CPI Card Group Inc 10-Q for FY2024 Q3
CPI Card Group Inc. (PMTS)
About this 10-Q
CPI Card Group Inc filed this 10-Q on November 5, 2024, covering the quarter ended September 30, 2024 (FY2024 Q3).
Headline figures
Quarter ended September 30, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $124.75M
- up 17.8% from $105.86M a year earlier
- Net income
- $1.29M
- down 66.5% from net income of $3.86M a year earlier
- Diluted EPS
- $0.11
- down 66.7% from $0.33 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 |
For the Quarterly Period Ended
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission File Number:
(Exact name of the registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | | (I.R.S. employer identification no.) |
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(Address of principal executive offices) | | (Zip Code) |
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(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 |
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.
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).
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.
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Large accelerated filer | ☐ | ☒ | |
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Non-accelerated filer | ☐ | Smaller reporting company | |
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| | 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
Number of shares of Common Stock, $0.001 par value, outstanding as of October 30, 2024:
Table of Contents
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Item 1 — Condensed Consolidated Financial Statements (Unaudited) | | 3 | |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 19 | |
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Item 3 — Quantitative and Qualitative Disclosures About Market Risk | | 29 | |
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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds | | 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)
| September 30, | | December 31, | ||
| 2024 | | 2023 | ||
Assets | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | | | $ | |
Accounts receivable, net | | | | | |
Inventories, net | | | | | |
Prepaid expenses and other current assets | | | | | |
Total current assets | | | | | |
Plant, equipment, leasehold improvements and operating lease right-of-use assets, net of accumulated depreciation of $ | | | | | |
Intangible assets, net of accumulated amortization of $ | | | | | |
Goodwill | | | | | |
Other assets | | | | | |
Total assets | $ | | | $ | |
Liabilities and stockholders’ deficit | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | | | $ | |
Accrued expenses | | | | | |
Deferred revenue and customer deposits | | | | | |
Total current liabilities | | | | | |
Long-term debt | | | | | |
Deferred income taxes | | | | | |
Other long-term liabilities | | | | | |
Total liabilities | | | | | |
Commitments and contingencies (Note 12) | | | | | |
Series A Preferred Stock; $ | | | | ||
Stockholders’ deficit: | | | | | |
Common stock; $ | | | | | |
Capital deficiency | | ( | | | ( |
Accumulated earnings | | | | | |
Total stockholders’ deficit | | ( | | | ( |
Total liabilities and stockholders’ deficit | $ | | | $ | |
See accompanying notes to condensed consolidated financial statements
3
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 | $ | | | $ | | | $ | | | $ | |
Services | | | | | | | | | | | |
Total net sales | | | | | | | | | | | |
Cost of sales: | | | | | | | | | | | |
Products (exclusive of depreciation and amortization shown below) | | | | | | | | | | | |
Services (exclusive of depreciation and amortization shown below) | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | |
Total cost of sales | | | | | | | | | | | |
Gross profit | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | |
Selling, general and administrative (exclusive of depreciation and amortization shown below) | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | |
Total operating expenses | | | | | | | | | | | |
Income from operations | | | | | | | | | | | |
Other expense, net: | | | | | | | | | | | |
Interest, net | | ( | | | ( | | | ( | | | ( |
Loss on debt extinguishment | | ( | | | ( | | | ( | | | ( |
Other expense, net | | ( | | | ( | | | ( | | | ( |
Total other expense, net | | ( | | | ( | | | ( | | | ( |
Income before income taxes | | | | | | | | | | | |
Income tax benefit (expense) | | | | | ( | | | ( | | | ( |
Net income | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | |
Basic and diluted earnings per share: | | | | | | | | | | | |
Basic earnings per share | $ | | | $ | | | $ | | | $ | |
Diluted earnings per share | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | |
Basic weighted-average shares outstanding | | | | | | | | | | | |
Diluted weighted-average shares outstanding | | | | | | | | | | | |
| | | | | | | | | | | |
Comprehensive income: | | | | | | | | | | | |
Net income | $ | | | $ | | | $ | | | $ | |
Total comprehensive income | $ | | | $ | | | $ | | | $ | |
See accompanying notes to condensed consolidated financial statements
4
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 | | | $ | | | $ | ( | | $ | | | $ | ( |
Shares issued under stock-based compensation plans | | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | | | — | | | | | | — | | | |
Repurchase and retirement of common shares | ( | | | — | | | — | | | — | | | — |
Components of comprehensive income: | | | | | | | | | | | | | |
Net income | | | | — | | | — | | | | | | |
September 30, 2024 | | | $ | | | $ | ( | | $ | | | $ | ( |
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| | | | | | | | | | | | | |
| Common Stock | | Capital | | Accumulated | | | ||||||
| Shares | | Amount | | deficiency | | earnings | | Total | ||||
December 31, 2023 | | | $ | | | $ | ( | | $ | | | $ | ( |
Shares issued under stock-based compensation plans | | | | — | | | ( | | | — | | | ( |
Stock-based compensation | | | | — | | | | | | — | | | |
Repurchase and retirement of common shares | ( | | | — | | | ( | | | — | | | ( |
Components of comprehensive income: | | | | | | | | | | | | | |
Net income | | | | — | | | — | | | | | | |
September 30, 2024 | | | $ | | | $ | ( | | $ | | | $ | ( |
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| Common Stock | | Capital | | Accumulated | | | ||||||
| Shares | | Amount | | deficiency | | earnings | | Total | ||||
June 30, 2023 | | | $ | | | $ | ( | | $ | | | $ | ( |
Shares issued under stock-based compensation plans | | | | — | | | ( | | | — | | | ( |
Stock-based compensation | — | | | — | | | | | | — | | | |
Components of comprehensive income: | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | | | | |
September 30, 2023 | | | $ | | | $ | ( | | $ | | | $ | ( |
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| Common Stock | | Capital | | Accumulated | | | ||||||
| Shares | | Amount | | deficiency | | earnings | | Total | ||||
December 31, 2022 | | | $ | | | $ | ( | | $ | | | $ | ( |
Shares issued under stock-based compensation plans | | | | — | | | ( | | | — | | | ( |
Stock-based compensation | — | | | — | | | | | | — | | | |
Components of comprehensive income: | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | | | | |
September 30, 2023 | | | $ | | | $ | ( | | $ | | | $ | ( |
See accompanying notes to condensed consolidated financial statements
5
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 | $ | | | $ | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation expense | | | | | |
Amortization expense | | | | | |
Stock-based compensation expense | | | | | |
Amortization of debt issuance costs | | | | | |
Loss on early extinguishment of debt | | | | | |
Deferred income taxes and other, net | | ( | | | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable, net | | ( | | | |
Inventories | | ( | | | ( |
Prepaid expenses and other assets | | ( | | | |
Income taxes, net | | ( | | | ( |
Accounts payable | | | | | ( |
Accrued expenses and other liabilities | | | | | ( |
Deferred revenue and customer deposits | | | | | ( |
Cash provided by operating activities | | | | | |
Investing activities | | | | | |
Capital expenditures for plant, equipment and leasehold improvements, net | | ( | | | ( |
Other | | | | | |
Cash used in investing activities | | ( | | | ( |
Financing activities | | | | | |
Principal payments on 2026 Senior Notes | | ( | | | ( |
Proceeds from 2029 Senior Notes | | | | | — |
Net proceeds from ABL Revolver | | — | | | |
Payments on finance lease obligations | | ( | | | ( |
Common stock repurchased | | ( | | | — |
Debt issuance costs | | ( | | | — |
Payment for debt early redemption premium | | ( | | | — |
Taxes withheld and paid on stock-based compensation awards | | ( | | | ( |
Cash used in financing activities | | ( | | | ( |
Effect of exchange rates on cash | | — | | | ( |
Net increase (decrease) in cash and cash equivalents | | | | | ( |
Cash and cash equivalents, beginning of period | | | | | |
Cash and cash equivalents, end of period | $ | | | $ | |
Supplemental disclosures of cash flow information | | | | | |
Cash paid (refunded) during the period for: | | | | | |
Interest | $ | | | $ | |
Income taxes paid | $ | | | $ | |
Income taxes refunded | $ | ( | | $ | ( |
Right-of-use assets obtained in exchange for lease obligations: | | | | | |
Operating leases | $ | | | $ | |
Financing leases | $ | | | $ | |
Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements | $ | | | $ | |
See accompanying notes to condensed consolidated financial statements
6
CPI Card Group Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share amounts or as otherwise indicated)
(Unaudited)
1. Business Overview and Summary of Significant Accounting Policies
Business Overview
CPI Card Group Inc. (which, together with its 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 | $ | | | $ | | | $ | |
Prepaid Debit | | — | | | | | | |
Intersegment eliminations | | ( | | | ( | |
| ( |
Total | $ | | | $ | | | $ | |
| | | | | | | | |
| Nine Months Ended September 30, 2024 | |||||||
| Products | | Services | | Total | |||
Debit and Credit | $ | | | $ | | | $ | |
Prepaid Debit | | — | | | | | | |
Intersegment eliminations | | ( | | | ( | |
| ( |
Total | $ | | | $ | | | $ | |
| | | | | | | | |
| Three Months Ended September 30, 2023 | |||||||
| Products | | Services | | Total | |||
Debit and Credit | $ | | | $ | | | $ | |
Prepaid Debit | | — | | | | | | |
Intersegment eliminations | | ( | | | ( | |
| ( |
Total | $ | | | $ | | | $ | |
| | | | | | | | |
| Nine Months Ended September 30, 2023 | |||||||
| Products | | Services | | Total | |||
Debit and Credit | $ | | | $ | | | $ | |
Prepaid Debit | | — | | | | | | |
Intersegment eliminations | | ( | | | ( | |
| ( |
Total | $ | | | $ | | | $ | |
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 EMV Co, 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 | $ | |
| $ | |
Unbilled accounts receivable | | |
| | |
| | |
| | |
Less allowance for credit losses | | ( | | | ( |
| $ | | | $ | |
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4. Inventories
Inventories consisted of the following:
| | September 30, | | | December 31, |
| | 2024 | | | 2023 |
Raw materials | $ | |
| $ | |
Finished goods | | |
| | |
Inventory reserve | | ( | | | ( |
| $ | |
| $ | |
5
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 | $ | |
| $ | |
Machinery and equipment under financing leases | | | | | |
Furniture, fixtures and computer equipment | | |
| | |
Leasehold improvements | | |
| | |
Construction in progress | | |
| | |
Operating lease right-of-use assets | | | | | |
| | | | | |
Less accumulated depreciation and amortization | | ( |
| | ( |
| $ | |
| $ | |
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 | $ | | | $ | | | $ | — | | $ | | | $ | — |
| 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 | $ | |
| $ | | | $ | — |
| $ | | | $ | — |
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 | $ | |
| $ | |
Accrued employee performance-based incentive compensation | | |
| | |
Employer payroll taxes | | |
