1,329
Ending balance at Jun. 30, 2019	$ 11	$ (111,939)	$ (37,537)		$ (149,465)
Ending balance (in shares) at Jun. 30, 2019	11,223,528				11,223,528

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Operating activities
Net loss	$ (1,533)	$ (24,001)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss (income) from discontinued operation	(12)	17,521
Depreciation and amortization expense	8,491	9,876
Stock-based compensation expense	308	784
Amortization of debt issuance costs and debt discount	979	972
Deferred income taxes	593	(4,782)
Reclassification adjustment to foreign currency loss	1,329
Other, net	(190)	158
Changes in operating assets and liabilities:
Accounts receivable	66	(6,577)
Inventories	(5,028)	(2,466)
Prepaid expenses and other assets	1,593	(299)
Income taxes	228	2,284
Accounts payable	(1,042)	2,271
Accrued expenses	(6,249)	3,093
Deferred revenue and customer deposits	(564)	25
Other liabilities	74	(212)
Cash used in operating activities - continuing operations	(957)	(1,353)
Cash provided by (used in) operating activities - discontinued operation	12	(1,152)
Investing activities
Acquisitions of plant, equipment and leasehold improvements	(2,686)	(2,109)
Cash received for sale of Canadian subsidiary	1,451
Cash used in investing activities - continuing operations	(1,235)	(2,109)
Cash used in investing activities - discontinued operation	0	(536)
Financing activities
Proceeds from revolving credit facility	11,500
Payments on revolving credit facility	(11,500)
Payments on financing leases	(663)	(306)
Cash used in financing activities	(663)	(306)
Effect of exchange rates on cash	36	1
Net decrease in cash and cash equivalents	(2,807)	(5,455)
Cash and cash equivalents, beginning of period	20,291	23,205
Cash and cash equivalents, end of period	17,484	17,750
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for: Interest	11,660	9,783
Cash paid (refunded) during the period for: Income taxes, net payments (refunds)	340	(1,504)
Right-to-use assets obtained in exchange for lease obligations- Operating leases	8,533
Right-to-use assets obtained in exchange for lease obligations- Financing leases	3,366	821
Accounts payable for acquisitions of plant, equipment and leasehold improvements	$ 841	$ 970

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Business Overview and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2019

Business Overview and Summary of Significant Accounting Policies

Business Overview and Summary of Significant Accounting Policies

CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Dollars in Thousands, Except Share and Per Share Amounts or as Otherwise Indicated)

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiaries, is referred to herein as “CPI” or the “Company”) is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit cards, debit cards and prepaid debit cards issued on the networks of the Payment Card Brands (Visa, MasterCard, American Express and Discover) in the United States. To a lesser extent, the Company is also engaged in the design, production, data personalization, packaging and fulfillment of retail gift and loyalty cards.

As a producer and provider of services for Financial Payment Cards, each of the Company’s secure facilities must be certified by one or more of the Payment Card Brands and is therefore subject to specific requirements and conditions. Noncompliance with these requirements would prohibit the individual facilities of the Company from producing Financial Payment Cards for these entities’ payment card issuers.

In the fourth quarter of 2018, the Company entered into a definitive agreement to sell the Canadian subsidiary to Allcard Limited, a provider of card solutions to the gift and loyalty sectors. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as that business migrated to the Company’s operations in the U.S. or to other service providers in 2019. The transaction closed on April 1, 2019, and the Company received cash proceeds of $1,451.  After the payment of liabilities and transaction costs, including employee termination costs, the sale did not have a significant impact on cash, and no significant loss on sale.  In connection with the disposition of the foreign entity, the Company released the related cumulative translation adjustment from “Accumulated Other Comprehensive Loss” on the Balance Sheet into income from continuing operations during the three months ended June 30, 2019. This adjustment was $1,329 and is included in “Foreign Currency Loss” on the Statement of Operations.  The Canadian subsidiary was not a significant operating segment and was part of the Other reportable segment.

During February 2018, the Company made the decision to consolidate three personalization operations in the United States into two facilities to better enable the Company to optimize operations and achieve market-leading quality and service with a cost-competitive business model. In conjunction with this decision, the Company accelerated the depreciation of certain related assets, which totaled $1,332 for the three months ended June 30, 2018 and $2,132 for the six months ended June 30, 2018, and recorded severance charges of $223 and $552 for these same respective time periods. The Company recorded a lease termination charge of $432 in the three months ended June 30, 2018. The charges were recorded in the U.S. Debit and Credit segment and were included in “Cost of Sales” and “Selling, General, and Administrative Expenses” on the Statement of Operations.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2018 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated, information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. See Note 3 “Discontinued Operation” for further information.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property and equipment, the valuation of goodwill and intangible assets, valuation allowances for inventories and deferred tax assets, uncertain tax positions, discount rates used to determine right-to-use assets and lease liabilities, and revenue recognized for period-end work in process. Actual results could differ from those estimates.

 Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient.

The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.

Right-to-use assets (“ROU’) represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

As a result of the adoption of ASC 842 the Company recorded $8,025 of operating ROU, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

The components of operating and finance lease costs for the three and six months ended June 30, 2019 were as follows:

	Three Months Ended			Six Months Ended
	June 30, 2019			June 30, 2019
Total operating lease costs	$	665	$	1,308
Finance lease cost:
Amortization of right-to-use assets	$	178	$	301
Interest on lease liabilities		40		62
Total financing lease costs	$	218	$	363

The following table reflects balances for operating leases and financing leases:

	June 30, 2019
Operating leases
Operating lease right-to-use assets, net of amortization	$	7,271
		7,271
Operating lease liability (current)	$	2,104
Long-term operating liability		6,285
Total operating lease liabilities	$	8,389
Financing leases
Property, equipment and leasehold improvements	$	5,178
Accumulated depreciation		(512)
Total property, equipment and leasehold improvements, net	$	4,666
Financing lease liability	$	1,725
Long-term financing liability		2,525
Total	$	4,250

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

Components of lease expense were as follows:

	June 30, 2019
Weighted Average Remaining Lease Term
Operating Leases	3.82
Financing Leases	2.67
Weighted Average Discount Rate
Operating Leases	8.96%
Financing Leases	9.38%

Future cash payments with respect to lease obligations as of June 30, 2019 were as follows:

		Operating		Financing
		Lease		Leases
Year Ending
2019	$	1,389	$	959
2020		2,854		1,836
2021		2,646		1,220
2022		1,371		469
2023		1,097		73
Thereafter		605		-
Total lease payments		9,962		4,557
Less imputed interest		(1,573)		(307)
Total	$	8,389	$	4,250

Future cash payments with respect to lease obligations as of December 31, 2018 were as follows:

	Operating		Capital
	Leases		Leases
2019	$	2,927	$	521
2020		2,771		474
2021		2,512		243
2022		1,243		256
2023		971		71
Thereafter		652		—
Total	$	11,076	$	1,565

Cash paid on operating leases was $444 and $934 during the three and six months ended June 30, 2019, respectively.

As of January 1, 2018, the Company adopted Accounting Standards Update Codification ASC 606, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied ASC 606 as of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Condensed Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2 “Net Sales” for revenue recognition timing and methodology under ASC 606. 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The Company is currently reviewing the requirements of the standard and evaluating the impact on the Company’s consolidated financial position, results of operations, and cash flows.

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Net Sales

6 Months Ended

Jun. 30, 2019

Net Sales.

Net Sales

2. Net Sales

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

	Three Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	33,276		17,810	$	51,086
U.S. Prepaid Debit		—		15,966		15,966
Intersegment eliminations		(151)		—		(151)
Total	$	33,125	$	33,776	$	66,901
	Six Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	66,120		33,895	$	100,015
U.S. Prepaid Debit		—		32,710		32,710
Other		397		1,282		1,679
Intersegment eliminations		(635)		(2)		(637)
Total	$	65,882	$	67,885	$	133,767
	Three Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	30,444		13,399	$	43,843
U.S. Prepaid Debit		—		15,427		15,427
Other		1,625		1,355		2,980
Intersegment eliminations		(575)		(221)		(796)
Total	$	31,494	$	29,960	$	61,454
	Six Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	54,164		26,827	$	80,991
U.S. Prepaid Debit		—		30,938		30,938
Other		3,000		2,679		5,679
Intersegment eliminations		(926)		(371)		(1,297)
Total	$	56,238	$	60,073	$	116,311

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are manufactured for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” revenue are the design and production of Financial Payment Cards, including contact-EMV, Dual-Interface EMV®, metal, contactless and magnetic stripe cards, private label credit cards and retail gift cards. Card@Once® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping.

The Company includes gross shipping and handling revenue and cost in net sales and cost of sales respectively.

