CPI Card Group Inc. [PMTS] Filings

10-Q 1 pmts-20230630x10q.htm 10-Q

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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, 2023

☐

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.)

10368 W. Centennial Road
Littleton, CO		80127
(Address of principal executive offices)		(Zip Code)

(720) 681-6304

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the 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 Global Market

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

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 August 1, 2023: 11,430,897

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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		18

Item 3 — Quantitative and Qualitative Disclosures About Market Risk		27

Item 4 — Controls and Procedures		27

Part II — Other Information

Item 1 — Legal Proceedings		28

Item 1A — Risk Factors		28

Item 6 — Exhibits		29

Signatures		30

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PART I - Financial Information

Item 1. Financial Statements

CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	11,168	$	11,037
Accounts receivable, net		75,291		80,583
Inventories, net		75,241		68,399
Prepaid expenses and other current assets		8,353		7,551
Total current assets		170,053		167,570
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net of accumulated depreciation of $67,023 and $61,922, respectively		58,941		57,178
Intangible assets, net of accumulated amortization of $49,831 and $47,897, respectively		16,054		17,988
Goodwill		47,150		47,150
Other assets		7,871		6,780
Total assets	$	300,069	$	296,666
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	22,570	$	24,371
Accrued expenses		30,500		40,070
Deferred revenue and customer deposits		727		3,571
Total current liabilities		53,797		68,012
Long-term debt		284,416		285,522
Deferred income taxes		7,234		6,808
Other long-term liabilities		17,592		18,401
Total liabilities		363,039		378,743
Commitments and contingencies (Note 11)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at June 30, 2023 and December 31, 2022		—		—
Stockholders’ deficit:
Common stock; $0.001 par value—100,000,000 shares authorized; 11,430,245 and 11,390,355 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		11		11
Capital deficiency		(106,668)		(108,379)
Accumulated earnings		43,687		26,291
Total stockholders’ deficit		(62,970)		(82,077)
Total liabilities and stockholders’ deficit	$	300,069	$	296,666

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income

(in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net sales:
Products	$	63,946	$	68,945	$	139,736	$	137,261
Services		51,014		44,363		96,076		87,471
Total net sales		114,960		113,308		235,812		224,732
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		41,308		43,055		87,288		86,149
Services (exclusive of depreciation and amortization shown below)		30,214		27,578		59,618		54,435
Depreciation and amortization		2,613		2,124		4,987		4,319
Total cost of sales		74,135		72,757		151,893		144,903
Gross profit		40,825		40,551		83,919		79,829
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		21,885		24,050		42,951		43,932
Depreciation and amortization		1,448		1,447		2,878		2,862
Total operating expenses		23,333		25,497		45,829		46,794
Income from operations		17,492		15,054		38,090		33,035
Other expense, net:
Interest, net		(6,740)		(7,146)		(13,521)		(15,011)
Other expense, net		(78)		(15)		(192)		(411)
Total other expense, net		(6,818)		(7,161)		(13,713)		(15,422)
Income before income taxes		10,674		7,893		24,377		17,613
Income tax expense		(4,151)		(1,742)		(6,981)		(5,460)
Net income	$	6,523	$	6,151	$	17,396	$	12,153

Basic and diluted earnings per share:
Basic earnings per share	$	0.57	$	0.55	$	1.52	$	1.08
Diluted earnings per share	$	0.55	$	0.52	$	1.46	$	1.04

Basic weighted-average shares outstanding		11,427,404		11,257,733		11,411,162		11,256,600
Diluted weighted-average shares outstanding		11,876,568		11,721,744		11,888,219		11,718,836

Comprehensive income:
Net income	$	6,523	$	6,151	$	17,396	$	12,153
Total comprehensive income	$	6,523	$	6,151	$	17,396	$	12,153

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Deficit

(in thousands, except per share amounts)

