What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-05 · 153 added, 96 removed, 185 unchanged (57% 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 March 31, 2022.

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 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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended June 30, 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,” “objective,” “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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our failure to retain our existing customers or identify and attract new customers;

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

system security risks, data protection breaches and cyber-attacks, including as retaliation for U.S.

sanctions in connection with the Russia-Ukraine conflict;

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

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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;

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;

our failure to comply with environmental, health and safety laws and 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;

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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.

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 SEC on March 8, 2022, 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.

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 ® ).

We define “Financial Payment Cards” as credit, debit and Prepaid Debit Cards (as defined below) 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 also offer an instant card issuance solution, which provides 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 solutions market through more than 20 years of experience.

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COVID-19 Update

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 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.

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 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.

The COVID-19 pandemic and associated counteracting measures implemented by governments and businesses around the world have impacted, and continue to impact, economies and societies globally, including the locations where we, our customers and our suppliers conduct business.

We believe the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on its supply chain, production lead times, labor availability, employee absenteeism and costs.

Though we have implemented measures to attempt to mitigate the impacts of the challenges described above, we believe that such impacts, and the associated costs, may continue to increase throughout 2022 and possibly beyond.

The long-term implications of COVID-19 on our results of operations and overall financial performance remain uncertain, though the health and safety of our employees remains paramount.

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

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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.

The second installment payment is permitted to be paid no later than the fourth quarter of 2022 and had not been paid as of June 30, 2022.

Trends and Key Factors Affecting our Financial Performance

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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 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.

In the six months ended June 30, 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 the Company to lose or delay customer opportunities, and are likely to continue throughout 2022 and possibly beyond.

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.

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.

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● 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.

The Company continues to be classified as an accelerated filer in 2022.

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.

Continued compliance with this new requirement has significantly increased our compensation expense, professional fees and other administrative costs during the six months ended June 30, 2022.

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

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Three Months Ended

Six Months Ended

(dollars in thousands)

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Segment Discussion

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

Three Months Ended March 31,

Three Months Ended June 30, 2022 Compared With Three Months Ended June 30, 2021

Three Months Ended June 30,

(dollars in thousands)

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Debit and Credit:

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.

Net sales for Debit and Credit increased $21.3 million, or 29.3%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year.

Products net sales increased due to increased volumes from existing customers, including the acquisition of new portfolios by an existing customer and the transition to eco-focused and other contactless cards, and higher Card@Once instant issuance sales.

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

The increase in Products net sales was partially offset by a reduction in volumes from our existing customers in our CPI On-Demand service, which benefited in the prior year second quarter from COVID-19 related government disbursement work.

Prepaid Debit:

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.

Net sales for Prepaid Debit decreased $1.2 million, or 5.7%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year.

Prepaid Debit net sales in the prior year second quarter benefited from the acquisition of new portfolios by our existing customers and customer replenishment of retail inventory, which had been maintained at lower levels in 2020 due to COVID-19 uncertainties.

Gross Profit and Gross Profit Margin:

Three Months Ended March 31,

Three Months Ended June 30,

(dollars in thousands)

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Debit and Credit:

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 .

Gross profit for Debit and Credit increased $5.8 million, or 20.6%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above, partially offset by higher production costs.

Gross profit margin decreased to 36.2% during the three months ended June 30, 2022, compared to 38.8% in the corresponding period in the prior year, primarily due to increased materials costs as a percentage of sales, partially offset by operating leverage from higher net sales .

Prepaid Debit:

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.

Gross profit for Prepaid Debit decreased $2.4 million, or 26.8%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year.

Gross profit margin for Prepaid Debit decreased to 33.6% for the three months ended June 30, 2022 compared to 43.3% in the corresponding period in the prior year.

The decreases in gross profit and gross profit margin were primarily due to lower sales, as described above, combined with increases in materials and labor costs.

Operating Expenses:

Three Months Ended March 31,

Three Months Ended June 30,

(dollars in thousands)

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Debit and Credit:

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.

Debit and Credit operating expenses increased $0.8 million, or 9.6%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to a sales tax benefit of $0.4 million recorded in 2021.

Prepaid Debit:

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.

Prepaid Debit operating expenses decreased $0.1 million, or 10.0%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year.

Other operating expenses increased $3.6 million, or 29.6%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to a $2.2 million increase in compensation expenses as a result of $1.0 million of increased stock compensation and increased employee headcount and higher labor costs, and a $1.0 million increase in professional fees.

Income from Operations and Operating Margin:

Three Months Ended March 31,

Three Months Ended June 30,

(dollars in thousands)

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Debit and Credit:

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.

Income from operations for Debit and Credit increased $5.1 million, or 25.0%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to higher net sales, partially offset by higher production costs.

Operating margin decreased to 26.9% for the three months ended June 30, 2022 compared to 27.8% in the corresponding period in the prior year primarily due to the factors discussed above under “Gross Profit and Gross Profit Margin.”

Prepaid Debit:

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.”

