What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-12 · 131 added, 155 removed, 213 unchanged (57% 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, 2021.

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, 2020 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, 2021 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “guides,” “provides guidance,” “provides outlook” or other similar expressions are intended to identify forward-looking statements, which are not historical in nature.

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These risks and uncertainties include, but are not limited to:

the potential effects of COVID-19 on our business, including our supply chain, customer demand, workforce, operations and ability to comply with certain covenants related to our indebtedness;

the potential effects of COVID-19 and responses thereto on our business, including our supply chain, customer demand, workforce, operations and ability to comply with certain covenants related to our indebtedness;

a disruption or other failure in our supply chain or labor pool resulting in increased costs and inability to pass those costs on to our customers;

our inability to recruit, retain and develop qualified personnel, including key personnel;

our transition to being an accelerated filer and complying with Section 404 of the Sarbanes-Oxley Act of 2002 and the costs associated with such compliance and implementation of procedures thereunder;

our failure to maintain effective internal control over financial reporting or remediate material weaknesses;

our lack of eligibility to participate in government relief programs related to COVID-19 or inability to realize material benefits from such programs;

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interruptions in our operations, including our information technology systems, or in the operations of the third parties that operate the data centers or computing infrastructure on which we rely;

failure to comply with regulations, customer contractual requirements and evolving industry standards regarding consumer privacy and data use and security;

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tax legislation increasing the corporate income tax rate and challenges to our income tax positions;

failure to meet the continued listing standards of the Toronto Stock Exchange or the Nasdaq Global Market;

a decrease in the value of our common stock combined with our common stock not being traded on a United States national securities exchange, which may prevent investors or potential investors from investing or achieving a meaningful degree of liquidity;

failure to meet the continued listing standards of the Nasdaq Global Market;

quarterly variation in our operating results;

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

our dependence on licensing

arrangements;

our dependence on licensing arrangements;

risks associated with international operations;

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

non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we

operate and sell our products and services;

the effect of legal and regulatory proceedings;

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Prepaid Debit Card program managers;

small to mid-sized issuer market, which includes independent community banks and credit unions;

small to mid-sized issuer market, which includes independent community banks, credit unions, and financial technology companies (“FinTechs”);

large issuer market, serving some of the largest U.S.

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Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States, and Prepaid Debit, which primarily provides integrated card services to Prepaid Debit Card providers in the United States.

Our “Other” segment includes corporate expenses.

Our “Other” segment includes corporate expenses and the loss on debt extinguishment.

COVID-19 Update

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The Company believes the global impacts from COVID-19 have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs for, certain raw materials and components, as well as a global chip shortage, which are expected to continue in the future.

CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate potential supply chain constraints.

The current economic environment has also affected the available labor pool in the areas in which the Company operates which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays.

The Company believes the related cost impacts of all of the foregoing will increase through the second half of 2021 and beyond.

The Company may not be able to pass some or all of these costs through to its customers.

CPI closely monitors its supply chain and has purchased and may continue to purchase additional inventory to help mitigate supply chain constraints.

The current environment has also affected the available labor pool in the areas in which the Company operates, which has resulted in increased labor cost and turnover in our facilities, challenges hiring production employees and shipping delays.

On November 4, 2021, the Occupational Safety and Health Administration (“OSHA”) filed an Emergency Temporary Standard (“ETS”) with the Office of the Federal Register that will require employers with 100 or more employees to require their employees to be fully vaccinated with a COVID-19 vaccine or to produce a negative COVID-19 test result on at least a weekly basis, along with certain other requirements.

Based on the pre-publication version of the ETS, the Company believes the proposed rule would apply to the Company.

Compliance with the ETS could result in increased costs as well as labor disruptions, employee attrition and/or difficulty recruiting new employees which could compound the labor shortage already impacting the Company.

The Company expects the labor and supply chain challenges described above, and the associated costs, to continue to increase through the fourth quarter of 2021 and beyond.

The Company may not be able to pass all of these costs through to its customers.

The Company has also experienced increased demand for its products and services.

The Company is experiencing increased production lead times, which is likely to continue through the second half of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers.

The Company is experiencing increased production lead times, which it believes is likely to continue in the fourth quarter of 2021 and beyond, depending on the duration of the staffing and supply chain challenges and the level of demand from its customers.

The Company will continue to monitor and respond as the situation evolves.

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Refer to Part I, Item 1, Financial Statements, Note 11, Income Taxes for a discussion of the CARES Act income tax impacts on the Company.

In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act, which are required to be paid in 2021 and 2022.

In addition, we deferred employer social security payments in 2020 in accordance with the CARES Act, which are allowed to be paid in two installments in 2021 and 2022.

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

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● We have experienced, and expect to continue to experience, labor availability issues, particularly in the Company’s production facilities.

