What changed in this filing

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Item 1. Financial Statements

2023-05-09 compared with 2022-11-03 · 125 added, 285 removed, 277 unchanged (60% of the section changed)

4 unchanged sentences

(in thousands, except share and per share amounts)

September 30,

Current assets:

Cash and cash equivalents

Accounts receivable, net of allowances of $ 169 and $ 86 , respectively

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

Income taxes receivable

Total current assets

Plant, equipment, leasehold improvements and operating lease right-of-use assets, net

Intangible assets, net

Plant, equipment, leasehold improvements and operating lease right-of-use assets, net of accumulated depreciation of $ 64,580 and $ 61,922 , respectively

Intangible assets, net of accumulated amortization of $ 48,864 and $ 47,897 , respectively

Liabilities and stockholders’ deficit

11 unchanged sentences

$ 0.001 par value— 100,000 shares authorized;

0 shares issued and outstanding at September 30, 2022 and December 31, 2021

0 shares issued and outstanding at March 31, 2023 and December 31, 2022

Stockholders’ deficit:

1 unchanged sentence

$ 0.001 par value— 100,000,000 shares authorized;

11,287,909 and 11,255,466 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

11,424,628 and 11,390,355 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively

Capital deficiency

Accumulated earnings (loss)

Accumulated earnings

Total stockholders’ deficit

5 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Total net sales

11 unchanged sentences

Interest, net

Other (expense) income, net

Loss on debt extinguishment

Other expense, net

Total other expense, net

13 unchanged sentences

(in thousands, except per share amounts)

earnings (loss)

June 30, 2022

Stock-based compensation

Shares issued under stock-based compensation plans

Components of comprehensive income:

September 30, 2022

earnings (loss)

December 31, 2022

Stock-based compensation

Shares issued under stock-based compensation plans

Components of comprehensive income:

September 30, 2022

earnings (loss)

June 30, 2021

Stock-based compensation

Shares issued under stock-based compensation plans

Components of comprehensive income:

September 30, 2021

March 31, 2023

earnings (loss)

December 31, 2021

Stock-based compensation

Shares issued under stock-based compensation plans

Stock-based compensation

Components of comprehensive income:

September 30, 2021

March 31, 2022

See accompanying notes to condensed consolidated financial statements

3 unchanged sentences

(in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Operating activities

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization expense

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation expense

Amortization expense

Stock-based compensation expense

9 unchanged sentences

Deferred revenue and customer deposits

Cash provided by operating activities

Cash provided by (used in) operating activities

Investing activities

2 unchanged sentences

Financing activities

Principal payments on First Lien Term Loan

Principal payments on Senior Credit Facility

Principal payments on Senior Notes

Principal payments on ABL Revolver

Proceeds from Senior Notes

Proceeds from ABL Revolver, net of discount

Debt issuance costs

Proceeds from ABL Revolver

Payments on debt extinguishment and other

1 unchanged sentence

Payments on finance lease obligations

Cash provided by (used in) financing activities

Cash (used in) provided by financing activities

Effect of exchange rates on cash

Net decrease in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents, beginning of period

3 unchanged sentences

Income taxes paid

Income taxes (refunded)

Right-of-use assets obtained in exchange for lease obligations:

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

Business Overview and Summary of Significant Accounting Policies

4 unchanged sentences

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 bank 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 by one or more of the Payment Card Brands.

CPI’s leading network of high-security production facilities allows the Company to optimize its solutions offerings and serve its customers .

COVID-19 Update

The COVID-19 pandemic and associated counteracting measures implemented by governments and businesses around the world have impacted, and continue to impact, economies and societies globally, including the locations where CPI, its customers and suppliers conduct business.

The Company believes the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on its supply chain, production lead times, labor availability, employee absenteeism and costs.

Though the Company has implemented measures to attempt to mitigate the impacts of the challenges described above, the Company believes that such impacts, and the associated costs, may continue throughout 2022 and beyond.

The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain, though the health and safety of CPI employees remains paramount.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.

The CARES Act, among other things, included provisions relating to refundable payroll tax credits, deferment of employer social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitation and technical corrections to tax depreciation methods for qualified improvement property.