Income from operations for Prepaid Debit decreased $2.2 million, or 29.6%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to lower gross profit.

Operating margin decreased to 27.7% for the three months ended June 30, 2022 compared to 37.0% in the corresponding period in the prior year primarily due to the factors discussed above under “Gross Profit and Gross Profit Margin.”

The loss from operations in Other increased $3.6 million, or 29.6%, for the three months ended June 30, 2022 compared to the corresponding period in the prior year due to the factors described above under “Operating Expenses.”

Interest, net :

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.

Interest expense increased to $7.1 million for the three months ended June 30, 2022 from $7.0 million in the corresponding period in the prior year, due to higher average debt balances offset by a lower average interest rate and interest income received of approximately $0.2 million in 2021 related to income tax refunds.

Loss on debt extinguishment:

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.

During the three months ended June 30, 2022, we did not record any loss on debt extinguishment.

Income tax expense:

Our effective tax rates on pre-tax income were 22.1% and 28.8% for the three months ended June 30, 2022 and 2021, respectively.

The decrease in our effective tax rate for the three months ended June 30, 2022 compared to the corresponding period in the prior year was primarily due to state taxes and a reduction in valuation allowance positions resulting from the impact of higher expected income before taxes on interest deduction limitations, which offset the

impacts of the more restrictive interest deduction limitation in Section 163(j) of the Internal Revenue Code that took effect in 2022.

During the three months ended June 30, 2022, net income decreased 1.4% compared to the corresponding period in the prior year due to increased material, labor, and “Selling, general and administrative” costs, offset by sales growth and lower income tax expense as a result of lower effective income tax rate.

Six Months Ended June 30, 2022 Compared With Six Months Ended June 30, 2021

Six Months Ended June 30,

(dollars in thousands)

Net sales by segment:

Debit and Credit

Prepaid Debit

* Not meaningful

Debit and Credit:

Net sales for Debit and Credit increased $43.5 million, or 30.5%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year.

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

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

Prepaid Debit:

Net sales for Prepaid Debit decreased $1.2 million, or 2.9%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year.

Prepaid Debit net sales in the prior year period benefited from the acquisition of new portfolios by our existing customers and customer replenishment of retail inventory, which had been maintained at lower levels in 2020 due to COVID-19 uncertainties.

Gross Profit and Gross Profit Margin:

Six Months Ended June 30,

(dollars in thousands)

Gross profit by segment:

Debit and Credit

Prepaid Debit

Debit and Credit:

Gross profit for Debit and Credit increased $10.5 million, or 18.8%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above, partially offset by higher production costs.

Gross profit margin decreased to 35.6% during the six months ended June 30, 2022,

compared to 39.1% in the corresponding period in the prior year, primarily due to increased materials as a percentage of sales, partially offset by operating leverage from higher sales .

Prepaid Debit:

Gross profit for Prepaid Debit decreased $3.5 million, or 20.5%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year.

Gross profit margin for Prepaid Debit decreased to 34.9% for the three months ended June 30, 2022 compared to 42.7% in the corresponding period in the prior year.

The decreases in gross profit and gross profit margin were primarily due to lower sales, as described above, combined with increases in labor and materials costs.

Operating Expenses:

Six Months Ended June 30,

(dollars in thousands)

Operating expenses by segment:

Debit and Credit

Prepaid Debit

Debit and Credit:

Debit and Credit operating expenses increased $1.5 million, or 9.7%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to increased selling, compensation and other costs to support the business.

Prepaid Debit:

Prepaid Debit operating expenses decreased $0.2 million, or 8.3%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year.

Other operating expenses increased $6.3 million, or 29.2%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to a $3.9 million increase in compensation expenses as a result of $1.9 million of increased stock compensation and increased employee headcount and higher labor costs, and a $2.0 million increase in professional fees and other costs, including costs related to compliance with the Sarbanes-Oxley Act.

Income from Operations and Operating Margin:

Six Months Ended June 30,

(dollars in thousands)

Income from operations by segment:

Debit and Credit

Prepaid Debit

* Not meaningful

Debit and Credit:

Income from operations for Debit and Credit increased $9.0 million, or 22.3%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to higher net sales, partially offset by increased production costs and operating expenses.

Operating margin decreased to 26.5% for the six months ended June 30, 2022 compared to 28.3% in the corresponding period in the prior year primarily due to the factors discussed above.

Prepaid Debit:

Income from operations for Prepaid Debit decreased $3.3 million, or 22.5%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year, primarily due to lower gross profit.

Operating margin decreased to 29.2% for the six months ended June 30, 2022 compared to 36.6% in the corresponding period in the prior year, primarily due to the factors discussed above under “Gross Profit and Gross Profit Margin.”

The loss from operations in Other increased $6.3 million, or 29.2%, for the six months ended June 30, 2022 compared to the corresponding period in the prior year due to the factors described above under “Operating Expenses.”

