CPI Card Group Inc. 10-Q

Item 1 . Financial Statements ​ CPI Card Group Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands, except share and per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ 2024 ​ 2023 Assets ​ ​ ​ ​ ​ Current assets: ​ ​ ​ ​ ​ Cash and cash equivalents $ 17,144 ​ $ 12,413 Accounts receivable, net ​ 68,539 ​ ​ 73,724 Inventories, net ​ 83,381 ​ ​ 70,594 Prepaid expenses and other current assets ​ 11,862 ​ ​ 8,647 Total current assets ​ 180,926 ​ ​ 165,378 Plant, equipment, leasehold improvements and operating lease right-of-use assets, net of accumulated depreciation of $ 70,039 and $ 66,436 respectively ​ 61,033 ​ ​ 63,053 Intangible assets, net of accumulated amortization of $ 52,731 and $ 51,763 respectively ​ 13,154 ​ ​ 14,122 Goodwill ​ 47,150 ​ ​ 47,150 Other assets ​ 17,517 ​ ​ 3,980 Total assets $ 319,780 ​ $ 293,683 Liabilities and stockholders’ deficit ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ Accounts payable $ 23,643 ​ $ 12,802 Accrued expenses ​ 49,203 ​ ​ 35,803 Deferred revenue and customer deposits ​ 1,172 ​ ​ 840 Total current liabilities ​ 74,018 ​ ​ 49,445 Long-term debt ​ 265,326 ​ ​ 264,997 Deferred income taxes ​ 6,742 ​ ​ 7,139 Other long-term liabilities ​ 22,145 ​ ​ 24,038 Total liabilities ​ 368,231 ​ ​ 345,619 Commitments and contingencies (Note 12) ​ ​ ​ ​ ​ Series A Preferred Stock; $ 0.001 par value— 100,000 shares authorized; 0 shares issued and outstanding at March 31, 2024 and December 31, 2023 ​ — ​ ​ — Stockholders’ deficit: ​ ​ ​ ​ ​ Common stock; $ 0.001 par value— 100,000,000 shares authorized; 11,391,476 and 11,446,155 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively ​ 11 ​ ​ 11 Capital deficiency ​ ( 104,193 ) ​ ​ ( 102,223 ) Accumulated earnings ​ 55,731 ​ ​ 50,276 Total stockholders’ deficit ​ ( 48,451 ) ​ ​ ( 51,936 ) Total liabilities and stockholders’ deficit $ 319,780 ​ $ 293,683 ​ See accompanying notes to condensed consolidated financial statements ​ ​ ​ 3 Table of Contents 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 March 31, ​ 2024 2023 Net sales: ​ ​ ​ ​ ​ Products $ 58,158 ​ $ 75,790 Services ​ 53,778 ​ ​ 45,062 Total net sales ​ 111,936 ​ ​ 120,852 Cost of sales: ​ ​ ​ ​ ​ Products (exclusive of depreciation and amortization shown below) ​ 37,802 ​ ​ 45,980 Services (exclusive of depreciation and amortization shown below) ​ 29,929 ​ ​ 29,404 Depreciation and amortization ​ 2,687 ​ ​ 2,374 Total cost of sales ​ 70,418 ​ ​ 77,758 Gross profit ​ 41,518 ​ ​ 43,094 Operating expenses: ​ ​ ​ ​ ​ Selling, general and administrative (exclusive of depreciation and amortization shown below) ​ 26,043 ​ ​ 21,066 Depreciation and amortization ​ 1,330 ​ ​ 1,430 Total operating expenses ​ 27,373 ​ ​ 22,496 Income from operations ​ 14,145 ​ ​ 20,598 Other expense, net: ​ ​ ​ ​ ​ Interest, net ​ ( 6,425 ) ​ ​ ( 6,781 ) Other expense, net ​ ( 65 ) ​ ​ ( 114 ) Total other expense, net ​ ( 6,490 ) ​ ​ ( 6,895 ) Income before income taxes ​ 7,655 ​ ​ 13,703 Income tax expense ​ ( 2,200 ) ​ ​ ( 2,830 ) Net income $ 5,455 ​ $ 10,873 ​ ​ ​ ​ ​ ​ Basic and diluted earnings per share: ​ ​ ​ ​ ​ Basic earnings per share $ 0.48 ​ $ 0.95 Diluted earnings per share $ 0.46 ​ $ 0.91 ​ ​ ​ ​ ​ ​ Basic weighted-average shares outstanding ​ 11,266,699 ​ ​ 11,394,919 Diluted weighted-average shares outstanding ​ 11,769,364 ​ ​ 11,901,581 ​ ​ ​ ​ ​ ​ Comprehensive income: ​ ​ ​ ​ ​ Net income $ 5,455 ​ $ 10,873 Total comprehensive income $ 5,455 ​ $ 10,873 See accompanying notes to condensed consolidated financial statements ​ ​ ​ 4 Table of Contents 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 December 31, 2023 11,446,155 ​ $ 11 ​ $ ( 102,223 ) ​ $ 50,276 ​ $ ( 51,936 ) Shares issued under stock-based compensation plans 13,579 ​ ​ — ​ ​ ( 109 ) ​ ​ — ​ ​ ( 109 ) Stock-based compensation — ​ ​ — ​ ​ 3,060 ​ ​ — ​ ​ 3,060 Repurchase and retirement of common shares ( 68,258 ) ​ ​ — ​ ​ ( 4,921 ) ​ ​ — ​ ​ ( 4,921 ) Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 5,455 ​ ​ 5,455 March 31, 2024 11,391,476 ​ $ 11 ​ $ ( 104,193 ) ​ $ 55,731 ​ $ ( 48,451 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Capital ​ Accumulated ​ ​ ​ Shares ​ Amount ​ deficiency ​ earnings ​ Total December 31, 2022 11,390,355 ​ $ 11 ​ $ ( 108,379 ) ​ $ 26,291 ​ $ ( 82,077 ) Shares issued under stock-based compensation plans 34,273 ​ ​ — ​ ​ ( 69 ) ​ ​ — ​ ​ ( 69 ) Stock-based compensation — ​ ​ — ​ ​ 541 ​ ​ — ​ ​ 541 Components of comprehensive income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income — ​ ​ — ​ ​ — ​ ​ 10,873 ​ ​ 10,873 March 31, 2023 11,424,628 ​ $ 11 ​ $ ( 107,907 ) ​ $ 37,164 ​ $ ( 70,732 ) ​ See accompanying notes to condensed consolidated financial statements ​ ​ 5 Table of Contents CPI Card Group Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2024 2023 Operating activities ​ ​ ​ ​ ​ Net income $ 5,455 ​ $ 10,873 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ Depreciation expense ​ 3,049 ​ ​ 2,837 Amortization expense ​ 968 ​ ​ 967 Stock-based compensation expense ​ 3,060 ​ ​ 541 Amortization of debt issuance costs and debt discount ​ 459 ​ ​ 473 Loss on debt extinguishment ​ — ​ ​ 119 Deferred income taxes ​ ( 397 ) ​ ​ ( 271 ) Other, net ​ 223 ​ ​ 12 Changes in operating assets and liabilities: ​ ​ ​ ​ ​ Accounts receivable, net ​ 5,171 ​ ​ 4,335 Inventories ​ ( 12,984 ) ​ ​ ( 1,464 ) Prepaid expenses and other assets ​ ( 17,610 ) ​ ​ 310 Income taxes, net ​ 728 ​ ​ 550 Accounts payable ​ 10,681 ​ ​ 1,533 Accrued expenses and other liabilities ​ 9,730 ​ ​ ( 11,358 ) Deferred revenue and customer deposits ​ 332 ​ ​ ( 1,456 ) Cash provided by operating activities ​ 8,865 ​ ​ 8,001 Investing activities ​ ​ ​ ​ ​ Capital expenditures for plant, equipment and leasehold improvements, net ​ ( 1,506 ) ​ ​ ( 4,145 ) Other ​ — ​ ​ 50 Cash used in investing activities ​ ( 1,506 ) ​ ​ ( 4,095 ) Financing activities ​ ​ ​ ​ ​ Principal payments on Senior Notes ​ — ​ ​ ( 7,903 ) Proceeds from ABL Revolver ​ — ​ ​ 8,000 Other ​ ( 109 ) ​ ​ ( 69 ) Payments on finance lease obligations ​ ( 1,269 ) ​ ​ ( 820 ) Common stock repurchased ​ ( 1,250 ) ​ ​ — Cash used in financing activities ​ ( 2,628 ) ​ ​ ( 792 ) Effect of exchange rates on cash ​ — ​ ​ 6 Net increase in cash and cash equivalents ​ 4,731 ​ ​ 3,120 Cash and cash equivalents, beginning of period ​ 12,413 ​ ​ 11,037 Cash and cash equivalents, end of period $ 17,144 ​ $ 14,157 Supplemental disclosures of cash flow information ​ ​ ​ ​ ​ Cash paid (refunded) during the period for: ​ ​ ​ ​ ​ Interest $ 11,903 ​ $ 12,608 Income taxes paid $ 16 ​ $ 28 Income taxes refunded $ ( 163 ) ​ $ — Right-of-use assets obtained in exchange for lease obligations: ​ ​ ​ ​ ​ Operating leases $ — ​ $ 168 Financing leases $ — ​ $ 2,169 Accounts payable and accrued expenses for capital expenditures for plant, equipment and leasehold improvements $ 263 ​ $ 422 Unsettled share repurchases included in accrued expenses $ 4,404 ​ $ — ​ See accompanying notes to condensed consolidated financial statements ​ 6 Table of Contents 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. ​ 7 Table of Contents 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 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 that the application of ASU 2023-07 will 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 has elected not to early adopt this accounting standard. 