In the second quarter, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales, which we expect to continue to increase for the remainder of 2021 and beyond as the Company continues to actively recruit additional employees.

Also as a result of labor shortages and supply chain constraints, as described below, the Company has experienced extended production lead times in some areas of the business and difficulty meeting some customer’s delivery expectations.

In the nine months ended September 30, 2021, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales and Operating Expenses, which we expect to continue to increase for the fourth quarter of 2021 and beyond as the Company continues to actively recruit additional employees.

We continue to proactively monitor, assess and take steps to minimize disruptions and delays in production;

however, these disruptions and delays have caused, and may continue to cause, the Company to lose or delay customer opportunities.

● Generally, surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in price increases to the Company, carrier delays, longer lead times and unpredictability.

In particular, a global shortage of chips that we use in many of our products is expected to continue for the foreseeable future.

Additionally, certain chip manufacturers recently indicated they plan to limit the types of chips that they manufacture, which will affect our ability to continue to provide lower-cost contact chips for certain of our

● Surges in demand for certain raw materials and components, as well as other factors such as staffing challenges, have continued to strain the global supply chain network, which has resulted in increased costs of such raw materials and components, increased shipping costs, freight and logistics delays, longer lead times and unpredictability.

In particular, shortages of raw materials and components that we use in many of our products is expected to continue for the foreseeable future and may adversely affect our ability to meet customer demand for our products.

Although we strive to place orders for materials and components sufficiently in advance, to compile buffer stock to mitigate the impacts of freight and logistics delays and to bolster our access to raw materials and components, it is difficult to predict the ability of our suppliers to continue to fulfill such orders, and it is likely that such delays as well as costs to obtain such raw materials and components will increase for the fourth quarter of 2021 and beyond.

This could cause us and affected customers to migrate programs to more expensive chip options or to contactless cards at a faster pace than expected, which may be costly and disruptive for the Company and affected customers.

While we may be able to pass on some of our increased labor and material costs to our customers, we expect these factors will impact profitability for the remainder of 2021 and beyond.

While we may be able to pass on some of our increased labor and material costs to our customers, we expect these factors will impact profitability for the fourth quarter of 2021 and beyond.

In addition, given that raw materials inventory is recognized on a first-in, first-out basis, we expect the impact of increasing raw materials costs to be realized into our statement of operations in 2022 and beyond.

● Our Second Wave payment cards feature a core made with recovered ocean-bound plastic (“ROBP”), which we source from Haiti and process using single source suppliers.

Due to the recent increased political unrest in Haiti as well as the supply chain constraints described above, there is an increased likelihood that we may face challenges in obtaining an adequate supply of ROBP, which is necessary to meet customer demand for our Second Wave cards.

Due to political instability and other factors in Haiti as well as the supply chain constraints described above, there is an increased likelihood that we may face challenges in obtaining an adequate supply of ROBP, which is necessary to meet customer demand for our Second Wave cards.

The Company actively monitors and manages its supply chain, including compiling buffer stock of materials and seeking alternative suppliers, but it is uncertain how the current political climate in Haiti and other factors in the ROBP supply chain will affect our ability to continue obtaining sufficient ROBP.

Additionally, to the extent we are able to secure one or more alternative suppliers of ROBP, we may be subject to increased shipping and materials costs imposed by such suppliers.

● As of June 30, 2021, the market capitalization of outstanding shares of our Common Stock owned by non-affiliates exceeded $75 million, which triggered the Company being classified as an accelerated filer with respect to SEC regulations and filing requirements effective December 31, 2021.

As a result, our annual assessment of the effectiveness of our internal control over financial reporting must be audited by our external audit firm, and the result of that audit will be included in our next Annual Report on Form 10-K in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002.

Preparations to comply and continued compliance with this new requirement will significantly increase our compensation expense, professional fees and other administrative costs.

As a result, our annual assessment of the effectiveness of our internal control over financial reporting must be audited by our independent registered public accounting firm, and the result of that audit will be included in our next Annual Report on Form 10-K in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002.

Preparations to comply and continued compliance with this new requirement has significantly increased our compensation expense, professional fees and other administrative costs during the nine months ended September 30, 2021.

We expect these increased costs to continue for the fourth quarter of 2021 and beyond.

In connection with our evaluation and testing during the third quarter of 2021, management identified deficiencies that they determined resulted in material weaknesses in internal controls.

For additional information, see Part I, Item 4, Controls and Procedures .

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Segment Discussion

Three Months Ended June 30, 2021 Compared With Three Months Ended June 30, 2020

Three Months Ended June 30,

Three Months Ended September 30, 2021 Compared With Three Months Ended September 30, 2020

Three Months Ended September 30,

(dollars in thousands)

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Net sales for the three months ended June 30, 2021 increased $21.8 million, or 30.6%, to $93.2 million compared to $71.4 million for the three months ended June 30, 2020.