Services Net Sales

Revenue is recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Service” revenue click-fees from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards historically in Canada prior to disposition. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

Customer Contracts

The Company often enters into Master Services Agreements (“MSAs”) with its customers. Generally, enforceable rights and obligations for goods and services occur only when a customer places a purchase order or statement of work to obtain goods or services under an MSA. The contract term as defined by ASU 2014-09 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

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Discontinued Operation

6 Months Ended

Jun. 30, 2019

Discontinued Operation

Discontinued Operation

3. Discontinued Operation

On August 3, 2018, the Company completed the sale of its United Kingdom facilities that comprised the U.K. Limited reporting segment. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP.  The Company did not retain significant continuing involvement with the discontinued operation subsequent to the disposal.

The major line items constituting the loss from the discontinued operation for the three and six months ended June 30, 2018 are presented in the table below.  The amounts relating to the discontinued operation for the three and six months ended June 30, 2019 were not significant.    

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Total net sales	$	4,587	$	8,799
Total cost of sales		4,300		8,498
Selling, general and administrative		1,446		3,066
Impairments		7,615		7,615
Other expense		21		29
Pretax (loss) from discontinued operation		(8,795)		(10,409)
Pretax loss on discontinued operation classification		(7,244)		(7,244)
Total pretax loss on discontinued operations		(16,039)		(17,653)
Income tax expense		132		132
Net (loss) from discontinued operation	$	(15,907)	$	(17,521)

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Accounts Receivable

6 Months Ended

Jun. 30, 2019

Accounts Receivable

Accounts Receivable

4. Accounts Receivable

Accounts receivable consisted of the following:

	June 30, 2019		December 31, 2018
Trade accounts receivable	$	34,215	$	36,428
Unbilled accounts receivable		8,295		7,577
		42,510		44,005
Less allowance for doubtful accounts		(290)		(211)
	$	42,220	$	43,794

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Inventories

6 Months Ended

Jun. 30, 2019

Inventories

Inventories

5.  Inventories

Inventories are summarized below:

	June 30, 2019		December 31, 2018
Raw materials	$	10,917	$	8,235
Finished goods		5,427		2,991
Inventory reserve		(1,490)		(1,399)
	$	14,854	$	9,827

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Plant, Equipment and Leasehold Improvements

6 Months Ended

Jun. 30, 2019

Plant, Equipment and Leasehold Improvements

Plant, Equipment and Leasehold Improvements

6. Plant, Equipment and Leasehold Improvements

Plant, equipment and leasehold improvements consisted of the following:

	June 30, 2019		December 31, 2018
Machinery and equipment	$	55,714	$	62,067
Machinery and equipment under financing leases		5,178		1,812
Furniture, fixtures and computer equipment		5,539		7,730
Leasehold improvements		14,637		19,651
Construction in progress		1,662		1,596
		82,730		92,856
Less accumulated depreciation		(44,486)		(53,746)
Operating right-of-use assets, net of accumulated amortization		7,271		—
	$	45,515	$	39,110

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $3,104 and $3,802 for the three months ended June 30, 2019 and 2018, respectively, and $6,163 and $7,548 for the six months ended June 30, 2019 and 2018, respectively.

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Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2019

Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

7. Goodwill and Other Intangible Assets

The Company reports all of its goodwill in its U.S. Debit and Credit segment at June 30, 2019 and December 31, 2018.

Intangible assets consist of customer relationships, technology and software, non-compete agreements and trademarks. Intangible amortization expense was $1,164 for each period ended for the three months and $2,328 for each period ended for the six months ended June 30, 2019 and 2018. 

At June 30, 2019 and December 31, 2018, intangible assets, excluding goodwill, were comprised of the following:

				June 30, 2019						December 31, 2018
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	55,454	$	(27,226)	$	28,228	$	55,454		(25,587)	$	29,867
Technology and software	7	to	10		7,101		(4,489)		2,612		7,101		(4,024)		3,077
Trademarks	7.5	to	10		3,330		(1,071)		2,259		3,330		(877)		2,453
Non-compete agreements	5	to	8		491		(481)		10		491		(451)		40
Intangible assets subject to amortization				$	66,376	$	(33,267)	$	33,109	$	66,376	$	(30,939)	$	35,437

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of June 30, 2019 was as follows:

2019	$	2,308
2020		4,595
2021		4,352
2022		3,867
2023		3,867
Thereafter		14,120
	$	33,109

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Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2019

Fair Value of Financial Instruments

Fair Value of Financial Instruments

8. Fair Value of Financial Instruments

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

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

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

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

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

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2019
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2019		2019		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	246,875	$	—	$	246,875	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2018
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2018		2018		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	203,125	$	—	$	203,125	$	—

The aggregate fair value of the Company’s First Lien Term Loan, as defined in Note 10 “Long-Term Debt and Credit Facility,” was based on bank quotes.

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

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Accrued Liabilities

6 Months Ended

Jun. 30, 2019

Accrued Liabilities

Accrued Liabilities

9. Accrued Liabilities

Accrued liabilities consisted of the following:

	June 30, 2019		December 31, 2018
Accrued payroll and related employee expenses	$	4,853	$	4,040
Accrued employee performance bonus		3,247		7,137
Accrued Interest		5,191		5,058
Short term operating and financing leases		3,829		521
Other		3,726		7,097
Total accrued expenses	$	20,846	$	23,853

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Long-Term Debt and Credit Facility

6 Months Ended

Jun. 30, 2019

Long-Term Debt and Credit Facility

Long-Term Debt and Credit Facility

10. Long-Term Debt and Credit Facility

At June 30, 2019 and December 31, 2018, long-term debt and credit facilities consisted of the following:

	Interest		June 30,		December 31,
	Rate (1)		2019		2018
First Lien Term Loan (1)	7.35	%	$	312,500	$	312,500
Unamortized discount				(2,109)		(2,448)
Unamortized deferred financing costs				(3,595)		(4,234)
Total Long-term debt			$	306,796	$	305,818

(1)   Interest rate at June 30, 2019.  Interest rate at December 31, 2018 was 7.02%.

First Lien Credit Facility

On August 17, 2015, the Company entered into a first lien credit facility (the “First Lien Credit Facility”) with a syndicate of lenders providing for a $435,000 first lien term loan (the “First Lien Term Loan”) and a $40,000 revolving credit facility (the “Revolving Credit Facility”). The First Lien Term Loan and the Revolving Credit Facility have maturity dates of August 17, 2022 and August 17, 2020, respectively.

The First Lien Credit Facility is secured by a first-priority security interest in substantially all of the Company’s assets constituting equipment, inventory, receivables, cash and other tangible and intangible property.

Interest rates under the First Lien 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 4.50%, or a base rate plus a margin of 3.50%.  

The First Lien Credit Facility contains customary nonfinancial covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, dividends, redemptions and other distributions to equity holders, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets and affiliate transactions. The First Lien Credit Facility also contains a requirement that, as of the last day of any fiscal quarter, if the amount the Company has drawn under the Revolving Credit Facility is greater than 50% of the aggregate principal amount of all commitments of the lenders thereunder, the Company maintain a first lien net leverage ratio not in excess of 7.0 times trailing twelve month Adjusted EBITDA, as defined in the agreement. As of June 30, 2019, the Company was in compliance with all covenants under the First Lien Credit Facility.

The First Lien Credit Facility also requires prepayment in advance of the maturity date upon the occurrence of certain customary events, including based on an annual excess cash flow calculation, pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company was not required to make any prepayments of the First Lien Term Loan with respect to our 2018 annual financial statements.

At June 30, 2019, the Company did not have any outstanding amounts under the Revolving Credit Facility and has $19,950 available for borrowing. Additional amounts may be available for borrowing under the term of the Revolving Credit Facility, up to the full $40,000, to the extent the Company’s net leverage ratio does not exceed 7.0 times Adjusted EBITDA, as defined in the agreement. The interest rate on the Revolving Credit Facility is the Federal base rate plus 3.5%. The Company has one outstanding letter of credit for $50 relating to the security deposit on a real property lease agreement. The Company pays a fee on outstanding letters of credit at the applicable margin, which was 4.50% as of June 30, 2019 and December 31, 2018, in addition to a fronting fee of 0.125% per annum. In addition, the Company is required to pay an unused commitment fee ranging from 0.375% per annum to 0.50% per annum of the average unused portion of the revolving commitments. The unused commitment fee is determined on the basis of a grid that results in a lower unused commitment fee as the Company’s total net leverage ratio declines.

Deferred Financing Costs

Certain costs 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.

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Income Taxes - Continuing Operations

6 Months Ended

Jun. 30, 2019

Income Taxes - Continuing Operations

Income Taxes - Continuing Operations

11. Income Taxes – Continuing Operations

During the three months ended June, 2019, the Company recognized an income tax expense of $777 on a pre-tax income of $2,329 compared to an income tax benefit of $2,593 on a pre-tax loss of $3,395 for the prior period. During the six months ended June 30, 2019, the Company recognized an income tax expense of $1,180 on pre-tax loss of $365, representing an effective income tax rate of (323.3%).  For the six months ended June 30, 2018, the Company recognized an income tax benefit of $4,578 on a pre-tax loss of $11,058, representing an effective income tax rate of 41.4%.

