CPI Card Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation s ​ 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 March 31, 2026. 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, 2025 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 March 31, 2026 (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: (i) risks relating to our business and industry, such as a deterioration in general economic conditions, including due to inflationary conditions, 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; our failure to retain our existing key customers or identify and attract new customers; the highly competitive, saturated and consolidated nature of our marketplace; our inability to develop, introduce and commercialize new products and related services, including due to our inability to undertake research and development activities; new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and related services in a timely manner or at all; system security risks, data protection breaches and cyber-attacks; the usage, or lack thereof, of artificial intelligence technologies; disruptions, delays or other failures in our supply chain, including as a result of inflationary pressures, single-source suppliers, failure or inability of suppliers to comply with our code of conduct or contractual requirements, trade restrictions, tariffs, foreign conflicts or political unrest in countries in which our suppliers operate, and our inability to pass related costs on to our customers or difficulty meeting customers’ delivery expectations due to extended lead times; changes in U.S. and global trade policy and the impact of tariffs on our business and results of operations; 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; defects in our software and computing systems; disruptions in production at one or more of our facilities due to weather conditions, climate change, political instability, or social unrest; problems in production quality, materials and process and costs relating to product defects and any related product liability and/or warranty claims and damage to our reputation; our inability to recruit, retain and develop qualified personnel, including key personnel, and implement effective succession processes; our substantial indebtedness, including 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 inability to make debt service payments or refinance such indebtedness; our inability to successfully execute on, integrate, or achieve the anticipated benefits of acquisitions, including the acquisition of Arroweye Solutions, Inc. (“Arroweye”), or execute on divestitures, strategic relationships, or investments; 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 and risks relating to investor confidence in our financial reporting; environmental, social and governance (“ESG”) preferences and demands of various stakeholders and the related impact on our ability to access capital, produce our products in conformity with stakeholder preferences, comply with stakeholder demands and comply with any related legal or regulatory requirements or restrictions; 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; our inability to adequately protect our trade secrets and 16 Table of Contents intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software; our inability to renew licenses with key technology licensors; our limited ability to raise capital, which may lead to delays in innovation or the abandonment of our strategic initiatives; costs and impacts related to additional tax collection efforts by states, unclaimed property laws, or future increases in U.S. federal or state income taxes, resulting in additional expenses which we may be unable to pass along to our customers; our inability to realize the full value of our long-lived assets; costs and potential liabilities associated with compliance or failure to comply with laws and regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security; 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 ongoing foreign conflicts on the global economy; adverse conditions in the banking system and financial markets, including the failure of banks and financial institutions; 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; (ii) risks relating to ownership of our common stock, such as those associated with concentrated ownership of our stock by our significant stockholders and potential conflicts of interests with other stockholders; the impact of concentrated ownership of our common stock and the sale or perceived sale of a substantial amount of common stock on the trading volume and market price of our common stock; potential conflicts of interest that may arise due to our Board of Directors being comprised in part of directors who are principals of or were nominated by our significant stockholders; the influence of securities analysts over the trading market for and price of our common stock, particularly due to the lack of substantial research coverage of our common stock; the impact of stockholder activism or actual or threatened securities litigation on the trading price and volatility of our common stock; 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 stockholders to change the composition of our Board of Directors; and (iii) general risks, such as relating to our ability to comply with a wide variety of complex evolving laws and regulations and the exposure to liability for any failure to comply; the effect of legal and regulatory proceedings and the adequacy of our insurance policies; 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, 2025 filed with the SEC on March 5, 2026, and our other reports filed from time to time with the SEC. We caution and advise readers not to place undue reliance on forward-looking statements, which speak only as of the date hereof. These statements are based on assumptions that may not be realized and involve risks and uncertainties that could cause actual results or other events to differ materially from the expectations and beliefs contained herein. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. Company Overview CPI is a payments technology company providing a comprehensive range of physical and digital payment solutions for U.S. financial institutions, processors, fintechs, prepaid program managers, and more. We are a leader in several areas of the U.S. payment card solutions market, including debit and credit card production, personalization, and Software-as-a-Service-based (“SaaS-based”) instant issuance solutions. We are also a market leader in the production of “Prepaid Debit Cards,” defined as debit cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ) but not linked to a traditional bank account, and related secure packaging solutions. We serve thousands of customers through direct and indirect sales channels and have maintained long-standing relationships with our top customers. Our revenues are primarily generated from the production of and services related to secure debit and credit cards that are issued on the networks of the Payment Card Brands, including Prepaid Debit Cards. ​ 17 Table of Contents Segment Overview In connection with our increased strategic focus on expanding and developing additional proprietary integrated technological solutions for its customer base and to reflect the manner in which the Company’s Chief Operating Decision Maker (“CODM”), the Chief Executive Officer (“CEO”) manages our business, we implemented a revised segment structure to assess performance and allocate resources, beginning in the first quarter of 2026. The changes in our segment structure primarily relate to the separation of the results of our proprietary integrated technological related operations into a separate segment from the former Debit and Credit segment. Our business consists of the following reportable segments: ● Secure Card Solutions: primarily produces secure debit and credit cards and provides card personalization services for U.S. card-issuing financial institutions, including highly customizable, on-demand payment card solutions acquired through the purchase of Arroweye in the second quarter of 2025; ​ ● Prepaid Solutions: primarily provides prepaid debit cards and secure packaging solutions and other integrated prepaid card services to prepaid program managers in the U.S.; and ​ ● Integrated Paytech: primarily provides a SaaS-based instant issuance solution, which gives customers the ability to issue an instant personalized debit or credit card within a customer location; and other digital payment solutions such as push provisioning for mobile wallets. ​ Operating results for prior periods have been recast to conform to the current period presentation. The updated information reflects only reclassification of prior period segment data and does not represent a restatement of previously issued financial statements. ​ 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 March 31, ​ 2026 ​ ​ ​ 2025 ​ $ Change ​ % Change ​ (dollars in thousands) Revenue (1) $ 147,108 ​ $ 122,761 ​ $ 24,347 ​ 19.8 % Cost of goods sold (1) ​ 102,984 ​ ​ 82,065 ​ ​ 20,919 ​ 25.5 % Gross profit ​ 44,124 ​ ​ 40,696 ​ ​ 3,428 ​ 8.4 % Selling, general and administrative expenses ​ 33,130 ​ ​ 26,592 ​ ​ 6,538 ​ 24.6 % Income from operations ​ 10,994 ​ ​ 14,104 ​ ​ (3,110) ​ (22.1) % Other expense, net: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest, net ​ (7,656) ​ ​ (7,685) ​ ​ 29 ​ (0.4) % Other income, net ​ 32 ​ ​ 18 ​ ​ 14 ​ 77.8 % Income before taxes and equity in losses of unconsolidated affiliates ​ 3,370 ​ ​ 6,437 ​ ​ (3,067) ​ (47.6) % Income tax expense ​ (1,158) ​ ​ (1,663) ​ ​ 505 ​ (30.4) % Equity in losses of unconsolidated affiliates ​ (156) ​ ​ — ​ ​ (156) ​ * % Net income $ 2,056 ​ $ 4,774 ​ $ (2,718) ​ (56.9) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit margin ​ 30.0 % ​ 33.2 % ​ ​ ​ ​ ​ * Calculation not meaningful. (1) For the three months ended March 31, 2026 and 2025, revenue and cost of goods sold each include $4.2 million and $4.8 million of intersegment eliminations, respectively. ​ The following discussion of our condensed consolidated results of operations and segment results refers to the three months ended March 31, 2026, compared to the corresponding prior year period. 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. 