The Company deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021.

The second installment payment is permitted to be paid no later than the fourth quarter of 2022 and had not been paid as of September 30, 2022.

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’s network of high-security production facilities allows the Company to optimize its solutions offerings and serve its customers.

The Company’s business consists of the following reportable segments:

Debit and Credit, Prepaid Debit and Other.

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services for card-issuing financial institutions primarily in the United States.

The Prepaid Debit segment primarily provides integrated card services to Prepaid Debit Card program managers primarily in the United States.

The Company’s “Other” segment includes corporate expenses.

Basis of Presentation

5 unchanged sentences

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, liability for sales tax, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions.

Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, leases, valuation allowances for inventories and deferred taxes, revenue recognized for work performed but not completed and uncertain tax positions.

Actual results could differ from those estimates.

Recent Accounting Standards

Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

This ASU changes the model for the recognition of credit losses from an incurred loss model, which recognized credit losses only if it was probable that a loss had been incurred, to an expected loss model, which requires the Company to estimate the total credit losses expected on the portfolio of financial instruments.

The effective date of ASU 2016-13 was amended by ASU 2019-10, Credit Losses Effective Dates.

Since CPI is a smaller reporting company, adoption of this accounting standard is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods therein, with early adoption permitted.

The Company has elected not to early adopt this accounting standard.

The Company is evaluating the impact of adoption of this standard and does not anticipate the application of ASU 2016-13 will have a material impact on the Company’s consolidated financial position or results of operations.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ ASU”) 2016 - 13, Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which changes the criteria under which credit losses on financial instruments (such as the Company’s trade receivables) are measured.

The ASU introduces a new credit reserve model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology previously used under GAAP with an expected loss

Effective January 1, 2023, the Company adopted the CECL model.

The adoption of the model did not have a material impact on the Company’s consolidated financial position or results of operations.

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

Three Months Ended September 30, 2022

Debit and Credit

Prepaid Debit

Intersegment eliminations

Nine Months Ended September 30, 2022

Debit and Credit

Prepaid Debit

Intersegment eliminations

Three Months Ended September 30, 2021

Three Months Ended March 31, 2023

(dollars in thousands)

Debit and Credit

1 unchanged sentence

Intersegment eliminations

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

(dollars in thousands)

Debit and Credit

4 unchanged sentences

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 produced Financial Payment Cards, including contact-EMV ® , contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s eco-focused solutions, including Second Wave ® and Earthwise TM cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards.

For unbilled work performed but not completed, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

Items included in “Products” net sales are the design and production of Financial Payment Cards, including contact-EMV ® , contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s eco-focused solutions, including Second Wave ® and Earthwise ® cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards.

Card@Once ® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping.

6 unchanged sentences

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.

As applicable, for unbilled work performed but not completed, the Company estimates revenue by taking actual costs incurred and applying historical margins for similar types of contracts.

Customer Contracts

5 unchanged sentences

Accounts receivable consisted of the following:

September 30,

(dollars in thousands)

Trade accounts receivable

Unbilled accounts receivable

Less allowance for doubtful accounts

Less allowance

Inventories consisted of the following:

September 30,

(dollars in thousands)

Raw materials

3 unchanged sentences

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

September 30,

(dollars in thousands)

Machinery and equipment

3 unchanged sentences

Construction in progress

Operating lease right-of-use assets

Less accumulated depreciation and amortization

Operating lease right-of-use assets, net of accumulated amortization

Depreciation expense of plant, equipment and leasehold improvements, including depreciation of assets under financing leases, was $ 2,870 and $ 2,482 for the three months ended September 30, 2022 and 2021, respectively, and $ 8,118 and $ 8,223 for the nine months ended September 30, 2022 and 2021, respectively.

Operating lease right-of-use assets, net of accumulated amortization, are further described in Note 9, “Financing and Operating Leases.”

Goodwill and Other Intangible Assets

The Company reports all of its goodwill in the Debit and Credit segment at September 30, 2022 and December 31, 2021.