(Unaudited)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings		Total
March 31, 2023	11,424,628	$	11	$	(107,907)	$	37,164	$	(70,732)
Shares issued under stock-based compensation plans	5,617		—		(51)		—		(51)
Stock-based compensation			—		1,290		—		1,290
Components of comprehensive income:
Net income			—		—		6,523		6,523
June 30, 2023	11,430,245	$	11	$	(106,668)	$	43,687	$	(62,970)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings		Total
December 31, 2022	11,390,355	$	11	$	(108,379)	$	26,291	$	(82,077)
Shares issued under stock-based compensation plans	39,890		—		(120)		—		(120)
Stock-based compensation			—		1,831		—		1,831
Components of comprehensive income:
Net income			—		—		17,396		17,396
June 30, 2023	11,430,245	$	11	$	(106,668)	$	43,687	$	(62,970)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings (loss)		Total
March 31, 2022	11,255,466	$	11	$	(109,821)	$	(4,247)	$	(114,057)
Shares issued under stock-based compensation plans	7,222		—		(60)		—		(60)
Stock-based compensation			—		1,001		—		1,001
Components of comprehensive income:
Net income			—		—		6,151		6,151
June 30, 2022	11,262,688	$	11	$	(108,880)	$	1,904	$	(106,965)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings (loss)		Total
December 31, 2021	11,255,466	$	11	$	(110,782)	$	(10,249)	$	(121,020)
Shares issued under stock-based compensation plans	7,222		—		(60)		—		(60)
Stock-based compensation			—		1,962		—		1,962
Components of comprehensive income:
Net income			—		—		12,153		12,153
June 30, 2022	11,262,688	$	11	$	(108,880)	$	1,904	$	(106,965)

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Operating activities
Net income	$	17,396	$	12,153
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense		5,931		5,248
Amortization expense		1,934		1,933
Stock-based compensation expense		1,831		1,962
Amortization of debt issuance costs and debt discount		936		967
Loss on debt extinguishment		218		395
Deferred income taxes		426		305
Other, net		253		788
Changes in operating assets and liabilities:
Accounts receivable		5,287		(12,280)
Inventories		(7,351)		(17,853)
Prepaid expenses and other assets		(1,381)		(409)
Income taxes, net		(772)		256
Accounts payable		(1,758)		1,690
Accrued expenses and other liabilities		(9,784)		(2,955)
Deferred revenue and customer deposits		(2,844)		(348)
Cash provided by (used in) operating activities		10,322		(8,148)
Investing activities
Capital expenditures for plant, equipment and leasehold improvements		(6,594)		(8,179)
Other		128		15
Cash used in investing activities		(6,466)		(8,164)
Financing activities
Principal payments on Senior Notes		(14,877)		(20,000)
Principal payments on ABL Revolver		—		(10,000)
Proceeds from ABL Revolver		13,000		35,000
Payments on debt extinguishment and other		(120)		(922)
Proceeds from finance lease financing		—		2,074
Payments on finance lease obligations		(1,739)		(1,435)
Cash (used in) provided by financing activities		(3,736)		4,717
Effect of exchange rates on cash		11		(37)
Net increase (decrease) in cash and cash equivalents		131		(11,632)
Cash and cash equivalents, beginning of period		11,037		20,683
Cash and cash equivalents, end of period	$	11,168	$	9,051
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest	$	13,135	$	13,985
Income taxes paid	$	7,408	$	5,746
Income taxes refunded	$	(26)	$	(449)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	168	$	816
Financing leases	$	2,169	$	3,077
Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements	$	368	$	3,110

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. CPI is engaged in the design, production, data personalization, packaging and fulfillment of Financial Payment Cards, which the Company defines as credit, debit and Prepaid Debit Cards (defined below) issued on the networks of the Payment Card Brands (Visa, Mastercard^®, American Express^® and Discover^®). CPI defines “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. CPI also offers an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

CPI serves its customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands. CPI’s network of high-security production facilities allows the Company to optimize its solutions offerings and serve its customers.

The Company’s business consists of the following reportable segments: Debit and Credit, Prepaid Debit and Other. The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services for card-issuing financial institutions primarily in the United States. The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States. The Company’s “Other” segment includes corporate expenses.

