What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2021-11-05 · 177 added, 240 removed, 104 unchanged (80% of the section changed)

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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 September 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, 2021 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 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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (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,” “continue,” “committed,” “attempt,” “target,” “guides,” “seek,” “focus,” “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, including statements about our strategic initiatives and market opportunities, are based on our current expectations and beliefs concerning future developments and their potential effect on us and other information currently available.

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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;

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

a disruption or other failure in our supply chain, including as a result of the Russia-Ukraine conflict, or labor pool resulting in increased costs and inability to pass those costs on to our customers and extended production lead times and difficulty meeting customers’ delivery expectations;

a decline in U.S.

and global market and economic conditions and resulting decreases in consumer and business spending and ongoing or accelerating inflationary pressure;

our failure to retain our existing customers or identify and attract new customers;

system security risks, data protection breaches and cyber-attacks;

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

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

our limited ability to raise capital in the future;

the effects of current or additional U.S.

government tariffs as well as economic downturns or disruptions, including delays or interruptions in our ability to source raw materials and components used in our products;

system security risks, data protection breaches and cyber-attacks;

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;

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

disruptions in production at one or more of our facilities;

our failure to retain our existing customers or identify and attract new customers;

environmental, social and governance preferences and demands of various stakeholders and our ability to conform to such preferences and demands and to comply with any related regulatory requirements;

the effects of climate change, negative perceptions of our products due to the impact of our products and production processes on the environment and other ESG-related risks;

disruptions in production due to weather conditions, climate change, political instability or social unrest;

our inability to adequately protect our trade secrets and intellectual property rights from misappropriation, infringement claims brought against us and risks related to open source software;

defects in our software;

our limited ability to raise capital in the future;

problems in production quality, materials and process;

a loss of market share or a decline in profitability resulting from competition;

our inability to develop, introduce and commercialize new products;

new and developing technologies that make our existing technology solutions and products obsolete or less relevant or our failure to introduce new products and services in a timely manner;

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, as well as potential new U.S.

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

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

quarterly variation in our operating results;

our inability to successfully execute on our divestitures or acquisitions;

our inability to realize the full value of our long-lived assets;

our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards;

a decline in U.S.

and global market and economic conditions and resulting decreases in consumer and business spending;

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

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;

the effect of legal and regulatory proceedings;

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;

our inability to renew licenses with key technology licensors;

the highly competitive, saturated and consolidated nature of our marketplace;

the effects of delays or interruptions in our ability to source raw materials and components used in our products from foreign countries;

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

new and developing technologies that make our existing technology solutions and

products obsolete or less relevant or our failure to introduce new products and services in a timely manner;

quarterly variation in our operating results;

our failure to operate our business in accordance with the Payment Card Industry Security Standards Council security standards or other industry standards;

our failure to comply with environmental, health and safety laws and regulations, including climate change regulations that apply to our products and the raw materials we use in our production processes;

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

the influence of securities analysts over the trading market for and price of our common stock;

our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy;

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

the influence of securities analysts over the trading market for and price of our common stock;

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

certain provisions of our organizational documents and other contractual provisions that may delay or prevent a change in control and make it difficult for stockholders other than our majority stockholders to change the composition of our board of directors;

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, 2020 filed with the SEC on February 25, 2021, in Part II, Item 1A – Risk Factors of this Quarterly Report on Form 10-Q and our other reports filed from time to time with the SEC.

our ability to comply with a wide variety of complex laws and regulations and the exposure to liability for any failure to comply;

the effect of legal and regulatory proceedings;

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, 2021 filed with the Securities and Exchange Commission (“SEC”) on March 8, 2022, 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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We are a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States.

We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® in the United States and Interac in Canada).

We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards issued on the networks of the “Payment Card Brands” (Visa, Mastercard ® , American Express ® and Discover ® ).

We define “Prepaid Debit Cards” as debit cards issued on the networks of the Payment Card Brands, but not linked to a traditional bank account.