Interest, net :

Interest expense decreased to $15.0 million for the six months ended June 30, 2022 from $16.0 million in the corresponding period in the prior year.

Interest expense was higher in the first six months of 2021 primarily due to $2.6 million of “make-whole” interest premium paid in connection with the termination of our $30.0 million senior credit agreement (the “Senior Credit Facility”) on March 15, 2021.

The decrease in interest expense for the six months ended June 30, 2022 was partially offset by higher average interest rates on our borrowings during 2022.

Loss on debt extinguishment:

During the six months ended June 30, 2022, we recorded a $0.4 million loss on debt extinguishment relating to the $20.0 million early redemption of the 8.625% Senior Secured Notes due 2026 (the “Senior Notes”), as we expensed the associated portion of the unamortized deferred financing costs.

During the six months ended June 30, 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.

Our effective tax rate on pre-tax income was 31.0% for both the six months ended June 30, 2022 and 2021, respectively.

The effective tax rate at June 30, 2022 includes a recorded valuation allowance related to the more restrictive interest deduction limitation in Section 163(j) of the Internal Revenue Code that took effect in 2022, offset by a decrease in permanent items.

During the six months ended June 30, 2022, net income was $12.2 million, compared to net income of $8.6 million in the corresponding period in the prior year.

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

Liquidity and Capital Resources

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

At June 30, 2022, we had $9.1 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.

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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%.

On March 15, 2021, we completed a private offering of $310.0 million aggregate principal amount of the Senior N otes 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.

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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 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 LIBOR 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 SOFR adjusted for a credit spread, plus an interest rate margin.

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

For each quarter 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 unused portion of the ABL Revolver commitment accrues a monthly 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 previous 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.

As of June 30, 2022, we have $25.0 million in ABL Revolver borrowings outstanding and $50.0 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 ABL Revolver includes limitations on our ability to borrow in certain situations, including limitations based on the calculation of a borrowing capacity and further limitations that are triggered if 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.

Additionally, commencing with the month immediately following a date on which borrowing capacity is below $7.5 million and until such time that borrowing capacity 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.

Furthermore, prior to March 15, 2023, but not more than once during each consecutive

twelve-month period, 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.

No such payment was 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 previous Senior Credit Facility and previous First Lien Term Loan.

Net proceeds from the Senior Notes, together with cash on hand and initial borrowings of $15.0 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 March 31, 2022, the Company had $290 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

As of June 30, 2022, the Company had $290.0 million aggregate principal amount outstanding on the Senior Notes, plus accrued and unpaid interest.

Operating Activities

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.

Cash used in operating activities for the six months ended June 30, 2022 was $8.1 million compared to cash provided by operating activities of $22.7 million during the six months ended June 30, 2021.

Cash generated from earnings for the six months ended June 30, 2022 was negatively impacted by working capital increases, including an increase in accounts receivable of $12.3 million due to higher net sales compared to the previous period.

We also increased inventories by $17.9 million during the six months ended June 30, 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 $3.3 million during the six months ended June 30, 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 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 for the six months ended June 30, 2022 was $8.2 million, compared to $3.5 million during the six months ended June 30, 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 $3.5 million during the three months ended March 31, 2022, compared to $0.5 million during the corresponding period of the prior year.

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 $3.1 million during the six months ended June 30, 2022, compared to $0.5 million during the corresponding period of the prior year.

Financing Activities

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.

During the six months ended June 30, 2022, cash provided by financing activities was $4.7 million.

Net proceeds from the ABL Revolver were $25.0 million and in connection with the Amendment to the ABL revolver, we paid $0.3 million of debt issuance costs.

A portion of the proceeds from the ABL Revolver was 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 $1.4 million of principal on financing leases during the six months ended June 30, 2022, compared to $1.3 million of principal payments during the corresponding period of the prior year.

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

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

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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.

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 Senior Credit Facility and First Lien Term Loan.

During the second quarter of 2021, we used $15.0 million of cash on hand to pay down the ABL Revolver to zero and had no borrowings outstanding thereunder as of June 30, 2021.

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.

Our working capital as of June 30, 2022 was $99.4 million, compared to $80.9 million as of December 31, 2021.

Our working capital d uring the six months ended June 30, 2022 was primarily affected by borrowings of $25.0 million on our ABL Revolver, principal payments of $20.0 million on the Senior Notes, an increase in inventories of $17.8 million, and an increase in accounts receivable of $12.2 million.

Our working capital needs are typically highest in the first and third quarters due to the timing of payments for employee incentives and interest on outstanding borrowings.

A large portion of our employee incentive compensation payments are made in the first quarter, with smaller payments made in each subsequent quarter.

The majority of our interest payments are due in the first and third quarters.

Material Cash Requirements

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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.

As of June 30, 2022, the total projected principal and interest payments on our borrowings were $417.1 million, primarily related to the Senior Notes, of which $26.0 million of interest 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.

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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 for the year ended December 31, 2021, for which there were no material changes as of March 31, 2022, included:

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 June 30, 2022, included:

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

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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