CPI Card Group(PMTS) - 2023 Q1 - Quarterly Report

Part I Item 1. Financial Statements (Unaudited) Unaudited Q1 2023 financials show total assets at $298.2 million, net sales of $120.9 million, net income of $10.9 million, and positive operating cash flow Condensed Consolidated Balance Sheets As of March 31, 2023, total assets reached $298.2 million, liabilities decreased to $368.9 million, and stockholders' deficit improved to $70.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $168,332 | $167,570 | | Total assets | $298,208 | $296,666 | | Total current liabilities | $57,460 | $68,012 | | Long-term debt | $285,984 | $285,522 | | Total liabilities | $368,940 | $378,743 | | Total stockholders' deficit | $(70,732) | $(82,077) | Condensed Consolidated Statements of Operations and Comprehensive Income Q1 2023 net sales increased 8.5% to $120.9 million, gross profit reached $43.1 million, and net income significantly rose to $10.9 million Q1 2023 vs. Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total net sales | $120,852 | $111,424 | | Gross profit | $43,094 | $39,278 | | Income from operations | $20,598 | $17,981 | | Net income | $10,873 | $6,002 | | Diluted earnings per share | $0.91 | $0.51 | Condensed Consolidated Statements of Cash Flows Q1 2023 operating cash flow turned positive at $8.0 million, with cash and equivalents increasing by $3.1 million to $14.2 million Cash Flow Summary for Three Months Ended March 31 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Cash provided by (used in) operating activities | $8,001 | $(15,961) | | Cash used in investing activities | $(4,095) | $(3,149) | | Cash (used in) provided by financing activities | $(792) | $10,563 | | Net increase (decrease) in cash | $3,120 | $(8,547) | | Cash and cash equivalents, end of period | $14,157 | $12,136 | Notes to Condensed Consolidated Financial Statements Notes detail business segments, revenue recognition, debt composition, income tax rates, segment performance, and contingencies including a patent lawsuit - The company's business is organized into two main reportable segments: Debit and Credit, which serves financial institutions, and Prepaid Debit, which serves prepaid program managers. A third segment, "Other," includes corporate expenses[22] Net Sales by Segment (Q1 2023 vs Q1 2022, in thousands) | Segment | Q1 2023 Net Sales | Q1 2022 Net Sales | | :--- | :--- | :--- | | Debit and Credit | $101,985 | $92,015 | | Prepaid Debit | $19,130 | $19,461 | Long-Term Debt Composition (in thousands) | Debt Instrument | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Senior Notes (8.625%) | $277,000 | $285,000 | | ABL Revolver | $13,000 | $5,000 | | Total long-term debt | $285,984 | $285,522 | - The effective tax rate for Q1 2023 was 20.7%, a significant decrease from 38.2% in Q1 2022, primarily due to increased deductibility of interest costs from a 2022 tax election and the reduction of a state tax valuation allowance[52] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2023 revenue growth to contactless cards, driving net income up 81.2% to $10.9 million, while maintaining solid liquidity despite banking system risks Results of Operations Q1 2023 net sales increased 8.5%, gross profit rose 9.7%, and net income surged 81.2% due to higher sales, lower interest, and a reduced tax rate Q1 2023 vs Q1 2022 Results of Operations Summary (in thousands) | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $120,852 | $111,424 | $9,428 | 8.5% | | Gross profit | $43,094 | $39,278 | $3,816 | 9.7% | | Income from operations | $20,598 | $17,981 | $2,617 | 14.6% | | Net income | $10,873 | $6,002 | $4,871 | 81.2% | - The increase in net sales was primarily driven by higher sales of higher-priced contactless card products and personalization services, along with benefits from price increases[87] - The effective tax rate decreased from 38.2% to 20.7% year-over-year, mainly due to a tax election made in Q3 2022 that increased interest cost deductibility and a reduction in a state valuation allowance[93] Segment Discussion Debit and Credit segment sales grew 10.8% to $102.0 million, while Prepaid Debit sales decreased 1.7% to $19.1 million, impacting segment income Debit and Credit Segment Performance (Q1 2023 vs Q1 2022, in thousands) | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $101,985 | $92,015 | $9,970 | 10.8% | | Income from operations | $30,026 | $24,110 | $5,916 | 24.5% | Prepaid Debit Segment Performance (Q1 2023 vs Q1 2022, in thousands) | Metric | Q1 2023 | Q1 2022 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net sales | $19,130 | $19,461 | $(331) | (1.7)% | | Income from operations | $3,677 | $5,968 | $(2,291) | (38.4)% | - The decrease in Prepaid Debit gross profit was primarily due to expenses related to transitioning temporary workers to permanent employees and lower net sales[101] Liquidity and Capital Resources As of March 31, 2023, cash was $14.2 million, with operating activities generating $8.0 million, and $8.0 million of Senior Notes retired - Cash provided by operating activities was $8.0 million for Q1 2023, compared to cash used of $16.0 million in Q1 2022[116] - During Q1 2023, the company used cash on hand and ABL Revolver capacity to retire $8.0 million of the principal amount of its Senior Notes[47][118] - As of March 31, 2023, the company had $277.0 million principal outstanding on its Senior Notes and $13.0 million outstanding on its ABL Revolver[111][114] Item 3. Quantitative and Qualitative Disclosures About Market Risk Disclosure is not required due to the company's status as a smaller reporting company - Disclosure is not required due to the company's status as a smaller reporting company[127] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal controls - Management concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective[128] - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[129] Part II Item 1. Legal Proceedings The company is involved in a patent infringement lawsuit by SPS concerning contactless product antenna technology, currently stayed pending IPR proceedings - The company is defending a patent infringement lawsuit from Smart Packaging Solutions, SA (SPS) related to antenna technology in its contactless products[132] - The lawsuit is currently stayed pending the resolution of Inter Partes Review (IPR) proceedings at the U.S. Patent Office, expected to conclude around September 2023[132] Item 1A. Risk Factors New material risk factors include banking system instability, potentially reducing demand from financial institution customers due to market uncertainty - A new material risk factor relates to adverse conditions in the banking system, highlighted by the recent failures of Silicon Valley Bank and Signature Bank[135] - The company faces risks of reduced demand for its products, as its financial institution customers may reduce spending on card programs due to market uncertainty and liquidity concerns[136] Item 5. Other Information Jeffrey Hochstadt was appointed new CFO, effective May 15, 2023, with a compensation package including a $400,000 base salary and equity awards - Jeffrey Hochstadt was appointed as the new Chief Financial Officer, effective May 15, 2023, succeeding Amintore Schenkel[139] - Mr. Hochstadt's compensation includes a $400,000 base salary, a target annual bonus of $325,000, and a sign-on equity award with a fair value of $250,000[142] Item 6. Exhibits Exhibits filed with Form 10-Q include the new CFO's offer letter and Sarbanes-Oxley Act certifications - Key exhibits filed include the employment offer letter for the new CFO, Jeffrey Hochstadt, and Sarbanes-Oxley Act certifications[145]