Basis of Presentation

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to Form 10-Q and Article 8 of Regulation S-X. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for the fair statement of the results of the interim periods presented. The condensed consolidated balance sheet as of December 31, 2022 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, 2022.

Use of Estimates

Management uses estimates and assumptions relating to the reporting of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures in the preparation of the condensed consolidated financial statements. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions. Actual results could differ from those estimates.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the criteria under which credit losses on financial instruments (such as the Company’s trade receivables) are measured. The ASU introduces a new credit reserve model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology previously used under GAAP with an expected loss

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methodology. Effective January 1, 2023, the Company adopted the CECL model. The adoption of the model did not have a material impact on the Company’s consolidated financial position or results of operations.

2. Net Sales

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


	Three Months Ended June 30, 2023
	Products		Services		Total

	(dollars in thousands)
Debit and Credit	$	64,001	$	29,193	$	93,194
Prepaid Debit		—		21,821		21,821
Intersegment eliminations		(55)		—		(55)
Total	$	63,946	$	51,014	$	114,960

	Six Months Ended June 30, 2023
	Products		Services		Total

	(dollars in thousands)
Debit and Credit	$	140,033	$	55,146	$	195,179
Prepaid Debit		—		40,951		40,951
Intersegment eliminations		(297)		(21)		(318)
Total	$	139,736	$	96,076	$	235,812

	Three Months Ended June 30, 2022
	Products		Services		Total

	(dollars in thousands)
Debit and Credit	$	69,031	$	25,150	$	94,181
Prepaid Debit		—		19,214		19,214
Intersegment eliminations		(86)		(1)		(87)
Total	$	68,945	$	44,363	$	113,308

	Six Months Ended June 30, 2022
	Products		Services		Total

	(dollars in thousands)
Debit and Credit	$	137,379	$	48,817	$	186,196
Prepaid Debit		—		38,675		38,675
Intersegment eliminations		(118)		(21)		(139)
Total	$	137,261	$	87,471	$	224,732

Products Net Sales

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

EMV^® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo, LLC.

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Services Net Sales

Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service personalization of instant issuance debit cards. As applicable, for unbilled work performed but not completed, 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 ASC 606, Revenue from Contracts with Customers, is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

3. Accounts Receivable

Accounts receivable consisted of the following:


		June 30,		December 31,
		2023		2022

	(dollars in thousands)
Trade accounts receivable	$	66,139	$	68,886
Unbilled accounts receivable		9,375		11,915
		75,514		80,801
Less allowance		(223)		(218)
	$	75,291	$	80,583

4. Inventories

Inventories consisted of the following:


		June 30,		December 31,
		2023		2022

	(dollars in thousands)
Raw materials	$	68,511	$	61,434
Finished goods		10,574		10,300
Inventory reserve		(3,844)		(3,335)
	$	75,241	$	68,399

5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets

Plant, equipment, leasehold improvements and operating lease right-of-use assets consisted of the following:


		June 30,		December 31,
		2023		2022

	(dollars in thousands)
Machinery and equipment	$	73,038	$	64,786
Machinery and equipment under financing leases		16,384		15,717
Furniture, fixtures and computer equipment		2,892		3,072
Leasehold improvements		15,249		14,703
Construction in progress		1,164		3,304
Operating lease right-of-use assets		17,237		17,518
		125,964		119,100
Less accumulated depreciation and amortization		(67,023)		(61,922)
	$	58,941	$	57,178

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6. Fair Value of Financial Instruments

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

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

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

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

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


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at June 30, 2023
	June 30,		June 30,		(Using Fair Value Hierarchy)
	2023		2023		Level 1		Level 2		Level 3

	(dollars in thousands)
Liabilities:
Senior Notes	$	270,000	$	259,835	$	—	$	259,835	$	—
ABL Revolver	$	18,000	$	18,000	$	—	$	18,000	$	—


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2022
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2022		2022		Level 1		Level 2		Level 3

	(dollars in thousands)
Liabilities:
Senior Notes	$	285,000	$	281,438	$	—	$	281,438	$	—
ABL Revolver	$	5,000	$	5,000	$	—	$	5,000	$	—

The aggregate fair value of the Company’s Senior Notes (as defined in Note 8, “Long-Term Debt”) was based on bank quotes. The fair value measurement associated with the ABL Revolver (as defined in Note 8, “Long-Term Debt”) approximates its carrying value as of June 30, 2023, given the applicable variable interest rates and nature of the security interest in Company assets.

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature.

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7. Accrued Expenses

Accrued expenses consisted of the following:


	June 30,		December 31,
	2023		2022

	(dollars in thousands)
Accrued payroll and related employee expenses	$	7,291	$	7,727
Accrued employee performance bonuses		3,095		8,576
Employer payroll taxes		414		1,092
Accrued rebates		2,607		2,668
Estimated sales tax liability		456		622
Accrued interest		6,805		7,275
Current operating and financing lease liabilities		5,909		5,697
Other		3,923		6,413
Total accrued expenses	$	30,500	$	40,070

Other accrued expenses as of June 30, 2023, and December 31, 2022, consisted primarily of miscellaneous accruals for invoices not yet received, self-insurance claims that have yet to be reported, and accrued royalties.

8. Long-Term Debt

As of June 30, 2023, and December 31, 2022, long-term debt consisted of the following:


	Interest		June 30,		December 31,
	Rate ⁽¹⁾		2023		2022

			(dollars in thousands)
Senior Notes	8.625	%	$	270,000	$	285,000
ABL Revolver	6.461	%		18,000		5,000
Unamortized deferred financing costs				(3,584)		(4,478)
Total long-term debt				284,416		285,522
Less current maturities				—		—
Long-term debt, net of current maturities			$	284,416	$	285,522

(1)

The Senior Notes bear interest at a fixed rate and the ABL Revolver bears interest at a variable rate.

Senior Notes

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $310.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year.

The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among CPI CG Inc., the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. No such payment is required to be made in 2023 based on the Company’s operating results for the year ended December 31, 2022.

During the six months ended June 30, 2023, the Company used cash on hand and available borrowing capacity under the ABL Revolver (defined below) to retire a portion of the Senior Notes totaling $15.0 million of the principal amount thereof plus accrued and unpaid interest thereon to the retirement dates.

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ABL

On March 15, 2021, the Company and CPI CG Inc., as borrower, entered into a Credit Agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $50.0 million (the “ABL Revolver”). The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. On March 3, 2022, the Company and CPI CG Inc. entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver. The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $75.0 million, increased the uncommitted accordion feature to $25.0 million from $15.0 million, and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York. On October 11, 2022, the Company and CPI CG Inc. entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory.

Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10% to 0.30% depending on the term selected. Through March 31, 2023, the applicable interest rate margin ranged from 1.50% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrued a monthly unused line fee, 0.50% per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. The interest rate margin and unused line fee percentage changed, effective April 1, 2023, to between 1.25% and 1.75% (interest rate margin) and 0.375% and 0.50% (unused line fee).

Deferred Financing Costs and Discount

Certain costs and discounts incurred with borrowings are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The remaining unamortized debt issuance costs recorded on the Senior Notes were $3.6 million and are reported as a reduction to the long-term debt balance as of June 30, 2023. The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $1.3 million and are recorded as other assets (current and long-term) on the condensed consolidated balance sheet as of June 30, 2023.

9. Income Taxes

The Company’s effective tax rate on pre-tax income was 38.9% and 22.1% for the three months ended June 30, 2023, and 2022, respectively, and 28.6% and 31.0% for the six months ended June 30, 2023, and 2022, respectively. The increase in the effective tax rate for the three months ended June 30, 2023, was primarily due to tax deduction limitations on executive compensation. The decrease in the effective tax rate for the six months ended June 30, 2023, was a result of increased deductibility of interest costs due to a tax election made by the Company in the third quarter of 2022 and the reduction of a valuation allowance in the first quarter of 2023 related to a state tax law change.

For the six months ended June 30, 2023, and 2022, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:


	June 30,
	2023		2022
Tax at federal statutory rate	21.0	%	21.0	%
State taxes, net	5.1		5.5
Valuation allowance	(1.4)		2.5
Permanent items	1.3		1.4
Deductibility limitations on excess compensation	3.4		0.7
Other	(0.8)		(0.1)
Effective income tax rate	28.6	%	31.0	%

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10. Earnings per Share

Basic and diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Shares excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive were 105,884 and 14,732 for the three months ended June 30, 2023, and 2022, respectively, and 132,594 and 40,874 for the six months ended June 30, 2023, and 2022, respectively.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(dollars in thousands)
Numerator:
Net income	$	6,523	$	6,151	$	17,396	$	12,153

Denominator:
Basic weighted-average common shares outstanding		11,427,404		11,257,733		11,411,162		11,256,600
Dilutive shares		449,164		464,011		477,057		462,236
Diluted weighted-average common shares outstanding		11,876,568		11,721,744		11,888,219		11,718,836

Basic earnings per share	$	0.57	$	0.55	$	1.52	$	1.08

Diluted earnings per share	$	0.55	$	0.52	$	1.46	$	1.04

11. Commitments and Contingencies

Commitments

During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems. The Company leases real property for its facilities under non-cancellable operating lease agreements. Land and facility leases expire at various dates between 2023 and 2029 and contain various provisions for rental adjustments and renewals. The leases typically require the Company to pay property taxes, insurance and normal maintenance costs. The Company’s financing leases expire at various dates between 2023 and 2028 and contain purchase options which the Company may exercise to keep the machinery in use.

Contingencies

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

Smart Packaging Solutions SA v. CPI Card Group Inc.

On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests and two of the patents have been invalidated in the IPR proceedings and two remain under review. The remaining proceedings in the patent office are scheduled to run through September 2023. Should any of the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously. However, no assurance can be given that this matter will be resolved favorably. Due to the stage of this

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matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of June 30, 2023.

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

Voluntary Disclosure Program

The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable.

12. Stock-Based Compensation

In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, consultants, and directors. On May 27, 2021, the Company’s stockholders approved an amendment and restate of the Omnibus Plan, to among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance, resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan.

Beginning in the first quarter of 2023, the Company’s employees that participate in the Company’s long-term incentive program will receive a quarterly grant comprising one-fourth of the annual equity-based incentive component of their total compensation. Executive awards will be awarded as a mix of restricted stock units and nonqualified stock options, and other employee awards will be comprised solely of restricted stock units. The number of shares awarded will be determined based on the grant-date fair value for nonqualified stock options and on a value tied to the monthly average closing price of the Company’s common stock for restricted stock units.

In June 2023, the Company implemented an additional long-term incentive program under the Omnibus Plan, independent of the quarterly awards described above, designed to retain and incentivize executive officers and certain key employees, excluding the Company’s President and Chief Executive Officer (“CEO”), comprised of restricted stock units. The first tranche was awarded in June 2023 and additional tranches will be awarded in August 2023 and November 2023, subject to continued employment on those dates. The awards vest ratably over a three-year period, subject to continued employment.

In June 2023, the Company also announced an award comprised of 25% nonqualified stock options and 75% restricted stock units to its CEO as an incentive to remain employed by the Company through February 28, 2024. The first one-third of the awards was granted in June 2023 with another one-third to be granted in August 2023 and the remainder in November 2023. All of these awards will vest ratably over a two-year period irrespective of employment status with expense related to these awards to be recognized by the Company through February 28, 2024. As part of the CEO’s incentive package, the requisite service and exercise periods for all of his outstanding awards granted prior to June 2023 were also modified with expense related to the modification being recognized in June 2023 through February 2024.

All equity awards are contingent and issued only upon approval by the compensation committee of the Company’s board of directors, or as otherwise permitted under the Omnibus Plan. The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation is measured at fair value and expensed on a straight-line basis over the requisite service period for each tranche of the award.

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During the six months ended June 30, 2023, the Company granted 49,929 options at a weighted average exercise price of $27.73. As of June 30, 2023, there were 823,108 options outstanding at a weighted average exercise price of $18.73.

During the six months ended June 30, 2023, the Company granted 219,381 restricted stock units at a weighted average grant date fair value of $26.50, and as of June 30, 2023, there were 274,641 outstanding restricted stock units at a weighted average grant date fair value of $26.07.

13. Segment Reporting

The Company has identified reportable segments that represent 10% or more of its net sales, EBITDA (as defined below) or total assets, or when the Company believes information about the segment would be useful to the readers of the financial statements. The Company’s chief operating decision maker is its Chief Executive Officer, who is charged with management of the Company and is responsible for the evaluation of operating performance and decision making about the allocation of resources to operating segments based on measures, such as net sales and EBITDA.

EBITDA is the primary measure used by the Company’s chief operating decision maker to evaluate segment operating performance. As the Company uses the term, “EBITDA” is defined as income before interest expense, income taxes, depreciation and amortization. The Company’s chief operating decision maker believes EBITDA is a meaningful measure and is useful as a supplement to GAAP measures as it represents a transparent view of the Company’s operating performance that is unaffected by fluctuations in property, equipment and leasehold improvement additions. The Company’s chief operating decision maker uses EBITDA to perform periodic reviews and comparison of operating trends and to identify strategies to improve the allocation of resources amongst segments.

As of June 30, 2023, the Company’s reportable segments were as follows:

● Debit and Credit;

● Prepaid Debit; and

● Other.

Debit and Credit Segment

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services for card-issuing financial institutions primarily in the United States. Products produced by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and Earth Elements^TM Eco-Focused Cards. The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Card Brands. The Company provides print-on-demand services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers. This segment also provides a variety of integrated card services, including card personalization and fulfillment services and instant issuance services. The Debit and Credit segment facilities and operations are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands.

Prepaid Debit Segment

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

Other

The Other segment includes corporate expenses.

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Performance Measures of Reportable Segments

Net sales and EBITDA of the Company’s reportable segments, as well as a reconciliation of total segment EBITDA to income from operations and net income for the three and six months ended June 30, 2023 and 2022, were as follows:


	Three Months Ended June 30, 2023
	Debit and Credit		Prepaid Debit		Other		Intersegment Eliminations		Total

	(dollars in thousands)
Net sales	$	93,194	$	21,821	$	—	$	(55)	$	114,960
Cost of sales		60,156		14,034		—		(55)		74,135
Gross profit		33,038

CPI Card Group Inc. [PMTS] Filings
10-Q	[2023-08-08]
10-Q	[2023-05-09]
10-K	[2023-03-08]
10-Q	[2022-11-03]
10-Q	[2022-08-08]
10-Q	[2022-05-05]
10-K	[2022-03-08]
10-Q	[2021-11-05]
10-Q	[2021-08-12]
10-Q	[2021-05-11]
10-K	[2021-02-25]
10-Q	[2020-11-03]
10-Q	[2020-08-05]
10-Q	[2020-05-06]
10-K	[2020-03-06]
10-Q	[2019-11-06]
10-Q	[2019-08-07]
10-Q	[2019-05-09]
10-K	[2019-03-06]
10-Q	[2018-11-07]
10-Q	[2018-08-09]
10-Q	[2018-05-09]
10-K	[2018-03-13]
10-Q	[2017-11-08]
10-Q	[2017-08-03]
10-Q	[2017-05-04]
10-K	[2017-03-02]
10-Q	[2016-11-10]
10-Q	[2016-08-11]
10-Q	[2016-05-12]
10-K	[2016-03-24]
10-Q	[2015-11-23]
S-1	[2015-08-07]