CPI Card Group(PMTS) - 2024 Q1 - Quarterly Report

PART I — Financial Information This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2024 Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents CPI Card Group Inc.'s unaudited condensed consolidated financial statements and accompanying notes for Q1 2024 Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position at March 31, 2024, and December 31, 2023 | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total Assets | $319,780 | $293,683 | | Total Liabilities | $368,231 | $345,619 | | Total Stockholders' Deficit | $(48,451) | $(51,936) | - Total assets increased by $26.1 million, primarily driven by increases in cash and cash equivalents, inventories, and other assets. Total liabilities increased by $22.6 million, mainly due to higher accounts payable and accrued expenses. Stockholders' deficit improved by $3.5 million[8] Condensed Consolidated Statements of Operations and Comprehensive Income This section details the company's financial performance, including net sales, gross profit, and net income for Q1 2024 and Q1 2023 | Metric (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net Sales | $111,936 | $120,852 | $(8,916) | (7.4)% | | Gross Profit | $41,518 | $43,094 | $(1,576) | (3.7)% | | Income from Operations| $14,145 | $20,598 | $(6,453) | (31.3)% | | Net Income | $5,455 | $10,873 | $(5,418) | (49.8)% | | Basic EPS | $0.48 | $0.95 | $(0.47) | (49.5)% | | Diluted EPS | $0.46 | $0.91 | $(0.45) | (49.5)% | - Net sales decreased by 7.4% year-over-year, primarily due to a decline in product sales. Net income saw a significant decrease of 49.8% compared to the prior year, leading to a nearly 50% reduction in both basic and diluted EPS[11] Condensed Consolidated Statements of Stockholders' Deficit This section outlines changes in the company's equity, including net income, share repurchases, and stock-based compensation adjustments | Metric (in thousands) | December 31, 2023 | March 31, 2024 | | :-------------------- | :---------------- | :------------- | | Total Stockholders' Deficit | $(51,936) | $(48,451) | | Accumulated Earnings | $50,276 | $55,731 | - The total stockholders' deficit improved from $(51,936) thousand at December 31, 2023, to $(48,451) thousand at March 31, 2024, primarily driven by net income of $5,455 thousand, partially offset by share repurchases and stock-based compensation adjustments[13] Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for Q1 2024 and Q1 2023 | Metric (in thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Cash provided by operating activities | $8,865 | $8,001 | | Cash used in investing activities | $(1,506) | $(4,095) | | Cash used in financing activities | $(2,628) | $(792) | | Net increase in cash and cash equivalents | $4,731 | $3,120 | | Cash and cash equivalents, end of period | $17,144 | $14,157 | - Cash provided by operating activities increased to $8.9 million in Q1 2024 from $8.0 million in Q1 2023, mainly due to lower employee performance incentive compensation payments, despite a $5.0 million payment to the prior CEO and increased inventory purchases. Cash used in investing activities decreased significantly, while cash used in financing activities increased due to common stock repurchases[16][111] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. Business Overview and Summary of Significant Accounting Policies This note describes the company's core business, operational segments, and key accounting policies and estimates - CPI Card Group Inc. is a payments technology company and a leading provider of comprehensive Financial Payment Card solutions in the United States, specializing in the design, production, data personalization, packaging, and fulfillment of credit, debit, and Prepaid Debit Cards[17] - The Company operates through three reportable segments: Debit and Credit, Prepaid Debit, and Other (corporate expenses)[19] - Management uses estimates and assumptions for financial reporting, including property and equipment, goodwill, intangible assets, leases, inventory and deferred tax valuation allowances, and revenue recognition for uncompleted work[21] - The Company is evaluating new accounting standards ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively, and does not anticipate a material impact on its financial position, results of operations, or cash flows[23][24] 2. Net Sales This note disaggregates net sales by segment and product/service type, detailing revenue recognition policies | Segment (in thousands) | Products (Q1 2024) | Services (Q1 2024) | Total (Q1 2024) | Products (Q1 2023) | Services (Q1 2023) | Total (Q1 2023) | | :--------------------- | :----------------- | :----------------- | :-------------- | :----------------- | :----------------- | :-------------- | | Debit