CPI Card Group Inc.

SEC Document
SEC Filing

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 September 30, 2024

☐

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 October 30, 2024: 11,159,418

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Table of Contents


		Page
Part I — Financial Information

Item 1 — Condensed Consolidated Financial Statements (Unaudited)		3

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3 — Quantitative and Qualitative Disclosures About Market Risk		29

Item 4 — Controls and Procedures		29

Part II — Other Information

Item 1 — Legal Proceedings		30

Item 1A — Risk Factors		30

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 3 — Defaults Upon Senior Securities		30

Item 4 — Mine Safety Disclosures		30

Item 5 — Other Information		31

Item 6 — Exhibits		31

Signatures		32

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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)


	September 30,		December 31,
	2024		2023
Assets
Current assets:
Cash and cash equivalents	$	14,650	$	12,413
Accounts receivable, net		79,583		73,724
Inventories, net		92,286		70,594
Prepaid expenses and other current assets		12,295		8,647
Total current assets		198,814		165,378
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net of accumulated depreciation of $72,651 and $66,436 respectively		64,073		63,053
Intangible assets, net of accumulated amortization of $54,533 and $51,763 respectively		11,352		14,122
Goodwill		47,150		47,150
Other assets		20,960		3,980
Total assets	$	342,349	$	293,683
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	21,538	$	12,802
Accrued expenses		52,107		35,803
Deferred revenue and customer deposits		1,466		840
Total current liabilities		75,111		49,445
Long-term debt		280,152		264,997
Deferred income taxes		5,057		7,139
Other long-term liabilities		24,820		24,038
Total liabilities		385,140		345,619
Commitments and contingencies (Note 12)
Series A Preferred Stock; $0.001 par value—100,000 shares authorized; 0 shares issued and outstanding at September 30, 2024 and December 31, 2023		—		—
Stockholders’ deficit:
Common stock; $0.001 par value—100,000,000 shares authorized; 11,159,418 and 11,446,155 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively		11		11
Capital deficiency		(105,827)		(102,223)
Accumulated earnings		63,025		50,276
Total stockholders’ deficit		(42,791)		(51,936)
Total liabilities and stockholders’ deficit	$	342,349	$	293,683

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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net sales:
Products	$	69,648	$	55,689	$	191,650	$	195,425
Services		55,103		50,174		163,855		146,250
Total net sales		124,751		105,863		355,505		341,675
Cost of sales:
Products (exclusive of depreciation and amortization shown below)		44,199		37,540		123,894		124,828
Services (exclusive of depreciation and amortization shown below)		32,927		29,574		94,599		89,192
Depreciation and amortization		2,927		2,597		8,408		7,584
Total cost of sales		80,053		69,711		226,901		221,604
Gross profit		44,698		36,152		128,604		120,071
Operating expenses:
Selling, general and administrative (exclusive of depreciation and amortization shown below)		25,674		21,783		77,942		64,734
Depreciation and amortization		1,226		1,408		3,810		4,286
Total operating expenses		26,900		23,191		81,752		69,020
Income from operations		17,798		12,961		46,852		51,051
Other expense, net:
Interest, net		(13,458)		(6,714)		(26,413)		(20,235)
Loss on debt extinguishment		(2,987)		(25)		(2,987)		(243)
Other expense, net		(534)		(28)		(677)		(2)
Total other expense, net		(16,979)		(6,767)		(30,077)		(20,480)
Income before income taxes		819		6,194		16,775		30,571
Income tax benefit (expense)		474		(2,337)		(4,026)		(9,318)
Net income	$	1,293	$	3,857	$	12,749	$	21,253

Basic and diluted earnings per share:
Basic earnings per share	$	0.12	$	0.34	$	1.14	$	1.86
Diluted earnings per share	$	0.11	$	0.33	$	1.08	$	1.79

Basic weighted-average shares outstanding		11,107,126		11,432,794		11,141,264		11,418,372
Diluted weighted-average shares outstanding		11,872,783		11,827,816		11,856,404		11,861,868

Comprehensive income:
Net income	$	1,293	$	3,857	$	12,749	$	21,253
Total comprehensive income	$	1,293	$	3,857	$	12,749	$	21,253