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 March 31, 2024 ​ Products ​ Services ​ Total Debit and Credit $ 58,371 ​ $ 29,602 ​ $ 87,973 Prepaid Debit ​ — ​ ​ 24,198 ​ ​ 24,198 Intersegment eliminations ​ ( 213 ) ​ ( 22 ) ​ ( 235 ) Total $ 58,158 ​ $ 53,778 ​ $ 111,936 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, 2023 ​ Products ​ Services ​ Total Debit and Credit $ 76,032 ​ $ 25,953 ​ $ 101,985 Prepaid Debit ​ — ​ ​ 19,130 ​ ​ 19,130 Intersegment eliminations ​ ( 242 ) ​ ( 21 ) ​ ( 263 ) Total $ 75,790 ​ $ 45,062 ​ $ 120,852 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 contact-EMV ® , contactless dual-interface EMV, contactless and magnetic stripe cards, CPI’s eco-focused solutions, including Second Wave ® and Earthwise ® cards made with upcycled plastic, metal cards, private label credit cards and retail gift cards. Card@Once ® printers and consumables are also included in “Products” net sales, and their associated revenues are recognized at the time of shipping. The Company includes gross shipping and handling revenue in net sales, and shipping and handling costs in cost of sales. 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 8 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ ​ December 31, ​ ​ 2024 ​ ​ 2023 Trade accounts receivable $ 59,788 $ 69,245 Unbilled accounts receivable ​ 8,997 ​ 4,725 ​ ​ 68,785 ​ 73,970 Less allowance for credit losses ​ ( 246 ) ​ ​ ( 246 ) ​ $ 68,539 ​ $ 73,724 ​ ​ 4 . Inventories Inventories consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ ​ December 31, ​ ​ 2024 ​ ​ 2023 Raw materials $ 79,825 $ 66,210 Finished goods ​ 6,531 ​ 7,162 Inventory reserve ​ ( 2,975 ) ​ ​ ( 2,778 ) ​ $ 83,381 $ 70,594 ​ ​ 5 ​ ​ 9 Table of Contents 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ ​ December 31, ​ ​ 2024 ​ ​ 2023 Machinery and equipment $ 68,466 $ 67,506 Machinery and equipment under financing leases ​ 23,774 ​ ​ 23,774 Furniture, fixtures and computer equipment ​ 160 ​ 107 Leasehold improvements ​ 17,419 ​ 16,335 Construction in progress ​ 1,264 ​ 1,778 Operating lease right-of-use assets ​ 19,989 ​ ​ 19,989 ​ ​ 131,072 ​ ​ 129,489 Less accumulated depreciation and amortization ​ ( 70,039 ) ​ ( 66,436 ) ​ $ 61,033 $ 63,053 ​ ​ ​ ​ 6. Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). In determining fair value, the Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: ● Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. ​ ● Level 2— Observable inputs other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term for the assets or liabilities. ​ ● Level 3— Valuations based on unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. ​ 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 March 31, 2024 ​ March 31, ​ March 31, ​ (Using Fair Value Hierarchy) ​ 2024 ​ 2024 ​ Level 1 ​ Level 2 ​ Level 3 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes $ 267,897 ​ $ 267,147 ​ $ — ​ $ 267,147 ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Senior Notes $ 267,897 $ 261,834 ​ $ — $ 261,834 ​ $ — ​ The aggregate fair value of the Company’s Senior Notes (as defined in Note 8, “Long-Term Debt”) was based on bank quotes. The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable each approximate fair value due to their short-term nature. 10 Table of Contents 7. Accrued Expenses ​ Accrued expenses consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ December 31, ​ 2024 ​ 2023 Accrued payroll and related employee expenses $ 8,146 $ 11,431 Accrued employee performance bonuses ​ 2,009 ​ 667 Employer payroll taxes ​ 1,377 ​ 298 Accrued rebates ​ 1,540 ​ ​ 2,919 Capitalized contract costs payable ​ 15,000 ​ ​ — Accrued interest ​ 999 ​ ​ 6,830 Current operating and financing lease liabilities ​ 7,195 ​ ​ 7,318 Accrued share repurchases ​ 4,404 ​ ​ 733 Other ​ 8,533 ​ ​ 5,607 Total accrued expenses $ 49,203 ​ $ 35,803 ​ Other accrued expenses as of March 31, 2024, and December 31, 2023, consisted primarily of federal income and sales tax accruals, as well as self-insurance claims that have yet to be reported. ​ 8. Long-Term Debt ​ As of