Goodwill is tested for impairment at least annually on October 1 or more frequently when an event occurs or circumstances change that indicate the carrying value may not be recoverable.

The Company did not identify a triggering event requiring a quantitative test for impairment as of September 30, 2022.

Intangible assets consist of customer relationships, technology, and trademarks.

Intangible amortization expense was $ 967 and $ 1,088 for the three months ended September 30, 2022 and 2021, respectively, and $ 2,900 and $ 3,386 for the nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022 and December 31, 2021, intangible assets, excluding goodwill, were comprised of the following:

September 30,

Weighted Average

Customer relationships

Intangible assets subject to amortization

The estimated future aggregate amortization expense for the identified amortizable intangibles noted above as of September 30, 2022 was as follows:

2022 (excluding the nine months ended September 30, 2022)

Fair Value of Financial Instruments

7 unchanged sentences

Fair Value as of

Fair Value Measurement at September 30, 2022

September 30,

Fair Value Measurement at March 31, 2023

(Using Fair Value Hierarchy)

(dollars in thousands)

Fair Value as of

1 unchanged sentence

(Using Fair Value Hierarchy)

(dollars in thousands)

The aggregate fair value of the Company’s Senior Notes (as defined in Note 8, “Long-Term Debt”) was based on bank quotes.

The fair value measurement associated with the ABL Revolver (as defined in Note 10, “Long-Term Debt”) approximates its carrying value as of September 30, 2022, given the applicable variable interest rates and nature of the security interest in Company assets.

The fair value measurement associated with the ABL Revolver (as defined in Note 8, “Long-Term Debt”) approximates its carrying value as of March 31, 2023, given the applicable variable interest rates and nature of the security interest in Company assets.

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

1 unchanged sentence

Accrued expenses consisted of the following:

September 30,

(dollars in thousands)

Accrued payroll and related employee expenses

Accrued employee performance bonuses

Employer payroll taxes, including social security deferral

Employer payroll taxes

Accrued rebates

3 unchanged sentences

Total accrued expenses

The estimated sales tax liability is further described in Note 14, “Commitments and Contingencies” and Note 1, “Business Overview and Summary of Significant Accounting Policies.”

Financing and Operating Leases

Right-of-use (“ROU”) represents the right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

A lease is deemed to exist when the Company has the right to control the use of identified property, plant or equipment, as conveyed through a contract, for a certain period of time and consideration paid.

The right to control is deemed to occur when the Company has the right to obtain substantially all of the economic benefits of the identified assets and the right to direct the use of such assets.

The components of operating and finance lease costs were as follows:

Three Months Ended

September 30, 2022

September 30, 2021

Operating lease costs

Variable lease costs

Short-term operating lease costs

Total expense from operating leases

Finance lease costs:

Right-of-use amortization expense

Interest on lease liabilities

Total financing lease costs

Nine Months Ended

September 30, 2022

September 30, 2021

Operating lease costs

Variable lease costs

Short-term operating lease costs

Total expense from operating leases

Finance lease costs:

Right-of-use amortization expense

Interest on lease liabilities

Total financing lease costs

The following table reflects balances for operating and financing leases:

September 30,

Operating leases:

Operating lease right-of-use assets, net of amortization

Current operating lease liabilities

Non-current operating lease liabilities

Total operating lease liabilities

Financing leases:

Property, equipment and leasehold improvements

Accumulated depreciation

Total financing leases in property, equipment and leasehold

___ improvements, net

Current financing lease liabilities

Non-current financing lease liabilities

Total financing lease liabilities

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

Future cash payment with respect to lease obligations as of September 30, 2022 were as follows:

2022 (excluding the nine months ended September 30, 2022)

Total lease payments

Less imputed interest

Other accrued expenses as of March 31, 2023 and December 31, 2022 consisted primarily of sales and income tax accruals, miscellaneous accruals for invoices not yet received, and other items such as self-insurance claims that have yet to be reported and accrued royalties.

Long-Term Debt

At September 30, 2022 and December 31, 2021, long-term debt consisted of the following:

September 30,

At March 31, 2023 and December 31, 2022, long-term debt consisted of the following:

(dollars in thousands)

Unamortized deferred financing costs

2 unchanged sentences

Long-term debt, net of current maturities

(1) The Senior Notes bear interest at a fixed rate.