Debit and Credit:

Net sales for Debit and Credit for the three months ended June 30, 2021 increased $14.6 million, or 25.0%, to $72.9 million compared to $58.3 million for the three months ended June 30, 2020 .

The net sales increase was due primarily to new customer growth and the ongoing transition to contactless cards.

During the second quarter of 2021, product net sales increased due to higher volumes of contactless cards including new customer growth.

In addition, net sales increased from card personalization service sales due to new customers, and higher volumes of contactless cards including higher CPI On-Demand and Card@Once instant issuance personalization sales.

Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV ® cards.

CPI’s net sales in the prior year second quarter were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Net sales for Debit and Credit increased $13.4 million, or 21.4%, due primarily to the ongoing transition to contactless cards and new customer growth.

Product net sales increased due to higher volumes of contactless cards, including new customer growth, and higher Card@Once instant issuance sales.

Additionally, net sales from card personalization services increased due to higher volumes of contactless cards, including new customer growth and higher CPI On-Demand sales.

Contactless cards have additional technology to process contactless transactions and

generally have a higher selling price than contact-only EMV ® cards.

Debit and Credit net sales in the prior year third quarter were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Prepaid Debit:

Net sales for Prepaid Debit for the three months ended June 30, 2021 increased $6.8 million, or 50.6%, to $20.4 million, compared to $13.5 million for the three months ended June 30, 2020.

Net sales increased from higher volumes from existing customers which included the replenishment of inventory by our customers which had been maintained at lower levels in the prior year due to COVID-19 uncertainties.

Net sales for Prepaid Debit increased $2.9 million, or 14.0%, due primarily to higher volumes from existing customers which included the acquisition of new customer portfolios and the replenishment of inventory by our customers which had been maintained at lower levels in the prior year period due to COVID-19 uncertainties.

Prepaid Debit net sales in the prior year third quarter were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Eliminations:

This includes the elimination of intercompany sales between segments in the consolidation of our financial statements.

The decrease in eliminations is due to lower sales between the segments during the three months ended June 30, 2021 compared to the prior year.

The decrease in eliminations is due to lower sales between the segments during the three months ended September 30, 2021 compared to the prior year period.

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, 2021 increased $14.0 million, or 60.6%, to $37.1 million compared to $23.1 million for the three months ended June 30, 2020.

Gross profit margin for the three months ended June 30, 2021 increased to 39.8% compared to 32.3% for the three months ended June 30, 2020.

Debit and Credit:

Gross profit for Debit and Credit for the three months ended June 30, 2021 increased $9.7 million, or 52.3%, to $28.3 million compared to $18.6 million during the three months ended June 30, 2020 .

The increase in gross profit for the Debit and Credit segment was driven primarily by the net sales increase from new customer growth and the ongoing transition to contactless cards.

Gross profit increased from higher product net sales due to higher volumes of contactless cards including new customer growth.

In addition, gross profit increased from card personalization service sales due to new customers, and higher volumes of contactless cards including higher CPI On-Demand and Card@Once instant issuance personalization sales.

Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV ® cards, which also benefitted gross profit in the current year.

Gross profit margin increased to 38.8% during the three months ended June 30, 2021, compared to 31.8% in the prior year period, due primarily to operating leverage from higher net sales.

Gross profit for Debit and Credit increased $6.5 million, or 29.7%, driven primarily by the net sales increase described above.

The increase in net sales was partially offset by higher labor costs in the current year.

Gross profit margin increased to 37.0% during the three months ended September 30, 2021, compared to 34.6% in the prior year period, due primarily to operating leverage from higher net sales, partially offset by labor cost increases.

Prepaid Debit:

Gross profit for Prepaid Debit during the three months ended June 30, 2021 increased $4.3 million, or 94.5%, to $8.8 million compared to $4.5 million during the three months ended June 30, 2020.

Gross profit margin for Prepaid Debit for the three months ended June 30, 2021, increased to 43.3% compared to 33.5% for the three months ended June 30, 2020.

The increase in gross profit and margin was primarily attributed to higher net sales and favorable overhead cost absorption.

Gross profit for Prepaid Debit increased $0.6 million, or 7.0%, due primarily to higher net sales and favorable overhead cost absorption, partially offset by increased labor costs.

Gross profit margin for Prepaid Debit decreased to 40.5% compared to 43.1% for the three months ended September 30, 2020 due primarily to increased labor costs as a percentage of sales.

Operating Expenses

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

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Operating expenses increased $3.2 million to $21.3 million for the three months ended June 30, 2021, compared to $18.1 million for the three months ended June 30, 2020.

