What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-03 compared with 2022-08-08 · 122 added, 108 removed, 230 unchanged (50% of the section changed)

2 unchanged sentences

and its subsidiaries.

For an understanding of the significant factors that influenced our results, the following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for the quarter ended June 30, 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 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.

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 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.

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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;

and global market and economic conditions and resulting decreases in consumer and business spending, declines in consumer credit worthiness impacting demand for credit cards and ongoing or accelerating inflationary pressure;

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

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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;

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;

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;

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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.

We believe the global impacts from COVID-19, along with other macro-economic factors, have contributed to, among other things certain adverse effects on our 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 throughout 2022 and 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.

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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 and had not been paid as of June 30, 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 September 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 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.

In the nine months ended September 30, 2022 , the Company incurred increased employee compensation and recruiting expenses in Cost of Sales and Operating Expenses, which we expect to continue throughout 2022 and beyond as the Company continues to actively recruit additional employees, including temporary contractors, and is affected by 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 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.

Certain of our suppliers have also required us to place orders that commit us to purchase goods as long as a year or more in advance of our anticipated production need, which is

a significant change from the historical practice of placing non-binding purchase orders for delivery within weeks of the order.

While we are taking actions to limit the impact of the dynamics described above, including compiling buffer stock, we expect to experience supply chain impacts on our business and our ability to meet customer demand in future periods.

We also believe some of our customers may have anticipated, or may anticipate in the future, supply chain-related delays and correspondingly have increased, or may seek to increase, their own inventory of the Company’s products on hand.

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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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.

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 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 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.

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

Due to political instability and other factors in Haiti as well as the supply chain constraints described above, we have faced challenges in obtaining consistent supply of ROBP from Haiti.

We recently began sourcing ROBP from Thailand, and the supply chain for this material includes single source suppliers similar to the materials sourced from Haiti.

We have tested this material and believe that cards that incorporate the material meet or exceed applicable quality standards, and we believe we will be able to procure sufficient supply from this new source country.

However, if we encounter production challenges with this material or are unable to obtain adequate or consistent supply from the source country, we may not have sufficient supply of ROBP to meet customer demand for our Second Wave cards.

The Company continues to actively monitor and manage 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, alternative suppliers of ROBP in other source countries may be 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.

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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 six months ended June 30, 2022.

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

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, 2022 .

We expect these increased costs to continue throughout 2022 and 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.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Segment Discussion

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

Three Months Ended June 30,

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

Three Months Ended September 30,

(dollars in thousands)

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Debit and Credit:

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.

Net sales for Debit and Credit increased $23.4 million, or 30.7%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year.

Products net sales increased primarily due to increased volumes of contactless cards.

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.

Services net sales increased due to growth from card personalization, higher CPI On-Demand sales from existing customers and higher Card@Once services.

Prepaid Debit:

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.

Net sales for Prepaid Debit increased $1.8 million, or 7.8%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year primarily due to increased volumes from existing customers and the benefit of price increases.

We historically have generated higher net sales in the third quarter of the year, as our sales of Prepaid Debit Card solutions are more heavily weighted toward the second half of the year when consumers tend to purchase more of these products and services in anticipation of the holiday season in the United States.

Gross Profit and Gross Profit Margin:

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Debit and Credit:

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 .

Gross profit for Debit and Credit increased $9.9 million, or 35.1%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above, partially offset by the inflationary impact on production costs.

Gross profit margin increased to 38.3% during the three months ended September 30, 2022, compared to 37.0% in the corresponding period in the prior year, primarily due to operating leverage from higher net sales, including the benefit of price increases, partially offset by higher production costs, primarily materials .

Prepaid Debit:

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.

Gross profit for Prepaid Debit increased $0.9 million, or 9.0%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above, partially offset by the inflationary impact on production costs.

Gross profit margin for Prepaid Debit increased to 40.9% for the three months ended September 30, 2022 compared to 40.5% in the corresponding period in the prior year primarily due to operating leverage from higher net sales, including the benefit of price increases, partially offset by increased materials costs as a percentage of sales.

Operating Expenses:

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Debit and Credit:

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.

Debit and Credit operating expenses increased $1.0 million, or 12.7%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to increased selling, compensation and other costs.

Prepaid Debit:

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.

Prepaid Debit operating expenses increased $0.2 million, or 23.9%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year.

Other operating expenses increased $2.8 million, or 22.7%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to a $1.7 million increase in compensation expenses as a result of increased employee headcount and higher labor costs in addition to $0.8 million of increased stock compensation, and a $1.1 million increase in professional services and other costs.

Income from Operations and Operating Margin:

Three Months Ended June 30,

Three Months Ended September 30,

(dollars in thousands)

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Prepaid Debit

* Not meaningful

Debit and Credit:

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.”