We also offer an instant card issuance solution, which provides card issuing bank customers the ability to issue a personalized debit or credit card within the bank branch to individual cardholders.

We have established a leading position in the Financial Payment Card market through more than 20 years of experience.

We serve a diverse set of approximately 2,000 direct customers and several thousand indirect customers, including some of the largest issuers of debit and credit cards in the United States, and the largest Prepaid Debit Card program managers, as well as thousands of independent community banks, credit unions, “Group Service Providers” (organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services) and card processors.

We have established a leading position in the Financial Payment Card solutions market through more than 20 years of experience.

We serve a diverse set of several thousand customers which includes direct customers and indirect customer relationships whereby CPI provides Financial Payment Card solutions to a customer through a Group Service Provider (as defined below).

Our customers include some of the largest issuers of debit and credit cards in the United States, the largest Prepaid Debit Card program managers in the United States, numerous financial technology companies (“FinTechs”), as well as independent community banks, credit unions and Group Service Providers.

We define “Group Service Providers” as reseller or card processor organizations that assist small card issuers, such as credit unions, with managing their credit and debit card programs, including managing the Financial Payment Card issuance process, core banking operations and other financial services.

We serve our customers through a network of high-security production and card services facilities in the United States, each of which is audited for compliance with the standards of the Payment Card Industry Security Standards Council (the “PCI Security Standards Council”) by one or more of the Payment Card Brands.

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Driven by a combination of our strong relationships, quality, technology, and innovation, we believe we have strong positions in the following markets:

prepaid debit market, serving several of the top U.S.

prepaid debit market, serving many of the top U.S.

Prepaid Debit Card program managers;

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

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

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

debit and credit card issuers;

FinTech market, where we produce and personalize Financial Payment Cards for financial technology companies.

Our business consists of the following reportable segments:

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 and the loss on debt extinguishment.

● Debit and Credit, which primarily produces Financial Payment Cards and provides integrated card services to card-issuing banks primarily in the United States;

● Prepaid Debit, which primarily provides integrated prepaid card services to Prepaid Debit Card program managers primarily in the United States;

● “Other,” which includes corporate expenses.

COVID-19 Update

The COVID-19 pandemic has impacted economies and societies globally.

The COVID-19 pandemic has impacted, and continues to impact economies and societies globally, including the locations where we, our customers and our suppliers conduct business.

The long-term implications of COVID-19 on the Company’s results of operations and overall financial performance remain uncertain.

The health and safety of CPI employees remain paramount, and the Company continues 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 have remained open and continue to provide direct and essential support to the financial services industry.

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 supply chain constraints.

The Company believes the global impacts from COVID-19, along with other factors, have contributed to certain adverse effects on its supply chain, including increased lead times for, and higher costs of, certain raw materials and components, such as microchips, which are expected to continue in the future.

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.

Though the Company has implemented measures to mitigate the impacts of the labor and supply chain challenges described above, the Company believes that such impacts, and the associated costs, may continue to increase throughout 2022 and possibly 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 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.

See Item 1A, Risk Factors , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC for further discussion of the possible impact of the COVID-19 pandemic on the Company.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.

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

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 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.

The Company is experiencing increased production lead times, which it believes are likely to continue throughout 2022 and possibly 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, including mitigation efforts such as purchasing additional inventory and attempting to hire additional production employees.

See Part I, Item 1A, Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for further discussion of the possible impact of the COVID-19 pandemic on the Company.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.

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

We deferred employer social security payments in 2020 in accordance with the CARES Act, and the first installment repayment was made in the fourth quarter of 2021.

The second installment payment is permitted to be paid no later than the fourth quarter of 2022.

Trends and Key Factors Affecting our Financial Performance

We believe the following key factors may have a meaningful impact on our business performance and negatively influence our financial and operating results:

We believe the following key factors may have a meaningful impact on our business performance and may negatively influence our financial and operating results:

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

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.

In the three months ended March 31, 2022, the Company incurred increased employee compensation and recruiting expenses in Cost of Sales and Operating Expenses, which we expect to continue to increase throughout 2022 and possibly beyond as the Company continues to actively recruit additional employees and is affected by increasing inflationary pressure.

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 customers’ delivery expectations.

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.

● 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.

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 customers.

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 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.

however, these

disruptions and delays have caused the Company to lose or delay customer opportunities, and are likely to continue throughout 2022 and possibly beyond.

● We have experienced, and continue to experience, inflationary pressure in our supply chain, as well as delays and difficulties in sourcing key materials and components needed for our products.

Such issues 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 certain raw materials and components, increased shipping costs, freight and logistics delays, longer lead times, shortages of raw materials we use in our products, such as the on-going global microchip shortage, and unpredictability.

While we are taking actions to limit this pressure, including placing orders in advance and compiling buffer stock, we expect to experience supply chain impacts on our business and our ability to meet customer demand in future periods.

Also, geopolitical uncertainties associated with the ongoing Russia and Ukraine conflict, as well as recent COVID-19 impacts in China, are introducing additional supply chain disruptions on a macro-economic level, which may further compound the Company’s supply chain challenges.

Additionally, certain microchip manufacturers have indicated they plan to limit the types of microchips that they manufacture, which will affect our ability to continue to provide lower-cost contact microchips for certain of our customers.

This could cause us and affected customers to migrate programs to more expensive microchip options or to contactless cards at a faster pace than expected, which may be 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, cost inflation has increased at a faster pace than anticipated, and we expect these factors will impact profitability throughout 2022 and possibly beyond.

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

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 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.

The Company actively monitors and manages its supply chain, including compiling buffer stock of materials and evaluating alternative suppliers and sources for ROBP, but it is uncertain how issues 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, such alternative suppliers may be similarly constrained by local or global geopolitical challenges, instability and unpredictability, and we may be subject to increased shipping and materials costs, which we may not be able to pass through to our customers.

● As of June 30, 2021, the market value 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 with the year ended 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 in compliance with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“the Sarbanes-Oxley Act”).

Continued compliance with this new requirement has significantly increased our compensation expense, professional fees and other administrative costs during the three months ended March 31, 2022.

We expect these increased costs to continue throughout 2022 and possibly beyond.

In connection with our evaluation and testing during 2021, management identified deficiencies that they determined resulted in material weaknesses in internal controls, and the related remediation efforts have also increased such costs.

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

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Three Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Interest, net

Other income (expense), net

Other (expense) income, net

Loss on debt extinguishment

Income (loss) before taxes

Income tax (expense) benefit

Net income from continuing operations

Net loss from discontinued operations

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 Significant Accounting Policies, for an explanation of the immaterial prior period adjustments.

Income before taxes

Income tax expense

Segment Discussion

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

Three Months Ended September 30,

Three Months Ended March 31, 2022 Compared With Three Months Ended March 31, 2021

Three Months Ended March 31,

(dollars in thousands)

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Debit and Credit:

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.

Net sales for Debit and Credit increased $22.2 million, or 31.8%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year.

Product net sales increased due to increased volumes from existing customers, including the transition to contactless and eco-focused cards, and higher Card@Once instant issuance sales.

Net sales from card personalization increased due to higher volumes of contactless cards, partially offset by a decrease in volumes for our existing customers in our CPI On-Demand service, which benefited in the prior year first quarter from COVID-19 related government disbursement work.

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

Prepaid Debit:

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 September 30, 2021 compared to the prior year period.

Net sales for Prepaid Debit was flat for the three months ended March 31, 2022 compared to the corresponding period in the prior year.

Prepaid Debit net sales in the prior year first quarter benefitted from the acquisition of new customer portfolios.

Gross Profit and Gross Profit Margin

Three Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

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Debit and Credit:

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.

Gross profit for Debit and Credit increased $4.7 million, or 17.0%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above, partially offset by higher materials and labor costs.