| | |
Accrued rebates | | | | | |
Capitalized contract costs payable | | | | | — |
Accrued interest | | | | | |
Current operating and financing lease liabilities | | | | | |
Accrued share repurchases | | — | | | |
Other | | | | | |
Total accrued expenses | $ | | | $ | |
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 | | $ | | | $ | — |
2026 Senior Notes | | | — | | | |
Unamortized deferred financing costs | |
| ( | |
| ( |
Total long-term debt | | | | | | |
Less current maturities | | | — | | | — |
Long-term debt, net of current maturities | | $ | | | $ | |
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 $
Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $
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 $
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 $
As of the Closing Date, the Borrower had $
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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 as administered by the Federal Reserve Bank of New York plus
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 $
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 $
During the three months ended September 30, 2024, the Company recorded a $
9. Income Taxes
The Company’s effective tax rates on pre-tax income were (
13
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 | | % | | | % |
State taxes, net | | | | | |
Valuation allowance | — | | | ( | |
Permanent items (1) | | | | | |
Other (2) | ( | | | ( | |
Effective income tax rate | | % | | | % |
| (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 $
During the nine months ended September 30, 2024, the Company repurchased
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
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 $
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
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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 | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | |
Denominator: | | | | | | | | | | | |
Basic weighted-average common shares outstanding |
| | |
| | |
| | |
| |
Dilutive shares | | | | | | | | | | | |
Diluted weighted-average common shares outstanding | | | | | | | | | | | |
| | | | | | | | | | | |
Basic earnings per share | $ | | | $ | | $ | | | $ | ||
| | | | | | | | | | | |
Diluted earnings per share | $ | | | $ | | $ | | | $ | ||
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
In June 2023, the Company announced an award comprised of
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2024. The first -third of the awards was granted in June 2023, the second -third was granted in August 2023, and the remainder was granted in November 2023. All of these awards will vest ratably over a
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
During the nine months ended September 30, 2024, the Company granted
In January 2024, the Company granted
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 | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Cost of sales | | | | | | | | — | | | ( | | | |
Gross profit | | | | | | | | — | | | — | | | |
Operating expenses | | | | | | | | | | | — | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
EBITDA by segment: | | | | | | | | | | | | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
Depreciation and amortization | | | | | | | | | | | — | | | |
Other income (expense) | | | | | ( | | | ( | | | — | | | ( |
EBITDA | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
17
| Nine Months Ended September 30, 2024 | |||||||||||||
| Debit and Credit | | Prepaid Debit | | Other | | Intersegment Eliminations | | Total | |||||
Net sales | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Cost of sales | | | | | | | | — | | | ( | | | |
Gross profit | | | | | | | | — | | | — | | | |
Operating expenses | | | | | | | | | | | — | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
EBITDA by segment: | | | | | | | | | | | | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
Depreciation and amortization | | | | | | | | | | | — | | | |
Other income (expense) | | ( | | | ( | | | ( | | | — | | | ( |
EBITDA | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 | |||||||||||||
| Debit and Credit | | Prepaid Debit | | Other | | Intersegment Eliminations | | Total | |||||
Net sales | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Cost of sales | | | | | | | | — | | | ( | | | |
Gross profit | | | | | | | | — | | | — | | | |
Operating expenses | | | | | | | | | | | — | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
EBITDA by segment: | | | | | | | | | | | | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
Depreciation and amortization | | | | | | | | | | | — | | | |
Other income (expense) | | ( | | | ( | | | ( | | | — | | | ( |
EBITDA | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2023 | |||||||||||||
| Debit and Credit | | Prepaid Debit | | Other | | Intersegment Eliminations | | Total | |||||
Net sales | $ | | | $ | | | $ | — | | $ | ( | | $ | |
Cost of sales | | | | | | | | — | | | ( | | | |
Gross profit | | | | | | | | — | | | — | | | |
Operating expenses | | | | | | | | | | | — | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| | | | | | | | | | | | | | |
EBITDA by segment: | | | | | | | | | | | | | | |
Income (loss) from operations | $ | | | $ | | | $ | ( | | $ | — | | $ | |
Depreciation and amortization | | | | | | | | | | | — | | | |
Other income (expense) | | ( | | | ( | | | ( | | | — | | | ( |
EBITDA | $ | | | $ | | | $ | ( | | $ | — | | $ | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Net income | $ | | | $ | | | $ | | | $ | |
Interest, net | | | | | | | | | | | |
Income tax expense |
| ( | |
| | |
| | |
| |
Depreciation and amortization |
| | |
| | |
| | |
| |
EBITDA | $ | | | $ | | | $ | | | $ | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
References to the “Company,” “our,” “us” or “we” refer to CPI Card Group Inc. and its subsidiaries. For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024. This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission (“SEC”).