The interest rate on the ABL Revolver represents the average effective variable interest rate on outstanding borrowings as of September 30, 2022.

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310,000 aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees.

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

On March 15, 2021, the Company completed a private offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310.0 million aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees.

The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026.

Interest is payable on the Senior Notes on March 15 and September 15 of each year.

On March 15, 2021, the Company and CPI CG Inc., as borrower, entered into a Credit Agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility of up to $ 50,000 (the “ABL Revolver”).

The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation.

The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among CPI CG Inc., the Company, the subsidiary guarantors and U.S.

Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements.

No such payment is required to be made in 2023 based on the Company’s operating results for the year ended December 31, 2022.

During the three months ended March 31, 2023, the Company used cash on hand and available borrowing capacity under the ABL Revolver (defined below) to retire a portion of the Senior Notes totaling $ 8.0 million of the principal amount thereof plus accrued and unpaid interest thereon to the retirement dates.

The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes.

2 unchanged sentences

1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver.

The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75,000 , increased the uncommitted accordion feature to $ 25,000 from $ 15,000 , and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) administered by the Federal Reserve Bank of New York.

The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $ 75.0 million, increased the uncommitted accordion feature to $ 25.0 million from $ 15.0 million, and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York.

On October 11, 2022, the Company and CPI CG Inc.

3 unchanged sentences

The Company may select a one, three or six month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected.

For each quarter through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average unused capacity of the facility for the previous quarter.

The unused portion of the ABL Revolver commitment accrues a monthly commitment fee, 0.50 % per annum through March 31, 2023, based on the average daily borrowing capacity under the ABL Revolver over the previous month.

Unused commitment fee expense was $ 179 and $ 118 for the nine months ended September 30, 2022 and 2021, respectively.

The interest rate margin and unused commitment fee percentage changes, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused commitment fee).

The ABL Revolver includes limitations on the Company’s ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than $ 7,500 .

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 or b) the $ 75,000 of available borrowing capacity under the ABL Revolver (“Borrowing Base”).

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 $ 7,500 and until such time that borrowing capacity equals or exceeds $ 7,500 for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) greater than 1.00 , calculated for the trailing 12 months, in order to borrow under the ABL Revolver.

On March 15, 2021, the Company used net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $ 15,000 under the ABL Revolver, to pay in full and terminate a previous Senior Credit Facility and a previous First Lien Term Loan on March 15, 2021, and to pay related fees and expenses.

Early termination of the Senior Credit Facility required payment of a “make-whole” premium of $ 2,635 as an early termination penalty, which was paid on March 15, 2021, and recorded as interest expense on the condensed consolidated statement of comprehensive income for the year ended December 31, 2021.

On March 11, 2022, the Company used the available borrowing capacity under the ABL Revolver to fund the redemption of $ 20,000 aggregate principal amount of the Senior Notes at a redemption price equal to 103 % of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date.

The Senior Notes are guaranteed by the Company and certain of its current and future wholly-owned domestic subsidiaries (other than CPI CG Inc.

as the issuer of the Senior Notes) that guarantee the ABL Revolver.

The Senior Notes are secured by substantially all of the assets of CPI CG Inc.

and the guarantors, subject to customary exceptions.

The ABL Revolver is guaranteed by the Company and its subsidiaries (other than CPI CG Inc.

as borrower and excluded subsidiaries), and is secured by substantially all of the assets of CPI CG Inc.

and the guarantors, subject to customary exceptions.

The Senior Notes and the ABL Revolver contain covenants limiting the ability of the Company, CPI CG Inc.

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 CPI CG Inc.

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.

Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements.

No such payment was required to be made in 2022 based on the Company’s operating results for the year ended December 31, 2021.

Through March 31, 2023, the applicable interest rate margin ranges from 1.50 % to 1.75 % depending on the average excess availability of the facility for the most recently completed quarter.