Debit and Credit:

Debit and Credit operating expenses increased $0.2 million to $8.0 million in the three months ended June 30, 2021 compared to $7.8 million in the three months ended June 30, 2020 .

The increase was due primarily to increased

selling and compensation costs due to strong business performance, partially offset by a benefit recorded in the second quarter of 2021 relating to estimated sales taxes which are further described in Item 1 - Financial Statements, Note 14, Commitments and Contingencies.

Debit and Credit operating expenses increased $0.7 million, or 9.9%, due primarily to increased selling and compensation costs due to strong business performance.

Prepaid Debit:

Prepaid Debit operating expenses increased $0.2 million to $1.3 million in the three months ended June 30, 2021 compared to $1.1 million in the three months ended June 30, 2020 .

The increase was due primarily to increased selling and compensation costs due to strong business performance .

Other operating expenses increased $2.9 million to $12.0 million in the three months ended June 30, 2021 compared to $9.2 million in the three months ended June 30, 2020 .

The $2.9 million increase was due primarily to $1.6 million of increased employee performance incentive compensation from strong business performance, $0.8 million of increased healthcare expenses, and other compliance costs.

Prepaid Debit operating expenses were essentially flat and decreased less than $0.1 million, or 4.0%, compared to the prior year period.

Other operating expenses increased $3.2 million, or 35.3%, due primarily to $1.7 million of compensation expenses including from employee performance incentive compensation due to strong business performance and from additional efforts associated with new compliance requirements, $1.1 million of executive severance charges, and increased professional fees and compliance costs.

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, 2021 was $15.8 million compared to income from operations of $5.0 million for the three months ended June 30, 2020.

The Company’s operating income margin for the three months ended June 30, 2021 increased to 16.9% compared to 7.0% for the three months ended June 30, 2020 .

Debit and Credit:

Income from operations for Debit and Credit for the three months ended June 30, 2021 was $20.3 million, an increase of 89.3% compared to $10.7 million for the three months ended June 30, 2020 due primarily to higher net sales and gross profit from new customer growth and the ongoing transition to contactless cards which generally have a higher selling price than contact-only EMV cards.

Operating margins for the three months ended June 30, 2021 increased to 27.8% compared to 18.4% for the three months ended June 30, 2020 due to the higher net sales and operating leverage.

Income from operations for Debit and Credit increased $5.8 million, or 39.1 %, due primarily to higher net sales and gross profit as described above.

Operating margins increased to 26.9% compared to 23.5% for the three months ended September 30, 2020 due to primarily higher net sales and operating leverage.

Prepaid Debit:

Income from operations for Prepaid Debit for the three months ended June 30, 2021 was $7.6 million, an increase of 119.9% compared to $3.4 million for the three months ended June 30, 2020 .

The increase was the result of higher volumes from existing customers.

Operating income margin for the three months ended June 30, 2021 increased to 37.0% from 25.4% for the same period in 2020, due to higher net sales and favorable overhead cost absorption.

The loss from operations in Other was $12.0 million for the three months ended June 30, 2021, compared to a loss from operations of $9.2 million for the same period in 2020.

The loss from operations was higher in the second quarter of 2021 by $2.9 million, primarily due to an increase in operating expenses from employee performance incentive compensation, healthcare expenses, and other compliance costs.

Income from operations for Prepaid Debit increased $0.7 million, or 8.5 %, primarily due to higher net sales and gross profit.

Operating income margin for the three months ended September 30, 2021 decreased to 36.1% from 38.0% for the same period in 2020, due primarily to increased labor costs as a percentage of sales.

The loss from operations in Other increased $3.2 million, or 35.3%, primarily due to an increase in compensation expenses including from employee performance incentive compensation due to strong business performance and from compliance requirements, executive severance charges, and increased professional fees and compliance costs.

Interest, net :

Interest expense for the three months ended June 30, 2021 increased to $7.0 million compared to $6.8 million for the three months ended June 30, 2020.

Interest expense was higher in the second quarter of 2021 primarily due higher interest rates on the Senior Notes issued in 2021, compared to the interest rates on the debt facilities in the prior year period.

This increase was partially offset by less debt principal outstanding in the current year period compared to the prior year.

Interest expense for the three months ended September 30, 2021 increased to $7.2 million compared to $6.3 million for the three months ended September 30, 2020.

Interest expense was higher in the third quarter of 2021 primarily due to higher interest rates on the Senior Notes issued in 2021, compared to the interest rates on the debt facilities in the prior year period.

This increase was partially offset by less debt principal outstanding in the current year period compared to the prior year period, and from interest income received of approximately $0.2 million in 2021 related to income tax refunds.

Income tax (expense) benefit:

During the three months ended June 30, 2021, we recorded an income tax expense of $2.5 million on pre-tax income of $8.8 million, representing an effective income tax rate of 28.8%.