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
June 30, 2024	11,186,596	$	11	$	(106,300)	$	61,732	$	(44,557)
Shares issued under stock-based compensation plans	93,356		—		(1,309)		—		(1,309)
Stock-based compensation			—		1,782		—		1,782
Repurchase and retirement of common shares	(120,534)		—		—		—		—
Components of comprehensive income:
Net income			—		—		1,293		1,293
September 30, 2024	11,159,418	$	11	$	(105,827)	$	63,025	$	(42,791)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings		Total
December 31, 2023	11,446,155	$	11	$	(102,223)	$	50,276	$	(51,936)
Shares issued under stock-based compensation plans	186,547		—		(2,595)		—		(2,595)
Stock-based compensation			—		6,936		—		6,936
Repurchase and retirement of common shares	(473,284)		—		(7,945)		—		(7,945)
Components of comprehensive income:
Net income			—		—		12,749		12,749
September 30, 2024	11,159,418	$	11	$	(105,827)	$	63,025	$	(42,791)


	Common Stock			Capital		Accumulated
	Shares	Amount		deficiency		earnings		Total
June 30, 2023	11,430,245	$	11	$	(106,668)	$	43,687	$	(62,970)
Shares issued under stock-based compensation plans	23,304		—		(207)		—		(207)
Stock-based compensation	—		—		2,600		—		2,600
Components of comprehensive income:
Net income	—		—		—		3,857		3,857
September 30, 2023	11,453,549	$	11	$	(104,275)	$	47,544	$	(56,720)


	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	63,194		—		(327)		—		(327)
Stock-based compensation	—		—		4,431		—		4,431
Components of comprehensive income:
Net income	—		—		—		21,253		21,253
September 30, 2023	11,453,549	$	11	$	(104,275)	$	47,544	$	(56,720)

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)


	Nine Months Ended September 30,
	2024		2023
Operating activities
Net income	$	12,749	$	21,253
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense		9,448		8,970
Amortization expense		2,770		2,900
Stock-based compensation expense		6,936		4,431
Amortization of debt issuance costs		1,206		1,397
Loss on early extinguishment of debt		8,763		243
Deferred income taxes and other, net		(1,781)		956
Changes in operating assets and liabilities:
Accounts receivable, net		(5,878)		12,988
Inventories		(21,964)		(5,806)
Prepaid expenses and other assets		(19,343)		422
Income taxes, net		(602)		(1,616)
Accounts payable		8,326		(7,805)
Accrued expenses and other liabilities		15,396		(13,283)
Deferred revenue and customer deposits		626		(2,784)
Cash provided by operating activities		16,652		22,266
Investing activities
Capital expenditures for plant, equipment and leasehold improvements, net		(4,199)		(6,076)
Other		1		183
Cash used in investing activities		(4,198)		(5,893)
Financing activities
Principal payments on 2026 Senior Notes		(267,897)		(16,954)
Proceeds from 2029 Senior Notes		285,000		—
Net proceeds from ABL Revolver		—		3,000
Payments on finance lease obligations		(3,688)		(2,655)
Common stock repurchased		(8,678)		—
Debt issuance costs		(6,583)		—
Payment for debt early redemption premium		(5,776)		—
Taxes withheld and paid on stock-based compensation awards		(2,595)		(327)
Cash used in financing activities		(10,217)		(16,936)
Effect of exchange rates on cash		—		(1)
Net increase (decrease) in cash and cash equivalents		2,237		(564)
Cash and cash equivalents, beginning of period		12,413		11,037
Cash and cash equivalents, end of period	$	14,650	$	10,473
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for:
Interest	$	25,128	$	25,307
Income taxes paid	$	8,247	$	9,994
Income taxes refunded	$	(409)	$	(25)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	1,292	$	2,641
Financing leases	$	5,690	$	6,989
Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements	$	1,527	$	977

See accompanying notes to condensed consolidated financial statements

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CPI Card Group Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share amounts or as otherwise indicated)

(Unaudited)

1. Business Overview and Summary of Significant Accounting Policies

Business Overview

CPI Card Group Inc. (which, together with its subsidiary companies, is referred to herein as “CPI” or the “Company”) is a payments 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 (“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 to 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, 2023 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, 2023.

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.

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Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require enhanced segment disclosures. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2023. The application of ASU 2023-07 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In December 2023, the Financial Accounting Standards Board issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which will require a disaggregated rate reconciliation disclosure as well as additional information regarding taxes paid. Adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2024. The Company is evaluating the impact of adoption of this standard and does not anticipate that the application of ASU 2023-09 will have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

2. Net Sales

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


	Three Months Ended September 30, 2024
	Products		Services		Total
Debit and Credit	$	69,803	$	29,952	$	99,755
Prepaid Debit		—		25,173		25,173
Intersegment eliminations		(155)		(22)		(177)
Total	$	69,648	$	55,103	$	124,751

	Nine Months Ended September 30, 2024
	Products		Services		Total
Debit and Credit	$	192,635	$	90,713	$	283,348
Prepaid Debit		—		73,186		73,186
Intersegment eliminations		(985)		(44)		(1,029)
Total	$	191,650	$	163,855	$	355,505

	Three Months Ended September 30, 2023
	Products		Services		Total
Debit and Credit	$	55,934	$	27,846	$	83,780
Prepaid Debit		—		22,335		22,335
Intersegment eliminations		(245)		(7)		(252)
Total	$	55,689	$	50,174	$	105,863

	Nine Months Ended September 30, 2023
	Products		Services		Total
Debit and Credit	$	195,967	$	82,992	$	278,959
Prepaid Debit		—		63,286		63,286
Intersegment eliminations		(542)		(28)		(570)
Total	$	195,425	$	146,250	$	341,675

Products Net Sales

“Products” net sales are recognized when obligations under the terms of a contract with a customer are satisfied. In most instances, this occurs over time as cards are produced for specific customers and have no alternative use and the Company has an enforceable right to payment for work performed. For work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts. Items included in “Products” net sales are the design and production of Financial Payment Cards, including

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contact-EMV^®(1), 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.

(1)

Europay, Mastercard and Visa (“EMV^®”) is a global technical standard maintained by EMV Co, LLC. 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.

Services Net Sales

Net sales are recognized for “Services” as the services are performed. Items included in “Services” net sales include the personalization and fulfillment of Financial Payment Cards, providing tamper-evident secure packaging and fulfillment services to Prepaid Debit Card program managers, and software-as-a-service personalization of instant issuance debit cards. As applicable, for work performed but not completed and unbilled, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

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.

Costs to Obtain a Contract with a Customer

Costs to obtain a contract (“contract costs”) include only those costs incurred to obtain a contract that the Company would not have incurred if the contract had not been obtained. For contracts where the term is greater than one year, these costs are recorded as an asset and amortized consistent with the timing of the related revenue over the life of the contract. The current portion of the asset is included in “Prepaid expenses and other current assets” and the noncurrent portion is included in “Other assets” on the Company's condensed consolidated balance sheets. Contract costs incurred but unpaid are included in “Accrued expenses” on the Company's condensed consolidated balance sheets. Contract costs are expensed as incurred when the amortization period is one year or less.

3. Accounts Receivable

Accounts receivable consisted of the following:


		September 30,		December 31,
		2024		2023
Trade accounts receivable	$	71,670	$	69,245
Unbilled accounts receivable		8,157		4,725
		79,827		73,970
Less allowance for credit losses		(244)		(246)
	$	79,583	$	73,724

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4. Inventories

Inventories consisted of the following:


		September 30,		December 31,
		2024		2023
Raw materials	$	87,942	$	66,210
Finished goods		7,394		7,162
Inventory reserve		(3,050)		(2,778)
	$	92,286	$	70,594

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

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


		September 30,		December 31,
		2024		2023
Machinery and equipment	$	69,955	$	67,506
Machinery and equipment under financing leases		29,464		23,774
Furniture, fixtures and computer equipment		632		107
Leasehold improvements		18,586		16,335
Construction in progress		2,092		1,778
Operating lease right-of-use assets		15,995		19,989
		136,724		129,489
Less accumulated depreciation and amortization		(72,651)		(66,436)
	$	64,073	$	63,053

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.

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


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at September 30, 2024
	September 30,		September 30,		(Using Fair Value Hierarchy)
	2024		2024		Level 1		Level 2		Level 3
Liabilities:
2029 Senior Notes	$	285,000	$	300,518	$	—	$	300,518	$	—


	Carrying		Estimated
	Value as of		Fair Value as of		Fair Value Measurement at December 31, 2023
	December 31,		December 31,		(Using Fair Value Hierarchy)
	2023		2023		Level 1		Level 2		Level 3
Liabilities:
2026 Senior Notes	$	267,897	$	261,834	$	—	$	261,834	$	—

The aggregate fair value of the Company’s 2029 Senior Notes and 2026 Senior Notes (each defined in Note 8, “Long-Term Debt”) was based on quoted prices for identical or similar liabilities in markets that are not active and, as a result, they are classified as Level 2 inputs.

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

7. Accrued Expenses

Accrued expenses consisted of the following:


	September 30,		December 31,
	2024		2023
Accrued payroll and related employee expenses	$	8,993	$	11,431
Accrued employee performance-based incentive compensation		4,590		667
Employer payroll taxes		1,591		298
Accrued rebates		3,613		2,919
Capitalized contract costs payable		10,000		—
Accrued interest		6,402		6,830
Current operating and financing lease liabilities		8,303		7,318
Accrued share repurchases		—		733
Other		8,615		5,607
Total accrued expenses	$	52,107	$	35,803

Other accrued expenses as of September 30, 2024, and December 31, 2023, consisted primarily of executive retention and severance, miscellaneous accruals for invoices not yet received, and self-insurance claims incurred but yet to be recorded.

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8. Long-Term Debt

As of September 30, 2024, and December 31, 2023, long-term debt consisted of the following:


	September 30,		December 31,
	2024		2023
2029 Senior Notes	$	285,000	$	—
2026 Senior Notes		—		267,897
Unamortized deferred financing costs		(4,848)		(2,900)
Total long-term debt		280,152		264,997
Less current maturities		—		—
Long-term debt, net of current maturities	$	280,152	$	264,997

2029 Senior Notes

On July 11, 2024 (the “Closing Date”), the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “2029 Senior Notes”) and related guarantees at an issue price of 100%. The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S. persons in compliance with Regulation S under the Securities Act.

Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $267.9 million of 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”) as of the Closing Date, and to pay related fees, an early redemption premium of 2.156%, and other expenses. The early redemption premium paid is recorded in “Interest, net” on the condensed consolidated statement of operations and comprehensive income for the three and nine months ended September 30, 2024.

The 2029 Senior Notes mature on July 15, 2029. Interest is payable on the 2029 Senior Notes on January 15 and July 15 of each year, beginning on January 15, 2025. The 2029 Senior Notes are guaranteed by the Company and its domestic subsidiaries (other than the Issuer), and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions. The Company may be required to make an offer to repurchase the 2029 Senior Notes, upon the occurrence of certain events including a change of control or certain asset sales. The 2029 Senior Notes also require the Company to comply with certain covenants limiting the ability of the Company and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of our restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates.

2029 ABL Revolver

On the Closing Date, the Company and CPI CG Inc. as borrower (the “Borrower”), entered into a credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “2029 ABL Revolver”) of up to $75.0 million (the “Maximum Revolver Amount”). The 2029 ABL Revolver is guaranteed by the Company and its subsidiaries (other than certain excluded subsidiaries), and is secured by substantially all of the assets of the Company, the Borrower and the subsidiary guarantors, subject to customary exceptions.

The 2029 ABL Revolver consists of revolving loans, letters of credit and swing line loans provided by lenders, with a sublimit on letters of credit outstanding at any time of $10.0 million. The 2029 ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the 2029 ABL Revolver commitment by an aggregate amount not to exceed $25.0 million, subject to certain conditions. The 2029 ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the 2029 Senior Notes.

As of the Closing Date, the Borrower had $4.0 million of outstanding borrowings under a prior Credit Agreement with Wells Fargo Bank, N.A. entered into in March 2021 (the “2026 ABL Revolver”). The Company used

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initial borrowings under the 2029 ABL Revolver, together with cash on hand and proceeds under the notes, to repay in full and terminate the 2026 ABL Revolver and to pay related fees and expenses, and will use future borrowings for general corporate purposes.

Borrowings under the 2029 ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York plus 1.50% to 1.75%, (subject, in each case, to a credit spread adjustment of 0.10%) based on the average daily borrowing capacity under the 2029 ABL Revolver over the most recently completed month. The unused portion of the 2029 ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the 2029 ABL Revolver over the immediately preceding month.

The 2029 ABL Revolver includes limitations on the Borrower’s ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $7.5 million and 10% of the Maximum Revolver Amount. The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments (the “Borrowing Base”) and b) the Maximum Revolver Amount. The Borrowing Base is further reduced by credit line reserves and letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver. Additionally, commencing with the month immediately following a date on which borrowing capacity is below the greater of $7.5 million and 10% of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $7.5 million and 10% of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver.

The 2029 ABL Revolver contains covenants limiting the ability of the Company, the Borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional debt or issue disqualified stock or certain preferred stock; create or incur liens; pay dividends, redeem stock or make other distributions; make certain investments; create restrictions on the ability of the Borrower and its restricted subsidiaries to pay dividends to the Company or make other intercompany transfers; transfer or sell assets; merge or consolidate; and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications as set forth in the respective agreements.

Deferred Financing Costs

Certain costs 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. As of September 30, 2024, the remaining unamortized debt issuance costs recorded on the 2029 Senior Notes were $4.8 million and are reported as a reduction to the long-term debt balance. The remaining unamortized debt issuance costs on the 2029 ABL Revolver were $1.5 million and are recorded as other assets (current and long-term) on the consolidated balance sheet as of September 30, 2024.

During the three months ended September 30, 2024, the Company recorded a $3.0 million loss on debt extinguishment relating to the unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the termination of the 2026 ABL Revolver.

9. Income Taxes

The Company’s effective tax rates on pre-tax income were (57.9)% and 37.7% for the three months ended September 30, 2024 and 2023, respectively, and 24.0% and 30.5% for the nine months ended September 30, 2024 and 2023, respectively. The benefit recognized for the three months ended September 30, 2024 and the decrease in the effective tax rate for the nine months ended September 30, 2024 related to increased deductibility of stock compensation realized upon certain stock option exercises and restricted stock unit vesting. The effective tax rate for the three and nine months ended September 30, 2023 was impacted by the limitation of executive compensation deductibility related to the former CEO’s retention agreement.

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For the nine months ended September 30, 2024 and 2023, the effective tax rate differs from the U.S. federal statutory income tax rate as follows:


	September 30,
	2024		2023
Tax at federal statutory rate	21.0	%	21.0	%
State taxes, net	5.6		5.3
Valuation allowance	—		(1.1)
Permanent items ⁽¹⁾	2.1		6.0
Other ⁽²⁾	(4.7)		(0.7)
Effective income tax rate	24.0	%	30.5	%

(1)

Includes the deductibility limitations on excess compensation.

(2)

The 2024 amount primarily relates to increased deductibility of stock compensation realized upon certain stock option exercises and restricted stock unit vesting.

10. Stockholders’ Deficit

Share Repurchases

On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $20.0 million of the Company's common stock, par value $0.001 per share. This authorization expires on December 31, 2024.

During the nine months ended September 30, 2024, the Company repurchased 473,284 shares of its common stock at an average price of $18.16 per share, excluding commissions, or $8.6 million in aggregate, on a trade date basis. This amount includes 364,848 shares purchased from a stockholder that was part of our majority stockholder group at an average price of $18.09 per share, in accordance with the Stock Repurchase Agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”). As of September 30, 2024, the Company had an authorized amount of $11.2 million remaining under the share repurchase plan.

Secondary Offering

On September 30, 2024, the majority stockholder group members Tricor Pacific Capital Partners (Fund IV), LP and Tricor Pacific Capital Partners (Fund IV) US, LP entered into an underwriting agreement for the sale of an aggregate of 1,380,000 shares of CPI common stock in a public offering. In conjunction with the Company’s initial public offering in October 2015, the Company entered into a registration rights agreement with its majority stockholder group whereby the Company is required to pay expenses incurred in an offering of shares of CPI common stock by the Company’s majority stockholder group other than underwriters’ fees, discounts, commissions, and certain transfer taxes.

The offering contemplated in the underwriting agreement closed on October 2, 2024, and total expenses to be paid by the Company on behalf of the majority stockholder group pursuant to the registration rights agreement for the offering were approximately $0.5 million. The Company did not sell any securities in the offering and did not receive any proceeds from the sale of the shares offered by the majority stockholder group.

11. 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 5,728 and 160,384 for the three months ended September 30, 2024 and 2023, respectively, and 24,298 and 210,457 for the nine months ended September 30, 2024 and 2023, respectively.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Numerator:
Net income	$	1,293	$	3,857	$	12,749	$	21,253

Denominator:
Basic weighted-average common shares outstanding		11,107,126		11,432,794		11,141,264		11,418,372
Dilutive shares		765,657		395,022		715,140		443,496
Diluted weighted-average common shares outstanding		11,872,783		11,827,816		11,856,404		11,861,868

Basic earnings per share	$	0.12	$	0.34	$	1.14	$	1.86

Diluted earnings per share	$	0.11	$	0.33	$	1.08	$	1.79

12. Commitments and Contingencies

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. The Company is 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.

13. Stock-Based Compensation

In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (as amended and supplemented, the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors, and directors. Effective January 30, 2024, the Company’s stockholders approved an amendment to the Omnibus Plan to increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares, resulting in a total of 3,200,000 shares issuable under the Omnibus Plan. As of September 30, 2024, there were 935,337 shares of Common Stock available for grant under the Omnibus Plan.

In June 2023, the Company announced an award comprised of 25% nonqualified stock options and 75% restricted stock units to its CEO at the time as an incentive to remain employed by the Company through February 28,

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2024. The first one-third of the awards was granted in June 2023, the second one-third was granted in August 2023, and the remainder was granted 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 his awards granted in 2023 prior to June 2023 were also modified with expense related to the modification being recognized in June 2023 through February 2024.

During 2024, executives receive a quarterly restricted stock unit grant comprising one-fourth of the annual equity-based incentive component of their total compensation. The number of shares awarded will be determined based on a value tied to the monthly average closing price of the Company’s common stock.

As of September 30, 2024, there were 795,128 options outstanding at a weighted average exercise price of $20.62. No options were granted during the nine months ended September 30, 2024. Options have 7-year terms and are issued with exercise prices equal to the fair market value of the Company’s common stock on the grant date.

During the nine months ended September 30, 2024, the Company granted 157,966 restricted stock units at a weighted average grant date fair value of $22.17, and as of September 30, 2024, there were 635,312 outstanding restricted stock units at a weighted average grant date fair value of $20.82.

In January 2024, the Company granted 60,000 performance stock units (PSU) in connection with the appointment of its CEO, with a grant date fair value of $0.9 million using a Monte Carlo simulation model. The PSU award will vest, subject to continuous employment, in equal one-third increments upon the attainment of the rolling weighted average closing price of the Company’s common stock equaling or exceeding each of $35.00, $50.00, and $65.00, in each case, for at least 90 consecutive trading days during the five-year performance period commencing on the grant date.

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 required to be measured at fair value and expensed over the requisite service period, generally defined as the applicable vesting period. The Company accounts for forfeitures as they occur and reverses previously recognized expense for the unvested portion of the forfeited shares. Upon the exercise of stock options, shares of common stock are issued from authorized common shares.

14. Segment Reporting

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

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

As of September 30, 2024, the Company’s reportable segments were as follows:

● Debit and Credit

● Prepaid Debit

● Other

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Debit and Credit Segment

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services, including digital 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 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 providers 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.

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 nine months ended September 30, 2024 and 2023, were as follows:


	Three Months Ended September 30, 2024
	Debit and Credit		Prepaid Debit		Other		Intersegment Eliminations		Total
Net sales	$	99,755	$	25,173	$	—	$	(177)	$	124,751
Cost of sales		63,624		16,606		—		(177)		80,053
Gross profit		36,131		8,567		—		—		44,698
Operating expenses		9,096