The unused portion of the ABL Revolver commitment accrues a monthly unused line fee, 0.50 % per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

The interest rate

margin and unused line fee percentage changed, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused line fee).

Deferred Financing Costs and Discount

1 unchanged sentence

These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method.

The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 4,909 and is reported as a reduction to the long-term debt balance as of September 30, 2022.

The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1,670 and are recorded as other assets (current and long-term) on the condensed consolidated balance sheet as of September 30, 2022.

During the nine months ended September 30, 2021, the Company recorded a $ 5,048 loss on debt extinguishment relating to the unamortized deferred financing costs and debt discount in connection with the termination of the Senior Credit Facility and First Lien Term Loan, as described earlier.

The Company’s effective tax rates on pre-tax income were 25.8 % and 30.3 % for the three months ended September 30, 2022 and 2021, respectively, and 28.5 % and 30.7 % for the nine months ended September 2022 and 2021, respectively.

The decrease in the Company’s effective tax rate for the three and nine months compared to the corresponding periods in the prior year was primarily due to a greater proportion of pre-tax income in relation to the impact of permanent items.

The effective tax rate for the three months ended September 30, 2022 also decreased as a result of the release of a federal valuation allowance for increased deductibility of interest costs due to a tax election made in the current year.

For the nine months ended September 30, 2022 and 2021, the effective tax rate differs from the U.S.

The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 4.0 million and are reported as a reduction to the long-term debt balance as of March 31, 2023.

The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 1.4 million and are recorded as other assets (current and long-term) on the condensed consolidated balance sheet as of March 31, 2023.

The Company’s effective tax rate on pre-tax income was 20.7 % and 38.2 % for the three months ended March 31, 2023 and 2022 respectively.

The Company’s effective tax rate decreased as a result of increased deductibility of interest costs due to a tax election made by the Company in the third quarter of 2022 and the reduction of a valuation allowance in the first quarter of 2023 related to state taxes.

For the three months ended March 31, 2023 and 2022, the effective tax rate differs from the U.S.

federal statutory income tax rate as follows:

September 30,

Tax at federal statutory rate

3 unchanged sentences

Effective income tax rate

Stockholders’ Deficit

Common Stock has a par value of $ 0.001 per share.

Holders of Common Stock are entitled to receive dividends and distributions subject to the participation rights of holders of all classes of stock at the time outstanding, as such holders may have prior rights as to dividends pursuant to the rights of any series of Preferred Stock.

Upon any liquidation, dissolution or winding up of the Company, after required payments are made to holders of any series of Preferred Stock, any remaining assets of the Company will be distributed ratably to the holders of Common Stock.

Holders of Common Stock are entitled to one vote per share.

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.

For the three months ended March 31, 2023 and 2022, 28,831 and 54,050 potentially dilutive securities, respectively, are excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive.

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

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

(dollars in thousands)

Basic weighted-average common shares outstanding

4 unchanged sentences

Commitments and Contingencies

Refer to Note 9, “Financing and Operating Leases” for details on the Company’s future cash payments with respect to financing and operating leases.

During the normal course of business, the Company enters into non-cancellable agreements to purchase goods and services, including production equipment and information technology systems.

The Company leases real property for its facilities under non-cancellable operating lease agreements.

The Company leases real property

for its facilities under non-cancellable operating lease agreements.

Land and facility leases expire at various dates between 2023 and 2029 and contain various provisions for rental adjustments and renewals.

13 unchanged sentences

SPS alleges that the Company incorporates the patented technology into its products that use contactless communication.

The Company does not manufacture antennas;

The Company does not produce antennas;

it purchases certain antenna-related components from SPS and a number of other suppliers.

2 unchanged sentences

As a result, the Delaware District Court stayed the case pending resolution of the requests for review.

Thus far, the United States Patent Office has instituted proceedings with respect to three of the IPR requests and the other remains pending.

The current proceedings

in the patent office are scheduled to run through June 22, 2023.

Should the remaining IPR request be denied or should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously.

The United States Patent Office has instituted proceedings with respect to all of the IPR requests.

The current proceedings in the patent office are scheduled to run through September 2023.