During the three months ended June 30, 2020, we recorded an income tax benefit of $3.1 million on pre-tax loss of $1.8 million , representing an effective income tax rate of 170.0%.

For the quarter ended June 30, 2021, the effective tax rate differs from the federal U.S.

During the three months ended September 30, 2021, we recorded an income tax expense of $2.9 million on pre-tax income of $9.5 million, representing an effective income tax rate of 30.3%.

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%.

For the quarter ended September 30, 2021, the effective tax rate differs from the federal U.S.

statutory rate of 21.0% primarily due to the impact of state taxes and permanent items.

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

statutory rate of 21.0% primarily due to the impact of the CARES Act which was signed into law in March 2020, and due to tax expense for a partial valuation allowance for the limitation on the deductibility of interest expense.

During the three months ended June 30, 2021, net income was $6.2 million, compared to net income of $1.3 million during the three months ended June 30, 2020 .

The increase was primarily due to higher net sales and gross profit, partially offset by higher operating expenses and income tax expense during the three months ended June 30, 2021, compared to the prior year period.

Six Months Ended June 30, 2021 Compared With Six Months Ended June 30, 2020

Six Months Ended June 30,

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

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

During the three months ended September 30, 2021, net income was $6.6 million, compared to net income of $5.8 million during the three months ended September 30, 2020 .

The increase was primarily due to higher net sales and gross profit, partially offset by higher operating expenses, income tax expense and interest expense during the three months ended September 30, 2021, compared to the prior year period.

Nine Months Ended September 30, 2021 Compared With Nine Months Ended September 30, 2020

Nine Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

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Net sales for the six months ended June 30, 2021 increased $37.0 million, or 25.4%, to $182.3 million compared to $145.3 million for the six months ended June 30, 2020.

Debit and Credit:

Net sales for Debit and Credit for the six months ended June 30, 2021 increased $24.5 million, or 20.8%, to $142.7 million compared to $118.1 million for the six months ended June 30, 2020.

The net sales increase was due primarily to new customer growth, and the ongoing transition to contactless cards.

During the six months ended June 30, 2021, product net sales increased due to higher volumes of contactless cards including new customer growth.

In addition, net sales increased from card personalization service sales due to new customers and higher volumes of contactless cards, including higher CPI On-Demand and Card@Once instant issuance personalization sales.

Contactless cards have additional technology to process contactless transactions and generally have a higher selling price than contact-only EMV ® cards.

CPI’s net sales in the prior year period were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Net sales for Debit and Credit increased $37.9 million, or 21.0%, due primarily to new customer growth and the ongoing transition to contactless cards.

Product net sales increased due to higher volumes of contactless cards, including new customer growth, and higher Card@Once instant issuance sales.

Additionally, net sales from card personalization services increased due to higher volumes of contactless cards, including new customer growth and higher CPI On-Demand sales.

Contactless cards have additional technology to process contactless transactions and generally have a

higher selling price than contact-only EMV ® cards.

Debit and Credit net sales in the prior year period were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Prepaid Debit:

Net sales for Prepaid Debit for the six months ended June 30, 2021 increased $11.8 million, or 41.9%, to $39.8 million, compared to $2 8.1 million for the six months ended June 30, 2020.

Net sales increased from higher volumes from existing customers which included the acquisition of new customer portfolios and the replenishment of inventory by our customers which had been maintained at lower levels in the prior year due to COVID-19 uncertainties.

Net sales for Prepaid Debit increased $14.7 million, or 30.1%, due primarily to higher volumes from existing customers which included the acquisition of new customer portfolios and the replenishment of inventory by our customers which had been maintained at lower levels in the prior year period due to COVID-19 uncertainties.

Prepaid Debit net sales in the prior year period were impacted by lower customer demand than expected, which we believe was primarily attributable to the COVID-19 pandemic.

Eliminations:

This includes the elimination of intercompany sales between segments in the consolidation of our financial statements.

The decrease in eliminations is due to lower sales between the segments during the six months ended June 30, 2021 compared to the prior year.

The decrease in eliminations is due to lower sales between the segments during the nine months ended September 30, 2021 compared to the prior year period.

Gross Profit and Gross Profit Margin

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

2 unchanged sentences

Prepaid Debit

Gross profit for the six months ended June 30, 2021 increased $24.1 million, or 49.4%, to $72.8 million compared to $48.7 million for the six months ended June 30, 2020.

Gross profit margin for the six months ended June 30, 2021 increased to 39.9% compared to 33.5% for the six months ended June 30, 2020.

Debit and Credit:

Gross profit for Debit and Cre dit for the six months ended June 30, 2021 increased $16.9 million, or 43.3%, to $55.8 million compared to $39.0 million during the six months ended June 30, 2020.