Income from operations for Debit and Credit increased $8.9 million, or 43.5%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to higher net sales and operating leverage, partially offset by higher production costs.

Operating margin increased to 29.6% for the three months ended September 30, 2022 compared to 26.9% in the corresponding period in the prior year primarily due to the factors discussed above.

Prepaid Debit:

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.”

Income from operations for Prepaid Debit increased $0.6 million, or 7.3%, for the three months ended September 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 slightly to 36.0% for the three months ended September 30, 2022 compared to 36.1% in the corresponding period in the prior year.

The loss from operations in Other increased $2.8 million, or 22.7%, for the three months ended September 30, 2022 compared to the corresponding period in the prior year due to the factors described above under “Operating Expenses.”

Interest, net :

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.

Interest expense increased to $7.3 million for the three months ended September 30, 2022 from $7.2 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 June 30, 2022, we did not record any loss on debt extinguishment.

During the three months ended September 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,

Our effective tax rates on pre-tax income were 25.8% and 30.3% for the three months ended September 30, 2022 and 2021, respectively.

The decrease in our effective tax rate for the three months ended September 30, 2022 compared to the corresponding period in the prior year was primarily due to the release of a federal valuation allowance

for increased deductibility of interest costs due to a tax election made in the current year and a greater proportion of pre-tax income in relation to the impact of permanent items.

During the three months ended September 30, 2022, net income was $11.9 million, compared to net income of $6.6 million in the corresponding period in the prior year.

The increase was primarily due to higher net sales resulting in higher gross profit, partially offset by higher “Selling, general and administrative” costs and income tax expense.

Nine Months Ended September 30, 2022 Compared With Nine Months Ended September 30, 2021

Nine Months Ended September 30,

(dollars in thousands)

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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.

Net sales for Debit and Credit increased $66.9 million, or 30.6%, for the nine months ended September 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.

Services net sales increased due to growth from card personalization, as well as higher 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.

Net sales for Prepaid Debit increased $0.7 million, or 1.1%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year primarily due to the benefit of price increases.

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,

Nine Months Ended September 30,

(dollars in thousands)

3 unchanged sentences

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 .

Gross profit for Debit and Credit increased $20.4 million, or 24.3%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year primarily due to the net sales increase described above,

partially offset by the inflationary impact on production costs.

Gross profit margin decreased to 36.5% during the nine months ended September 30, 2022, compared to 38.4% in the corresponding period in the prior year, primarily due to higher production costs, primarily materials, partially offset by operating leverage from higher sales including the benefit of price increases .

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.

Gross profit for Prepaid Debit decreased $2.6 million, or 9.9%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year.

Gross profit margin for Prepaid Debit decreased to 37.3% for the nine months ended September 30, 2022 compared to 41.8% in the corresponding period in the prior year.

The decreases in gross profit and gross profit margin were primarily due to higher production costs, primarily materials, partially offset by higher sales as described above.

Operating Expenses:

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

3 unchanged sentences

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.

Debit and Credit operating expenses increased $2.5 million, or 10.7%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to increased selling, compensation and other costs.

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.

Prepaid Debit operating expenses were essentially flat and increased less than $0.1 million, or 1.2%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year.

Other operating expenses increased $9.0 million, or 26.8%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to a $5.7 million increase in compensation expenses as a result of increased employee headcount and higher labor costs in addition to $2.7 million of increased stock compensation, and a $3.0 million increase in professional services and other costs, including costs related to compliance with the Sarbanes-Oxley Act.

Income from Operations and Operating Margin:

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

2 unchanged sentences

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.

Income from operations for Debit and Credit increased $17.9 million, or 29.4%, for the nine months ended September 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 27.6% for the nine months ended September 30, 2022 compared to 27.8% 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.”

Income from operations for Prepaid Debit decreased $2.7 million, or 11.6%, for the nine months ended September 30, 2022 compared to the corresponding period in the prior year, primarily due to lower gross profit.

Operating margin decreased to 31.9% for the nine months ended September 30, 2022 compared to 36.4% 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 $9.0 million, or 26.8%, for the nine months ended September 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.

Interest expense decreased to $22.3 million for the nine months ended September 30, 2022 from $23.2 million in the corresponding period in the prior year.

Interest expense was higher in the first nine 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 due to the “make-whole” interest premium was partially offset by higher average interest rates on our borrowings during the nine months ended September 30, 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.

During the nine months ended September 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 nine months ended September 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:

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.

Our effective tax rate on pre-tax income was 28.5% and 30.7% for the nine months ended September 30, 2022 and 2021, respectively.