Should the patents survive review by the United States Patent Office, the Company intends to defend the suit vigorously.

However, no assurance can be given that this matter will be resolved favorably.

Due to the stage of this matter, the Company is unable to predict the outcome or the possible loss or range of loss, if any, associated with this matter, and no liability has been recorded as of September 30, 2022 .

In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business.

The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations.

Estimated Sales Tax Liability

The Company has continued to evaluate a state sales tax liability analysis for states in which it has economic nexus and to collect exemption documentation from its customers.

It is probable that the Company will be subject to sales tax liabilities plus interest and penalties relating to historical activity in certain states.

The estimated liability for sales tax as of September 30, 2022 and December 31, 2021 was $ 762 and $ 1,019 , respectively, and is recorded in a ccrued expenses in the condensed consolidated balance sheets.

The liability decreased from the estimate recorded in the prior period primarily due to the Company remitting cash to the applicable state tax authorities for historical sales tax and interest.

The Company may be subject to examination by the relevant state tax authorities.

Due to the estimates involved in the analysis, the liability may change in the future.

The Company is unable to predict a range of additional loss that is reasonably possible.

Sales tax recovered from customers reduces the estimated expense when it is received or probable of collection .

Future changes to the liability that impact the condensed consolidated statements of operations will be recorded within “Selling, general and administrative” (“SG&A”).

During the nine months ended September 30, 2022 and 2021, the Company recorded sales tax expense of $ 74 and sales tax benefit of $ 465 , respectively, within SG&A for current activity relating to updates to the estimated liability.

Voluntary Disclosure Program

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Stock-Based Compensation

CPI Card Group Inc.

Omnibus Incentive Plan

In October 2015, the Company adopted the CPI Card Group Inc.

Omnibus Incentive Plan (the ‘Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors, and directors.

On May 27, 2021, the Company’s stockholders approved an amendment and restatement of the Omnibus Plan to, among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan.

As of September 30, 2022, there were 879,197 shares of Common Stock available for grant under the Omnibus Plan.

During the nine months ended September 30, 2022, the Company granted 44,905 awards of non-qualified stock options.

The Company granted 115,659 awards of non-qualified stock options of during the nine months ended September 30, 2021.

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

Contractual Term

Outstanding as of December 31, 2021

Outstanding as of September 30, 2022

Options vested and exercisable as of September 30, 2022

Options vested and expected to vest as of September 30, 2022

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

Weighted-Average

Grant-Date Fair Value

Unvested as of December 31, 2021

Unvested as of September 30, 2022

Unvested stock options of 108,850 as of September 30, 2022 have a seven year term and are expected to vest ratably over a two-year period on each anniversary of the grant date.

The fair value of the stock option awards granted during the nine months ended September 30, 2022, was determined using a Black-Scholes option-pricing model with the following weighted-average assumptions:

Nine Months Ended

September 30,

Expected term in years (1)

Volatility (2)

Risk-free interest rate (3)

Dividend yield (4)

(1) The Company estimated the expected term based on the average of the weighted-average vesting period and the contractual term of the stock option awards by utilizing the “simplified method”, as the Company does not have sufficient available historical data to estimate the expected term of these stock option awards.

(2) Volatility was based on a weighting of the Company’s historical volatility and its peer group, which is comprised of companies with similar industry, size and financial leverage.

(3) The risk-free interest rate was determined by using the United States Treasury rate for the period consistent with the expected option term described above.

(4) The Company’s expected annual dividend yield was zero based on current practice.

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

Outstanding as of December 31, 2021

Outstanding as of September 30, 2022

The restricted stock unit awards contain conditions associated with continued employment or service.

Restricted stock units granted in 2022 are expected to vest ratably over a two-year period on each anniversary of the grant date.

On the vesting date, shares of Common Stock will be issued to the award recipients.

Compensation expense for the Omnibus Plan for the three months ended September 30, 2022 and 2021 was $ 966 and $ 116 , respectively.

Compensation expense for the Omnibus Plan for the nine months ended September 30, 2022 and 2021 was $ 2,928 and $ 214 , respectively.