Cautionary Statement Regarding Forward-Looking Information
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “affirm,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “target,” “objective,” “guides,” “seek,” “focus,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature. These forward-looking statements, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available. Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated.
These risks and uncertainties include, but are not limited to: a deterioration in general economic conditions, including inflationary conditions and resulting in reduced consumer confidence and business spending, and a decline in consumer credit worthiness impacting demand for our products; the unpredictability of our operating results, including an inability to anticipate changes in customer inventory management practices and its impact on our business; a disruption or other failure in our supply chain, including as a result of foreign conflicts and with respect to single source suppliers, or the failure or inability of suppliers to comply with our code of conduct or contractual requirements, or political unrest in countries in which our suppliers operate, or inflationary pressures, resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations; our failure to retain our existing customers or identify and attract new customers; our inability to recruit, retain and develop qualified personnel, including key personnel, and implement effective succession processes; adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions; system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate computing infrastructure on which we rely; our inability to develop, introduce and commercialize new products and services; the usage, or lack thereof, of artificial intelligence technologies; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our indebtedness and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies; our status as an accelerated filer and complying with the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder; our failure to maintain effective internal control over financial reporting; disruptions in production at one or more of our facilities; problems in production quality, materials and process and costs relating to product defects and any related product liability and/or warranty claims; environmental, social and governance (“ESG”) preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements; the effects of climate change, negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks; damage to our reputation or brand image; disruptions in production due to weather conditions, climate change, political instability or social unrest; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; defects in our software and computing systems; our limited ability to raise capital; costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses or unclaimed property, as well as potential new U.S. tax legislation increasing the corporate income tax rate and challenges to our income tax positions; our inability to successfully execute on our divestitures or acquisitions; our inability to realize the full value of our long-lived assets; our inability to renew licenses with key technology licensors; the highly competitive, saturated and consolidated nature of our marketplace; costs and potential liabilities associated
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with compliance or failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner; our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards; the effects of restrictions, delays or interruptions in our ability to source raw materials and components used in our products from foreign countries; the effects on the global economy of ongoing foreign conflicts; our failure to comply with environmental, health and safety laws and regulations that apply to our products and the raw materials we use in our production processes; risks associated with our significant stockholder group’s ownership of our stock; potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our significant stockholder group; the influence of securities analysts over the trading market for and price of our common stock; failure to meet the continued listing standards of the Nasdaq Global Market; the impact of stockholder activism or securities litigation on the trading price and volatility of our common stock; our inability to fully execute on our share repurchase program strategy; certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our significant stockholder group to change the composition of our board of directors; our ability to comply with a wide variety of complex laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings; and other risks that are described in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 7, 2024, in Part II, Item 1A – Risk Factors of this Quarterly Report on Form 10-Q and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”).
We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
Overview
We are a payments technology company and leading provider of comprehensive Financial Payment Card solutions in the United States. We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) issued on the networks of the “Payment Card Brands” (Visa, Mastercard®, American Express® and Discover®). We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account. We also offer an instant card issuance solution, which provides customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders. We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience.
We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below). Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“fintechs”), as well as independent community banks, credit unions and Group Service Providers. We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services.
We serve our 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. Many of our customers require us to comply with PCI Security Standards Council requirements that relate to the provision of our products and services. Our network of high-security production facilities allows us to optimize our solutions offerings and to serve the needs of our diverse customer base.
