What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-08 compared with 2025-05-07 · 72 added, 60 removed, 149 unchanged (47% of the section changed)

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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, 2025.

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, 2024 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, 2025 (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”).

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2025 (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.

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our inability to make debt service payments or refinance such indebtedness;

our inability to successfully execute on acquisitions, including the acquisition of Arroweye, or divestitures or strategic relationships;

our inability to successfully execute on, integrate, or achieve the anticipated benefits of acquisitions, including the acquisition of Arroweye, or execute on divestitures or strategic relationships;

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;

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the effects of climate change on our business;

our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open

source software;

our inability to adequately protect our trade secrets and intellectual property rights from misappropriation,

infringement claims brought against us and risks related to open source software;

our inability to renew licenses with key technology licensors;

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the effects of trade restrictions, delays or interruptions in our ability to source raw materials and components used in our products from foreign countries;

the effects ongoing foreign conflicts on the global economy;

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;

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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, 2024 filed with the SEC on March 4, 2025, in Part II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q and our other reports filed from time to time with the SEC.

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, 2024 filed with the SEC on March 4, 2025, in Part II, Item 1A, Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2025 filed with the SEC on May 7, 2025 , 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.

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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.

On May 6, 2025, we acquired Arroweye Solutions, Inc.

(“Arroweye”), a leading provider of digitally-driven on-demand payment card solutions for the U.S.

market, based in Las Vegas, Nevada for a purchase price of $45.6 million, subject to customary post-closing working capital adjustments.

Segment Overview

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Services include personalization;

instant issuance, which provides customers the ability to issue an instant personalized debit or credit

card on-demand within a customer location;

instant issuance, which provides customers the ability to issue an instant personalized debit or credit card on-demand within a customer location;

and other payment solutions such as digital push provisioning for mobile wallets.

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Macroeconomic Trends and Uncertainty

We continue to monitor macroeconomic trends and uncertainties such as the effects of recently implemented tariffs, and the potential imposition of modified or additional tariffs, which may have adverse effects on net sales and profitability.

We continue to monitor macroeconomic trends and uncertainties such as the effects of recently implemented tariffs, and the potential imposition of modified or additional tariffs, which have had and may have adverse effects on net sales and profitability.

As a result of the tariffs announced by the U.S.

presidential administration in the first quarter of 2025, and potential tariff modifications or the imposition of tariffs or export controls by other countries, we anticipate increased supply chain challenges and fluctuations in the costs of raw materials and components used in our products.

In addition, tariffs or other trade restrictions may lead to continuing economic uncertainty, which may reduce demand for our products and services, and negatively affect our net sales and profitability.

presidential administration in the first half of 2025, and potential tariff modifications or the imposition of tariffs or export controls by other countries, we have experienced and anticipate further increased supply chain challenges and fluctuations in the costs of raw materials and components used in our products.

In addition, tariffs or other trade restrictions caused and may lead to continuing economic uncertainty, which has and may continue to reduce demand for our products and services, and negatively affect our net sales and profitability.

We are continuing to evaluate these factors and their possible effects as well as our ability to potentially offset all or a portion of the impacts through pricing actions and cost savings efforts for the rest of fiscal year 2025 and in the future.

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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,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands)

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* Calculation not meaningful.

(1) For the three months ended March 31, 2025 and 2024, net sales and cost of sales each include $0.5 million and $0.2 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three months ended March 31, 2025, 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.

Net sales increased for the three months ended March 31, 2025, primarily due to increased Products net sales in our Debit and Credit segment and higher Services net sales in our Prepaid Debit segment, partially offset by lower Services net sales in our Debit and Credit segment.

(1) For the three months ended June 30, 2025 and 2024, net sales and cost of sales each include $0.2 million and $0.6 million of intersegment eliminations, respectively.

For the six months ended June 30, 2025 and 2024, net sales and cost of sales each include $0.7 million and $0.9 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three and six months ended June 30, 2025, 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.

Net sales increased for the three and six months ended June 30, 2025, primarily due to increased Products net sales in our Debit and Credit segment, which included contributions from the acquisition of Arroweye, partially offset by decreased Services net sales in our Debit and Credit and Prepaid Debit segments.

The decrease in Services net sales in the Prepaid Debit segment was attributable to a change in accounting resulting in reduced revenue recognition related to work-in-process orders as discussed in Note 1, “Business Overview and Summary of Significant Accounting Policies” of the condensed consolidated financial statements in this report.

Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin decreased for the three months ended March 31, 2025, as increases in net sales were offset by negative impacts from differences in sales mix and increased production costs in our Debit and Credit segment.

Gross profit decreased for the three and six months ended June 30, 2025, primarily due to negative impacts from a change in accounting resulting in reduced revenue recognition related to work-in-process orders, primarily in our Prepaid Debit segment.

Gross profit margin decreased for the three and six months ended June 30, 2025, as negative sales mix and increases in production costs, including increased tariffs, were partially offset by increases in net sales.