As of September 30, 2022, the total unrecognized compensation expense related to unvested options and restricted stock units is $ 1,892 , which the Company expects to recognize over an estimated weighted-average period of approximately 1.14 years.

On May 27, 2021, the Company’s stockholders approved an amendment and restate of the Omnibus Plan, to among other things, increase the total number of shares of the Company’s Common Stock reserved and available for issuance, resulting in a total of 2,200,000 shares of Common Stock issuable under the Omnibus Plan.

Beginning in the first quarter of 2023, certain of the Company’s employees are eligible to receive a quarterly grant comprising one-fourth of the annual equity-based incentive component of their total compensation.

These awards will be in the form of a mix of restricted stock units and stock options granted under the Omnibus Plan.

The number of shares awarded will be determined based on the grant-date fair value for options and on a value tied to the monthly average closing price of the Company’s common stock for restricted stock awards.

All equity awards are contingent and issued only upon quarterly approval by the compensation committee of the Company’s board of directors.

The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments.

All stock-based compensation to employees is measured at fair value and expensed on a straight-line basis over the requisite service period for each tranche of the award.

During the three months ended March 31, 2023, the Company granted 8,307 options at a weighted average exercise price of $ 45.01 .

As of March 31, 2023, there were 783,769 options outstanding at a weighted average exercise price of $ 18.40 .

During the three months ended March 31, 2023, the Company granted 24,003 restricted stock units at a weighted average grant date fair value of $ 45.01 , and as of March 31, 2023 there were 88,576 outstanding restricted stock units at a weighted average grant date fair value of $ 29.54 .

Segment Reporting

5 unchanged sentences

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, 2022, the Company’s reportable segments were as follows:

As of March 31, 2023, the Company’s reportable segments were as follows:

● Debit and Credit;

1 unchanged sentence

Debit and Credit Segment

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States.

The Debit and Credit segment primarily produces Financial Payment Cards and provides integrated card services for card-issuing financial institutions primarily in the United States.

Products produced by this segment primarily include EMV and non-EMV Financial Payment Cards, including contact and contactless cards, and Earth Elements TM Eco-Focused Cards.

The Company also sells Card@Once instant card issuance solutions, and private label credit cards that are not issued on the networks of the Payment Card Brands.

The Company provides CPI On-Demand ® services, where images, personalized payment cards, and related collateral are produced on a one-by-one, on demand basis for customers.

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 Payment Card Industry Security Standards Counsel by multiple Payment Card Brands.

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 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 Payment Card Industry Security Standards Counsel by multiple Payment Card Brands.

The Prepaid Debit segment primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States, including tamper-evident security packaging.

This segment also produces Financial Payment Cards issued on the networks of the Payment Card Brands that are included in the tamper-evident

security packages.

The Prepaid Debit segment facilities and operations are audited for compliance with the standards of the PCI Security Standards Council by multiple Payment Card Brands.

The Other segment includes corporate expenses.

Performance Measures of Reportable Segments

Net Sales and EBITDA of the Company’s reportable segments for the three and nine months ended September 30, 2022 and 2021, were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

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 months ended March 31, 2023 and 2022, were as follows:

Three Months Ended March 31, 2023

Debit and Credit

1 unchanged sentence

Intersegment Eliminations

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

Cost of sales

Operating expenses

Income from operations

EBITDA by segment:

Income from operations

Depreciation and amortization

Other income (expenses)

Three Months Ended March 31, 2022

Debit and Credit

Prepaid Debit

The following table provides a reconciliation of total segment EBITDA to net income for the three and nine months ended September 30, 2022 and 2021:

Three Months Ended

Nine Months Ended

September 30,

Intersegment Eliminations

(dollars in thousands)

Cost of sales

Operating expenses

Income from operations

EBITDA by segment:

Income from operations

Depreciation and amortization

Other income (expenses)

Three Months Ended March 31,

(dollars in thousands)

Total segment EBITDA

2 unchanged sentences

Depreciation and amortization

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

Each of the Company’s Net Sales, Property, Equipment and Leasehold Improvements, and Long-Lived Assets relating to geographic locations outside of the United States is insignificant.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements