What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-05 · 139 added, 156 removed, 204 unchanged (59% of the section changed)

2 unchanged sentences

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 June 30, 2020.

This 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, 2019 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 June 30, 2020 (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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (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 words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “guides,” “provides guidance,” “provides outlook,” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature.

These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us, and other information currently available.

Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or other events may vary materially from those described herein.

Such forward-looking statements, because they relate to future events, are by their very nature subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated.

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

costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state retailers, and challenges to our income tax positions;

costs and impacts to our financial results relating to the obligatory collection of sales tax and claims for uncollected sales tax in states that impose sales tax collection requirements on out-of-state businesses, and challenges to our income tax positions;

the restrictive terms of our credit facilities and covenants of future agreements governing indebtedness and the resulting restraints on our ability to pursue our business strategies;

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costs relating to product defects and any related product liability and/or warranty claims;

maintenance and further imposition of tariffs

and/or trade restrictions on, or slow-downs or interruptions in our ability to obtain, goods imported into the United States;

maintenance and further imposition of tariffs and/or trade restrictions on, or slow-downs or interruptions in our ability to obtain, goods imported into the United States;

our dependence on licensing arrangements;

1 unchanged sentence

non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products;

our ability to comply with a wide variety of environmental, health and safety laws and regulations and the exposure to liability for any failure to comply;

ability to comply with a wide variety of environmental, health and safety laws and regulations and the exposure to liability for any failure to comply;

risks associated with the controlling stockholders’ ownership of our stock;

potential conflicts of interest that may arise due to our board of directors being comprised in part of directors who are principals of our largest stockholder;

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, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2020, Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended June 30 , 2020, 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, 2019 filed with the Securities and Exchange Commission (the “SEC”) on March 6, 2020, Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended September 30 , 2020, 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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In the fourth quarter of 2018, we entered into a definitive agreement to sell our Canadian subsidiary.

The sale did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our

operations in the Debit and Credit segment or to other service providers in 2019.

The sale did not include the portions of the business relating to Financial Payment Cards, as that business migrated to our operations in the Debit and Credit segment or to other service providers in 2019.

The transaction closed on April 1, 2019, and we received cash proceeds of $1.5 million.

After the payment of liabilities and transaction costs, including employee termination costs (the majority of which were expensed in 2018), the sale did not have a significant impact on cash, and no significant loss on sale was recorded.

In connection with the disposition of the Canadian subsidiary, the Company released the related cumulative translation adjustment of $1.3 million from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the six months ended June 30, 2019.

In connection with the disposition of the Canadian subsidiary, the

Company released the related cumulative translation adjustment of $1.3 million from “Accumulated Other Comprehensive Loss” on the condensed consolidated balance sheet into “Foreign Currency Loss” on the condensed consolidated statement of operations during the nine months ended September 30, 2019.

The Canadian subsidiary was not a significant operating segment and the financial results of this business through the transaction closing date were presented as part of the Other reportable segment.

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The adverse effects of the COVID-19 pandemic have become widespread, including in the locations where we, our customers and our suppliers conduct business.

The health and safety of our employees remains paramount, and we continue to follow the safety precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention.

The health and safety of our employees remains paramount, and we continue to follow response protocols based on precautions and other appropriate measures recommended by the Centers for Disease Control and Prevention as well as various state and local executive orders, health orders and guidelines.

All of CPI’s operations remain open and continue to provide direct and essential support to the financial services industry.

However, we may experience constrained supply, curtailed customer demand or impacts on our workforce that could materially adversely impact our business, results of operations and overall financial performance in future periods.

While CPI’s net sales in the second quarter and first half of 2020 increased over the prior year, we experienced lower customer demand than expected (which we believe is primarily attributable to the COVID-19 pandemic), and we may experience further effects in the Company’s results of operations and overall financial performance in future periods.

We may experience constrained supply, curtailed customer demand or impacts on our workforce that could materially adversely impact our business, results of operations and overall financial performance in future periods.

While CPI’s net sales in the third quarter and first nine months of 2020 increased over the prior year, we experienced lower customer demand than expected (which we believe is primarily attributable to the COVID-19 pandemic), and we may experience further effects in the Company’s results of operations and overall financial performance in future periods.

There can be no assurance that the Company’s strategies will be successful in effectively managing the Company’s resources and mitigating the negative impact of the COVID-19 pandemic on our business and operating results.

See Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 for further discussion of the possible impact of the COVID-19 pandemic on the business.

See Part II, Item 1A – Risk Factors in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 for further discussion of the possible impact of the COVID-19 pandemic on the business.

On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (CARES) Act into law.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, changes in net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

CPI is continuing to evaluate the applicability of the CARES Act to the Company, and the potential impacts on the business.

Refer to Note 12, Income Taxes – Continuing Operations, for a discussion of the CARES Act income tax refund the Company has applied for.

In addition, we have applied for the deferment of employer side social security payments during the second quarter of 2020.

While we are participating in certain programs under the CARES Act, the Act and its guidance are subject to change, and there is no guarantee that CPI will continue to meet eligibility requirements or that such programs will provide meaningful benefit to our business.

CPI is continuing to evaluate and apply certain provisions of the CARES Act that may benefit the Company.

Refer to Note 12, Income Taxes – Continuing Operations, for a discussion of the CARES Act income tax impacts.

In addition, we have deferred employer side social security payments starting with the second quarter of 2020.

While we are participating in certain programs under the CARES Act, the Act and its guidance are subject to change.

The Company evaluates goodwill for impairment at least annually on October 1, or more frequently when an event occurs or circumstances change such that the carrying value may not be recoverable.

The potential negative implications of COVID-19, and a related potential decline in the Company’s total fair value of invested capital and financial performance for reporting units with goodwill, could require the Company to perform a quantitative test for goodwill impairment in future quarters.

As of June 30 , 2020, all of the Company’s $47.2 million of goodwill is included within reporting units in the Debit and Credit segment.

As of September 30 , 2020, all of the Company’s $47.2 million of goodwill is included within reporting units in the Debit and Credit segment.

Results of Continuing Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Interest, net

Foreign currency (loss) gain

Foreign currency gain (loss)

Other income (expense), net

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Net income (loss) from continuing operations

(1) Includes an estimated sales tax expense of $2.7 million recorded during the second quarter of 2020.

(2) Refer to Note 15.

Commitments and Contingencies;

Litigation Settlement, for further information regarding the cash litigation settlement gain.

The Company revised its prior year financial statements to adjust immaterial items, relating to estimated sales tax expense and depreciation expense.

Refer to Note 1, Business Overview and Summary of Accounting Policies, for an explanation of the immaterial prior period adjustments.

(1) Refer to Note 15, Commitments and Contingencies, for further information regarding the cash litigation settlement gain recorded in the second quarter of 2019.

Segment Discussion

Three Months Ended June 30, 2020 Compared With Three Months Ended June 30, 2019

Three Months Ended June 30,

Three Months Ended September 30, 2020 Compared With Three Months Ended September 30, 2019

Three Months Ended September 30,

(dollars in thousands)

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* Not meaningful

Net sales for the three months ended June 30, 2020 increased $4.5 million, or 6.7%, to $71.4 million compared to $66.9 million for the three months ended June 30, 2019.

Net sales for the three months ended September 30, 2020 increased $11.0 million, or 15.4%, to $82.7 million compared to $71.7 million for the three months ended September 30, 2019, due to an increase in sales from the Debit and Credit segment.

Debit and Credit:

Net sales for Debit and Credit for the three months ended June 30, 2020 increased $7.2 million, or 14.1%, to $58.3 million compared to $51.1 million for the three months ended June 30, 2019.

The net sales increase was primarily due to higher volumes of dual-interface EMV® card sales, including a significant amount of Second Wave ® cards

featuring a core made with recovered ocean bound plastic .

In addition, net sales increased from CPI on-Demand card personalization due to new customer wins and higher volumes from our existing customers, and from COVID-19 related wins of government disbursement work.

Net sales for Debit and Credit for the three months ended September 30, 2020 increased $11.2 million, or 21.8%, to $62.7 million compared to $51.5 million for the three months ended September 30, 2019.

The net sales increase was primarily due to higher volumes of dual-interface EMV card sales, including Second Wave cards featuring a core made with recovered ocean bound plastic .

In addition, net sales increased from CPI On-Demand card personalization due to new customer wins and higher volumes from our existing customers, and from COVID-19 related government disbursement work.

Dual-interface EMV cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV cards, which benefitted the current year sales increase compared to the prior year period.

Partially offsetting these increases were reductions in volumes from card personalization and Card@Once instant issuance product sales in the second quarter of 2020.

The decline in volumes was primarily as a result of impacts from COVID-19 and governmental stay-at-home orders, including fewer new accounts and replacement cards, and the closure of certain bank branches or reduced hours of operation.

Partially offsetting these increases were reductions in volumes of Card@Once instant issuance product sales and card personalization sales in the third quarter of 2020.

The decline in volumes was primarily as a result of ongoing impacts from COVID-19 including reduced hours of operation, lack of access or closure of certain bank branches, and fewer new accounts and requests for replacement cards.

Prepaid Debit:

Net sales for Prepaid Debit for the three months ended June 30, 2020, decreased $2.4 million, or 15.2%, to $13.5 million, compared to $16.0 million for the three months ended June 30, 2019.

The decrease was primarily a result of reduced sales volumes primarily associated with COVID-19 impacts, including lower retail store traffic resulting from governmental stay-at-home orders during the second quarter of 2020.

During the three months ended June 30 , 2020, and 2019, there were no sales in the Other segment.

In April 2019, we sold the Canadian subsidiary, which was the only operation contributing to Other segment net sales.

Net sales for Prepaid Debit for the three months ended September 30, 2020, increased $0.2 million, or 0.7%, to $20.6 million, compared to $20.5 million for the three months ended September 30, 2019.

The increase was primarily due to timing of certain customer sales, partially offset by reduced sales volumes primarily associated with COVID-19 impacts, including lower retail store traffic.

Gross Profit and Gross Profit Margin

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

Gross profit for the three months ended June 30, 2020, increased $0.8 million, or 3.4%, to $23.2 million compared to $22.4 million for the three months ended June 30, 2019.

Gross profit margin for the three months ended June 30, 2020 decreased to 32.4% compared to 33.5% for the three months ended June 30, 2019, primarily due to the decline in the Prepaid Debit segment.

Gross profit for the three months ended September 30, 2020, increased $5.3 million, or 20.7%, to $30.6 million compared to $25.4 million for the three months ended September 30, 2019.

Gross profit margin for the three months ended September 30, 2020 increased to 37.0% compared to 35.4% for the three months ended September 30, 2019, due to an increase in gross profit margins in the Debit and Credit segment.

Debit and Credit:

Gross profit for Debit and Credit for the three months ended June 30, 2020, increased $2.7 million, or 17.3%, to $18.6 million compared to $15.9 million during the three months ended June 30, 2019.

Gross profit for Debit and Credit for the three months ended September 30, 2020, increased $5.3 million, or 32.1%, to $21.7 million compared to $16.4 million during the three months ended September 30, 2019.

The increase in gross profit for the Debit and Credit segment was driven primarily by higher sales volumes and pricing of dual interface EMV cards, including Second Wave cards.

In addition, higher sales from CPI on-Demand card personalization and government disbursement work contributed to an improvement in gross profit compared to the prior year.

Gross profit margin increased to 31.9% during the three months ended June 30, 2020, compared to 31.1% in the prior year period, primarily due to favorable operating leverage from higher dual interface card sales volumes including Second Wave ® cards, card personalization sales mix from dual interface EMV cards and higher CPI on-Demand net sales.

In addition, higher sales from CPI On-Demand card personalization and COVID-19 related government disbursement work contributed to an improvement in gross profit compared to the prior year.

Gross profit margin increased to 34.6% during the three months ended September 30, 2020, compared to 31.9% in the prior year period, due primarily to operating leverage from higher dual interface card sales including Second Wave and CPI On-Demand net sales .

Prepaid Debit:

Gross profit for Prepaid Debit during the three months ended June 30, 2020 decreased 30.3% to $4.5 million compared to $6.5 million for the three months ended June 30, 2019.

Gross profit margin for Prepaid Debit for the three months ended June 30, 2020, decreased to 33.5% compared to 40.8% for the three months ended June 30, 2019.

The decrease in gross profit and margin was primarily attributed to lower sales resulting in unfavorable cost absorption.

For the three months ended June 30, 2020 and 2019, there was no gross profit in the Other segment.

In April 2019, we sold our Canadian subsidiary and no longer have any operations contributing to Other segment net sales or gross profit.

Gross profit for Prepaid Debit during the three months ended September 30, 2020 was flat at $8.9 million compared to the three months ended September 30, 2019.

Gross profit margin for Prepaid Debit for the three months ended September 30, 2020, decreased to 43.1% compared to 43.6% for the three months ended September 30, 2019.

The decrease in gross profit and margin was primarily attributed to product mix.

Operating Expenses, net

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

Other-litigation settlement

* Not meaningful

Operating expenses, net, for the three months ended June 30, 2020, increased $8.4 million, or 68.1%, to $20.6 million compared to $12.3 million for the three months ended June 30, 2019.

The increase was primarily due to the cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019, which was a reduction to net operating expenses , and an estimated sales tax expense of $2.7 million recorded in the second quarter of 2020 within the Debit and Credit segment .

The Company is in the process of evaluating and finalizing a state sales tax analysis and recorded an estimated expense.

Due to the complexity of the analysis and remaining information needed from customers, we expect this estimate will change in the future.

Refer to Item 1 Financial Statements, Note 15, Commitments and Contingencies, for further discussion regarding the sales tax liability.

Operating expenses, net, for the three months ended September 30, 2020, decreased $0.5 million, or 2.8%, to $17.1 million compared to $17.6 million for the three months ended September 30, 2019.

Debit and Credit:

Debit and Credit operating expenses increased $2.5 million to $10.4 million in the three months ended June 30, 2020 compared to $7.9 million in the three months ended June 30 , 2019, primarily due to the $2.7 million estimated sales tax expense recorded in the second quarter of 2020.

Debit and Credit operating expenses decreased $0.8 million to $7.0 million in the three months ended September 30, 2020 compared to $7.8 million in the three months ended September 30 , 2019.

The decrease was due primarily to cost reductions during the three months ended September 30, 2020.

Prepaid Debit:

Prepaid Debit operating expenses decreased slightly for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 primarily due to certain cost reductions.

Other operating expenses during the three months ended June 30, 2020 decreased $0.1 million compared to the three months ended June 30 , 2019.

The reduction in operating expenses was primarily due to certain cost reductions.

During the three months ended June 30, 2019, we received $6.0 million cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement.

Prepaid Debit operating expenses decreased slightly for the three months ended September 30, 2020 when compared to the three months ended September 30, 2019 primarily due to certain cost reductions.

Other operating expenses during the three months ended September 30, 2020 increased $0.4 million compared to the three months ended September 30 , 2019.

The increase in operating expenses was due to certain costs including self insurance medical expense, partially offset by cost reductions.

Income from Operations and Operating Margin

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Income from operations for the three months ended June 30, 2020 was $2.5 million compared to income from operations of $10.1 million for the three months ended June 30, 2019.

The Company’s operating income margin for the three months ended June 30, 2020 decreased to 3.5% compared to 15.1% for the three months ended June 30 , 2019.

In the prior year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment.

In the second quarter of 2020, we recorded an estimated sales tax expense of $2.7 million within the Debit and Credit segment.

Income from operations for the three months ended September 30, 2020 was $13.5 million compared to income from operations of $7.7 million for the three months ended September 30, 2019.

The Company’s operating income margin for the three months ended September 30, 2020 increased to 16.3% compared to 10.8% for the three months ended September 30 , 2019.

Debit and Credit:

Income from operations for Debit and Credit for the three months ended June 30, 2020 increased $0.3 million, to $8.2 million compared to $8.0 million for the three months ended June 30, 2019 due primarily to higher sales volumes and pricing of dual interface EMV cards including Second Wave ® cards, CPI on-Demand card personalization, and government disbursement work.

The impact of these improvements to income from operations were partially offset by higher operating expenses as a result of the $2.7 million estimated sales tax expense recorded in the second quarter of 2020.

Operating margins for the three months ended June 30, 2020 decreased to 14.1% compared to 15.6% for the three months ended June 30 , 2019, primarily due to the estimated sales tax expense recorded in the second quarter of 2020.

Income from operations for Debit and Credit for the three months ended September 30, 2020 increased $6.1 million, to $14.7 million compared to $8.6 million for the three months ended September 30, 2019 due primarily to higher sales volumes and pricing of dual interface EMV cards including Second Wave cards, and CPI On-Demand card personalization including COVID-19 related government disbursement work.

In addition, lower operating expenses during the three months ended September 30, 2020 contributed to an improvement in income from operations.

The lower operating expenses were a result of cost reductions in the third quarter of 2020.

Operating margins for the three months ended September 30, 2020 increased to 23.5% compared to 16.8% for the three months ended September 30 , 2019 due to the higher net sales and decrease in operating expenses.

Prepaid Debit:

Income from operations for Prepaid Debit for the three months ended June 30, 2020 decreased to $3.4 million compared to $5.4 million for the three months ended June 30 , 2019, due to reduced sales volumes primarily from COVID-19 impacts from lower retail store traffic.

Operating income margin for the three months ended June 30, 2020 decreased to 25.4% from 33.7% for the same period in 2019, primarily as a result of unfavorable cost absorption from lower sales, which impacted gross profit and operating expenses.

The loss from operations in Other was $9.2 million for the three months ended June 30, 2020 compared to a loss from operations of $3.3 million for the same time period in 2019.

The loss from operations was higher in the second quarter of 2020 by $5.9 million, primarily due to the $6.0 million litigation settlement gain recorded during the second quarter of 2019, partially offset by lower current period operating expenses from certain cost reductions .

Income from operations for Prepaid Debit for the three months ended September 30, 2020 was $7.8 million, an increase of 0.2% compared to $7.8 million for the three months ended September 30 , 2019.

The minor increase was the result of lower operating expenses.

The Prepaid Debit segment had reduced sales volumes primarily from COVID-19 impacts from lower retail store traffic during the three months ended September 30, 2020.

Operating income margin for the three months ended September 30, 2020 decreased to 38.0% from 38.2% for the same period in 2019, due to lower operating expenses.

The loss from operations in Other was $9.1 million for the three months ended September 30, 2020 compared to a loss from operations of $8.7 million for the same time period in 2019.

The loss from operations was higher in the third quarter of 2020 by $0.4 million, primarily due to an increase in operating expenses from certain costs including self insurance medical expense, partially offset by cost reductions .

Interest, net :

Interest expense for the three months ended June 30, 2020 increased to $6.8 million compared to $6.4 million for the three months ended June 30 , 2019.

Interest expense is higher in the second quarter of 2020 as a result of interest incurred the new $30.0 million Senior Credit Facility entered into on March 6, 2020.

Partially offsetting this additional expense is a decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the three months ended June 30 , 2020 compared to the same period in 2019.

Interest expense for the three months ended September 30, 2020 increased to $6.3 million compared to $6.1 million for the three months ended September 30, 2019.

Interest expense is higher in the third quarter of 2020 as a result of interest incurred on the new $30.0 million Senior Credit Facility entered into on March 6, 2020.

Partially offsetting this additional expense is a decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the three months ended September 30 , 2020 compared to the same period in 2019.

Income tax benefit (expense):

During the three months ended June 30, 2020, we recorded an income tax benefit of $4.4 million on pre-tax loss of $4.3 million, representing an effective income tax rate of 102.7%.

During the three months ended June 30, 2019, we

recorded an income tax expense of $0.8 million on pre-tax income of $2.3 million , representing an effective tax rate of 33.4%.

For the quarter ended June 30, 2020, the effective tax rate differs from the federal U.S.

statutory rate of 21.0% primarily due to the impact of a partial valuation allowance for the limitation on the deductibility of interest expense in 2020, permanent items, and state taxes.

During the three months ended September 30, 2020, we recorded an income tax expense of $1.4 million on pre-tax income of $7.2 million, representing an effective income tax rate of 19.4%.

During the three months ended September 30, 2019, we recorded an income tax expense of $2.3 million on pre-tax income of $1.6 million , representing an effective tax rate of 138.6%.

For the quarter ended September 30, 2020, the effective tax rate differs from the federal U.S.

statutory rate of 21.0% primarily due to the impact of a partial valuation allowance for the limitation on the deductibility of interest expense in 2020, offset by permanent items and state taxes.

Net income (loss) from continuing operations:

During the three months ended June 30, 2020, net income from continuing operations was $0.1 million, compared to $1.6 million during the three months ended June 30 , 2019.

The change was primarily due to higher operating expenses, net, as a result of the cash litigation settlement gain of $6 million recorded in the prior year, and the current year estimated sales tax expense of $2.7 million.

This was partially offset by higher net sales and gross profit, and a larger income tax benefit for the second quarter of 2020.

Six Months Ended June 30, 2020 Compared With Six Months Ended June 30, 2019

Six Months Ended June 30,

During the three months ended September 30, 2020, net income from continuing operations was $5.8 million, compared to a net loss of $0.6 million during the three months ended September 30 , 2019.

The change was primarily due to higher net sales and gross profit in the Debit and Credit segment.

Nine Months Ended September 30, 2020 Compared With Nine Months Ended September 30, 2019

Nine Months Ended September 30,

(dollars in thousands)

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* Not meaningful

Net sales for the six months ended June 30, 2020 increased $11.6 million, or 8.7%, to $145.3 million compared to $133.8 million for the six months ended June 30, 2019.

Net sales for the nine months ended September 30, 2020 increased $22.6 million, or 11.0%, to $228.0 million compared to $205.4 million for the nine months ended September 30, 2019.

Debit and Credit:

Net sales for Debit and Credit for the six months ended June 30, 2020 increased $18.1 million, or 18.1%, to $118.1 million compared to $100.0 million for the six months ended June 30, 2019.

The net sales increase was primarily due to higher volumes of dual-interface EMV ® card sales, including a significant amount of Second Wave ® cards featuring a core made with recovered ocean bound plastic .

Net sales for Debit and Credit for the nine months ended September 30, 2020 increased $29.3 million, or 19.4%, to $180.9 million compared to $151.5 million for the nine months ended September 30, 2019.

The net sales increase was primarily due to higher volumes of dual-interface EMV card sales, including Second Wave cards featuring a core made with recovered ocean bound plastic .

Partially offsetting these increases were reductions in volumes from card personalization and Card@Once instant issuance product sales in the second quarter of 2020.

Partially offsetting these increases were reductions in volumes from card personalization and Card@Once instant issuance product sales.

The decline in volumes was primarily as a result of impacts from COVID-19 including fewer new accounts and requests for replacement cards, and reduced hours of operation, lack of access or closure of certain bank branches.

Prepaid Debit:

Net sales for Prepaid Debit for the six months ended June 30, 2020 decreased $4.6 million, or 14.2%, to $28.1 million, compared to $32.7 million for the six months ended June 30, 2019.

The decrease was a result of reduced sales volumes primarily from COVID-19 impacts, including lower retail store traffic resulting from governmental stay-at-home orders during the second quarter of 2020.

In addition, in the prior year period, we benefited from higher sales as the Company supported customers through changing regulatory requirements in the industry.

There were no Other net sales for the six months ended June 30, 2020, compared to $1.7 million for the six months ended June 30, 2019.

Net sales for Prepaid Debit for the nine months ended September 30, 2020 decreased $4.5 million, or 8.4%, to $48.7 million, compared to $53.2 million for the nine months ended September 30, 2019.

The decrease was primarily a result of reduced sales volumes primarily from COVID-19 impacts, including lower retail store traffic.

There were no Other net sales for the nine months ended September 30, 2020, compared to $1.7 million for the nine months ended September 30, 2019.

In April 2019, we sold the Canadian subsidiary, which was the only operation contributing to Other segment net sales.

Gross Profit and Gross Profit Margin

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

3 unchanged sentences

* Not meaningful

Gross profit for the six months ended June 30, 2020 increased $5.0 million, or 11.3%, to $48.9 million compared to $43.9 million for the six months ended June 30, 2019.

Gross profit margin for the six months ended June 30, 2019 increased to 33.6% compared to 32.8% for the six months ended June 30, 2019.

Gross profit for the nine months ended September 30, 2020 increased $10.2 million, or 14.8%, to $79.3 million compared to $69.1 million for the nine months ended September 30, 2019.

Gross profit margin for the nine months ended September 30, 2020 increased to 34.8% compared to 33.7% for the nine months ended September 30, 2019.

Debit and Credit:

Gross profit for Debit and Credit for the six months ended June 30, 2020 increased $7.9 million, or 25.5%, to $39.1 million compared to $31.1 million during the six months ended June 30, 2019.

Gross profit for Debit and Credit for the nine months ended September 30, 2020 increased $13.2 million, or 27.9%, to $60.7 million compared to $47.5 million during the nine months ended September 30, 2019.

The increase in gross profit was driven primarily by higher sales volumes and pricing of dual interface EMV cards, including Second Wave cards.

In addition, higher sales from CPI on-Demand card personalization and government disbursement work contributed to an improvement in gross profit compared to the prior year.

Gross profit margin increased to 33.1% during the six months ended June 30, 2020, compared to 31.1% in the prior year period, due to favorable operating leverage from higher dual interface card sales volumes, card personalization sales mix from dual interface EMV cards and higher CPI on-Demand net sales.

In addition, higher sales from CPI On-Demand card personalization and COVID-19 related government disbursement work contributed to an improvement in gross profit compared to the prior year.

Gross profit margin increased to 33.6% during the nine months ended September 30, 2020, compared to 31.3% in the prior year period, due primarily to operating leverage from higher dual interface card sal es and CPI On-Demand net sales.

Prepaid Debit:

Gross profit for Prepaid Debit during the six months ended June 30, 2020 decreased 23.9% to $9.8 million compared to $12.9 million for the six months ended June 30, 2019.

Gross profit margin for Prepaid Debit for the six months ended June 30, 2020 decreased to 34.8% compared to 39.3% for the six months ended June 30, 2019.

The decrease in gross profit and margin was attributed to lower sales described previously which resulted in unfavorable cost absorption.

There was no gross profit for the six months ended June 30, 2020 compared to gross loss of $0.1 million for the six months ended June 30, 2019.

Gross profit for Prepaid Debit during the nine months ended September 30, 2020 decreased 14.3% to $18.7 million compared to $21.8 million for the nine months ended September 30, 2019.

Gross profit margin for Prepaid Debit for the nine months ended September 30, 2020 decreased to 38.3% compared to 41.0% for the nine months ended September 30, 2019.

The decrease in gross profit and margin was attributed to lower sales primarily from COVID-19 impacts which resulted in unfavorable cost absorption.

There was no gross profit for the nine months ended September 30, 2020 compared to gross loss of $0.1 million for the nine months ended September 30, 2019.

In April 2019, we sold our Canadian subsidiary and no longer have any operations contributing to Other segment net sales or gross profit.

Operating Expenses, net

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

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Operating expenses, net, for the six months ended June 30, 2020 increased $8.4 million, or 27.9%, to $38.7 million compared to $30.2 million for the six months ended June 30, 2019.

The increase was primarily due to the cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019, which was a reduction to net operating expenses, and the estimated sales tax expense of $2.7 million recorded in the second quarter of 2020 within the Debit and Credit segment.

The Company is in the process of evaluating and finalizing a state sales tax analysis and recorded an estimated expense.

Due to the complexity of the analysis and remaining information needed from customers, we expect this estimate will change in the future.

Refer to Item 1 Financial Statements, Note 15, Commitments and Contingencies, for further disclosure regarding the sales tax liability.

Operating expenses, net, for the nine months ended September 30, 2020 increased $5.3 million, or 11.0%, to $53.4 million compared to $48.1 million for the nine months ended September 30, 2019.

The increase was primarily due to the cash litigation settlement gain of $6.0 million recorded in the second quarter of 2019, which was a reduction to net operating expenses.

Debit and Credit:

Debit and Credit operating expenses increased $2.8 million to $18.2 million in the six months ended June 30, 2020 compared to $15.4 million in the six months ended June 30, 2019, primarily due to the $2.7 million estimated sales tax expense recorded in the second quarter of 2020.

Debit and Credit operating expenses decreased $0.7 million to $22.8 million in the nine months ended September 30, 2020 compared to $23.4 million in the nine months ended September 30, 2019, primarily due to cost reductions.

Prepaid Debit:

Prepaid Debit operating expenses increased slightly by $0.1 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019.

Other operating ex penses were down $0.4 million for the six months ended June 30, 2020, when compared to the six months ended June 30, 2019.

The reduction in operating expenses was primarily due to certain cost reductions and expense savings from the sale of our Canadian subsidiary, partially offset by restructuring severance charges incurred in 2020 .

During the six months ended June 30, 2019, we received $6.0 million cash, which was recorded as a reduction to net operating exp enses, related to a litigation settlement.

Prepaid Debit operating expenses were $3.3 million for the nine months ended September 30, 2020, a minor increase of 0.6% when compared to the nine months ended September 30, 2019.

Other operating expenses were down $0.1 million for the nine months ended September 30, 2020, when compared to the nine months ended September 30, 2019.

During the nine months ended September 30, 2019, we received $6.0 million cash, which was recorded as a reduction to net operating expenses, related to a litigation settlement.

Income from Operations and Operating Margin

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

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Income from operations for the six months ended June 30, 2020 was $10.2 million compared to income from operations of $13.7 million for the six months ended June 30, 2019.

The Company’s operating profit margin for the six months ended June 30, 2020 decreased to 7.0% compared to an operating profit margin of 10.2% for the six months ended June 30, 2019.

Income from operations for the nine months ended September 30, 2020 was $26.0 million compared to income from operations of $21.1 million for the nine months ended September 30, 2019.

The Company’s operating profit margin for the nine months ended September 30, 2020 increased to 11.4% compared to an operating profit margin of 10.2% for the nine months ended September 30, 2019.

In the prior year period, we reached a litigation settlement and received $6.0 million cash which was recorded through income from operations within the Other segment.

In the second quarter of 2020, we recorded an estimated sales tax expense of $2.7 million within the Debit and Credit segment.

Debit and Credit:

Income from operations for Debit and Credit for the six months ended June 30, 2020 increased $5.1 million, to $20.9 million compared to $15.8 million for the six months ended June 30, 2019.

The increase in income from operations was driven primarily by higher sales volumes and pricing of dual interface EMV cards including Second Wave ® cards, and CPI on-Demand card personalization and government disbursement work .

Operating margins for the six months ended June 30, 2020 increased to 17.7% compared to 15.8% for the six months ended June 30, 2019.

Income from operations for Debit and Credit for the nine months ended September 30, 2020 increased $13.9 million, to $37.9 million compared to $24.0 million for the nine months ended September 30, 2019.

The increase in income from operations was driven primarily by higher sales volumes and pricing of dual interface EMV cards including Second Wave cards, and CPI On-Demand card personalization and COVID-19 related government disbursement work .

Operating margins for the nine months ended September 30, 2020 increased to 21.0% compared to 15.9% for the nine months ended September 30, 2019.

Prepaid Debit:

Income from operations for Prepaid Debit for the six months ended June 30, 2020 decreased to $7.6 million compared to $10.7 million for the six months ended June 30, 2019.

Income from operations for Prepaid Debit for the nine months ended September 30, 2020 decreased to $15.4 million compared to $18.5 million for the nine months ended September 30, 2019.

The decrease in income from operations was due to reduced sales volumes primarily due to COVID-19 impacts from lower retail store traffic.

Operating income margin for the six months ended June 30, 2020 decreased to 26.9% from 32.7% for the same period in 2019, primarily as a result of unfavorable cost absorption from lower sales, impacting gross profit and operating expenses.

The loss from operations in Other was $18.3 million for the six months ended June 30, 2020, compared to a loss from operations of $12.8 million for the same time period in 2019.

The 2019 loss benefited from the $6.0 million cash litigation settlement gain, and was partially offset by lower current period operating expenses from certain cost reductions and cost savings from the sale of our Canadian subsidiary.

Operating income margin for the nine months ended September 30, 2020 decreased to 31.6% from 34.8% for the same period in 2019, primarily as a result of unfavorable cost absorption from lower sales, impacting gross profit and operating expenses.

The loss from operations in Other was $27.3 million for the nine months ended September 30, 2020, compared to a loss from operations of $21.5 million for the same time period in 2019.

The 2019 loss benefited from the $6.0 million cash litigation settlement gain, and was partially offset by lower net current year operating expenses.

Interest, net:

Interest expense for the six months ended June 30, 2020 increased to $12.9 million compared to $12.8 million for the six months ended June 30, 2019.

Interest expense for the nine months ended September 30, 2020 increased to $19.2 million compared to $18.8 million for the nine months ended September 30, 2019.

Interest expense was higher in 2020 primarily as a result of interest incurred on the new $30.0 million Senior Credit Facility entered into on March 6, 2020.

This additional expense was partially offset by a decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the six months ended June 30, 2020 compared to the same period in 2019.

This additional expense was partially offset by a decline in the interest incurred on our First Lien Term Loan due to lower average interest rates for the nine months ended September 30, 2020 compared to the same period in 2019.

Income tax benefit (expense):

During the six months ended June 30, 2020, there was an income tax benefit of $5.4 million on pre-tax loss of $2.8 million, representing an effective income tax rate of 191.5%.

During the six months ended June 30, 2019, we recorded an income tax expense of $1.2 million on pre-tax loss of $0.4 million, representing an effective tax rate of (323.3)%.

During the nine months ended September 30, 2020, there was an income tax benefit of $2.2 million on pre-tax income of $6.7 million, representing an effective income tax rate of (32.5)%.

During the nine months ended September 30, 2019, we recorded an income tax expense of $3.6 million on pre-tax income of $0.9 million, representing an effective tax rate of 396.7%.

The effective tax rate differs from the federal U.S.

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The CARES Act increases the Internal Revenue Code Section 163(j) interest deduction limit for 2019 and 2020, and allows for the acceleration of refunds of alternative minimum tax credits.

For the six months ended June 30, 2020, the Company estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 127.9% .

For the nine months ended September 30, 2020, the Company estimated a tax benefit for certain provisions in the CARES Act including the carryback of losses and the increase to the interest deduction limitation, resulting in a tax rate benefit of 54.7% .

In addition, the effective tax rate differs from the federal U.S.

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Net income (loss) from continuing operations:

During the six months ended June 30, 2020, net income from continuing operations was $2.6 million, compared to a $1.5 million loss during the six months ended June 30, 2019.

The change was primarily due to higher net sales and gross profit, and a larger income tax benefit for the six months ended June 30, 2020, partially offset by the cash litigation settlement gain recorded in the prior year and the current year estimated sales tax expense.

During the nine months ended September 30, 2020, net income from continuing operations was $8.9 million, compared to a $2.7 million loss during the nine months ended September 30, 2019.

The change was primarily due to higher net sales and gross profit, and the income tax benefit for the nine months ended September 30, 2020, partially offset by the cash litigation settlement gain recorded in the prior year.

Liquidity and Capital Resources

At June 30, 2020, we had $54.4 million of cash and cash equivalents.

At September 30, 2020, we had $50.3 million of cash and cash equivalents.

Of this amount, $0.5 million was held in accounts outside of the United States.

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On March 6, 2020, the Company entered into a new $30 million Senior Credit Facility which matures on May 17, 2022.

The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, which had $312.5 million outstanding as of June 30 , 2020.

The Senior Credit Facility ranks senior in priority to the Company’s First Lien Term Loan, which had $312.5 million outstanding as of September 30 , 2020.

The Company’s Revolving Credit Facility was terminated concurrently with the new Senior Credit Facility on March 6, 2020.

The Revolving Credit Facility had no borrowings outstanding as of the termination date.

The Senior Credit Facility and the First Lien Term Loan contain customary representations, covenants and events of default, including certain covenants that limit or restrict the Company’s and certain of its subsidiaries’ ability to incur indebtedness, grant certain types of security interests, incur certain types of liens, sell or transfer assets or enter into a merger or consolidate with another company, enter into sale and leaseback transactions, make certain types of investments, declare or make dividends or distributions, engage in certain affiliate transactions, or modify organizational documents, among other restrictions and subject to certain exceptions.

documents, among other restrictions and subject to certain exceptions.

In accordance with the Senior Credit Facility, the Company is also required to have adjusted EBITDA, as defined in the agreement, of $25 million for the previous four consecutive fiscal quarters in total at the end of each quarterly period ending on or after March 31, 2020.

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Interest rates under the Senior Credit Facility are based, at the Company's election, on a Eurodollar rate subject to an interest rate floor of 1.0%, plus a margin of 8.5% or a base rate plus a margin of 7.5%.

As of June 30, 2020, the interest rate on our Senior Credit Facility was 9.5%.

As of September 30, 2020, the interest rate on our Senior Credit Facility was 9.5%.

Interest rates under the First Lien Term Loan, at the Company’s election, are based on either a Eurodollar rate, subject to an interest rate floor of 1.0%, plus a margin of 4.5%, or a base rate plus a margin of 3.5%.

As of June 30, 2020, the interest rate on our First Lien Term Loan was 6.38%.

As of September 30, 2020, the interest rate on our First Lien Term Loan was 5.5%.

Operating Activities – Continuing Operations

Cash provided by operating activities – continuing operations for the six months ended June 30, 2020 was $12.0 million compared to a usage of $1.0 million during the six months ended June 30 , 2019.

The year over year improvement was due to net income during the six months ended June 30, 2020 of $2.5 million compared to a net loss of $1.5 million in the prior year period, in addition to working capital cash benefits, primarily in accrued expense and inventories.

For the six months ended June 30, 2019, we had a working capital cash usage relating primarily to payments for employee performance incentive compensation earned in 2018 and increases in inventory to support the growth of our business.

Cash interest paid during the six months ended June 30 , 2020 was $11.5 million, which was lower than the prior year period by $0.1 million, primarily as a result of lower interest rates on our First Lien Term Loan.

Cash provided by operating activities – continuing operations for the nine months ended September 30, 2020 was $10.2 million compared to a usage of $3.0 million during the nine months ended September 30, 2019.

The year over year improvement was due primarily to net income during the nine months ended September 30, 2020 of $8.8 million compared to a net loss of $2.7 million in the prior year period.

For the nine months ended September 30 2020, we had a working capital cash usage of $16.2 million relating to an increase in accounts receivable due primarily to higher sales in the period and timing.

For the nine months ended September 30, 2019, we had a working capital cash usage relating primarily to payments for employee performance incentive compensation earned in 2018 and increases in inventory to support the growth of our business.

Investing Activities – Continuing Operations

Cash used in investing activities – continuing operations for the six months ended June 30, 2020 was $1.6 million, compared to a usage of $1.2 million during the six months ended June 30 , 2019.

Cash used in investing activities – continuing operations for the nine months ended September 30, 2020 was $3.3 million, compared to a usage of $1.8 million during the nine months ended September 30 , 2019.

Cash used in investing activities – continuing operations was related primarily to capital expenditures, including investments to support the growth of the business, such as machinery and information technology equipment.

In the prior year period, partially offsetting the capital expenditure outflows, we received cash of $1.5 million for the sale of our Canadian subsidiary.

As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $0.8 million during the six months ended June 30, 2020, compared to $3.4 million during the prior year period.

As presented in our supplemental disclosures of non-cash information on the statement of cash flows, finance leases were executed for the acquisition of right-of-use machinery and equipment assets totaling $1.6 million during the nine months ended September 30, 2020, compared to $5.2 million during the prior year period.

Financing Activities

During the six months ended June 30 , 2020, cash provided by financing activities was $25.4 million.

The Senior Credit Facility provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance costs during the six months ended June 30 , 2020.

The Company paid $1.2 million and $0.7 million of principal on finance leases during the six months ended June 30 , 2020 and 2019, respectively.

For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility during the six months ended June 30 , 2019.

During the nine months ended September 30 , 2020, cash provided by financing activities was $24.8 million.

The Senior Credit Facility provided $29.1 million of cash, net of discount, partially offset by $2.5 million of associated debt issuance costs during the nine months ended September 30 , 2020.

The Company paid $1.8 million and $1.2 million of principal on finance leases during the nine months ended September 30 , 2020 and 2019, respectively.

For working capital purposes, we borrowed and repaid $11.5 million on the Revolving Credit Facility during the nine months ended September 30 , 2019.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2020.

We had no material off-balance sheet arrangements at September 30, 2020.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2019, for which there were no material changes as of June 30, 2020, included:

Our Critical Accounting

Policies and Estimates disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2019, for which there were no material changes as of September 30, 2020, included:

● Impairment Assessments of Goodwill and Long-Lived Assets,

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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