For the six months ended June 30, 2019 and 2018, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:

	June 30,
	2019		2018
Tax at federal statutory rate	20.3	%	21.0	%
State Taxes, net	(60.1)		2.1
Valuation allowance	(206.2)		(8.3)
Tax benefit U.K. discontinued operation	—		27.2
Other	(77.3)		(0.6)
Effective income tax rate	(323.3)	%	41.4	%

The effective tax rate differs from the federal U.S. statutory rate primarily due to the impact of tax expense recorded related to a partial valuation allowance of $752 on certain U.S. deferred tax assets at an effective income tax rate impact of (206.2%) for the six months ended June 30, 2019.  The partial valuation allowance is due to the limitation on the deductibility of business interest expense which is a provision of U.S. government tax reform legislation enacted in December 2017.  For the six months ended June 30, 2018, the primary reason that the effective tax rate differs from the federal U.S. statutory rate is due to a tax benefit recorded in connection with the U.K. Limited discontinued operation. The Company’s income tax receivable on the condensed consolidated balance sheet as of June 30, 2019, is primarily comprised of U.S. federal income tax receivable relating to a prior tax year.

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Income (loss) per Share

6 Months Ended

Jun. 30, 2019

Income (loss) per Share

Income (loss) per Share

12. Income (loss) per Share

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

The following table sets forth the computation of basic and diluted loss per share:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Numerator:
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)
Net income (loss) from discontinued operation		(30)		(15,907)		12		(17,521)
Net income (loss)	$	1,522	$	(16,709)	$	(1,533)	$	(24,001)
Denominator:
Basic weighted-average common shares outstanding		11,178,462		11,143,230		11,169,468		11,138,972
Dilutive shares		63,763		—		—		—
Diluted weighted-average shares outstanding		11,242,225		11,143,230		11,169,468		11,138,972
Basic and diluted-Continuing operations	$	0.14	$	(0.07)	$	(0.14)	$	(0.58)
Basic and diluted-Discontinued operation		—		(1.43)		—		(1.57)
Basic and diluted net earnings (loss) per share	$	0.14	$	(1.50)	$	(0.14)	$	(2.15)

The Company reported a net loss for the three months ended June 30, 2018, six months ended June 30, 2019 and 2018. Accordingly, the potentially dilutive effect of 864,257 and 957,840 stock options and 11,201 and 98,535 restricted stock units were excluded from the computation of diluted earnings per share as of June 30, 2019 and 2018, respectively, as their inclusion would be anti-dilutive.

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Commitments and Contingencies; Litigation Settlement

6 Months Ended

Jun. 30, 2019

Commitments and Contingencies; Litigation Settlement

Commitments and Contingencies; Litigation Settlement

13. Commitments and Contingencies; Litigation Settlement

Contingencies

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

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

On November 20, 2017, a purported CPI stockholder filed a stockholder derivative complaint in the United States District Court for the District of Delaware (the “Court”) against certain of CPI’s former officers and current and former directors, along with the sponsors of CPI’s October 2015 initial public offering (“IPO”). CPI 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 SEC Rule 10b-5 and seeks, among other things, injunctive relief, damages and costs. It alleges false or misleading statements and omissions in the Registration Statement filed by CPI in connection with its IPO and subsequent public filings and statements. The derivative complaint also asserts claims for purported breaches of fiduciary duties, unjust enrichment, mismanagement and waste of corporate assets.

On March 28, 2018, the Court entered the parties’ stipulated order staying the Derivative Suit pending final determination of In Re CPI Card Group Inc. Securities Litigation, Case No. 1:16-CV-04531 (S.D.N.Y.) (the “Class Action”), which was dismissed in its entirety, with prejudice, on February 25, 2019.  Under its terms, the stay of the Derivative Suit was lifted 30 days after the entry of final judgment in the Class Action which was entered on February 25, 2019.  The Derivative Suit litigation is ongoing.

Given the current stage of this matter, the range of any potential loss is not probable or estimable and no liability has been recorded as of June 30, 2019 and December 31, 2018.

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.  For further information see Part II-Item 1. Legal Proceedings.

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

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Stock Based Compensation

6 Months Ended

Jun. 30, 2019

Stock Based Compensation

Stock Based Compensation

14. Stock-Based Compensation

CPI Card Group Inc. Omnibus Incentive Plan

During 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 shares of common stock for issuance under the Omnibus Plan. Effective September 25, 2017, the Omnibus Plan was amended and restated, providing for an increase in the number of shares of common stock authorized for issuance thereunder by 400,000. The increase was made effective in the fourth quarter of 2017 by stockholder approval in accordance with applicable law, after which the Company had reserved 1,200,000 shares of common stock for issuance. As of June 30, 2019, there were 204,100 shares available for grant under the Omnibus Plan. 

During the six months ended June 30, 2019, the Company did not grant any awards of non-qualified stock options.

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

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2018	910,627	$	14.99
Granted	—		0.00
Forfeited	(46,370)		11.52
Outstanding as of June 30, 2019	864,257	$	15.17	7.88
Options vested and exercisable as of June 30, 2019	344,148		22.23	7.47
Options vested and expected to vest	864,257		15.17	7.88

The following is a summary of the activity in non-vested stock options under the Omnibus Plan:

		Weighted-Average
	Number	Grant-Date Fair Value
Non-vested as of December 31, 2018	605,352	$	3.14
Granted	-
Forfeited	(28,791)		2.51
Vested	(56,452)		3.76
Non-vested as of June 30, 2019	520,109	$	3.11

Unvested options as of June 30, 2019, will vest as follows:

2019	231,906
2020	236,503
2021	51,700
Total unvested options as of June 30, 2019	520,109

 The weighted-average grant-date fair value of options granted was as follows:

	Three Months Ended June 30,
	2019		2018
Weighted-average grant-date fair value of options granted	$	n/a	$	1.65

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

				Weighted-
				Average
		Weighted-		Remaining
		Average		Amortization
		Grant-Date		Period
	Units	Fair Value		(in Years)
Outstanding as of December 31, 2018	68,649	$	6.25
Granted	—
Vested	(56,635)		2.75
Forfeited	(813)		21.75
Outstanding as of June 30, 2019	11,201	$	22.81	0.84

During the six months ended June 30, 2019, the Company did not grant any awards of restricted stock units.

Unvested restricted stock units as of June 30, 2019, will vest as follows:

2019	928
2020	10,030
2021	243
Total unvested restricted stock units as of June 30, 2019	11,201

The following table summarizes the changes in the number of outstanding cash performance units:

	Units
Outstanding as of December 31, 2018	425,012
Granted	—
Vested	(212,505)
Forfeited	(17,858)
Outstanding as of June 30, 2019	194,649

These awards will settle in cash in three annual payments on the first, second and third anniversaries of the date of grant. The cash performance units are 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 of March 22, 2017, compared to the Company’s stock price on the date of grant. During the first six months of 2019, the second tranche of the cash performance units vested. Accordingly, the Company made a cash payment of $106 to the award recipients. 

The Company recognizes compensation expense on a straight-line basis for each annual performance period. The cash performance units are accounted for as a liability and re-measured to fair value at the end of each reporting period. As of June 30, 2019, the Company recognized a liability of $74 in “Accrued expenses” in the Condensed Consolidated Balance Sheet for unsettled cash performance units.

Compensation expense for the Omnibus Plan for the three months ended June 30, 2019 and 2018 was $161 and $389, respectively. Compensation expense for the six months ended June 30, 2019 and 2018 was $308 and $784, respectively. As of June 30, 2019, the total unrecognized compensation expense related to unvested options, restricted stock units and cash performance unit awards under the Omnibus Plan was $354, which the Company expects to recognize over an estimated weighted-average period of 1.0 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 may 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 is granted.

As a result of the Company’s adoption of the Omnibus Plan, as further described above, no further awards will be made under the Option Plan. The outstanding stock options under the Option Plan are non-qualified, have a 10-year life and are fully vested as of June 30, 2019. 

During the three months ended June  30, 2019, the remaining 6,600 outstanding shares were exercised.  As such, there were no outstanding shares remaining as of June 30, 2019.

Compensation expense and unrecorded compensation expense related to options previously granted under the Option Plan, for the three months ended June 30, 2019 and 2018, were de minimis.  

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Segment Reporting

6 Months Ended

Jun. 30, 2019

Segment Reporting

Segment Reporting

15. Segment Reporting

The Company has identified reportable segments as those consolidated subsidiaries that represent 10% or more of its revenue, 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 revenue and EBITDA.

EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, EBITDA is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is superior to available 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 identify strategies to improve the allocation of resources amongst segments.

On August 3, 2018, the Company completed the sale of the U.K. Limited segment. See Note 3 “Discontinued Operation” for further information. The Company has restated all historical periods presented within these financial statements and has not included U.K. Limited as a reportable segment. 

As of June 30, 2019, the Company’s reportable segments were as follows:

    U.S. Debit and Credit,

    U.S. Prepaid Debit, and

    Other.

The Other category includes the Company’s corporate headquarters and a less significant operating segment that historically derived its revenue from the production of financial payment cards and retail gift cards in Canada. The Canadian subsidiary was sold on April 1, 2019. The sale agreement did not include the portions of the business relating to Financial Payment Cards, as those business customers of the Canadian subsidiary migrated to the Company’s operations in the U.S. or to other service providers in 2019.