18 Table of Contents Revenue: Revenue increased for the three months ended March 31, 2026, primarily due to increased revenue in our Secure Card Solutions segment, driven by contributions of $16.1 million from the acquisition of Arroweye, increased volumes of contactless cards, including metal cards, and higher personalization services; partially offset by lower revenue in our Prepaid Solutions segment. Gross Profit and Gross Profit Margin: Gross profit increased for the three months ended March 31, 2026, primarily due to increased revenue, partially offset by negative sales mix and increased production costs, including increased depreciation expenses and tariffs totaling $3.0 million. Additional changes in tariff rates could further impact our results of operations during 2026. Gross profit margin decreased for the three months ended March 31, 2026, primarily due to negative sales mix and increased production costs, including increased depreciation expenses and tariffs, partially offset by operating leverage from increased revenue. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased for the three months ended March 31, 2026, primarily due to increased costs of $2.4 million associated with the integration of Arroweye and increased compensation-related expenses resulting from increased headcount, including increased executive severance and employee performance-based incentive compensation. Interest, net : Interest expense was relatively consistent for the three months ended March 31, 2026. Other Income, net: Other income, net, was relatively consistent for the three months ended March 31, 2026. Income Tax Expense: Our effective tax rates on pre-tax income were 34.4% and 25.8% for the three months ended March 31, 2026 and 2025, respectively. The increase in the Company’s effective tax rate for the three months ended March 31, 2026, compared to the prior year related to deductibility of stock-based compensation realized upon certain stock option exercises and restricted stock unit vesting and an increase in the valuation allowance related to states decoupling from recent favorable tax legislation changes. Segment Discussion Secure Card Solutions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2026 ​ ​ ​ 2025 ​ $ Change ​ % Change ​ (dollars in thousands) Revenue $ 109,851 ​ $ 81,642 ​ $ 28,209 ​ 34.6 % Gross profit $ 27,702 ​ $ 20,819 ​ $ 6,883 ​ 33.1 % Income from operations $ 17,268 ​ $ 14,310 ​ $ 2,958 ​ 20.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit margin ​ 25.2 % ​ 25.5 % ​ ​ ​ ​ ​ Revenue: Revenue for Secure Card Solutions increased for the three months ended March 31, 2026, primarily due to contributions from the acquisition of Arroweye, increased volumes of contactless cards, including metal cards, and higher personalization services. 19 Table of Contents Gross Profit and Gross Profit Margin: Gross profit for Secure Card Solutions increased for the three months ended March 31, 2026, primarily due to increased revenue, partially offset by increased production costs, including increased depreciation expenses and tariffs. Gross profit margin was relatively consistent for Secure Card Solutions for the three months ended March 31, 2026 . Income from Operations: Income from operations for Secure Card Solutions increased for the three months ended March 31, 2026, primarily due to increased gross profit, partially offset by increased selling, general and administrative expenses driven by increased compensation-related expenses resulting from increased headcount and other costs due to the Arroweye acquisition. Prepaid Solutions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2026 ​ ​ ​ 2025 ​ $ Change ​ % Change ​ (dollars in thousands) Revenue $ 22,049 ​ $ 26,713 ​ $ (4,664) ​ (17.5) % Gross profit $ 5,666 ​ $ 9,442 ​ $ (3,776) ​ (40.0) % Income from operations $ 4,093 ​ $ 7,999 ​ $ (3,906) ​ (48.8) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit margin ​ 25.7 % ​ 35.3 % ​ ​ ​ ​ ​ ​ Revenue: Revenue for Prepaid Solutions decreased for the three months ended March 31, 2026, primarily due to comparisons with strong sales of higher-value packaging solutions in the prior year period, partially offset by sales of closed loop payment cards. Gross Profit and Gross Profit Margin: Gross profit and gross profit margin for Prepaid Solutions decreased for the three months ended March 31, 2026, primarily due to lower operating leverage from decreased revenue and unfavorable sales mix. Income from Operations: Income from operations for Prepaid Solutions decreased for the three months ended March 31, 2026, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above. Integrated Paytech: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2026 ​ ​ ​ 2025 ​ $ Change ​ % Change ​ (dollars in thousands) Revenue $ 19,382 ​ $ 19,253 ​ $ 129 ​ 0.7 % Gross profit $ 10,756 ​ $ 10,435 ​ $ 321 ​ 3.1 % Income from operations $ 6,865 ​ $ 7,393 ​ $ (528) ​ (7.1) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit margin ​ 55.5 % ​ 54.2 % ​ ​ ​ ​ ​ ​ Revenue: Revenue for Integrated Paytech was relatively consistent for the three months ended March 31, 2026. ​ 20 Table of Contents Gross Profit and Gross Profit Margin: Gross profit and gross profit margin for Integrated Paytech were relatively consistent for the three months ended March 31, 2026. Income from Operations: Income from operations for Integrated Paytech decreased for the three months ended March 31, 2026, primarily due to increased selling, general and administrative expenses driven by increased compensation-related expenses resulting from increased headcount. Liquidity and Capital Resources At March 31, 2026, we had $19.3 million of cash and cash equivalents. Our primary source of liquidity has been cash generated from our operating activities, which has been driven by net income and fluctuations in working capital. Our working capital fluctuates primarily due to timing and size of tax payments, collections from customers, inventory purchases, 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. 