and Credit | $58,371 | $29,602 | $87,973 | $76,032 | $25,953 | $101,985 | | Prepaid Debit | — | $24,198 | $24,198 | — | $19,130 | $19,130 | | Intersegment eliminations | $(213) | $(22) | $(235) | $(242) | $(21) | $(263) | | Total Net Sales | $58,158 | $53,778 | $111,936 | $75,790 | $45,062 | $120,852 | - Total net sales decreased by 7.4% year-over-year. Products net sales declined by 23.3% to $58.2 million, while Services net sales increased by 19.3% to $53.8 million[25] - Product sales include design and production of various Financial Payment Cards and Card@Once® printers, recognized over time or at shipping. Service sales include personalization, fulfillment, and software-as-a-service, recognized as performed[26][28] 3. Accounts Receivable This note details the composition of accounts receivable, including trade and unbilled amounts, and the allowance for credit losses | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Trade accounts receivable | $59,788 | $69,245 | | Unbilled accounts receivable | $8,997 | $4,725 | | Less allowance for credit losses | $(246) | $(246) | | Total Accounts Receivable, net | $68,539 | $73,724 | - Net accounts receivable decreased by $5.2 million from December 31, 2023, to March 31, 2024, primarily due to a reduction in trade accounts receivable, partially offset by an increase in unbilled accounts receivable[32] 4. Inventories This note provides a breakdown of inventory components, including raw materials, finished goods, and the inventory reserve | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Raw materials | $79,825 | $66,210 | | Finished goods | $6,531 | $7,162 | | Inventory reserve | $(2,975) | $(2,778) |\ | Total Inventories, net | $83,381 | $70,594 | - Net inventories increased by $12.8 million from December 31, 2023, to March 31, 2024, primarily driven by a significant increase in raw materials[33] 5. Plant, Equipment, Leasehold Improvements and Operating Lease Right-of-Use Assets This note details the company's property, plant, and equipment, including leasehold improvements and right-of-use assets, net of depreciation | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total Gross Assets | $131,072 | $129,489 | | Less accumulated depreciation and amortization | $(70,039) | $(66,436) | | Net Assets | $61,033 | $63,053 | - Net plant, equipment, leasehold improvements, and operating lease right-of-use assets decreased by $2.0 million from December 31, 2023, to March 31, 2024, primarily due to higher accumulated depreciation and amortization[36] 6. Fair Value of Financial Instruments This note discusses the fair value measurements of financial instruments, particularly the Senior Notes, and their classification within the fair value hierarchy | Liability (in thousands) | Carrying Value (Mar 31, 2024) | Estimated Fair Value (Mar 31, 2024) | Carrying Value (Dec 31, 2023) | Estimated Fair Value (Dec 31, 2023) | | :----------------------- | :---------------------------- | :---------------------------------- | :---------------------------- | :---------------------------------- | | Senior Notes | $267,897 | $267,147 | $267,897 | $261,834 | - The fair value of the Company's Senior Notes increased from $261.8 million at December 31, 2023, to $267.1 million at March 31, 2024, based on bank quotes, while the carrying value remained constant[37] - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs). The Senior Notes are classified as Level 2[37][39] 7. Accrued Expenses This note provides a detailed breakdown of accrued expenses, including payroll, bonuses, capitalized contract costs, and interest | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Accrued payroll and related employee expenses | $8,146 | $11,431 | | Accrued employee performance bonuses | $2,009 | $667 | | Capitalized contract costs payable | $15,000 | — | | Accrued interest | $999 | $6,830 | | Accrued share repurchases | $4,404 | $733 | | Total Accrued Expenses | $49,203 | $35,803 | - Total accrued expenses increased by $13.4 million from December 31, 2023, to March 31, 2024, primarily due to $15.0 million in capitalized contract costs payable and higher accrued employee performance bonuses and share repurchases, partially offset by lower accrued payroll and interest[40] 8. Long-Term Debt This note details the company's long-term debt obligations, including Senior Notes and the ABL Revolver, and their key terms | Metric (in thousands) | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Senior Notes | $267,897 | $267,897 | | Unamortized deferred financing costs | $(2,571) | $(2,900) | | Total Long-Term Debt | $265,326 | $264,997 | - Long-term debt, net of current maturities, remained stable at approximately $265 million, consisting