Performance Measures of Reportable Segments

Revenue and EBITDA of the Company’s reportable segments for the three and six months ended June 30, 2019, and 2018, were as follows:

	Net Sales
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	51,086	$	43,843	$	100,015	$	80,991
U.S. Prepaid Debit		15,966		15,427		32,710		30,938
Other		—		2,980		1,679		5,679
Intersegment eliminations		(151)		(796)		(637)		(1,297)
Total	$	66,901	$	61,454	$	133,767	$	116,311

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	10,590	$	9,933	$	20,970	$	15,651
U.S. Prepaid Debit		5,880		4,687		11,659		9,506
Other		(3,435)		(7,463)		(11,741)		(15,247)
Total	$	13,035	$	7,157	$	20,888	$	9,910

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, 2019, and 2018:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Total segment EBITDA from continuing operations	$	13,035	$	7,157	$	20,888	$	9,910
Interest, net		(6,438)		(5,586)		(12,762)		(11,092)
Income tax (expense) benefit		(777)		2,593		(1,180)		4,578
Depreciation and amortization		(4,268)		(4,966)		(8,491)		(9,876)
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)

Balance Sheet Data of Reportable Segments

Total assets of the Company’s reportable segments at June 30, 2019, and December 31, 2018, were as follows:

	June 30, 2019		December 31, 2018
U.S. Debit and Credit	$	173,565	$	169,567
U.S. Prepaid Debit		29,462		25,117
Other		7,265		12,520
Total assets	$	210,292	$	207,204

Net Sales by Products and Services

Net sales from products and services sold by the Company for the three and six months ended June 30, 2019 and 2018 were as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Products net sales (a)	$	33,125	$	31,494	$	65,882	$	56,238
Services net sales (b)		33,776		29,960		67,885		60,073
Total net sales	$	66,901	$	61,454	$	133,767	$	116,311

(a)   “Products” net sales include the design and production of Financial Payment Cards in contact-EMV®, Dual-Interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once® printers and consumables, private label credit cards and retail gift cards.

(b)   “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Services” revenue from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards, historically generated in Canada prior to the disposition.

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

Subsequent to the sale of the Company’s U.K. Limited segment and reclassification to discontinued operations, and the sale of the Canada operations on April 1, 2019, the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived assets relating to geographic locations outside of the United States is insignificant.

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Business Overview and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2019

Business Overview and Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The Condensed Consolidated Balance Sheet as of December 31, 2018 is derived from the audited financial statements as of that date. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

On August 3, 2018, the Company completed the sale of its three facilities in the United Kingdom that produce retail cards, such as gift and loyalty cards, for customers in the United Kingdom and continental Europe, and provide personalization, packaging and fulfillment services. The facilities sold included Colchester, Liverpool and Derby locations. The Company reported the U.K. Limited reporting segment as discontinued operations and restated the comparative financial information for all periods presented in conformity with GAAP. Unless otherwise indicated, information in these notes to the unaudited condensed consolidated financial statements relate to continuing operations. See Note 3 “Discontinued Operation” for further information.

Use of Estimates

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities in its preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the useful lives of property and equipment, the valuation of goodwill and intangible assets, valuation allowances for inventories and deferred tax assets, uncertain tax positions, discount rates used to determine right-to-use assets and lease liabilities, and revenue recognized for period-end work in process. Actual results could differ from those estimates.

Adoption of New Accounting Standards and Recently Issued Accounting Standards

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC Topic 842, Leases (“ASC 842”), which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. ASC 842 is effective for annual and interim periods beginning after December 15, 2018 (the Company’s fiscal year 2019) with early adoption permitted. The new guidance requires the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements. The guidance required a modified retrospective approach, with an option to apply the transition provisions of the new guidance at the adoption date without adjusting the comparative periods presented. In July 2018, the FASB issued additional accounting standard updates clarifying certain provisions, as well as providing for a second transition method allowing entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings.

The Company adopted the new guidance on the effective date of January 1, 2019 and used the adoption date as the date of initial application as allowed under ASC 842. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight transition practical expedient.

The new standard also provides practical expedients for the Company’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify, meaning the Company will not recognize right-of-use assets or lease liabilities for existing and new lease agreements that qualify. The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.

Right-to-use assets (“ROU’) represent the right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.

A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid. The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

As a result of the adoption of ASC 842 the Company recorded $8,025 of operating ROU, and corresponding operating lease liabilities of $8,813 on January 1, 2019, relating to existing real estate operating leases.

The components of operating and finance lease costs for the three and six months ended June 30, 2019 were as follows:

	Three Months Ended			Six Months Ended
	June 30, 2019			June 30, 2019
Total operating lease costs	$	665	$	1,308
Finance lease cost:
Amortization of right-to-use assets	$	178	$	301
Interest on lease liabilities		40		62
Total financing lease costs	$	218	$	363

The following table reflects balances for operating leases and financing leases:

	June 30, 2019
Operating leases
Operating lease right-to-use assets, net of amortization	$	7,271
		7,271
Operating lease liability (current)	$	2,104
Long-term operating liability		6,285
Total operating lease liabilities	$	8,389
Financing leases
Property, equipment and leasehold improvements	$	5,178
Accumulated depreciation		(512)
Total property, equipment and leasehold improvements, net	$	4,666
Financing lease liability	$	1,725
Long-term financing liability		2,525
Total	$	4,250

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

Components of lease expense were as follows:

	June 30, 2019
Weighted Average Remaining Lease Term
Operating Leases	3.82
Financing Leases	2.67
Weighted Average Discount Rate
Operating Leases	8.96%
Financing Leases	9.38%

Future cash payments with respect to lease obligations as of June 30, 2019 were as follows:

		Operating		Financing
		Lease		Leases
Year Ending
2019	$	1,389	$	959
2020		2,854		1,836
2021		2,646		1,220
2022		1,371		469
2023		1,097		73
Thereafter		605		-
Total lease payments		9,962		4,557
Less imputed interest		(1,573)		(307)
Total	$	8,389	$	4,250

Future cash payments with respect to lease obligations as of December 31, 2018 were as follows:

	Operating		Capital
	Leases		Leases
2019	$	2,927	$	521
2020		2,771		474
2021		2,512		243
2022		1,243		256
2023		971		71
Thereafter		652		—
Total	$	11,076	$	1,565

Cash paid on operating leases was $444 and $934 during the three and six months ended June 30, 2019, respectively.

As of January 1, 2018, the Company adopted Accounting Standards Update Codification ASC 606, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires an entity to disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company applied ASC 606 as of January 1, 2018 to all its contracts using the modified retrospective method and recognized the cumulative effect of adoption as an adjustment to the opening balance of “Accumulated loss” on the Condensed Consolidated Balance Sheet. Under the new guidance, the Company recognizes certain performance obligations over time as the goods are produced, since those products provide value to only a specified customer, have no alternative use and the Company has the right to payment for work completed on such items. This accelerates the timing of revenue recognition for these arrangements, as revenue is recognized as goods are produced rather than upon shipment or delivery of goods. See Note 2 “Net Sales” for revenue recognition timing and methodology under ASC 606. 

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments. The Company is currently reviewing the requirements of the standard and evaluating the impact on the Company’s consolidated financial position, results of operations, and cash flows.

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Business Overview and Summary of Significant Accounting Policies (Tables)

6 Months Ended

Jun. 30, 2019

Business Overview and Summary of Significant Accounting Policies

Schedule of operating and finance lease costs

	Three Months Ended			Six Months Ended
	June 30, 2019			June 30, 2019
Total operating lease costs	$	665	$	1,308
Finance lease cost:
Amortization of right-to-use assets	$	178	$	301
Interest on lease liabilities		40		62
Total financing lease costs	$	218	$	363

Schedule of balance sheet information for operating leases and financing leases

	June 30, 2019
Operating leases
Operating lease right-to-use assets, net of amortization	$	7,271
		7,271
Operating lease liability (current)	$	2,104
Long-term operating liability		6,285
Total operating lease liabilities	$	8,389
Financing leases
Property, equipment and leasehold improvements	$	5,178
Accumulated depreciation		(512)
Total property, equipment and leasehold improvements, net	$	4,666
Financing lease liability	$	1,725
Long-term financing liability		2,525
Total	$	4,250

Schedule of Components of lease expense

	June 30, 2019
Weighted Average Remaining Lease Term
Operating Leases	3.82
Financing Leases	2.67
Weighted Average Discount Rate
Operating Leases	8.96%
Financing Leases	9.38%

Lease maturity schedule

Future cash payments with respect to lease obligations as of June 30, 2019 were as follows:

		Operating		Financing
		Lease		Leases
Year Ending
2019	$	1,389	$	959
2020		2,854		1,836
2021		2,646		1,220
2022		1,371		469
2023		1,097		73
Thereafter		605		-
Total lease payments		9,962		4,557
Less imputed interest		(1,573)		(307)
Total	$	8,389	$	4,250

Schedule of future cash payments with respect to operating leases and purchase obligations

Future cash payments with respect to lease obligations as of December 31, 2018 were as follows:

	Operating		Capital
	Leases		Leases
2019	$	2,927	$	521
2020		2,771		474
2021		2,512		243
2022		1,243		256
2023		971		71
Thereafter		652		—
Total	$	11,076	$	1,565

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Net Sales (Tables)

6 Months Ended

Jun. 30, 2019

Net Sales.