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Driven by a combination of our strong relationships, quality, technology, innovation, and supply-chain management, we believe we have strong positions in the following markets:
| ● | the U.S. prepaid debit market, including the largest U.S. Prepaid Debit Card program managers; |
| ● | the U.S. small-to mid-sized financial institutions market, which includes independent community banks and credit unions; |
| ● | the U.S. large issuer market, serving some of the largest U.S. debit and credit card issuers; and |
| ● | the U.S. fintech market, where we produce and personalize Financial Payment Cards for financial technology companies. |
Our business consists of the following reportable segments:
| ● | Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services, including digital services, to card-issuing financial institutions primarily in the United States; |
| ● | Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States; and |
| ● | “Other,” which includes corporate expenses. |
Trends and Uncertainties That May Affect our Financial Performance
We experienced reduced demand from some of our customers for certain products and services during 2023 and the nine months ended September 30, 2024, which impacted our financial and operating results. We believe the reduced demand was the result of economic and supply chain-related concerns, whereby certain customers increased their inventory of our products during 2022 and then focused on reducing their inventory levels in subsequent periods and may continue to further reduce their inventory levels before returning to normalized purchasing behavior.
Additionally, liquidity concerns in the banking and financial services industry led to takeover of some banking and financial institutions by industry regulators during this period, which also affected demand.
Although we believe the environment is improving and we experienced increased card volume sales and results in our Debit and Credit segment during the third quarter of 2024, we may experience reduced demand if any of the foregoing events continue or reoccur in the future.
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Results of Operations
The following table presents the components of our condensed consolidated statements of operations and comprehensive income for each of the periods presented:
| Three Months Ended | | | | | | | | Nine Months Ended | | | | | | | ||||||||
| September 30, | | | | | | | | September 30, | | | | | | | ||||||||
| 2024 |
| 2023 | | $ Change | | % Change | | 2024 |
| 2023 | | $ Change | | % Change | ||||||||
| (dollars in thousands) | | |||||||||||||||||||||
Net sales: (1) | | | | | | | | | | | | | | | | | | | | | | | |
Products | $ | 69,648 | | $ | 55,689 | | $ | 13,959 | | 25.1 | % | | $ | 191,650 | | $ | 195,425 | | $ | (3,775) | | (1.9) | % |
Services | | 55,103 | | | 50,174 | | | 4,929 | | 9.8 | % | | | 163,855 | | | 146,250 | | | 17,605 | | 12.0 | % |
Total net sales | | 124,751 | | | 105,863 | | | 18,888 | | 17.8 | % | | | 355,505 | | | 341,675 | | | 13,830 | | 4.0 | % |
Cost of sales (1) | | 80,053 | | | 69,711 | | | 10,342 | | 14.8 | % | | | 226,901 | | | 221,604 | | | 5,297 | | 2.4 | % |
Gross profit | | 44,698 | | | 36,152 | | | 8,546 | | 23.6 | % | | | 128,604 | | | 120,071 | | | 8,533 | | 7.1 | % |
Operating expenses | | 26,900 | | | 23,191 | | | 3,709 | | 16.0 | % | | | 81,752 | | | 69,020 | | | 12,732 | | 18.4 | % |
Income from operations | | 17,798 | | | 12,961 | | | 4,837 | | 37.3 | % | | | 46,852 | | | 51,051 | | | (4,199) | | (8.2) | % |
Other expense, net: | | | | | | | | | | | | | | | | | | | | | | | |
Interest, net | | (13,458) | | | (6,714) | | | (6,744) | | 100.4 | % | | | (26,413) | | | (20,235) | | | (6,178) | | 30.5 | % |
Loss on debt extinguishment | | (2,987) | | | (25) | | | (2,962) | | * | % | | | (2,987) | | | (243) | | | (2,744) | | * | % |
Other expense, net | | (534) | | | (28) | | | (506) | | * | % | | | (677) | | | (2) | | | (675) | | * | % |
Income before taxes | | 819 | | | 6,194 | | | (5,375) | | (86.8) | % | | | 16,775 | | | 30,571 | | | (13,796) | | (45.1) | % |
Income tax benefit (expense) | | 474 | | | (2,337) | | | 2,811 | | (120.3) | % | | | (4,026) | | | (9,318) | | | 5,292 | | (56.8) | % |
Net income | $ | 1,293 | | $ | 3,857 | | $ | (2,564) | | (66.5) | % | | $ | 12,749 | | $ | 21,253 | | $ | (8,504) | | (40.0) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit margin | | 35.8% | | | 34.1% | | | | | | | | | 36.2% | | | 35.1% | | | | | | |
* Calculation not meaningful
| (1) | For the three months ended September 30, 2024 and 2023, net sales and cost of sales each include $0.2 million and $0.3 million of intersegment eliminations, respectively. For the nine months ended September 30, 2024 and 2023, net sales and cost of sales each include $1.0 million and $0.6 million of intersegment eliminations, respectively. |
The following discussion of our consolidated results of operations and segment results refers to the three and nine months ended September 30, 2024, compared to the corresponding periods in the prior year. The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the condensed consolidated statements of operations and comprehensive income.
