What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-05 compared with 2024-08-05 · 97 added, 86 removed, 158 unchanged (54% 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 June 30, 2024.

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, 2023 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, 2024 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2024 (as well as information included in other written or oral statements we make from time to time) may contain or constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The words “believe,” “estimate,” “project,” “expect,” “anticipate,” “affirm,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” “continue,” “committed,” “attempt,” “aim,” “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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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;

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

risks associated with our significant stockholder group’s ownership of our stock;

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

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

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our inability to fully execute on our share repurchase program strategy;

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

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

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

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Trends and Uncertainties That May Affect our Financial Performance

We have experienced reduced demand from some of our customers for certain products and services during 2023 through the first half of 2024.

This reduced demand impacted our financial and operating results during this period and may continue to have an impact on future periods.

This reduced demand appears to have been the result of some of the following factors:

● Some of our customers, particularly in the banking and financial services industry, have had and may continue to have concerns about the broader economic environment, which has resulted in reduced overall spending or delayed spending on card programs or other products and services we offer.

● Some of our customers anticipated supply chain-related delays and correspondingly increased their own inventory of the Company’s products on hand during 2022.

As supply chain lead times improved, and given the economic concerns noted above, we believe some customers became more focused on reducing their inventory levels and may continue to do so in the future.

● Certain banks experienced negative liquidity events, including takeover by industry regulators and deposit outflows, or increased loan loss reserves, each of which had the effect of deteriorating share prices and limiting access to capital, leading to cautionary signals and uncertainty in the financial services industry.

Following some of these events, we experienced reduced demand in the Debit and Credit segment and we may experience reduced demand again if such events occur in the future.

We experienced reduced demand from some of our customers for certain products and services during 2023 and the nine months ended September 30, 2024, which impacted our financial and operating results.

We believe the reduced demand was the result of economic and supply chain-related concerns, whereby certain customers increased their inventory of our products during 2022 and then focused on reducing their inventory levels in subsequent periods and may continue to further reduce their inventory levels before returning to normalized purchasing behavior.

Additionally, liquidity concerns in the banking and financial services industry led to takeover of some banking and financial institutions by industry regulators during this period, which also affected demand.

Although we believe the environment is improving and we experienced increased card volume sales and results in our Debit and Credit segment during the third quarter of 2024, we may experience reduced demand if any of the foregoing events continue or reoccur in the future.

Results of Operations

The following table presents the components of our condensed consolidated statements of operations for each of the periods presented:

The following table presents the components of our condensed consolidated statements of operations and comprehensive income for each of the periods presented:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Interest, net

Loss on debt extinguishment

Other expense, net

Income before taxes

Income tax expense

Income tax benefit (expense)

Gross profit margin

(1) For the three months ended June 30, 2024 and 2023, net sales and cost of sales each include $0.6 million and less than $0.1 million of intersegment eliminations, respectively.

For the six months ended June 30, 2024 and 2023, net sales and cost of sales each include $0.9 million and $0.3 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three and six months ended June 30, 2024, compared to the corresponding periods in the prior year.

The results of operations should be read in conjunction with the discussion of our segment results of operations, which provide more detailed discussions concerning certain components of the Condensed Consolidated Statements of Income.

Net sales increased for the three months ended June 30, 2024, primarily due to increased S ervices net sales in both our Debit and Credit and Prepaid Debit segments.

Net sales decreased for the six months ended June 30, 2024, primarily due to decreased Products net sales driven by lower card volumes in our Debit and Credit segment , partially offset by higher S ervices net sales in both our Prepaid Debit and Debit and Credit segments.

* Calculation not meaningful

(1) For the three months ended September 30, 2024 and 2023, net sales and cost of sales each include $0.2 million and $0.3 million of intersegment eliminations, respectively.

For the nine months ended September 30, 2024 and 2023, net sales and cost of sales each include $1.0 million and $0.6 million of intersegment eliminations, respectively.

The following discussion of our consolidated results of operations and segment results refers to the three and nine months ended September 30, 2024, compared to the corresponding periods in the prior year.

Net sales increased for the three months ended September 30, 2024, primarily due to increased Products net sales driven by higher card volumes in our Debit and Credit segment, as well as higher S ervices net sales in both our Debit and Credit and Prepaid Debit segments.

Net sales increased for the nine months ended September 30, 2024, primarily due to higher S ervices net sales in our Prepaid Debit segment and higher personalization services net sales in our Debit and Credit segment, partially offset by decreased Products net sales driven by lower card volumes in our Debit and Credit segment .

Gross Profit and Gross Profit Margin:

Gross profit increased for the three months ended June 30, 2024, primarily due to higher net sales and gross profit margin was relatively consistent.

Gross profit was relatively consistent for the six months ended June 30, 2024, and gross profit margin increased.