Schedule of disaggregation of net sales by major source

	Three Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	33,276		17,810	$	51,086
U.S. Prepaid Debit		—		15,966		15,966
Intersegment eliminations		(151)		—		(151)
Total	$	33,125	$	33,776	$	66,901
	Six Months Ended June 30, 2019
	Products		Services		Total
U.S. Debit and Credit	$	66,120		33,895	$	100,015
U.S. Prepaid Debit		—		32,710		32,710
Other		397		1,282		1,679
Intersegment eliminations		(635)		(2)		(637)
Total	$	65,882	$	67,885	$	133,767
	Three Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	30,444		13,399	$	43,843
U.S. Prepaid Debit		—		15,427		15,427
Other		1,625		1,355		2,980
Intersegment eliminations		(575)		(221)		(796)
Total	$	31,494	$	29,960	$	61,454
	Six Months Ended June 30, 2018
	Products		Services		Total
U.S. Debit and Credit	$	54,164		26,827	$	80,991
U.S. Prepaid Debit		—		30,938		30,938
Other		3,000		2,679		5,679
Intersegment eliminations		(926)		(371)		(1,297)
Total	$	56,238	$	60,073	$	116,311

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Discontinued Operation (Tables)

6 Months Ended

Jun. 30, 2019

Discontinued Operation

Schedule of assets, liabilities and operations of discontinued operations

	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Total net sales	$	4,587	$	8,799
Total cost of sales		4,300		8,498
Selling, general and administrative		1,446		3,066
Impairments		7,615		7,615
Other expense		21		29
Pretax (loss) from discontinued operation		(8,795)		(10,409)
Pretax loss on discontinued operation classification		(7,244)		(7,244)
Total pretax loss on discontinued operations		(16,039)		(17,653)
Income tax expense		132		132
Net (loss) from discontinued operation	$	(15,907)	$	(17,521)

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Accounts Receivable (Tables)

6 Months Ended

Jun. 30, 2019

Accounts Receivable

Schedule of accounts receivable

	June 30, 2019		December 31, 2018
Trade accounts receivable	$	34,215	$	36,428
Unbilled accounts receivable		8,295		7,577
		42,510		44,005
Less allowance for doubtful accounts		(290)		(211)
	$	42,220	$	43,794

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Inventories (Tables)

6 Months Ended

Jun. 30, 2019

Inventories

Schedule of inventories

	June 30, 2019		December 31, 2018
Raw materials	$	10,917	$	8,235
Finished goods		5,427		2,991
Inventory reserve		(1,490)		(1,399)
	$	14,854	$	9,827

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Plant, Equipment and Leasehold Improvements (Tables)

6 Months Ended

Jun. 30, 2019

Plant, Equipment and Leasehold Improvements

Schedule of plant, equipment and leasehold improvements

	June 30, 2019		December 31, 2018
Machinery and equipment	$	55,714	$	62,067
Machinery and equipment under financing leases		5,178		1,812
Furniture, fixtures and computer equipment		5,539		7,730
Leasehold improvements		14,637		19,651
Construction in progress		1,662		1,596
		82,730		92,856
Less accumulated depreciation		(44,486)		(53,746)
Operating right-of-use assets, net of accumulated amortization		7,271		—
	$	45,515	$	39,110

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Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2019

Goodwill and Other Intangible Assets

Schedule of intangible assets excluding goodwill

				June 30, 2019						December 31, 2018
	Average Life					Accumulated		Net Book				Accumulated		Net Book
	(Years)			Cost		Amortization		Value		Cost		Amortization		Value
Customer relationships	12	to	20	$	55,454	$	(27,226)	$	28,228	$	55,454		(25,587)	$	29,867
Technology and software	7	to	10		7,101		(4,489)		2,612		7,101		(4,024)		3,077
Trademarks	7.5	to	10		3,330		(1,071)		2,259		3,330		(877)		2,453
Non-compete agreements	5	to	8		491		(481)		10		491		(451)		40
Intangible assets subject to amortization				$	66,376	$	(33,267)	$	33,109	$	66,376	$	(30,939)	$	35,437

Schedule of future aggregate amortization expense for identified amortizable intangibles

2019	$	2,308
2020		4,595
2021		4,352
2022		3,867
2023		3,867
Thereafter		14,120
	$	33,109

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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2019

Fair Value of Financial Instruments

Schedule of financial assets and liabilities subject to fair value measurements

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2019
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2019		2019		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	246,875	$	—	$	246,875	$	—

	Carrying
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2018
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2018		2018		Level 1		Level 2		Level 3
Liabilities:
First Lien Term Loan	$	312,500	$	203,125	$	—	$	203,125	$	—

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Accrued Liabilities (Tables)

6 Months Ended

Jun. 30, 2019

Accrued Liabilities

Schedule of Accrued Liabilities

	June 30, 2019		December 31, 2018
Accrued payroll and related employee expenses	$	4,853	$	4,040
Accrued employee performance bonus		3,247		7,137
Accrued Interest		5,191		5,058
Short term operating and financing leases		3,829		521
Other		3,726		7,097
Total accrued expenses	$	20,846	$	23,853

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Long-Term Debt and Credit Facility (Tables)

6 Months Ended

Jun. 30, 2019

Long-Term Debt and Credit Facility

Schedule of long-term debt

	Interest		June 30,		December 31,
	Rate (1)		2019		2018
First Lien Term Loan (1)	7.35	%	$	312,500	$	312,500
Unamortized discount				(2,109)		(2,448)
Unamortized deferred financing costs				(3,595)		(4,234)
Total Long-term debt			$	306,796	$	305,818

(1)   Interest rate at June 30, 2019.  Interest rate at December 31, 2018 was 7.02%.

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Income Taxes – Continuing Operations (Tables)

6 Months Ended

Jun. 30, 2019

Income Taxes - Continuing Operations

Schedule of effective income tax rate reconciliation

	June 30,
	2019		2018
Tax at federal statutory rate	20.3	%	21.0	%
State Taxes, net	(60.1)		2.1
Valuation allowance	(206.2)		(8.3)
Tax benefit U.K. discontinued operation	—		27.2
Other	(77.3)		(0.6)
Effective income tax rate	(323.3)	%	41.4	%

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Income (loss) per Share (Tables)

6 Months Ended

Jun. 30, 2019

Income (loss) per Share

Computation of basic and diluted (loss) EPS

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Numerator:
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)
Net income (loss) from discontinued operation		(30)		(15,907)		12		(17,521)
Net income (loss)	$	1,522	$	(16,709)	$	(1,533)	$	(24,001)
Denominator:
Basic weighted-average common shares outstanding		11,178,462		11,143,230		11,169,468		11,138,972
Dilutive shares		63,763		—		—		—
Diluted weighted-average shares outstanding		11,242,225		11,143,230		11,169,468		11,138,972
Basic and diluted-Continuing operations	$	0.14	$	(0.07)	$	(0.14)	$	(0.58)
Basic and diluted-Discontinued operation		—		(1.43)		—		(1.57)
Basic and diluted net earnings (loss) per share	$	0.14	$	(1.50)	$	(0.14)	$	(2.15)

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Stock Based Compensation (Tables)

6 Months Ended

Jun. 30, 2019

Summary of changes in outstanding restricted stock units

				Weighted-
				Average
		Weighted-		Remaining
		Average		Amortization
		Grant-Date		Period
	Units	Fair Value		(in Years)
Outstanding as of December 31, 2018	68,649	$	6.25
Granted	—
Vested	(56,635)		2.75
Forfeited	(813)		21.75
Outstanding as of June 30, 2019	11,201	$	22.81	0.84

Schedule of vesting for unvested restricted stock units

2019	928
2020	10,030
2021	243
Total unvested restricted stock units as of June 30, 2019	11,201

Summary of changes in number of outstanding cash performance units

	Units
Outstanding as of December 31, 2018	425,012
Granted	—
Vested	(212,505)
Forfeited	(17,858)
Outstanding as of June 30, 2019	194,649

Omnibus Plan

Summary of outstanding and exercisable stock options

				Weighted-
		Weighted-		Average
		Average		Remaining
		Exercise		Contractual Term
	Options	Price		(in Years)
Outstanding as of December 31, 2018	910,627	$	14.99
Granted	—		0.00
Forfeited	(46,370)		11.52
Outstanding as of June 30, 2019	864,257	$	15.17	7.88
Options vested and exercisable as of June 30, 2019	344,148		22.23	7.47
Options vested and expected to vest	864,257		15.17	7.88