Net Sales:
Net sales increased for the three months ended September 30, 2024, primarily due to increased Products net sales driven by higher card volumes in our Debit and Credit segment, as well as higher Services net sales in both our Debit and Credit and Prepaid Debit segments.
Net sales increased for the nine months ended September 30, 2024, primarily due to higher Services net sales in our Prepaid Debit segment and higher personalization services net sales in our Debit and Credit segment, partially offset by decreased Products net sales driven by lower card volumes in our Debit and Credit segment.
Gross Profit and Gross Profit Margin:
Gross profit and gross profit margin increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.
22
Operating Expenses:
Operating expenses increased for the three months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.
Operating expenses increased for the nine months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation, stock compensation, salary expense, and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.
Interest, net:
Interest expense increased for the three and nine months ended September 30, 2024, primarily due to payment of an early redemption premium of $5.8 million related to the redemption of the $267.9 million 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”). Interest expense for the three months ended September 30, 2024 also increased due to the impact of the higher interest rates on the $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “2029 Senior Notes”) issued in July 2024 compared to the 2026 Senior Notes.
Loss on Debt Extinguishment:
During the three and nine months ended September 30, 2024, we 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 refinancing of our ABL Revolver Credit Agreement in July 2024.
Other Expense, net:
Other expense, net increased for both the three and nine months ended September 30, 2024, primarily due to expenses incurred related to a secondary offering of our common shares. See Note 10, “Stockholders’ Deficit” of the condensed consolidated financial statements for further information.
Income Tax Expense:
Our 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 limitation of executive compensation deductibility related to the former CEO’s retention agreement.
23
Segment Discussion
Debit and Credit:
| Three Months Ended | | | | | | | | Nine Months Ended | | | | | | | ||||||||
| September 30, | | | | | | | | September 30, | | | | | | | ||||||||
| 2024 |
| 2023 | | $ Change | | % Change | | 2024 |
| 2023 | | $ Change | | % Change | ||||||||
| (dollars in thousands) | | |||||||||||||||||||||
Net sales | $ | 99,755 | | $ | 83,780 | | $ | 15,975 | | 19.1 | % | | $ | 283,348 | | $ | 278,959 | | $ | 4,389 | | 1.6 | % |
Gross profit | $ | 36,131 | | $ | 28,381 | | $ | 7,750 | | 27.3 | % | | $ | 101,790 | | $ | 99,603 | | $ | 2,187 | | 2.2 | % |
Income from operations | $ | 27,035 | | $ | 20,791 | | $ | 6,244 | | 30.0 | % | | $ | 75,178 | | $ | 75,898 | | $ | (720) | | (0.9) | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit margin | | 36.2% | | | 33.9% | | | | | | | | | 35.9% | | | 35.7% | | | | | | |
Net Sales:
Net sales for Debit and Credit increased for the three months ended September 30, 2024, primarily due to higher volume of contactless cards, including eco-focused cards.
Net sales for Debit and Credit increased for the nine months ended September 30, 2024, primarily due to increased Services net sales, partially offset by a decrease in Products net sales. The increase in Services net sales was driven by higher personalization and Card@Once services. The decrease in Products net sales was driven by volume declines in contact-only EMV cards, partially offset by higher volumes of contactless cards and increased Card@Once printer sales.
Gross Profit and Gross Profit Margin:
Gross profit and gross profit margin for Debit and Credit increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.
Income from Operations:
Income from operations for Debit and Credit increased for the three months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by increased compensation-related operating expenses. Income from operations for Debit and Credit was relatively consistent for the nine months ended September 30, 2024.
Prepaid Debit:
| Three Months Ended | | | | | | | | Nine Months Ended | | | | | | | ||||||||
| September 30, | | | | | | | | September 30, | | | | | | | ||||||||
| 2024 |
| 2023 | | $ Change | | % Change | | 2024 |
| 2023 | | $ Change | | % Change | ||||||||
| (dollars in thousands) | | |||||||||||||||||||||
Net sales | $ | 25,173 | | $ | 22,335 | | $ | 2,838 | | 12.7 | % | | $ | 73,186 | | $ | 63,286 | | $ | 9,900 | | 15.6 | % |
Gross profit | $ | 8,567 | | $ | 7,771 | | $ | 796 | | 10.2 | % | | $ | 26,814 | | $ | 20,468 | | $ | 6,346 | | 31.0 | % |
Income from operations | $ | 7,111 | | $ | 6,631 | | $ | 480 | | 7.2 | % | | $ | 22,765 | | $ | 17,936 | | $ | 4,829 | | 26.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit margin | | 34.0% | | | 34.8% | | | | | | | | | 36.6% | | | 32.3% | | | | | | |
Net Sales:
Net sales for Prepaid Debit increased for the three and nine months ended September 30, 2024, primarily due to increased sales to existing customers of higher-priced packaging solutions.
