Cautionary Statement Regarding Forward-Looking Information

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 may constitute “forward-looking statements” that involve risks and uncertainties that could cause actual results to differ materially. Key factors that could impact financial performance include:

• Economic conditions and reduced consumer spending
• Fluctuations in customer inventory management practices
  
• Negative liquidity events at certain banks

Overview

CPI Card Group Inc. is a payment technology company and leading provider of Financial Payment Card solutions in the United States. The company serves several thousand customers including major card issuers, prepaid debit card program managers, financial technology companies, independent community banks and credit unions.

CPI operates three business segments:

• Debit and Credit - Produces financial payment cards and provides integrated card services
• Prepaid Debit - Provides integrated prepaid card services
• Other - Corporate expenses

Trends and Uncertainties

Some factors that may negatively impact CPI’s financial performance:

• Concerns about a potential economic slowdown have caused some customers to reduce spending
• In 2022, some customers increased inventory in anticipation of supply chain delays; they now seem focused on reducing inventory
• Negative liquidity events at some banks have led to uncertainty in the financial services industry

Results of Operations

Financial Results	Q1 2024	Q1 2023	Change
Total Net Sales	$111.9 million	$120.9 million	(7.4%)
Gross Profit	$41.5 million	$43.1 million	(3.7%)
Operating Expenses	$27.4 million	$22.5 million	21.7%
Net Income	$5.5 million	$10.9 million	(49.8%)

• Net sales decreased due to lower debit and credit product sales, partially offset by higher prepaid debit services revenue
• Gross profit margin improved due to lower production costs
• Operating expenses rose primarily due to higher compensation costs

Segment Performance

Debit and Credit

• Net sales decreased 13.7% on lower contactless and EMV card volumes
• Gross profit declined due to lower sales

Prepaid Debit

• Net sales increased 26.5% on existing customer growth
• Gross profit rose substantially on higher volumes and lower production costs

Liquidity and Capital Resources

At March 31, 2024, CPI had:

• $17.1 million of cash and cash equivalents
• $74.7 million of available borrowing capacity

Cash flow from operations increased compared to last year, while higher inventory purchases are expected in 2024.

Material Cash Requirements

• $23.5 million of interest payments due over next 12 months
• Entered 10-year lease agreement for Indiana production facility relocation
  

Critical Accounting Policies and Estimates

Key estimates relate to revenue recognition and income taxes.

In summary, CPI faced lower debit and credit card demand but increased prepaid debit volumes in Q1 2024. Higher operating costs and interest expenses also weighed on performance. The company maintains adequate liquidity but is monitoring economic conditions and customer inventory levels.