Operating Expenses:

Operating expenses decreased for the three months ended March 31, 2025, primarily due to decreased compensation-related expenses, including the impact of costs in the prior year period related to the prior-Chief Executive Officer (“CEO”) retention agreement, partially offset by increased professional fees.

Operating expenses increased for the three and six months ended June 30, 2025, primarily due to increased professional service fees related to acquisition and integration costs associated with the acquisition of Arroweye.

Interest, net :

Interest expense increased for the three months ended March 31, 2025, primarily due to impacts from higher interest rates and higher average borrowing on the 10.000% Senior Secured Notes due 2029 (defined below) entered into on July 11, 2024, compared to the 8.625% Senior Secured Notes due 2026 outstanding in the prior year period.

Other Expense, net:

Other expense, net was relatively consistent for the three months ended March 31, 2025.

Interest expense increased for the three and six months ended June 30, 2025, primarily due to impacts from higher interest rates and higher average borrowing on the 10.000% Senior Secured Notes due 2029 (defined below) entered into on July 11, 2024, compared to the 8.625% Senior Secured Notes due 2026 outstanding in the prior year period.

Other Income (Expense), net:

Other income (expense), net, was relatively consistent for the three and six months ended June 30, 2025.

Income Tax Expense:

Our effective tax rates on pre-tax income were 25.8% and 28.7% for the three months ended March 31, 2025 and 2024, respectively.

The decrease in our effective tax rate for the three months ended March 31, 2025, compared to the prior year related to increased deductibility of stock-based compensation realized upon certain stock option exercises and restricted stock unit vesting.

The effective tax rate for the three months ended March 31, 2024, was impacted by limitation of executive compensation deductibility related to the prior-CEO retention agreement.

Our effective tax rates on pre-tax income were 61.4% and 27.7% for the three months ended June 30, 2025 and 2024, respectively, and 32.0% and 28.2% for the six months ended June 30, 2025 and 2024, respectively.

The increase in the Company’s effective tax rate for the three months and six months ended June 30, 2025, compared to the prior year related to limitations on deductibility of executive compensation and non-deductible acquisition-related costs and increased state tax expenses related to the acquisition of Arroweye.

Segment Discussion

Debit and Credit:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands)

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Gross profit margin

Net sales for Debit and Credit increased for the three months ended March 31, 2025, primarily due to increased Products net sales, partially offset by decreased Services net sales.

The increase in Products net sales was driven by higher volumes of contactless cards, including eco-focused.

Net sales for Debit and Credit increased for the three and six months ended June 30, 2025, primarily due to increased Products net sales, including contributions from the Arroweye acquisition , partially offset by decreased Services net sales.

The increase in Products net sales was driven by higher volumes of contactless cards, including metal cards, as well as increased Card@Once printer sales.

The decrease in Services net sales was driven by lower personalization services.

Gross Profit and Gross Profit Margin:

Gross profit for Debit and Credit was relatively consistent and gross profit margin decreased for the three months ended March 31, 2025, primarily due to negative impacts of differences in sales mix and increased production costs.

Gross profit for Debit and Credit was relatively consistent for the three and six months ended June 30, 2025, primarily due to increased net sales, including additional net sales from the Arroweye acquisition.

Gross profit margin decreased primarily due to negative sales mix and increased production costs, including increased tariffs.

Income from Operations:

Income from operations for Debit and Credit decreased for the three months ended March 31, 2025, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, as well as increased compensation-related expenses.

Income from operations for Debit and Credit decreased for the three and six months ended June 30, 2025, primarily due to relatively consistent gross profit and increased operating expenses, including increased compensation-related expenses, driven by increased headcount including the Arroweye acquisition.

Prepaid Debit:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands)

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Gross profit margin

Net sales for Prepaid Debit increased for the three months ended March 31, 2025, primarily due to increased sales of higher-priced packaging solutions and healthcare payment solutions.

Net sales for Prepaid Debit decreased for the three and six months ended June 30, 2025, primarily due to a change in accounting resulting in reduced revenue recognition for work-in-process orders, partially offset by increased sales of higher-priced packaging solutions and healthcare payment solutions.

Gross Profit and Gross Profit Margin:

Gross profit and gross profit margin for Prepaid Debit decreased for the three months ended March 31, 2025, primarily due to negative impacts from differences in sales mix.

Gross profit and gross profit margin for Prepaid Debit decreased for the three and six months ended June 30, 2025, primarily due to negative impacts from a change in accounting resulting in reduced revenue recognition for work-in-process orders;

partially offset by increased net sales to existing customers.

Income from Operations:

Income from operations for Prepaid Debit decreased for the three months ended March 31, 2025, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.

Income from operations for Prepaid Debit decreased for the three and six months ended June 30, 2025, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.

As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands)

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Operating Expenses:

Other operating expenses decreased for the three months ended March 31, 2025, primarily due to decreased compensation-related expenses, including the impact of costs in the prior year period related to the prior-CEO retention agreement, partially offset by increased professional fees.

Other operating expenses increased for the three months ended June 30, 2025, primarily due to increased professional service fees related to acquisition and integration costs associated with the acquisition of Arroweye, as well as increased severance expense.

These increases were partially offset by decreased compensation-related expenses, including decreased stock compensation and employee performance-based incentive compensation.

Other operating expenses decreased for the six months ended June 30, 2025, primarily due to decreased compensation-related expenses, including the impact of costs in the prior year period related to the prior-Chief Executive Officer (“CEO”) retention agreement, and decreased stock compensation.

These decreases were partially offset by increased professional service fees related to acquisition and integration costs associated with the acquisition of Arroweye.

Liquidity and Capital Resources

At March 31, 2025, we had $31.5 million of cash and cash equivalents.

At June 30, 2025, we had $17.1 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 the timing and size of tax payments, receipts 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 working capital fluctuates primarily due to the 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 $72.8 million as of March 31, 2025, 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.

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 $42.9 million as of June 30, 2025, 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.

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Cash Flows from Operating Activities

Cash provided by operating activities for the three months ended March 31, 2025, decreased to $5.6 million from $8.9 million for the three months ended March 31, 2024, primarily due to lower net income excluding non-cash items and increased working capital usage.

Working capital benefits from lower inventory purchases, increased collections on accounts receivable, and lower payments related to the prior-CEO retention agreement were more than offset by incentive payments related to a customer contract originally entered into in the first quarter of 2024, higher employee performance-based incentive compensation payments in 2025, and higher cash paid for interest on our Senior Notes due to higher interest rates and higher average borrowings.

As of March 31, 2025, and December 31, 2024, we had the following outstanding borrowings:

Cash provided by operating activities for the six months ended June 30, 2025, increased to $9.9 million from $4.1 million for the six months ended June 30, 2024, primarily due to reduced working capital usage, partially offset by lower net income.

Working capital benefited from increased collections on accounts receivable, lower inventory purchases, and lower payments related to the prior-CEO retention agreement, partially offset by incentive payments related to a customer contract originally entered into in the first quarter of 2024, higher employee performance-based incentive compensation payments in 2025, and higher cash paid for interest on our Senior Notes due to a higher coupon rate and higher average borrowings.

Investing Activities

Arroweye Acquisition

On May 6, 2025, we acquired Arroweye for initial cash consideration of $42.4 million, which is net of cash acquired of $1.6 million and an initial working capital adjustment.

Final cash consideration is subject to customary post-closing working capital adjustments.

The acquisition was funded through a combination of cash on hand and our available capacity under the ABL Revolver.

Refer to Note 4, “Acquisition” of the condensed consolidated financial statements in this report for information regarding the acquisition.

Capital Expenditures

During the six months ended June 30, 2025, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $9.1 million, primarily related to the new production facility in Indiana.

As of June 30, 2025, and December 31, 2024, we had the following outstanding borrowings:

(dollars in thousands)

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On the Closing Date, the Company and CPI CG Inc.

as borrower, entered into a credit agreement with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “ABL Revolver”) of up to $75.0 million.

as borrower (the “Borrower”), entered into a credit agreement with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “ABL Revolver”) of 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.

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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.

As of March 31, 2025, there were no outstanding borrowings on the ABL Revolver.

Subsequent to the quarter ended March 31, 2025, we utilized $35 million of our ABL Revolver borrowing capacity to fund the acquisition of Arroweye.

As of June 30, 2025, we had $30.0 million of outstanding borrowings on the ABL Revolver.

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.

Cash Priorities

Capital Expenditures

We primarily use cash in investing activities for capital expenditures.

During the three months ended March 31, 2025, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $5.3 million.

During 2023, we commenced work on relocating and modernizing our production facility in Indiana.

Capital expenditures, net, for this project are anticipated to impact cash used in investing activities and assets acquired under lease arrangements in 2025.

Material Cash Requirements

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Debt Service Requirements

As of March 31, 2025, the total projected principal and interest payments on our borrowings were $414.9 million, primarily related to the Senior Notes, of which $28.9 million of interest is expected to be paid in the next 12 months.

As of June 30, 2025, the total projected principal and interest payments on our borrowings were $451.9 million, primarily related to the Senior Notes, of which $29.5 million of interest is expected to be paid in the next 12 months.

The remaining interest payments are expected to be paid over the remaining term of the 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.

We have estimated our future interest payments including an additional $32.0 million of borrowings under the ABL Revolver and early redemptions of principal of $20.0 million on the Senior Notes, both of which occurred on July 15, 2025.

This also assumes 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.

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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, 2024, for details on our leasing arrangements, including future maturities of our operating lease liabilities.

In February 2024, we entered into a build-to-suit lease agreement to relocate and modernize our operations at our Fort Wayne, Indiana production facility, which commenced in the first quarter of 2025, and payments beginning in the second half of 2025.

Under this lease agreement, we will pay an annual base rent of $0.9 million, subject to an annual rent increase of 2.0%.

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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, 2025, 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, 2024.

As of June 30, 2025, 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, 2024.

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, 2024, for which there were no material changes as of March 31, 2025, included:

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024, for which there were no material changes as of June 30, 2025, included:

● Revenue recognition, including estimates of work performed but not completed , and

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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 2. Management’s Discussion and Analysis