March 31, 2024, and December 31, 2023, long-term debt consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, December 31, ​ ​ 2024 ​ 2023 Senior Notes (1) ​ $ 267,897 ​ $ 267,897 Unamortized deferred financing costs ​ ( 2,571 ) ​ ( 2,900 ) Total long-term debt ​ ​ 265,326 ​ ​ 264,997 Less current maturities ​ ​ — ​ ​ — Long-term debt, net of current maturities ​ $ 265,326 ​ $ 264,997 (1) The Senior Notes bear interest at a fixed rate of 8.625 % . Senior Notes On March 15, 2021, the Company completed an offering by its wholly-owned subsidiary, CPI CG Inc., of $ 310.0 million aggregate principal amount of 8.625 % Senior Secured Notes due 2026 (the “Senior Notes”) and related guarantees. The Senior Notes bear interest at a rate of 8.625 % per annum and mature on March 15, 2026. Interest is payable on the Senior Notes on March 15 and September 15 of each year. The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation. The annual excess cash flow calculation is determined pursuant to the terms of that certain Indenture, dated as of March 15, 2021, by and among CPI CG Inc., the Company, the subsidiary guarantors and U.S. Bank National Association, as trustee, with any required prepayments to be made after the issuance of the Company’s annual financial statements. No such payment is required to be made in 2024 and was not required to be made in 2023 based on the Company’s operating results for the years ended December 31, 2023 and 2022, respectively. ABL Revolver 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 (the “ABL Revolver”). The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes. On March 3, 2022, the Company and CPI CG Inc. entered into Amendment No. 1 to the Credit Agreement (the “Amendment”), which amended the ABL Revolver. The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to 11 Table of Contents $ 75.0 million, increased the uncommitted accordion feature to $ 25.0 million from $ 15.0 million, and revised the interest rate provisions to replace the prior LIBOR benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York. On October 11, 2022, the Company and CPI CG Inc. entered into Amendment No. 2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory. Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable interest rate margin. The Company may select a one, three or six-month term SOFR, which is adjusted for a credit spread of 0.10 % to 0.30 % depending on the term selected. Through March 31, 2023, the applicable interest rate margin ranged from 1.50 % to 1.75 % depending on the average excess availability of the facility for the most recently completed quarter. The unused portion of the ABL Revolver commitment accrued a monthly unused line fee, 0.50 % per annum through March 31, 2023, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month. The interest rate margin and unused line fee percentage changed, effective April 1, 2023, to between 1.25 % and 1.75 % (interest rate margin) and 0.375 % and 0.50 % (unused line fee). Deferred Financing Costs and Discount Certain costs and discounts incurred with borrowings are reflected as a reduction to the long-term debt balance. These costs are amortized as an adjustment to interest expense over the life of the borrowing using the effective-interest rate method. The remaining unamortized debt issuance costs recorded on the Senior Notes were $ 2.6 million and are reported as a reduction to the long-term debt balance as of March 31, 2024. The remaining unamortized net discount and debt issuance costs on the ABL Revolver and related Amendment were $ 0.9 million and are recorded as other assets (current and long-term) on the consolidated balance sheet as of March 31, 2024. 9. Income Taxes The Company’s effective tax rates on pre-tax income were 28.7 % and 20.7 % for the three months ended March 31, 2024 and 2023, respectively. The increase in the effective tax rate for the three months ended March 31, 2024 compared to the corresponding period in the prior year primarily was due to the reduction of a valuation allowance in the first quarter of 2023 related to a state’s law change. For the three months ended March 31, 2024 and 2023, the effective tax rate differs from the U.S. federal statutory income tax rate as follows: ​ ​ ​ ​ ​ ​ ​ ​ March 31, ​ ​ 2024 ​ 2023 ​ Tax at federal statutory rate 21.0 % ​ 21.0 % State taxes, net 6.1 ​ ​ 4.7 ​ Valuation allowance — ​ ​ ( 5.2 ) ​ Permanent items 3.0 ​ ​ 1.2 ​ Deductibility limitations on excess compensation ( 1.8 ) ​ ​ 0.1 ​ Other 0.4 ​ ​ ( 1.1 ) ​ Effective income tax rate 28.7 % ​ 20.7 % ​ ​ 10. Stockholders’ Deficit Share Repurchases On November 2, 2023, the Company's board of directors approved a share repurchase plan authorizing the Company to repurchase up to $ 20.0 million of the Company's common stock, par value $ 0.001 per share. This authorization expires on December 31, 2024. During the three months ended March 31, 2024, the Company repurchased 68,258 shares of its common stock at an average price of $ 18.29 per share, excluding commissions, or $ 1.2 million in aggregate, on a trade date basis. In accordance with the Stock Repurchase Agreement entered into on December 6, 2023, the Company is obligated to purchase 244,314 shares from Tricor Pacific Capital Partners (Fund IV) US, LP, which is one of the Company’s majority stockholders and affiliated with Parallel49 Equity, at an average price of $ 18.03 per share, as of March 31, 2024. This 12 Table of Contents obligation is based on a multiple of the number of shares the Company purchased in the open market from the date of the agreement through March 31, 2024, payment for which is due in the second quarter of 2024. As of March 31, 2024, the Company had an authorized amount of $ 14.1 million remaining under the share repurchase plan. 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. The Company's calculation of weighted-average shares outstanding has been reduced by 244,314 shares that the Company is obligated to repurchase from Parallel49 in April 2024. Shares excluded from the calculation of diluted earnings per share because their inclusion would be anti-dilutive were 39,933 and 28,831 for the three months ended March 31, 2024 and 2023, respectively. The following table sets forth the computation of basic and diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2024 2023 Numerator: ​ ​ ​ ​ ​ Net income $ 5,455 ​ $ 10,873 ​ ​ ​ ​ ​ ​ Denominator: ​ ​ ​ ​ ​ Basic weighted-average common shares outstanding 11,266,699 ​ 11,394,919 Dilutive shares ​ 502,665 ​ ​ 506,662 Diluted weighted-average common shares outstanding ​ 11,769,364 ​ ​ 11,901,581 ​ ​ ​ ​ ​ ​ Basic earnings per share $ 0.48 ​ $ 0.95 ​ ​ ​ ​ ​ ​ Diluted earnings per share $ 0.46 ​ $ 0.91 ​ ​ 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. Smart Packaging Solutions SA v. CPI Card Group Inc. On April 20, 2021, Smart Packaging Solutions, SA (“SPS”) filed a patent infringement lawsuit against the Company in the United States District Court for the District of Delaware seeking an unspecified amount of damages and equitable relief. In the complaint, SPS alleges that the Company infringed four patents that SPS has exclusively licensed from Feinics AmaTech Teoranta. The patents all relate to antenna technology. SPS alleges that the Company incorporates the patented technology into its products that use contactless communication. The Company does not produce antennas; it purchases certain antenna-related components from SPS and a number of other suppliers. The Company’s motion to dismiss the complaint is currently pending. Additionally, a third party, Infineon, filed requests for Inter Parties Review (“IPR”) proceedings concerning each of the four patents. As a result, the Delaware District Court stayed the case pending resolution of the requests for review. The United States Patent Office has instituted proceedings with respect to all of the IPR requests; three of the patents have been invalidated in the IPR proceedings and any remaining claims in the fourth patent that are relevant to the Company have also been invalidated. While no assurance can be given that this matter will be resolved favorably, the patent owner has dismissed its appeals related to the three previously invalidated patents and the Company expects the pending litigation will be dismissed as a result of these developments. 13 Table of Contents In addition to the matter described above, the Company may be subject to routine legal proceedings in the ordinary course of business. The Company believes that the ultimate resolution of any such matters will not have a material adverse effect on its business, financial condition or results of operations. Voluntary Disclosure Program The Company is subject to unclaimed or abandoned property (escheat) laws which require it to turn over to state governmental authorities the property of others held by the Company that has been unclaimed for specified periods of time. Property subject to escheat laws generally relates to uncashed checks, trade accounts receivable credits and unpaid payable balances. During the second quarter of 2022, the Company received a letter from the Delaware Secretary of State inviting the Company to participate in the Delaware Secretary of State’s Abandoned or Unclaimed Property Voluntary Disclosure Agreement Program to avoid being sent an audit notice by the Delaware Department of Finance. On August 31, 2022, the Company entered into Delaware’s Voluntary Disclosure Agreement Program in order to voluntarily comply with Delaware’s abandoned property law in exchange for certain protections and benefits. The Company intends to work in good faith to complete a review of its books and records related to unclaimed or abandoned property during the periods required under the program. Any potential loss, or range of loss, that may result from this matter is not currently reasonably estimable. 13. Stock-Based Compensation In October 2015, the Company adopted the CPI Card Group Inc. Omnibus Incentive Plan (as amended and supplemented, the “Omnibus Plan”) pursuant to which cash and equity-based incentives may be granted to participating employees, advisors, and directors. Effective January 30, 2024, the Company’s stockholders approved an amendment to the Omnibus Plan to increase the total number of shares of the Company’s Common Stock reserved and available for issuance thereunder by 1,000,000 shares, resulting in a total of 3,200,000 shares issuable under the Omnibus Plan. As of March 31, 2024, there were 962,285 shares of Common Stock available for grant under the Omnibus Plan. In June 2023, the Company announced an award comprised of 25 % nonqualified stock options and 75 % restricted stock units to its CEO at the time as an incentive to remain employed by the Company through February 28, 2024. The first one -third of the awards was granted in June 2023, the second one -third was granted in August 2023, and the remainder was granted in November 2023. All of these awards will vest ratably over a two-year period irrespective of employment status with expense related to these awards to be recognized by the Company through February 28, 2024. As part of the CEO’s incentive package, the requisite service and exercise periods for his awards granted in 2023 prior to June 2023 were also modified with expense related to the modification being recognized in June 2023 through February 2024. During 2024, executives will 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 March 31, 2024, there were 904,438 options outstanding at a weighted average exercise price of $ 18.87 . No options were granted during the three months ended March 31, 2024. Options have 7-year terms and are issued with exercise prices equal to the fair market value of the Company’s common stock on the grant date. During the three months ended March 31, 2024, the Company granted 89,452 restricted stock units at a weighted average grant date fair value of $ 18.25 , and as of March 31, 2024, there were 786,673 outstanding restricted stock units at a weighted average grant date fair value of $ 20.55 . In January 2024, the Company granted 60,000 performance stock units (PSU) in connection with the appointment of its CEO, with a grant date fair value of $ 0.9 million using a Monte Carlo simulation model. The PSU award will vest, subject to continuous employment, in equal one -third increments upon the attainment of the rolling weighted average closing price of the Company’s common stock equaling or exceeding each of $ 35.00 , $ 50.00 , and $ 65.00 , in each case, for at least 90 consecutive trading days during the five-year performance period commencing on the grant date. All equity awards are contingent and issued only upon approval by the compensation committee of the Company’s board of directors, or as otherwise permitted under the Omnibus Plan. The Company accounts for stock-based compensation pursuant to ASC 718, Share-Based Payments. All stock-based compensation is required to be 14 Table of Contents 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 March 31, 2024, the Company’s reportable segments were as follows: ● Debit and Credit ● Prepaid Debit ● Othe r ​ 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. ​ 15 Table of Contents 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 months ended March 31, 2024 and 2023, were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, 2024 ​ Debit and Credit ​ Prepaid Debit ​ Other ​ Intersegment Eliminations ​ Total Net sales $ 87,973 ​ $ 24,198 ​ $ — ​ $ ( 235 ) ​ $ 111,936 Cost of sales ​ 56,478 ​ ​ 14,175 ​ ​ — ​ ​ ( 235 ) ​ ​ 70,418 Gross profit ​ 31,495 ​ ​ 10,023 ​ ​ — ​ ​ — ​ ​ 41,518 Operating expenses ​ 8,741 ​ ​ 1,278 ​ ​ 17,354 ​ ​ — ​ ​ 27,373 Income (loss) from operations $ 22,754 ​ $ 8,745 ​ $ ( 17,354 ) ​ $ — ​ $ 14,145 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EBITDA by segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations $ 22,754 ​ $ 8,745 ​ $ ( 17,354 ) ​ $ — ​ $ 14,145 Depreciation and amortization ​ 2,150 ​ ​ 871 ​ ​ 996 ​ ​ — ​ ​ 4,017 Other income (expense) ​ ( 62 ) ​ ​ ( 1 ) ​ ​ ( 2 ) ​ ​ — ​ ​ ( 65 ) EBITDA $ 24,842 ​ $ 9,615 ​ $ ( 16,360 ) ​ $ — ​ $ 18,097 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, 2023 ​ Debit and Credit ​ Prepaid Debit ​ Other ​ Intersegment Eliminations ​ Total Net sales $ 101,985 ​ $ 19,130 ​ $ — ​ $ ( 263 ) ​ $ 120,852 Cost of sales ​ 63,801 ​ ​ 14,220 ​ ​ — ​ ​ ( 263 ) ​ ​ 77,758 Gross profit ​ 38,184 ​ ​ 4,910 ​ ​ — ​ ​ — ​ ​ 43,094 Operating expenses ​ 8,158 ​ ​ 1,233 ​ ​ 13,105 ​ ​ — ​ ​ 22,496 Income (loss) from operations $ 30,026 ​ $ 3,677 ​ $ ( 13,105 ) ​ $ — ​ $ 20,598 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ EBITDA by segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations $ 30,026 ​ $ 3,677 ​ $ ( 13,105 ) ​ $ — ​ $ 20,598 Depreciation and amortization ​ 2,161 ​ ​ 624 ​ ​ 1,019 ​ ​ — ​ ​ 3,804 Other income (expense) ​ 5 ​ ​ — ​ ​ ( 119 ) ​ ​ — ​ ​ ( 114 ) EBITDA $ 32,192 ​ $ 4,301 ​ $ ( 12,205 ) ​ $ — ​ $ 24,288 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended March 31, ​ 2024 2023 Net income $ 5,455 ​ $ 10,873 Interest, net ​ 6,425 ​ ​ 6,781 Income tax expense 2,200 ​ 2,830 Depreciation and amortization 4,017 ​ 3,804 EBITDA $ 18,097 ​ $ 24,288 ​ ​ ​ ​ ​ 16 Table of Contents ​