The decrease in our effective tax rate for the nine months ended September 30, 2022 compared to the corresponding period in the prior year was primarily due to a greater proportion of pre-tax income in relation to the impact of permanent items.

During the nine months ended September 30, 2022, net income was $24.1 million, compared to net income of $15.3 million in the corresponding period in the prior year.

The increase was primarily due to higher gross profit partially offset by increased “Selling, general and administrative” costs and income tax expense, 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 June 30, 2022, we had $9.1 million of cash and cash equivalents.

At September 30, 2022, we had $21.5 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 the Senior N otes 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 Notes 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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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.

On October 11, 2022, we entered into Amendment No.

2 to the Credit Agreement, which amended the ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory.

Borrowings under the amended ABL Revolver bear interest at a rate per annum equal to the applicable term SOFR adjusted for a credit spread, plus an applicable 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 June 30, 2022, we have $25.0 million in ABL Revolver borrowings outstanding and $50.0 million available to borrow under the ABL Revolver.

The unused portion of the ABL Revolver commitment accrues a monthly commitment fee, 0.50% per annum through March 31, 2023, based on the average daily borrowing capacity under the ABL Revolver over the previous month.

The interest rate margin and unused commitment fee percentage changes, effective April 1, 2023, to between 1.25% and 1.75% (interest rate margin) and 0.375% and 0.50% (unused commitment fee).

As of September 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).

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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.

As permitted by the indenture governing the Senior Notes, the Company may from time to time repurchase some or all of the Senior Notes in open market transactions, in privately negotiated transactions or otherwise.

Prior to March 15, 2023, the Company may also 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 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.

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 timing and amount of any such redemptions or repurchases will depend upon market conditions, contractual commitments, the Company’s capital needs and other factors.

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.

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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 Senior Credit Facility and the First Lien Term Loan.

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

As of September 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 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.

Cash provided by operating activities for the nine months ended September 30, 2022 was $11.7 million compared to cash provided by operating activities of $14.5 million during the nine months ended September 30, 2021 .

Cash generated from earnings for the nine months ended September 30, 2022 was negatively impacted by working capital increases, including an increase in accounts receivable of $ 14.9 million due to higher net sales compared to the previous period.

We also increased inventories by $ 13.9 million during the nine months ended September 30, 2022 , to maintain certain levels of inventory to help mitigate supply chain constraints.

We also decreased accrued expenses by $ 3.2 million during the nine months ended September 30, 2022 , primarily related to payments on accrued interest and employee performance incentive compensation during the period.

Additionally, we benefited from the collection of $9.8 million of income tax refunds during the nine months ended September 30, 2021.

Investing Activities

Cash used in investing activities for the six months ended June 30, 2022 was $8.2 million, compared to $3.5 million during the six months ended June 30, 2021.

Cash used in investing activities for the nine months ended September 30, 2022 was $14.3 million, compared to $4.7 million during the nine months ended September 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 $3.1 million during the six months ended June 30, 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 $7.8 million during the nine months ended September 30, 2022, compared to $0.5 million during the corresponding period of the prior year.

Financing Activities

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

During the nine months ended September 30, 2022, cash provided by financing activities was $3.5 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.

We received $2.1 million under financing leases and we paid $2.5 million of principal on financing leases during the nine months ended September 30, 2022, compared to $1.7 million of principal payments during the corresponding period of the prior year.

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

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 September 30, 2021.

Working Capital

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 as of September 30, 2022 was $112.7 million, compared to $80.9 million as of December 31, 2021.

Our working capital d uring the nine months ended September 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 $ 14.2 million, and an increase in accounts receivable of $ 14.8 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.

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Debt Service Requirements

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.

As of September 30, 2022, the total projected principal and interest payments on our borrowings were $404.8 million, primarily related to the Senior Notes, of which $26.5 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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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.

As of September 30, 2022, 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.

Subsequent to quarter end, the Company entered into a capacity reservation agreement with one of the Company’s chip suppliers to reserve manufacturing supply capacity due to the current global supply shortage environment.

Under the agreement, the Company has agreed to pay certain fees in exchange for the supplier’s commitment to reserve capacity, subject to certain conditions, to produce a set quantity of chips from 2023 through 2025, and the Company has committed to purchase those chips.

The total value of the minimum non-cancellable commitment is $194.9 million over the term of the agreement, $69.6 million of which is expected to be paid in 2023.

In the event that the supplier is unable to deliver the specified quantity of chips, it will be subject to liquidated damages of 10% of the price of any non-delivered products.

Critical Accounting Policies and Estimates

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Actual results could differ from those estimates.

Our Critical Accounting Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, for which there were no material changes as of June 30, 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 September 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