Gross Profit and Gross Profit Margin:
Gross profit for Prepaid Debit increased for the three months ended September 30, 2024, primarily due to higher net sales. Gross profit margin was relatively consistent compared to the prior year period.
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Gross profit and gross profit margin for Prepaid Debit increased for the nine months ended September 30, 2024, primarily due to higher net sales. Gross profit and gross profit margin in the prior year period were negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions.
Income from Operations:
Income from operations for Prepaid Debit increased for the three and nine months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.
Other:
As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below.
| Three Months Ended | | | | | | | | Nine Months Ended | | | | | | | ||||||||
| September 30, | | | | | | | | September 30, | | | | | | | ||||||||
| 2024 |
| 2023 | | $ Change | | % Change | | 2024 |
| 2023 | | $ Change | | % Change | ||||||||
| (dollars in thousands) | | |||||||||||||||||||||
Operating expenses | $ | 16,348 | | $ | 14,461 | | $ | 1,887 | | 13.0 | % | | $ | 51,091 | | $ | 42,783 | | $ | 8,308 | | 19.4 | % |
Operating Expenses:
Other operating expenses increased for the three and nine months ended September 30, 2024, primarily due to an increase in compensation-related expenses, including the factors discussed in consolidated “Operating Expenses” above.
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Liquidity and Capital Resources
At September 30, 2024, we had $14.7 million of cash and cash equivalents. Our primary source of liquidity has been cash generated from our operating activities, which has been driven from net income and fluctuations in working capital. Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, share repurchases (including the repurchase of incremental shares from Parallel49), payments of employee incentive programs and interest payments on our outstanding Senior Notes, with the interest payments being due in the first and third quarters of the year.
Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, depends on our ability to generate excess operating cash flows through our operating subsidiaries. Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, and our senior secured revolving credit facility (the “2029 ABL Revolver”) with available borrowing capacity of $72.7 million as of September 30, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share repurchases and working capital needs. Our future cash flows could be impacted by a variety of factors, some of which are beyond our control. These factors include, but are not limited to, changes in economic conditions, especially those impacting our customers, and the pricing, terms and availability of goods and services that we purchase, and financings that we enter into.
Cash Flows from Operating Activities
Cash provided by operating activities decreased for the nine months ended September 30, 2024 to $16.7 million from $22.3 million for the nine months ended September 30, 2023 primarily due to changes in working capital. Working capital changes included increased inventory purchases related to the capacity reservation agreement we entered into with one of our suppliers in 2022, incentives related to a customer contract entered into in the first quarter of 2024, and a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024, partially offset by lower employee performance-based incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance. Additionally, we anticipate cash flows from operating activities to be negatively impacted in the fourth quarter of 2024 due to incentives related to the customer contract as described above.
Financing
As of September 30, 2024, we had the following outstanding borrowings:
| | September 30, | | December 31, | ||
|
| 2024 |
| 2023 | ||
| | (dollars in thousands) | ||||
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 |
2029 Senior Notes
On July 11, 2024 (the “Closing Date”), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc. (the “Issuer”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 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.
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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 us and our 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. We 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.
2029 ABL Revolver
On the Closing Date, we 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 us and our 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, we 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”). We used 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 (“Borrowing Base”) and b) the Maximum Revolver Amount. The Borrowing Base is further reduced by credit line reserves, 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.
Cash Priorities
Capital Expenditures
We primarily use cash in investing activities for capital expenditures. During the nine months ended September 30, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $4.2 million.
During 2023, we commenced work on relocating and modernizing our production facility in Indiana. We anticipate this project will extend into 2025. Total capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in 2025.
27
Share Repurchase Authorization and Activity
On November 2, 2023, our board of directors approved a share repurchase plan authorizing us to repurchase up to $20.0 million of our common stock, par value $0.001 per share. This authorization expires on December 31, 2024.
During the nine months ended September 30, 2024, we 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”).
We had $11.2 million remaining in our share repurchase authorization as of September 30, 2024. We may purchase shares through open market purchases or through privately negotiated transactions, the extent and timing of which will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us.
Material Cash Requirements
Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations.
Debt Service Requirements
As of September 30, 2024, the total projected principal and interest payments on our borrowings are $429.7 million, primarily related to the 2029 Senior Notes, of which $29.2 million of interest is expected to be paid in the next 12 months.
The remaining interest payments are expected to be paid over the remaining term of the 2029 Senior Notes, which mature in 2029, and the principal is due upon maturity. We have estimated our future interest payments assuming no additional borrowings under the 2029 ABL Revolver, no early redemptions of principal on the 2029 Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the 2029 ABL Revolver, redeem principal on the 2029 Senior Notes early or refinance all or a portion of our borrowings in future periods.