Summary of activity in non-vested stock options

		Weighted-Average
	Number	Grant-Date Fair Value
Non-vested as of December 31, 2018	605,352	$	3.14
Granted	-
Forfeited	(28,791)		2.51
Vested	(56,452)		3.76
Non-vested as of June 30, 2019	520,109	$	3.11

Schedule of vesting for unvested options

2019	231,906
2020	236,503
2021	51,700
Total unvested options as of June 30, 2019	520,109

Weighted average grant date fair value of options granted

	Three Months Ended June 30,
	2019		2018
Weighted-average grant-date fair value of options granted	$	n/a	$	1.65

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Segment Reporting (Tables)

6 Months Ended

Jun. 30, 2019

Segment Reporting

Schedule of revenue and EBITDA of the company's reportable segments

	Net Sales
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	51,086	$	43,843	$	100,015	$	80,991
U.S. Prepaid Debit		15,966		15,427		32,710		30,938
Other		—		2,980		1,679		5,679
Intersegment eliminations		(151)		(796)		(637)		(1,297)
Total	$	66,901	$	61,454	$	133,767	$	116,311

	EBITDA
	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
U.S. Debit and Credit	$	10,590	$	9,933	$	20,970	$	15,651
U.S. Prepaid Debit		5,880		4,687		11,659		9,506
Other		(3,435)		(7,463)		(11,741)		(15,247)
Total	$	13,035	$	7,157	$	20,888	$	9,910

Schedule of reconciliation of total segment EBITDA to income before taxes

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Total segment EBITDA from continuing operations	$	13,035	$	7,157	$	20,888	$	9,910
Interest, net		(6,438)		(5,586)		(12,762)		(11,092)
Income tax (expense) benefit		(777)		2,593		(1,180)		4,578
Depreciation and amortization		(4,268)		(4,966)		(8,491)		(9,876)
Net income (loss) from continuing operations	$	1,552	$	(802)	$	(1,545)	$	(6,480)

Schedule of total assets of the company's reportable segments

	June 30, 2019		December 31, 2018
U.S. Debit and Credit	$	173,565	$	169,567
U.S. Prepaid Debit		29,462		25,117
Other		7,265		12,520
Total assets	$	210,292	$	207,204

Schedule of net sales from product and services sold by the company

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Products net sales (a)	$	33,125	$	31,494	$	65,882	$	56,238
Services net sales (b)		33,776		29,960		67,885		60,073
Total net sales	$	66,901	$	61,454	$	133,767	$	116,311

(a)   “Products” net sales include the design and production of Financial Payment Cards in contact-EMV®, Dual-Interface EMV, metal, contactless and magnetic stripe card formats. The Company also generates “Products” revenue from the sale of Card@Once® printers and consumables, private label credit cards and retail gift cards.

(b)   “Services” net sales include revenue from the personalization and fulfillment of Financial Payment Cards, providing tamper-evident security packaging and fulfillment services to Prepaid Debit Card program managers and software as a service personalization of instant issuance debit cards. The Company also generates “Services” revenue from click-fees generated from the Company’s patented card design software, known as MYCA, which provides customers and cardholders the ability to design cards on the internet and customize cards with individualized digital images. “Services” revenue is also generated from personalizing retail gift cards, historically generated in Canada prior to the disposition.

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Business Overview and Summary of Significant Accounting Policies - Business Overview and Basis of Presentation (Details) $ in Thousands	1 Months Ended	3 Months Ended		6 Months Ended
	Feb. 28, 2019 item	Jun. 30, 2019 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2019 USD ($) item	Jun. 30, 2018 USD ($)	Aug. 03, 2018 facility
Business Overview and Summary of Significant Accounting Policies
Minimum number of payment card brands which certify card services | item				1
Proceeds from Divestiture of Interest in Subsidiaries and Affiliates				$ 1,451
Reclassification of cumulative translation adjustment from accumulated other comprehensive income		$ 1,329		$ 1,329
Number of personalization operations consolidated | item	3
Number of facilities personalization operations were consolidated into | item	2
Accelerated depreciation			$ 1,332		$ 2,132
Severance charge			223		$ 552
Termination charge			$ 432
Sold | U.K. Limited
Business Overview and Summary of Significant Accounting Policies
Number of facilities sold | facility						3

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Business Overview and Summary of Significant Accounting Policies - Components of Operating and Finance Lease Expense (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019
Operating lease cost:
Total operating lease costs	$ 665	$ 1,308
Finance lease cost:
Amortization of right-to-use assets	178	301
Interest on lease liabilities	40	62
Total financing lease cost	$ 218	$ 363

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Business Overview and Summary of Significant Accounting Policies - Operating and Financing Leases (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Leases
Operating lease right-to-use assets, net of amortization	$ 7,271
Operating lease right-to-use assets	7,271
Operating lease liability (current)	2,104
Long-term operating liability	6,285
Total	8,389
Property, equipment and leasehold improvements	82,730	$ 92,856
Accumulated depreciation	(44,486)	(53,746)
Plant, equipment and leasehold improvements, net	45,515	$ 39,110
Financing lease liability	1,725
Long-term financing liability	2,525
Total	4,250
Financing leases
Leases
Property, equipment and leasehold improvements	5,178
Accumulated depreciation	(512)
Plant, equipment and leasehold improvements, net	$ 4,666

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Business Overview and Summary of Significant Accounting Policies - Components of Lease Expense (Details)	Jun. 30, 2019
Weighted Average Remaining Lease Term
Weighted Average Remaining Lease Term - Operating Leases	3 years 9 months 26 days
Weighted Average Remaining Lease Term - Financing Leases	2 years 8 months 1 day
Weighted Average Discount Rate
Weighted Average Discount Rate - Operating Leases	8.96%
Weighted Average Discount Rate - Financing Leases	9.38%

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Business Overview and Summary of Significant Accounting Policies - Lease Maturity (Details) $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2019 USD ($)	Jun. 30, 2019 USD ($)
Operating Leases
2019	$ 1,389	$ 1,389
2020	2,854	2,854
2021	2,646	2,646
2022	1,371	1,371
2023	1,097	1,097
Thereafter	605	605
Total operating lease payment	9,962	9,962
Less imputed interest	(1,573)	(1,573)
Total	8,389	8,389
Cash paid for amounts included in the measurement of lease liabilities	444	934
Financing Leases
2019	959	959
2020	1,836	1,836
2021	1,220	1,220
2022	469	469
2023	73	73
Total financing lease payment	4,557	4,557
Less imputed interest	(307)	(307)
Total	$ 4,250	$ 4,250

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Business Overview and Summary of Significant Accounting Policies - Operating and Capital Leases (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Future Cash Payments, Capital Lease:
2019	$ 521
2020	474
2021	243
2022	256
2023	71
Total	1,565
Future Cash Payments, Operating Leases:
2019	2,927
2020	2,771
2021	2,512
2022	1,243
2023	971
Thereafter	652
Total	$ 11,076

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Business Overview and Summary of Significant Accounting Policies - Other (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2019	Jan. 01, 2019
Recently Issued Accounting Pronouncements
Lease, Practical Expedient, Use of Hindsight	false
Lease, Practical Expedients, Package	true
Right-to-use assets	$ 7,271
Operating lease liabilities	$ 8,389
Accounting Standards Update 2016-02 | Adjustment
Recently Issued Accounting Pronouncements
Right-to-use assets		$ 8,025
Operating lease liabilities		$ 8,813

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Net Sales (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Disaggregation of Revenue
Net Sales	$ 66,901	$ 61,454	$ 133,767	$ 116,311
Operating Segments | U.S. Debit and Credit
Disaggregation of Revenue
Net Sales	51,086	43,843	100,015	80,991
Operating Segments | U.S. Prepaid Debit
Disaggregation of Revenue
Net Sales	15,966	15,427	32,710	30,938
Operating Segments | Other
Disaggregation of Revenue
Net Sales		2,980	1,679	5,679
Intersegment eliminations
Disaggregation of Revenue
Net Sales	(151)	(796)	(637)	(1,297)
Products
Disaggregation of Revenue
Net Sales	33,125	31,494	65,882	56,238
Products | Operating Segments | U.S. Debit and Credit
Disaggregation of Revenue
Net Sales	33,276	30,444	66,120	54,164
Products | Operating Segments | Other
Disaggregation of Revenue
Net Sales		1,625	397	3,000
Products | Intersegment eliminations
Disaggregation of Revenue
Net Sales	(151)	(575)	(635)	(926)
Services
Disaggregation of Revenue
Net Sales	33,776	29,960	67,885	60,073
Services | Operating Segments | U.S. Debit and Credit
Disaggregation of Revenue
Net Sales	17,810	13,399	33,895	26,827
Services | Operating Segments | U.S. Prepaid Debit
Disaggregation of Revenue
Net Sales	$ 15,966	15,427	32,710	30,938
Services | Operating Segments | Other
Disaggregation of Revenue
Net Sales		1,355	1,282	2,679
Services | Intersegment eliminations
Disaggregation of Revenue
Net Sales		$ (221)	$ (2)	$ (371)