Gross profit margin decreased to 35.0% during the three months ended March 31, 2022, compared to 39.5% in the corresponding period in the prior year, primarily due to increased materials and labor costs as a percentage of sales .

Prepaid Debit:

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.

Gross profit for Prepaid Debit decreased $1.1 million, or 13.8%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year.

Gross profit margin for Prepaid Debit decreased to 36.2% for the three months ended March 31, 2022 compared to 42.0% in the corresponding period in the prior year.

The decreases in gross profit and gross profit margin were primarily due to increases in labor and materials costs.

Operating Expenses

Three Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

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Debit and Credit:

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.

Debit and Credit operating expenses increased $0.7 million, or 9.8%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year, primarily due to increased selling and compensation costs due to strong business performance.

Prepaid Debit:

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.

Prepaid Debit operating expenses decreased less than $0.1 million, or 6.4%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year.

Other operating expenses increased $2.7 million, or 28.7%, primarily due to a $1.9 million increase in compensation expenses, resulting from increased employee headcount and higher labor cost, and an $0.8 million increase in professional fees and other costs related to compliance with the Sarbanes-Oxley Act.

Income from Operations and Operating Margin

Three Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

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Debit and Credit:

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 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 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 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 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)

Net sales by segment:

Debit and Credit

Prepaid Debit

Debit and Credit:

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 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 nine months ended September 30, 2021 compared to the prior year period.

Gross Profit and Gross Profit Margin

Nine Months Ended September 30,

(dollars in thousands)

Gross profit by segment:

Debit and Credit

Prepaid Debit

Debit and Credit:

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 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

Nine Months Ended September 30,

Operating expenses by segment:

(dollars in thousands)

Debit and Credit

Prepaid Debit

Debit and Credit:

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, 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

Nine Months Ended September 30,

(dollars in thousands)

Income (loss) from operations by segment:

Debit and Credit

Prepaid Debit

Debit and Credit:

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.

Income from operations for Debit and Credit increased $4.0 million, or 19.6%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year, primarily due to higher net sales, partially offset by increased material and labor costs.

Operating margin decreased to 26.2% for the three months ended March 31, 2022 compared to 28.9% in the corresponding period in the prior year primarily due to increased materials and labor costs as a percentage of sales.

Prepaid Debit:

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.

Income from operations for Prepaid Debit decreased $1.1 million, or 15.0%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year, primarily due to lower gross profit.

Operating margin decreased to 30.7% for the three months ended March 31, 2022 compared to 36.1% in the corresponding period in the prior year primarily due to increased labor and materials costs as a percentage of sales.

The loss from operations in Other increased $2.7 million, or 28.7%, for the three months ended March 31, 2022 compared to the corresponding period in the prior year primarily due to the factors described above under “Operating Expenses.”

Interest, net :

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.

Interest expense decreased to $7.9 million for the three months ended March 31, 2022 from $9.0 million in the corresponding period in the prior year.

Interest expense was higher in the first quarter of 2021 primarily due to $2.6 million of “make-whole” interest premium paid in connection with the termination of our $30 million senior credit agreement (the “Senior Credit Facility”) on March 15, 2021.

This was partially offset by higher interest rates on our 8.625% Senior Secured Notes (the “Senior Notes”) issued in 2021, compared to the interest rates on the debt facilities in the prior year period.

Loss on debt extinguishment:

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 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.

statutory rate in 2021 primarily due to the impact of state taxes and permanent items.

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 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.

During the three months ended March 31, 2022, we recorded a $0.4 million loss on debt extinguishment relating to the $20.0 million early redemption the Senior Notes as we expensed the associated portion of the unamortized deferred financing costs.

During the three months ended March 31, 2021 we recorded a $5.0 million loss on debt extinguishment relating to the termination of both our previous 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 the Senior Notes and entry into our new asset-based, senior secured revolving credit facility (the “ABL Revolver”) on March 15, 2021.

Income tax expense:

During the three months ended March 31, 2022, we recorded income tax expense of $3.7 million on pre-tax income of $9.7 million, representing an effective income tax rate of 38.2%.

During the three months ended March 31, 2021, we recorded income tax expense of $1.4 million on pre-tax income of $3.8 million, representing an effective income tax rate of 36.1%.

For the quarter ended March 31, 2022, the effective income tax rate differs from the federal U.S.

statutory rate of 21.0% primarily due to the impact of state taxes and a valuation allowance related to the more restrictive interest deduction limitation in Section 163(j) of the Internal Revenue Code that took effect in 2022.

For the quarter ended March 31, 2021, the effective income tax rate differs from the federal U.S.

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

During the three months ended March 31, 2022, net income was $6.0 million, compared to net income of $2.4 million in the corresponding period in the prior year.

The increase was primarily due to the impact of debt refinancing costs incurred in the 2021 first quarter, as well as increased sales growth, partially offset by the increased material, labor, and “Selling, general & administrative” costs.

Liquidity and Capital Resources

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.

At March 31, 2022, we had $12.1 million of cash and cash equivalents.

Our ability to make investments in and grow our business, service our debt and improve our debt leverage ratios, while maintaining strong liquidity, will depend upon our ability to generate excess operating cash flows through our operating subsidiaries.

Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations and working capital needs.

On March 15, 2021, we completed a private offering of $310 million aggregate principal amount of 8.625% senior secured notes due 2026 (the “Senior Notes”) and related guarantees at an issue price of 100%.

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 million first lien term loan (the “First Lien Term Loan”).

On March 11, 2022, we used the available borrowing capacity under the ABL Revolver to fund the redemption of $20.0 million aggregate principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest thereon to the redemption date.

On March 15, 2021, we completed a private offering of $310.0 million aggregate principal amount of 8.625% senior secured notes due 2026 and related guarantees at an issue price of 100%.

The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026.

Interest is payable on the Senior Notes on March 15 and September 15 of each year.

On March 15, 2021, we entered into a credit agreement with Wells Fargo Bank, National Association providing for an ABL Revolver of up to $50.0 million.

On March 3, 2022, we entered into Amendment No.

1 to Credit Agreement (the “Amendment”), which amended the ABL Revolver.

The Amendment, among other things, increased the available borrowing capacity under the ABL Revolver to $75.0 million, increased the uncommitted accordion feature to $25.0 million, and revised the interest rate provisions to replace the ABL Revolver’s prior LIBOR interest benchmark with updated benchmark provisions using the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York.

Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR rate selected and adjusted for a credit spread, plus an applicable interest rate margin based on the average unused capacity of the facility.

We may select a one, three or six month term SOFR rate, which is adjusted for a credit spread of 0.10% to 0.30% depending on the term selected.

Through March 31, 2023, the applicable interest rate margin ranges from 1.50% to 1.75% depending on the average unused capacity of the facility for the previous quarter.

The applicable interest rate margin range changes, effective April 1, 2023, to between 1.25% and 1.75%, depending on the average unused capacity of the facility.

The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over

the immediately preceding month.

The fee percentage and calculation of the unused commitment fee changes, effective April 1, 2023, to between 0.375% and 0.50% (determined based on the average revolver usage over a specified period of time) of the unused portion of the facility.

As of March 31, 2022, we have $30.0 million in ABL Revolver borrowings outstanding and $45.0 million available to borrow under the ABL Revolver.

Amounts borrowed and outstanding under the ABL Revolver are required to be repaid in full, together with any accrued and unpaid interest, on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes (and may be subject to earlier mandatory prepayment upon certain events).

The ABL Revolver includes limitations on our ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and during periods in which the amount available to borrow under the ABL Revolver is less than $7.5 million.

The borrowing capacity represents the net availability under the ABL Revolver and is calculated as the lesser of a) the total of certain eligible assets, including cash, accounts receivable and inventories, further reduced by stated contribution percentages and adjustments or b) the $75.0 million of available borrowing capacity under the ABL Revolver (“Borrowing Base”).

The Borrowing Base is further reduced by credit line reserves, letters of credit, as well as the loan ledger balance outstanding on the ABL Revolver.

Additionally, commencing with the month immediately following a date on which borrowing availability is below $7.5 million and until such time that borrowing availability equals or exceeds $7.5 million for 30 consecutive days, we must maintain a fixed charge coverage ratio (as defined in the credit agreement for the ABL Revolver) greater than 1.00, calculated for the trailing 12 months in order to borrow under the ABL Revolver.

Prior to March 15, 2023, the Company may redeem some or all of the Senior Notes at a “make-whole” redemption price, and on or after March 15, 2023, the Company may redeem some or all of the Senior Notes at a redemption price initially set at 104.313% of the principal amount of the notes to be redeemed, and reducing over time to 100%, in each case plus accrued and unpaid interest.

Additionally, prior to March 15, 2023, the Company may redeem, on one or more occasions, up to 40% of the aggregate principal amount of the Senior Notes with the proceeds of certain equity offerings, at a redemption price equal to 108.625% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest.

Furthermore, prior to March 15, 2023, but not more than once during each consecutive twelve-month, the Company may also redeem up to 10% of the aggregate principal amount of the Senior Notes at a redemption price equal to 103% of the principal amount of the notes being redeemed, plus accrued and unpaid interest.

The Company has obligations to make an offer to repay the Senior Notes, requiring prepayment in advance of the maturity date, upon the occurrence of certain events including a change of control, certain asset sales and based on an annual excess cash flow calculation.

The annual excess cash flow calculation is determined pursuant to the terms of the related indenture, with any required payments to be made after the issuance of the Company’s annual financial statements.

No such payment is required based on the Company’s 2021 operating results.

In connection with the issuance of the Senior Notes and entry into the ABL Revolver, we terminated our Senior Credit Facility and 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 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.

Borrowings under the ABL Revolver are also subject to limitations based on the borrowing base.

The Senior Notes and the ABL Revolver also contain covenants limiting the ability of the Company, the borrower and the Company’s restricted subsidiaries to, among other things, incur or guarantee additional indebtedness or issue disqualified stock or certain preferred stock;

create or incur liens;

pay dividends, redeem stock or make other distributions;

make certain investments;

pay dividends to the Company or make other intercompany transfers;

transfer or sell assets;

merge or consolidate;

and enter into certain transactions with affiliates, subject to a number of important exceptions and qualifications, as set forth in the respective agreements.

The annual excess cash flow calculation is determined pursuant to the terms of the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements.

The Senior Notes bear interest at a rate of 8.625% per annum and mature on March 15, 2026.

Interest is payable on the Senior Notes on March 15 and September 15 of each year, beginning on September 15, 2021.

The ABL Revolver matures on the earliest to occur of March 15, 2026 and the date that is 90 days prior to the maturity of the Senior Notes.

Borrowings under the ABL Revolver bear interest at a rate per annum that ranges from the LIBOR Rate plus 1.25% to the LIBOR Rate plus 1.75%, or the Base Rate plus 0.25% to the Base Rate plus 0.75%, based on the average daily borrowing capacity under the ABL Revolver over the most recently completed month.

The borrower may elect to apply either the LIBOR Rate or Base Rate interest to borrowings at its discretion.

The unused portion of the ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily borrowing capacity under the ABL Revolver over the immediately preceding month.

As of March 31, 2022, the Company had $290 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

Operating Activities

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.

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 to help alleviate supply chain constraints.

Cash used in operating activities for the three months ended March 31, 2022 was $16.0 million compared to cash provided by operating activities of $0.1 million during the three months ended March 31, 2021.

Cash generated from earnings for the three months ended March 31, 2022 was offset by working capital increases, including an increase in accounts receivable of $10.3 million due to higher net sales compared to the previous quarter.

We also increased inventories by $12.6 million during the quarter ended March 31, 2022, including procurement of EMV contactless chips to support our business, and to maintain certain levels of inventory to help mitigate supply chain constraints.

We also decreased accrued expenses by $8.8 million during the quarter ended March 31, 2022, primarily related to payments on accrued interest and employee performance incentive compensation during the period.

Investing Activities

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 for the three months ended March 31, 2022 was $3.1 million, compared to $2.4 million during the three months ended March 31, 2021.

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 nine months ended September 30, 2021, compared to $1.6 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 $3.5 million during the three months ended March 31, 2022, compared to $0.5 million during the corresponding period of the prior year.

Financing Activities

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 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 September 30, 2021.

During the three months ended March 31, 2022, cash provided by financing activities was $10.6 million.

Proceeds from the ABL Revolver were $30.0 million and in connection with the ABL Amendment, we paid $0.3 million of debt issuance costs .

A portion of the proceeds from the ABL Revolver were used to redeem $20.0 million of Senior Notes and to pay $0.6 million of early redemption costs.

We received $2.1 million under financing leases and we paid $0.6 million of principal on financing leases during each of the three months ending March 31, 2022 and 2021.

During the three months ended March 31, 2021, cash used in financing activities was $30.5 million.

Proceeds from the Senior Notes and ABL Revolver, net of discount, were $310.0 million and $14.8 million, respectively.

We paid $9.5 million of debt issuance costs and $2.7 million of debt extinguishment costs, which included an early termination “make-whole” interest premium of $2.6 million on the Senior Credit Facility.

We used proceeds from the Senior Notes and initial borrowings under the ABL Revolver, plus cash on hand, to pay in full and terminate the Senior Credit Facility balance of $30.0 million and the First Lien Term Loan balance of $304.7 million on March 15, 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.

Working Capital

Our working capital as of March 31, 2022 was $99.4 million, compared to $80.9 million as of December 31, 2021.

During the three months ended March 31, 2022 , our inventory balance increased $12.5 million to support the business, accounts receivable increased $10.2 million, and accrued expenses decreased $7.5 million.

These increases were partially offset by a decrease in our cash balance of $8.5 million and an increase in accounts payable of $3.9 million.

Material Cash Requirements

Our material cash requirements include interest payments on our long-term debt, operating and finance lease payments, and purchase obligations to support our operations.

Debt Service Requirements

As of March 31, 2022, the total projected principal and interest payments on our borrowings were $421.9 million, primarily related to the Senior Notes, of which $25.9 million of interest and principal is expected to be paid in the next 12 months.

The remaining interest payments are expected to be paid over the remaining term of the Senior Notes which mature in 2026, and the principal is due upon maturity.

We have estimated our future interest payments assuming no additional borrowings under the ABL Revolver, no early redemptions of principal on the Senior Notes, no early voluntary or required repayment of the borrowings under the ABL Revolver within the next twelve months, and no debt issuances or renewals upon the maturity dates of our notes.

However, we may borrow additional amounts under the ABL Revolver, redeem principal on the Senior Notes early or refinance all or a portion of our borrowings in future periods.

We lease real property for production and services, in addition to equipment.

Refer to Part II, Item 8, Financial Statements and Supplemental Data, Note 9, “Financing and Operating Leases” for details on our leasing arrangements, including future maturities of our operating lease liabilities.

Purchase Obligations

A purchase obligation is an agreement to purchase goods or services that is enforceable, legally binding, and specifies all significant terms.

There have not been any material changes to the purchase obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Critical Accounting Policies and Estimates

1 unchanged sentence

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 September 30, 2021, included:

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

● Income taxes, including valuation allowances and uncertain tax positions, and

● Sales tax, including an estimated contingent liability.

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, for which there were no material changes as of March 31, 2022, included:

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

● Income taxes, including valuation allowances and uncertain tax positions.

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