Leases
We lease equipment and real property for production and services. Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 9, Financing and Operating Leases, in our Annual Report on Form 10-K for the year ended December 31, 2023 for details on our leasing arrangements, including future maturities of our operating lease liabilities.
In February 2024, we entered into a build-to-suit lease agreement to relocate and modernize our operations at our Fort Wayne, Indiana production facility, which is set to commence the later of: (i) the landlord’s delivery of exclusive possession of the premises and (ii) March 1, 2025. Under this lease agreement, we will pay an annual base rent of $0.9 million subject to an annual rent increase of 2.0%. The lease is for ten years and includes two consecutive options to extend the term of the lease by five years for each such option.
Purchase Obligations
A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms. As of September 30, 2024, there have not been any material changes to the purchase obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting
28
Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, for which there were no material changes as of September 30, 2024, included:
| ● | Revenue recognition, including estimates of work performed but not completed, and |
| ● | Income taxes, including estimates regarding future compensation for covered individuals, valuation allowances and uncertain tax positions. |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required due to smaller reporting company status.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations (as defined by Rules 13a-15(e) and 15d-15(e) within the Exchange Act of 1934) as of September 30, 2024, which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, the disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported, as applicable, within the time periods specified in the rules and forms of the Securities and Exchange Commission, and are designed to ensure that information required to be disclosed by us in the reports that we file or submit is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
PART II – Other Information
Item 1. Legal Proceedings
Refer to Note 12, “Commitments and Contingencies” of the Condensed Consolidated Financial Statements in this report for information regarding legal proceedings.
Item 1A. Risk Factors
The risk factors disclosed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 set forth information relating to various risks and uncertainties that could materially adversely affect our business, financial condition and operating results. Such risk factors continue to be relevant to an understanding of our business, financial condition and operating results. As of the date of this Quarterly Report on Form 10-Q, there have been no material changes with respect to such risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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. Under the share repurchase plan, the Company may purchase shares through privately negotiated transactions or through open market purchases, including through plans complying with Rule 10b5-1 under the Exchange Act. The extent and timing of repurchases will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by the Company.
On December 6, 2023, the Company entered into a Stock Repurchase Agreement with Parallel49, which was one of the Company’s majority stockholders. The Company has agreed to purchase from Parallel49, and Parallel49 has agreed to sell to the Company, three times the number of shares of the Company’s common stock acquired by the Company in the open market from time to time from non-Parallel49 holders during the period commencing from the date of the agreement and ending on March 31, 2024 up to a maximum of 325,000 shares. Pursuant to this and a subsequent stock repurchase agreement, the Company repurchased 364,848 shares at an average price of $18.09 per share between April 5, 2024 and September 30, 2024.
The following table sets forth share repurchases for each of the three months of the quarter ended September 30, 2024:
Period | | Total Number of | | Average Price | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | | Approximate Dollar | ||||
July 1 - 31 | | | 120,534 | | $ | 18.23 | | | 120,534 | | $ | 11,154 |
August 1 - 31 | | | — | | $ | — | | | — | | $ | 11,154 |
September 1 - 30 | | | — | | $ | — | | | — | | $ | 11,154 |
Total | | | 120,534 | | $ | 18.23 | | | 120,534 | | | |
(a) Reflects shares repurchased and retired under the 2023 repurchase authorization and the stock repurchase agreements.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
30
Item 5. Other Information
During the three and nine months ended September 30, 2024, no directors or officers of the Company
Our proxy statement for the 2024 Annual Meeting of Stockholders, which was filed with the Securities and Exchange Commission on April 29, 2024, contained a typographical error in the section entitled “Stockholder Proposals for 2025 Annual Meeting of Stockholders” solely related to the date by which a stockholder must provide notice to the Company to present proposals at the Company’s annual meeting of stockholders in 2025 pursuant to Rule 14a-8 under the Exchange Act. The reference to the date December 12, 2024 should have instead referenced December 30, 2024.
Item 6. Exhibits
Exhibit | Exhibit Description | |
4.1 | ||
4.2 | | |
10.1 | | |
10.2 | | |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
31
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
| CPI CARD GROUP INC. |
November 5, 2024 | /s/ John Lowe |
| John Lowe |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
November 5, 2024 | /s/ Jeffrey Hochstadt |
| Jeffrey Hochstadt |
| Chief Financial Officer |
| (Principal Financial Officer) |
November 5, 2024 | /s/ Donna Abbey Carmignani |
| Donna Abbey Carmignani |
| Chief Accounting Officer |
| (Principal Accounting Officer) |
32
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, John Lowe, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of CPI Card Group Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 5, 2024
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey Hochstadt, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of CPI Card Group Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 5, 2024
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Lowe, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CPI Card Group Inc. (the “Company”) for the period ended September 30, 2024, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffrey Hochstadt, Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 5, 2024