The increase in gross profit for the Debit and Credit segment was driven primarily by the net sales increase from new customer growth and the ongoing transition to contactless cards.

Gross profit increased from higher product net sales due to higher volumes of contactless cards including new customer growth.

Gross profit margin increased to 39.1% during the six months ended June 30, 2021, compared to 33.0% in the prior year period, due primarily to operating leverage from higher net sales.

Gross profit for Debit and Credit increased $23.3 million, or 38.4%, driven primarily by the net sales increase as described above.

Gross profit margin increased to 38.4% during the nine months ended September 30, 2021, compared to 33.6% in the prior year period, due primarily to operating leverage from hi gher net sales.

Prepaid Debit:

Gross profit for Prepaid Debit during the six months ended June 30, 2021 increased 73.8% to $17.0 million compared to $9.8 million for the six months ended June 30, 2020.

Gross profit margin for Prepaid Debit for the six months ended June 30, 2020 increased to 42.7% compared to 34.8% for the six months ended June 30, 2020.

The increase in gross profit and margin was primarily attributed to higher net sales and favorable overhead cost absorption.

Gross profit for Prepaid Debit increased $7.8 million, or 42.0% and Gross profit margin for Prepaid Debit for the nine months ended September 30, 2021 increased to 41.8% compared to 38.3% for the nine months ended September 30, 2020.

The increase in gross profit and margin was primarily attributed to higher net sales and favorable overhead cost absorption, partially offset by increased labor costs.

Operating Expenses, net

Six Months Ended June 30,

Nine Months Ended September 30,

Operating expenses by segment:

2 unchanged sentences

Prepaid Debit

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Operating expenses for the six months ended June 30, 2021 increased $3.0 million, or 8.2%, to $39.3 million compared to $36.3 million for the six months ended June 30, 2020.

Debit and Credit:

Debit and Credit operating expenses decreased $0.4 million to $15.4 million in the six months ended June 30, 2021 compared to $15.8 million in the six months ended June 30, 2020, due to a benefit recorded in 2021 relating to estimated sales taxe s which are further described in Item 1 - Financial Statements, Note 14, Commitments and Contingencies, and from cost reductions.

These net decreases to operating expenses were partially offset by increased selling and compensation costs due to strong business performance.

Debit and Credit operating expenses increased $0.3 million, or 1.4%, primarily due to increased selling and compensation costs due to strong business performance, partially offset by a benefit recorded in 2021 relating to estimated sales taxe s, which is further described in Item 1 - Financial Statements, Note 14, Commitments and Contingencies.

Prepaid Debit:

Prepaid Debit operating expenses increased $0.2 million to $2.4 million in the six months ended June 30, 2021 compared to $2.2 million in the six months ended June 30, 2020 .

The increase was due primarily to increased selling and compensation costs due to strong business performance in the current period.

Other operating expenses increased $3.2 million for the six months ended June 30, 2021, when compared to the six months ended June 30, 2020.

The $3.2 million increase was due primarily to $2.0 million of increased employee performance incentive compensation from strong business performance, and due to $1.2 million of increased healthcare expenses.

Prepaid Debit operating expenses increased $0.2 million, or 4.9%, due primarily to increased selling and compensation costs due to strong business performance in the current year period.

Other operating expenses increased $6.4 million, or 23.3%, due primarily to $3.7 million of compensation expenses including from employee performance incentive compensation due to strong business performance and from additional efforts associated with new compliance requirements, $1.1 million of executive severance charges, $0.9 million of increased healthcare expenses, and increased professional fees and compliance costs.

Income from Operations and Operating Margin

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

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Income from operations for the six months ended June 30, 2021 was $33.6 million compared to income from operations of $12.5 million for the six months ended June 30, 2020.

The Company’s operating profit margin for the six months ended June 30, 2021 increased to 18.4% compared to an operating profit margin of 8.6% for the six months ended June 30, 2020.

Debit and Credit:

Income from operations for Debit and Credit for the six months ended June 30, 2021 increased $17.2 million, to $40.4 million compared to $23.2 million for the six months ended June 30, 2020.

The increase in income from operations was driven primarily by higher net sales and gross profit from new customer growth and the ongoing transition to contactless cards which generally have a higher selling price than contact-only EMV cards.

In addition, lower operating expenses during the six months ended June 30, 2021, contributed to an improvement in income from operations.

Operating margins for the six months ended June 30, 2021 increased to 28.3% compared to 19.6% for the six months ended June 30, 2020, due to the higher net sales and operating leverage.

Income from operations for Debit and Credit increased $23.0 million, or 60.7%, driven primarily by higher net sales and gross profit as described above.

Operating margins for the nine months ended September 30, 2021 increased to 27.8% compared to 21.0% for the nine months ended September 30, 2020, due to the higher net sales and operating leverage.

Prepaid Debit:

Income from operations for Prepaid Debit for the six months ended June 30, 2021 increased to $14.6 million compared to $7.6 million for the six months ended June 30, 2020.

The increase was the result of higher net sales volumes from existing customers.

Operating income margin for the six months ended June 30, 2021 increased to 36.6% from 26.9% for the same period in 2020, due to higher net sales and favorable overhead cost absorption.

The loss from operations in Other was $21.4 million for the six months ended June 30, 2021, compared to a loss from operations of $18.3 million for the same period in 2020.

The loss from operations was higher in 2021 by $3.2 million, primarily due to an increase in operating expenses from employee performance incentive compensation and higher healthcare expenses.

Income from operations for Prepaid Debit increased $7.7 million, or 49.9% due primarily to higher net sales and gross margin as described above.

Operating income margin for the nine months ended September 30, 2021 increased to 36.4% from 31.6% for the same period in 2020, due to higher net sales and favorable overhead cost absorption, partially offset by increased labor costs.

The loss from operations in Other increased $6.4 million, or 23.3%, primarily due to an increase in operating expenses from employee performance incentive compensation, other compensation expenses and compliance costs, healthcare expenses and executive severance charges.

Interest, net:

Interest expense for the six months ended June 30, 2021 increased to $16.0 million compared to $12.9 million for the six months ended June 30, 2020.

Interest expense was higher in 2021 primarily due to $2.6 million of “make-whole” premium interest expense incurred a result of the termination of our Senior Credit Facility on March 15, 2021.

Interest expense for the nine months ended September 30, 2021 increased to $23.2 million compared to $19.2 million for the nine months ended September 30, 2020.

Interest expense was higher in 2021 primarily due to $2.6 million of “make-whole” premium interest expense incurred a result of the termination of our Senior Credit Facility on March 15, 2021, as well higher interest rates on the Senior Notes issued in 2021, compared to the interest rates on the debt facilities in the prior year period.

This increase was partially offset by less debt principal outstanding in the current year period compared to the prior year, and from interest income received of approximately $0.4 million in 2021 related to income tax refunds.

Loss on debt extinguishment:

During the six months ended June 30, 2021, we recorded a $5.0 million loss on debt extinguishment relating to the termination of our Senior Credit Facility and First Lien Term Loan as we expensed the unamortized deferred financing costs and debt discount.

During the nine months ended September 30, 2021, we recorded a $5.0 million loss on debt extinguishment relating to the termination of our Senior Credit Facility and First Lien Term Loan as we expensed the unamortized deferred financing costs and debt discount.

This was completed in connection with the issuance of new Senior Notes and entrance into the new ABL Revolver on March 15, 2021.

Income tax (expense) benefit:

During the six months ended June 30, 2021, we recorded an income tax expense of $3.9 million on pre-tax income of $12.5 million, representing an effective income tax rate of 31.0%.

During the six months ended June 30, 2020, we recorded an income tax benefit of $3.6 million on pre-tax loss of $0.5 million , representing an effective income tax rate of 695.1%.

During the nine months ended September 30, 2021, we recorded an income tax expense of $6.8 million on pre-tax income of $22.0 million, representing an effective income tax rate of 30.7%.

During the nine months ended September 30, 2020, we recorded 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%).

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

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In the prior year period, the effective income tax rate differs from the federal U.S.

statutory rate primarily due to the impact of the CARES Act which was signed into law in March 2020, and due to tax expense for a partial valuation allowance for the limitation on the deductibility of interest expense.

During the six months ended June 30, 2021, net income was $8.6 million, compared to $3.0 million during the six months ended June 30, 2020.

The increase was primarily due to higher net sales and gross profit, partially offset by the loss on debt extinguishment, and higher operating expenses, interest expense and income tax expense during the six months ended June 30, 2021, compared to the prior year period.

statutory rate primarily due to the impact of the CARES Act which was signed into law in March 2020 and due to the reduction of a partial valuation allowance for the limitation on the deductibility of interest expense.

During the nine months ended September 30, 2021, net income was $15.3 million, compared to $8.8 million during the nine months ended September 30, 2020.

The increase was primarily due to higher net sales and gross profit, partially offset by higher operating expenses, the loss on debt extinguishment, and higher interest expense and income tax expense during the nine months ended September 30, 2021 compared to the prior year period.

Liquidity and Capital Resources

At June 30, 2021, we had $30.7 million of cash and cash equivalents.

At September 30, 2021, we had $20.9 million of cash and cash equivalents.

Of this amount, $0.3 million was held in accounts outside of the United States.

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In addition, we entered into a credit agreement with Wells Fargo Bank, National Association, as lender, administrative agent and collateral agent, providing for an ABL revolver of up to $50 million (the “ABL Revolver”), subject to a borrowing base.

In connection with the issuance of the Senior Notes and entrance into the ABL Revolver, we terminated our existing credit facilities, consisting of a $30 million senior credit agreement (the “Senior Credit Facility”), and a $435,000 first lien term loan (the “First Lien Term Loan”).

In connection with the issuance of the Senior Notes and entrance into the ABL Revolver, we terminated our existing credit facilities, consisting of a $30 million senior credit agreement (the “Senior Credit Facility”), and a $435 million first lien term loan (the “First Lien Term Loan”).

Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15 million under the ABL Revolver, were used to pay in full and terminate the Senior Credit Facility and First Lien Term Loan on March 15, 2021, and to pay related fees and expenses.

During the three months ended March 31, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.

As of June 30, 2021, the Company had $310 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

As of June 30, 2021, the Company had no borrowings outstanding and $50 million available for borrowing under the ABL Revolver.

While not impacting the second quarter ended June 30, 2021, the ABL Revolver includes limitations on our ability to borrow in certain situations, including during periods in which the amount available to borrow under the ABL Revolver is less than $5 million.

As of September 30, 2021, the Company had $310 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

As of September

30, 2021, the Company had no borrowings outstanding and $50 million available for borrowing under the ABL Revolver.

While not impacting the third quarter ended September 30, 2021, the ABL Revolver includes limitations on our ability to borrow in certain situations, including during periods in which the amount available to borrow under the ABL Revolver is less than $5 million.

Commencing with the month immediately following a date on which borrowing availability is below $5 million until such time that borrowing availability equals or exceeds $5 million for 30 consecutive days, in order to borrow under the ABL Revolver, we must maintain a fixed charge coverage ratio (as defined in the credit agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, tested monthly during such period.

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Operating Activities

Cash provided by operating activities for the six months ended June 30, 2021 was $22.7 million compared to cash provided by operating activities of $12.0 million during the six months ended June 30, 2020.

The year over year increase was due primarily to higher net income and profitability, and working capital cash improvements, including the net collection of $3.7 million of income tax refunds during the six months ended June 30, 2021.

These increases were partially offset by cash used in operating activities to increase inventory, including EMV dual interface chips to support our business, and to maintain certain levels of inventory in anticipation of future customer demand and supply chain constraints.

Cash provided by operating activities for the nine months ended September 30, 2021 was $14.5 million compared to cash provided by operating activities of $10.2 million during the nine months ended September 30, 2020.

The year over year increase was due primarily to higher net income and profitability, and working capital cash improvements including the collection of $9.8 million of income tax refunds during the nine months ended September 30, 2021.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2021 was $3.5 million, compared to a usage of $1.6 million during the six months ended June 30, 2020.

Cash used in investing activities for the nine months ended September 30, 2021 was $4.7 million, compared to a usage of $3.3 million during the nine months ended September 30, 2020.

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

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 $0.5 million during the six months ended June 30, 2021, compared to $0.8 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 $0.5 million during the nine months ended September 30, 2021, compared to $1.6 million during the prior year period.

Financing Activities

During the six months ended June 30, 2021 , cash used in financing activities was $46.1 million.

Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million, respectively.

During the nine months ended September 30, 2021, cash used in financing activities was $46.6 million.

Proceeds from the new Senior Notes and ABL Revolver, net of discount, were $310 million and $14.8 million,

respectively.

We used proceeds from the Senior Notes and ABL Revolver, plus cash on hand from our balance sheet, to pay in full and terminate the Senior Credit Facility balance of $30 million and the First Lien Term Loan balance of $304.7 million on March 15, 2021.

During the six months ended June 30, 2021, we paid $9.5 million of debt issuance costs and $2.7 million of debt exting uishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility.

During the six months ended June 30, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.

During the second quarter of 2021 we used $15 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of June 30, 2021.

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

We also paid $1.3 million and $1.2 million of principal on finance leases during the six months ended June 30, 2021 and 2020, respectively.

During the nine months ended September 30, 2021, we paid $9.5 million of debt issuance costs and $2.7 million of debt exting uishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility.

During the nine months ended September 30, 2021, prior to the termination of the First Lien Term Loan, we paid an excess free cash flow balance of $7.8 million pursuant to the terms of the debt agreements.

During the second quarter of 2021 we used $15 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of September 30, 2021.

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

We also paid $1.7 million and $1.8 million of principal on finance leases during the nine months ended September 30, 2021 and 2020, respectively.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2021.

We had no material off-balance sheet arrangements at September 30, 2021.

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, 2020, for which there were no material changes as of June 30, 2021, included:

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

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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