primarily of $310.0 million aggregate principal amount of 8.625% Senior Secured Notes due March 15, 2026[41][42] - The ABL Revolver, with an increased borrowing capacity of $75.0 million, matures on the earliest of March 15, 2026, or 90 days prior to the Senior Notes' maturity, and bears interest based on SOFR plus an applicable margin[44][46][47] 9. Income Taxes This note explains the components of the effective income tax rate and factors influencing tax expense | Effective Tax Rate Component | March 31, 2024 | March 31, 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 % | - The effective tax rate increased to 28.7% for Q1 2024 from 20.7% for Q1 2023, primarily due to the reduction of a valuation allowance in the prior year related to a state's law change[49] 10. Stockholders' Deficit This note details changes in stockholders' deficit, including share repurchase plans and obligations - The Company's board approved a share repurchase plan on November 2, 2023, authorizing up to $20.0 million in common stock repurchases, expiring December 31, 2024[51] - During Q1 2024, the Company repurchased 68,258 shares for $1.2 million at an average price of $18.29 per share. As of March 31, 2024, $14.1 million remained under the authorization[52][53] - An obligation exists to purchase 244,314 shares from a majority stockholder (Parallel49) at $18.03 per share, with payment due in Q2 2024, based on a multiple of open market purchases[52][53] 11. Earnings per Share This note presents the calculation of basic and diluted earnings per share and the factors affecting them | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | | Net income | $5,455 | $10,873 | | Basic weighted-average common shares outstanding | 11,266,699 | 11,394,919 | | 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 | - Basic EPS decreased by 49.5% to $0.48 in Q1 2024 from $0.95 in Q1 2023, and diluted EPS decreased by 49.5% to $0.46 from $0.91, reflecting the lower net income[55] 12. Commitments and Contingencies This note discloses information regarding legal proceedings, including a patent infringement lawsuit, and participation in a voluntary disclosure program - The Company is involved in a patent infringement lawsuit (Smart Packaging Solutions SA v. CPI Card Group Inc.) where SPS alleges infringement of antenna technology patents. The case is stayed pending Inter Parties Review (IPR) proceedings, where three of the four patents have been invalidated, and relevant claims in the fourth have also been invalidated. The Company expects the litigation to be dismissed[57] - The Company is participating in Delaware's Voluntary Disclosure Agreement Program for abandoned or unclaimed property to comply with escheat laws and avoid an audit, but any potential loss is not currently estimable[60] 13. Stock-Based Compensation This note details the company's stock-based compensation plans, including share availability, grants, and expense recognition - Stockholders approved an amendment to the Omnibus Incentive Plan, increasing available shares by 1,000,000 to a total of 3,200,000. As of March 31, 2024, 962,285 shares were available for grant[61] - In Q1 2024, the Company granted 89,452 restricted stock units (RSUs) at a weighted average fair value of $18.25 and 60,000 performance stock units (PSUs) to the new CEO, with a grant date fair value of $0.9 million, vesting upon stock price targets ($35, $50, $65) over five years[65][66] - Stock-based compensation expense is measured at fair value and expensed over the requisite service period, with forfeitures accounted for as they occur[67][68] 14. Segment Reporting This note provides financial information by reportable segment, including net sales, gross profit, and EBITDA - The Company's reportable segments are Debit and Credit, Prepaid Debit, and Other (corporate expenses). The CEO uses net sales and EBITDA to evaluate segment performance and allocate resources[69][70][74] Segment Performance (Q1 2024) | Segment (in thousands) | Net Sales (Q1 2024) | Gross Profit (Q1 2024) | Income (loss) from operations (Q1 2024) | EBITDA (Q1 2024) | | :--------------------- | :------------------ | :--------------------- | :-------------------------------------- | :--------------- | | Debit and Credit | $87,973 | $31,495 | $22,754 | $24,842 | | Prepaid Debit | $24,198 | $10,023 | $8,745 | $9,615 | | Other | — | — | $(17,354) | $(16,360) | | Total | $111,936 | $41,518 | $14,145 | $18,097 | Segment Performance (Q1 2023) | Segment (in thousands) | Net Sales (Q1 2023) | Gross Profit (Q1 2023) | Income (loss) from operations (Q1 2023) | EBITDA (Q1 2023) | | :--------------------- | :------------------ | :--------------------- | :-------------------------------------- | :--------------- | | Debit