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 “ABL Revolver”) with available borrowing capacity of $81.8 million as of March 31, 2026, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs. Our future cash flows could be impacted by a variety of factors, some of which are beyond our control. Factors include, but are not limited to, demand from some of our customers for certain products and related services; changes in economic conditions, especially those impacting our customers; 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 for the three months ended March 31, 2026, increased to $13.6 million from $5.6 million for the three months ended March 31, 2025, primarily due to reduced working capital usage. Working capital benefited from decreased incentive payments related to a customer contract originally entered into in the first quarter of 2024, decreased employee performance-based incentive compensation and severance payments in 2026, and lower inventory purchases. These benefits were partially offset by timing of collections in accounts receivable and payments on accounts payable and prepaid expense balances. Cash Flows from Investing Activities Capital Expenditures During the three months ended March 31, 2026, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $3.5 million. Cash Flows from Financing Activities As of March 31, 2026, and December 31, 2025, we had the following outstanding borrowings: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ ​ ​ ​ 2026 ​ ​ ​ 2025 ​ ​ (dollars in thousands) Senior Notes ​ $ 265,000 ​ $ 265,000 ABL Revolver ​ ​ 15,000 ​ ​ 25,000 Unamortized deferred financing costs ​ ​ (3,097) ​ ​ (3,332) Total long-term debt ​ $ 276,903 ​ $ 286,668 ​ ​ 21 Table of Contents Senior Notes On July 11, 2024 (the “Closing Date”), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc. (the “Borrower”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “Senior Notes”) and related guarantees at an issue price of 100%. The Senior Notes mature on July 15, 2029 and interest is payable on January 15 and July 15 of each year. The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control and certain asset sales. ABL Revolver On the Closing Date, the Company and the Borrower entered into a credit agreement with JPMorgan, (the “ABL Revolver”) providing for up to $75.0 million. The 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 Senior Notes. We primarily utilize our ABL Revolver to provide general liquidity and to support shorter term financing requirements. On July 2, 2025, the Company, the Borrower, and JPMorgan entered into the Amendment, which amends the ABL Revolver to, among other things, increase the available borrowing capacity from $75.0 million to $100.0 million. The Amendment did not modify the maturity date of the ABL Revolver nor the interest rate. Borrowings under the 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 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 ABL Revolver over the most recently completed month. The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the ABL Revolver over the immediately preceding month. Amounts borrowed and outstanding under the ABL Revolver and Senior Notes are required to be repaid in full, together with any accrued and unpaid interest, no later than July 15, 2029 and may be subject to earlier mandatory prepayment upon certain events. 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 March 31, 2026, the total projected principal and interest payments on our borrowings are $368.4 million, primarily related to the Senior Notes, of which $26.8 million of interest is expected to be paid in the next 12 months. T he remaining interest payments are expected to be paid over the remaining term of the 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 ABL Revolver, no early redemptions of principal on the Senior Notes, and no debt issuances or renewals upon the maturity dates of our notes. However, we may borrow additional amounts under the ABL Revolver, redeem principal on the 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, 2025, for details on our leasing arrangements, including future maturities of our operating lease liabilities. ​ 22 Table of Contents 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 commenced in the first quarter of 2025, and payments beginning in 2026. 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 10 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 March 31, 2026, 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, 2025. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025, for which there were no material changes as of March 31, 2026, included: ● Revenue recognition, including estimates of work performed but not completed , ● Income taxes, including estimates regarding future compensation for covered individuals, valuation allowances and uncertain tax positions, ● Business combinations.