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Discontinued Operation (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Major line items constituting the (loss) income of the discontinued operation
Net (loss) from discontinued operation	$ (30)	$ (15,907)	$ 12	$ (17,521)
U.K. Limited | Sold
Major line items constituting the (loss) income of the discontinued operation
Total net sales		4,587		8,799
Total cost of sales		4,300		8,498
Selling general and administrative		1,446		3,066
Impairment		7,615		7,615
Other expense		21		29
Pretax (loss) income from discontinued operation		(8,795)		(10,409)
Pre-tax loss on discontinued operation classification		(7,244)		(7,244)
Total pretax loss on discontinued operation		(16,039)		(17,653)
Income tax expense		132		132
Net (loss) from discontinued operation		$ (15,907)		$ (17,521)

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Accounts Receivable (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Accounts Receivable
Trade accounts receivable	$ 34,215	$ 36,428
Unbilled accounts receivable	8,295	7,577
Accounts receivable, gross	42,510	44,005
Less allowance for doubtful accounts	(290)	(211)
Accounts receivable, net	$ 42,220	$ 43,794

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Inventories (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Inventories
Raw materials	$ 10,917	$ 8,235
Finished goods	5,427	2,991
Inventory reserve	(1,490)	(1,399)
Inventory	$ 14,854	$ 9,827

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Plant, Equipment and Leasehold Improvements (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 82,730		$ 82,730		$ 92,856
Less accumulated depreciation	(44,486)		(44,486)		(53,746)
Operating lease right-to-use assets, net of amortization	7,271		7,271
Plant, equipment and leasehold improvements, net	45,515		45,515		39,110
Depreciation	3,104	$ 3,802	6,163	$ 7,548
Machinery and equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	55,714		55,714		62,067
Machinery and equipment under financing leases
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	5,178		5,178		1,812
Furniture, fixtures and computer equipment
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	5,539		5,539		7,730
Leasehold improvements
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	14,637		14,637		19,651
Construction in progress
Plant, Equipment and Leasehold Improvements
Plant, equipment and leasehold improvements, gross	$ 1,662		$ 1,662		$ 1,596

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Goodwill and Other Intangible Assets - Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Dec. 31, 2018
Intangible Assets [Line Items]
Intangible amortization expense	$ 1,164	$ 1,164	$ 2,328	$ 2,328
Intangible assets subject to amortization, Cost	66,376		66,376		$ 66,376
Intangible assets subject to amortization, Accumulated Amortization	(33,267)		(33,267)		(30,939)
Intangible assets subject to amortization, Net Book Value	33,109		33,109		35,437
Customer relationships
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	55,454		55,454		55,454
Intangible assets subject to amortization, Accumulated Amortization	(27,226)		(27,226)		(25,587)
Intangible assets subject to amortization, Net Book Value	28,228		$ 28,228		$ 29,867
Customer relationships | Minimum
Intangible Assets [Line Items]
Average Life (Years)			12 years		12 years
Customer relationships | Maximum
Intangible Assets [Line Items]
Average Life (Years)			20 years		20 years
Technology and software
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	7,101		$ 7,101		$ 7,101
Intangible assets subject to amortization, Accumulated Amortization	(4,489)		(4,489)		(4,024)
Intangible assets subject to amortization, Net Book Value	2,612		$ 2,612		$ 3,077
Technology and software | Minimum
Intangible Assets [Line Items]
Average Life (Years)			7 years		7 years
Technology and software | Maximum
Intangible Assets [Line Items]
Average Life (Years)			10 years		10 years
Trademarks
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	3,330		$ 3,330		$ 3,330
Intangible assets subject to amortization, Accumulated Amortization	(1,071)		(1,071)		(877)
Intangible assets subject to amortization, Net Book Value	2,259		$ 2,259		$ 2,453
Trademarks | Minimum
Intangible Assets [Line Items]
Average Life (Years)			7 years 6 months		7 years 6 months
Trademarks | Maximum
Intangible Assets [Line Items]
Average Life (Years)			10 years		10 years
Non-compete agreements
Intangible Assets [Line Items]
Intangible assets subject to amortization, Cost	491		$ 491		$ 491
Intangible assets subject to amortization, Accumulated Amortization	(481)		(481)		(451)
Intangible assets subject to amortization, Net Book Value	$ 10		$ 10		$ 40
Non-compete agreements | Minimum
Intangible Assets [Line Items]
Average Life (Years)			5 years		5 years
Non-compete agreements | Maximum
Intangible Assets [Line Items]
Average Life (Years)			8 years		8 years

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Goodwill and Other Intangible Assets - Future Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Estimated future aggregate amortization expense
2019	$ 2,308
2020	4,595
2021	4,352
2022	3,867
2023	3,867
Thereafter	14,120
Intangible assets subject to amortization, Net Book Value	$ 33,109	$ 35,437

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Fair Value of Financial Instruments (Details) - First Lien Credit Facility - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Liabilities:
Carrying amount	$ 312,500	$ 312,500
Term Loan
Liabilities:
Carrying amount	312,500	312,500
Long-term debt	246,875	203,125
Level 2 | Term Loan
Liabilities:
Long-term debt	$ 246,875	$ 203,125

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Accrued Liabilities (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Accrued Liabilities
Accrued payroll and related employee expenses	$ 4,853	$ 4,040
Accrued employee performance bonus	3,247	7,137
Accrued Interest	5,191	5,058
Short term operating and financing leases	3,829	521
Other	3,726	7,097
Total accrued expenses	$ 20,846	$ 23,853

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Long-Term Debt and Credit Facility - Long-Term Debt (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Long-term Debt
Unamortized discount	$ (2,109)	$ (2,448)
Unamortized deferred financing costs	(3,595)	(4,234)
Total long-term debt	$ 306,796	$ 305,818
First Lien Credit Facility
Long-term Debt
Interest rate (as a percent)	7.35%	7.02%
Long-term debt	$ 312,500	$ 312,500

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Long-Term Debt and Credit Facility - First Lien Credit Facility (Details) $ in Thousands		6 Months Ended	12 Months Ended
	Aug. 17, 2015 USD ($)	Jun. 30, 2019 USD ($) letter	Dec. 31, 2018 USD ($)
Long-term Debt
Fee on outstanding letters of credit (as a percent)		4.50%	4.50%
Fronting fee for letters of credit (as a percent)		0.125%	0.125%
Number of outstanding letters of credit | letter		1
Letters of credit outstanding		$ 50
Accrued interest		$ 5,191	$ 5,058
First Lien Credit Facility
Long-term Debt
Maximum net leverage ratio	7.00
Eurodollar rate | First Lien Credit Facility
Long-term Debt
Applicable margin over reference rate (as a percent)		4.50%
Eurodollar rate | First Lien Credit Facility | Minimum
Long-term Debt
Interest rate (as a percent)		1.00%
Base rate | First Lien Credit Facility
Long-term Debt
Applicable margin over reference rate (as a percent)		3.50%
Term Loan | First Lien Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 435,000
Revolving Credit Facility
Long-term Debt
Amount outstanding		$ 0
Remaining borrowing capacity		$ 19,950
Revolving Credit Facility | Minimum
Long-term Debt
Unused commitment fee (as a percent)		0.375%	0.375%
Revolving Credit Facility | Maximum
Long-term Debt
Unused commitment fee (as a percent)		0.50%	0.50%
Revolving Credit Facility | First Lien Credit Facility
Long-term Debt
Maximum borrowing capacity	$ 40,000
Amount drawn to trigger net leverage requirement (as a percent)		50.00%
Revolving Credit Facility | Base rate
Long-term Debt
Applicable margin over reference rate (as a percent)		3.50%

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Income Taxes - Continuing Operations (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Income Taxes - Continuing Operations
Income tax expense (benefit)	$ 777	$ (2,593)	$ 1,180	$ (4,578)
Loss before income taxes
Income (loss) before income taxes	$ 2,329	$ (3,395)	$ (365)	$ (11,058)
Effective income tax rate (as a percent)			(323.30%)	41.40%
Tax expense recorded related to valuation allowance			$ 752
Effective tax rate for tax expense recorded related to valuation allowance (as a percent)			(206.20%)

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Income Taxes – Continuing Operations - Effective Income Tax Rate Reconciliation (Details)	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018
Effective Income Tax Rate Reconciliation
Tax at federal statutory rate (as a percent)	20.30%	21.00%
State Taxes, net (as a percent)	(60.10%)	2.10%
Valuation allowance (as a percent)	(206.20%)	(8.30%)
Tax benefit U.K. discontinued operation		27.20%
Other (as a percent)	(77.30%)	(0.60%)
Effective income tax rate (as a percent)	(323.30%)	41.40%

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Income (loss) per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Numerator:
Net income (loss) from continuing operations	$ 1,552	$ (802)	$ (1,545)	$ (6,480)
Net loss from discontinued operation	(30)	(15,907)	12	(17,521)
Net income (loss)	$ 1,522	$ (16,709)	$ (1,533)	$ (24,001)
Denominator:
Basic weighted-average common shares outstanding (in shares)	11,178,462	11,143,230	11,169,468	11,138,972
Dilutive shares	63,763
Weighted Average Number of Shares Outstanding, Diluted, Total	11,242,225	11,143,230	11,169,468	11,138,972
Basic and diluted EPS:
Basic and diluted - Continuing operations (in dollar per share)	$ 0.14	$ (0.07)	$ (0.14)	$ (0.58)
Basic and diluted-Discontinued operation (in dollar per share)		(1.43)		(1.57)
Net earnings (loss) per share (in dollars per share)	$ 0.14	$ (1.50)	$ (0.14)	$ (2.15)
Stock Options
Outstanding stock based awards
Potential dilutive effect of share-based compensation excluded (in shares)			864,257	957,840
Restricted stock units
Outstanding stock based awards
Potential dilutive effect of share-based compensation excluded (in shares)			11,201	98,535

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Commitments and Contingencies; Litigation Settlement (Details) $ in Thousands		3 Months Ended
	Mar. 28, 2018	Jun. 30, 2019 USD ($)	Jun. 30, 2015 plaintiff
Securities Litigation Case
Commitments and Contingencies
The number of patents involved in lawsuit | plaintiff			2
Heckermann Montross Suit
Commitments and Contingencies
Period after final judgment the stay is lifted	30 days
CPI Card Group Inc. v. Multi Packaging Solutions, Inc., et al. Second Case | Settled Litigation
Commitments and Contingencies
Proceeds from settlements | $		$ 6,000

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Stock Based Compensation - Omnibus Incentive Plan (Details) - Omnibus Plan - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended		6 Months Ended
	Sep. 25, 2017	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Oct. 31, 2015
Weighted-Average Grant Date Fair Value
Compensation expense		$ 161	$ 389	$ 308	$ 784
Stock Options
Stock based compensation
Number of shares authorized	1,200,000					800,000
Number of additional shares authorized	400,000
Number of shares available for grant		204,100		204,100
Stock options granted (in shares)				0
Number of shares
Balance at beginning of year (in shares)				910,627
Granted (in shares)				0
Forfeited (in shares)				(46,370)
Balance at end of year (in shares)		864,257		864,257
Options: Options vested and exercisable		344,148		344,148
Options: Options vested and expected to vest		864,257		864,257
Weighted-Average Exercise Price
Balance at beginning of year (in dollars per share)				$ 14.99
Granted (in dollars per share)			$ 1.65	0.00
Forfeited (in dollars per share)				11.52
Balance at end of year (in dollars per share)		$ 15.17		15.17
Weighted-Average Exercise Price: Options vested and exercisable		22.23		22.23
Weighted-Average Exercise Price: Options vested and expected to vest		$ 15.17		$ 15.17
Weighted- Average Remaining Contractual Term (in Years)
Balance (in years)				7 years 10 months 17 days
Weighted-Average Remaining Contractual Term (in Years): Options vested and exercisable				7 years 5 months 19 days
Weighted-Average Remaining Contractual Term (in Years): Options vested and expected to vest				7 years 10 months 17 days
Number of unvested options scheduled to vest
Non-Vested Options as of beginning of period				605,352
Granted (in shares)				0
Forfeited (in shares)				(28,791)
Vested (in shares)				(56,452)
Non-Vested Options as of end of period		520,109		520,109
Weighted-Average Grant Date Fair Value
Non-Vested, beginning balance				$ 3.14
Forfeited: Weighted-Average Grant Date Fair Value				2.51
Vested: Weighted-Average Grant Date Fair Value				3.76
Non-Vested, ending balance		$ 3.11		$ 3.11
2019 | Stock Options
Number of unvested options scheduled to vest
Non-Vested Options as of end of period		231,906		231,906
2020 | Stock Options
Number of unvested options scheduled to vest
Non-Vested Options as of end of period		236,503		236,503
2021 | Stock Options
Number of unvested options scheduled to vest
Non-Vested Options as of end of period		51,700		51,700

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Stock Based Compensation - Restricted Stock Units (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019
Restricted stock units
Weighted Average Grant Date Fair Value
Period over which compensation expense expected to recognize			1 year
Omnibus Plan
Weighted Average Grant Date Fair Value
Compensation expense	$ 161	$ 389	$ 308	$ 784
Omnibus Plan | Restricted stock units
Number of Restricted Stock Units
Units outstanding at the beginning of the period (in shares)			68,649
Granted (in shares)			0
Vested (in shares)			(56,635)
Forfeited (in shares)			(813)
Units outstanding at the end of the period (in shares)	11,201		11,201
Weighted Average Grant Date Fair Value
Units outstanding at the beginning of the period (in dollars per shares)			$ 6.25
Vested (in dollars per share)			2.75
Forfeited (in dollars per share)			21.75
Units outstanding at the end of the period (in dollars per shares)	$ 22.81		$ 22.81
Unrecognized compensation expense					$ 354
Period over which compensation expense expected to recognize			10 months 2 days
Unvested restricted stock (in units)	11,201		68,649		11,201
Omnibus Plan | Restricted stock units | 2019
Number of Restricted Stock Units
Units outstanding at the end of the period (in shares)	928		928
Weighted Average Grant Date Fair Value
Unvested restricted stock (in units)	928		928		928
Omnibus Plan | Restricted stock units | 2020
Number of Restricted Stock Units
Units outstanding at the end of the period (in shares)	10,030		10,030
Weighted Average Grant Date Fair Value
Unvested restricted stock (in units)	10,030		10,030		10,030
Omnibus Plan | Restricted stock units | 2021
Number of Restricted Stock Units
Units outstanding at the end of the period (in shares)	243		243
Weighted Average Grant Date Fair Value
Unvested restricted stock (in units)	243		243		243

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Stock Based Compensation - Cash Performance Units (Details) - Cash Performance $ in Thousands	6 Months Ended
	Jun. 30, 2019 USD ($) shares
Stock based compensation
Period over which compensation expense expected to recognize	3 years
Cash payments made | $	$ 106
Number of Cash Performance Units
Units outstanding at the beginning of the period (in shares)	425,012
Vested (in shares)	(212,505)
Forfeited (in shares)	(17,858)
Units outstanding at the end of the period (in shares)	194,649
Accrued expenses
Stock based compensation
Cash performance liability | $	$ 74

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Stock Based Compensation - Option Plan (Details) - Stock Options - Option Plan - shares	3 Months Ended	6 Months Ended
	Jun. 30, 2019	Jun. 30, 2019
Stock based compensation
Stock option life (in years)		10 years
Number of shares
Exercised (in shares)	6,600

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Segment Reporting - Revenue and EBITDA from Continuing Operations (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Segment Reporting
Revenue	$ 66,901	$ 61,454	$ 133,767	$ 116,311
EBITDA	13,035	7,157	20,888	9,910
U.S. Debit and Credit
Segment Reporting
EBITDA	10,590	9,933	20,970	15,651
U.S. Prepaid Debit
Segment Reporting
EBITDA	5,880	4,687	11,659	9,506
Other
Segment Reporting
EBITDA	(3,435)	(7,463)	(11,741)	(15,247)
Operating Segments | U.S. Debit and Credit
Segment Reporting
Revenue	51,086	43,843	100,015	80,991
Operating Segments | U.S. Prepaid Debit
Segment Reporting
Revenue	15,966	15,427	32,710	30,938
Operating Segments | Other
Segment Reporting
Revenue		2,980	1,679	5,679
Intersegment eliminations
Segment Reporting
Revenue	$ (151)	$ (796)	$ (637)	$ (1,297)

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Segment Reporting - Reconciliation of EBITDA from Continuing Operations to "Net income (loss) from continuing operations" (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Reconciliation of total segment EBITDA to income before taxes
Total segment EBITDA from continuing operations	$ 13,035	$ 7,157	$ 20,888	$ 9,910
Interest, net	(6,438)	(5,586)	(12,762)	(11,092)
Income tax (expense) benefit	(777)	2,593	(1,180)	4,578
Depreciation and amortization	(4,268)	(4,966)	(8,491)	(9,876)
Net income (loss) from continuing operations	$ 1,552	$ (802)	$ (1,545)	$ (6,480)

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Segment Reporting - Balance Sheet Data (Details) - USD ($) $ in Thousands	Jun. 30, 2019	Dec. 31, 2018
Segment Reporting
Total assets	$ 210,292	$ 207,204
U.S. Debit and Credit
Segment Reporting
Total assets	173,565	169,567
U.S. Prepaid Debit
Segment Reporting
Total assets	29,462	25,117
Other
Segment Reporting
Total assets	$ 7,265	$ 12,520

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Segment Reporting - Net Sales by Product and Services (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2019	Jun. 30, 2018	Jun. 30, 2019	Jun. 30, 2018
Segment Reporting
Total net sales	$ 66,901	$ 61,454	$ 133,767	$ 116,311
Products
Segment Reporting
Total net sales	33,125	31,494	65,882	56,238
Services
Segment Reporting
Total net sales	$ 33,776	$ 29,960	$ 67,885	$ 60,073