and Credit | $101,985 | $38,184 | $30,026 | $32,192 | | Prepaid Debit | $19,130 | $4,910 | $3,677 | $4,301 | | Other | — | — | $(13,105) | $(12,205) | | Total | $120,852 | $43,094 | $20,598 | $24,288 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CPI Card Group Inc.'s financial condition and results of operations for Q1 2024, including key trends, segment analysis, and liquidity Overview This section provides a general description of CPI Card Group Inc.'s business, market position, and customer base - CPI Card Group Inc. is a leading payments technology company providing comprehensive Financial Payment Card solutions in the U.S., including credit, debit, and Prepaid Debit Cards, and instant card issuance solutions[81] - The Company serves a diverse customer base, including large issuers, Prepaid Debit Card program managers, fintechs, and small-to-mid-sized financial institutions, through a network of high-security production facilities[82][83] - Key market positions include the U.S. prepaid debit market, small-to-mid-sized financial institutions, large issuers, and the fintech market[85] Trends and Uncertainties That May Affect our Financial Performance This section discusses economic and industry factors that could impact the company's future financial results - Economic slowdown concerns are leading some customers, particularly in banking and financial services, to reduce or delay spending and request pricing concessions[86] - Improved supply-chain lead times have shifted customer focus to reducing existing inventory levels, impacting demand for the Company's products[86] - Negative liquidity events and increased loan loss reserves in the banking system have led to reduced demand in the Debit and Credit segment[86] Results of Operations This section analyzes the consolidated financial performance, including net sales, gross profit, operating expenses, and net income | Metric (in thousands) | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Net Sales | $111,936 | $120,852 | $(8,916) | (7.4)% | | Products Net Sales | $58,158 | $75,790 | $(17,632) | (23.3)% | | Services Net Sales | $53,778 | $45,062 | $8,716 | 19.3 % | | Gross Profit | $41,518 | $43,094 | $(1,576) | (3.7)% | | Gross Profit Margin | 37.1% | 35.7% | 1.4 pp | | | Operating Expenses | $27,373 | $22,496 | $4,877 | 21.7 % | | Income from Operations| $14,145 | $20,598 | $(6,453) | (31.3)% | | Net Income | $5,455 | $10,873 | $(5,418) | (49.8)% | - Total net sales decreased by 7.4% due to lower product sales volumes in the Debit and Credit segment, partially offset by higher service sales in both Prepaid Debit and Debit and Credit segments[89] - Gross profit decreased by 3.7% due to lower net sales, but gross profit margin increased to 37.1% from 35.7% due to lower production costs and the absence of prior year's staffing model transition expenses[90][91] - Operating expenses increased by 21.7% primarily due to higher compensation-related expenses, including executive retention and severance, and increased stock compensation[92] - Net income decreased by 49.8% due to lower income from operations and a higher effective tax rate (28.7% vs. 20.7%), which was positively impacted in the prior year by a valuation allowance reduction[87][96] Segment Discussion This section provides a detailed analysis of the financial performance for each of the company's reportable segments Debit and Credit This section analyzes the financial performance of the Debit and Credit segment, including sales and profitability trends | Metric (in thousands) | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Net sales | $87,973 | $101,985 | $(14,012) | (13.7)% | | Gross profit | $31,495 | $38,184 | $(6,689) | (17.5)% | | Income from operations| $22,754 | $30,026 | $(7,272) | (24.2)% | | Gross profit margin | 35.8% | 37.4% | (1.6 pp) | | - Net sales for Debit and Credit decreased by 13.7% due to lower product sales, specifically volume declines in contactless and EMV cards, partially offset by increased personalization and Card@Once services[97] - Gross profit and gross profit margin decreased primarily due to lower net sales and increased compensation-related operating expenses[98][99] Prepaid Debit This section analyzes the financial performance of the Prepaid Debit segment, focusing on sales growth and margin improvements | Metric (in thousands) | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Net sales | $24,198 | $19,130 | $5,068 | 26.5 % | | Gross profit | $10,023 | $4,910 | $5,113 | 104.1 % | | Income from operations| $8,745 | $3,677 | $5,068 | 137.8 % | | Gross profit margin | 41.4% | 25.7% | 15.7 pp | | - Net sales for Prepaid Debit increased by 26.5% due to higher volumes from existing customers[101] - Gross profit and gross profit margin significantly increased by 104.1% and 15.7 percentage points, respectively, driven by higher net sales and lower production costs, as the prior year was negatively impacted by staffing model transition expenses[102] Other This section discusses the operating expenses categorized under the 'Other' segment, primarily corporate overhead | Metric (in thousands) | Q1 2024 | Q1 2023 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Operating expenses | $17,354 | $13,105 | $4,249 | 32.4 % | - Operating expenses for the Other segment (corporate expenses) increased by 32.4% due to higher compensation-related expenses, including executive retention and severance, and increased stock compensation[106] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations, including cash position, borrowing capacity, and material cash requirements - As of March 31, 2024, the Company had $17.1 million in cash and cash equivalents and $74.7 million in available borrowing capacity under its ABL Revolver[107][108] - Cash provided by operating activities increased to $8.9 million in Q1 2024 from $8.0 million in Q1 2023, primarily due to lower employee performance incentive compensation payments, partially offset by a $5.0 million payment to the prior CEO and increased inventory purchases[111] - The Company's material cash requirements include $23.5 million in interest payments on Senior Notes over the next 12 months, operating and finance lease payments, and purchase obligations[124][125] - A new build-to-suit lease agreement was entered into in February 2024 for relocating and modernizing the Fort Wayne, Indiana production facility, with an annual base rent of $0.9 million for ten years, commencing March 1, 2025, or later[128] - The Company repurchased $1.2 million of common stock in Q1 2024 and has an obligation to repurchase an additional $4.4 million from a majority stockholder in Q2 2024, with $14.1 million remaining under the $20.0 million share repurchase authorization[121][122][123] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is not required to provide quantitative and qualitative disclosures about market risk due to its status as a smaller reporting company - Disclosure not required due to smaller reporting company status[131] Item 4. Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures, concluding they were effective with no material changes - Disclosure controls and procedures were effective as of March 31, 2024[132] - No material changes occurred in internal control over financial reporting during the fiscal quarter[133] PART II — Other Information This section provides additional information not covered in Part I, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to Note 12 of the Condensed Consolidated Financial Statements for information regarding legal proceedings - Refer to Note 12 of the Condensed Consolidated Financial Statements for details on legal proceedings[135] Item 1A. Risk Factors This section states that no material changes to the previously disclosed risk factors have occurred - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2023[136] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities and obligations under its approved plan - A share repurchase plan for up to $20.0 million of common stock was approved on November 2, 2023, expiring December 31, 2024[137] Common Stock Repurchases (Q1 2024) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------- | :------------------------------- | :--------------------------- | | January 1 - 31 | 23,876 | $18.58 | | February 1 - 29 | 22,650 | $18.96 | | March 1 - 31 | 21,732 | $17.28 | | Total | 68,258 | $18.29 | - As of March 31, 2024, the Company was obligated to repurchase 244,314 shares from Parallel49 at an average price of $18.03 per share, with a related payment of $4.4 million made in April 2024[139] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - No defaults upon senior securities[140] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[141] Item 5. Other Information This section confirms no Rule 10b5-1 or non-Rule 10b5-1 trading arrangements were adopted or terminated by directors or officers - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q1 2024[143] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including employment agreements and certifications - Exhibits include Employment Agreement for John Lowe, CEO and CFO certifications (Sections 302 and 906 of Sarbanes-Oxley Act), and various XBRL interactive data files[144][145] SIGNATURES This section lists the individuals who signed the report on behalf of the company - The report was signed on May 7, 2024, by John Lowe (President and CEO), Jeffrey Hochstadt (CFO), and Donna Abbey Carmignani (Chief Accounting Officer)[150]