The prior year period was negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions in our Prepaid Debit segment.

Gross profit and gross profit margin increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.

Operating Expenses:

Operating expenses increased for the three months ended June 30, 2024, primarily due to increased compensation related expenses in our Other and Debit and Credit segments, including increased stock compensation.

Operating expenses increased for the six months ended June 30, 2024, primarily due to increased compensation related expenses, including increased stock compensation, severance, and compensation related to an executive retention agreement entered into in June 2023.

Retention expense in 2024 includes approximately $2.0 million related to an executive retention package announced in 2023, including stock compensation, compared to $1.0 million in the comparable prior year period.

Operating expenses for both the three and six months ended June 30, 2024 were impacted by higher expenses in our Prepaid Debit segment.

Operating expenses increased for the three months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.

Operating expenses increased for the nine months ended September 30, 2024, primarily due to increased compensation-related expenses, including increased employee performance-based incentive compensation, stock compensation, salary expense, and executive severance, partially offset by decreased impacts from an executive retention agreement entered into with our former CEO in 2023.

Interest, net :

Interest expense decreased for the three and six months ended June 30, 2024, primarily due to lower outstanding principal balances on our borrowings.

Interest expense increased for the three and nine months ended September 30, 2024, primarily due to payment of an early redemption premium of $5.8 million related to the redemption of the $267.9 million 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”).

Interest expense for the three months ended September 30, 2024 also increased due to the impact of the higher interest rates on the $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 (the “2029 Senior Notes”) issued in July 2024 compared to the 2026 Senior Notes.

Loss on Debt Extinguishment:

During the three and nine months ended September 30, 2024, we recorded a $3.0 million loss on debt extinguishment relating to the unamortized deferred financing costs in connection with the redemption of the 2026 Senior Notes and the refinancing of our ABL Revolver Credit Agreement in July 2024.

Other Expense, net:

Other expense, net was relatively consistent for both the three and six months ended June 30, 2024.

Other expense, net increased for both the three and nine months ended September 30, 2024, primarily due to expenses incurred related to a secondary offering of our common shares.

See Note 10, “Stockholders’ Deficit” of the condensed consolidated financial statements for further information.

Income Tax Expense:

Our effective tax rates on pre-tax income were 27.7% and 38.9% for the three months ended June 30, 2024 and 2023, respectively, and 28.2% and 28.6% for the six months ended June 30, 2024 and 2023, respectively.

The decrease in our effective tax rate for the three months ended June 30, 2024, compared to the corresponding period in the prior year was primarily due to limitation of executive compensation deductibility related to the former CEO’s retention agreement, recognized in the second quarter of 2023.

The effective tax rate for the six months ended June 30, 2024, was consistent with the rate in the comparable period in the prior year as the limitation of executive compensation deductibility recognized in the second quarter of 2023 was offset by a reduction in a valuation allowance related to interest deductibility due to a state tax law change recognized in the first quarter of 2023.

Our effective tax rates on pre-tax income were (57.9)% and 37.7% for the three months ended September 30, 2024 and 2023, respectively, and 24.0% and 30.5% for the nine months ended September 30, 2024 and 2023, respectively.

The benefit recognized for the three months ended September 30, 2024 and the decrease in the effective tax rate for the nine months ended September 30, 2024 related to increased deductibility of stock compensation realized upon certain stock option exercises and restricted stock unit vesting.

The effective tax rate for the three and nine months ended September 30, 2023 was impacted by limitation of executive compensation deductibility related to the former CEO’s retention agreement.

Segment Discussion

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Nine Months Ended

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(dollars in thousands)

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Gross profit margin

Net sales for Debit and Credit increased for the three months ended June 30, 2024, primarily due to higher personalization and Card@Once services .

Net sales for Debit and Credit decreased for the six months ended June 30, 2024, primarily due to a decrease in Products net sales, partially offset by increased Services net sales.

The decrease in Products net sales was driven by volume declines in contactless and EMV cards.

Net sales for Debit and Credit increased for the three months ended September 30, 2024, primarily due to higher volume of contactless cards, including eco-focused cards.

Net sales for Debit and Credit increased for the nine months ended September 30, 2024, primarily due to increased Services net sales, partially offset by a decrease in Products net sales.

The increase in Services net sales was driven by higher personalization and Card@Once services .

The decrease in Products net sales was driven by volume declines in contact-only EMV cards, partially offset by higher volumes of contactless cards and increased Card@Once printer sales.

Gross Profit and Gross Profit Margin:

Gross profit for Debit and Credit increased for the three months ended June 30, 2024, primarily due to higher net sales.

Gross profit margin was relatively consistent for the three months ended June 30, 2024.

Gross profit and gross profit margin for Debit and Credit decreased for the six months ended June 30, 2024, primarily due to lower net sales.

Gross profit and gross profit margin for Debit and Credit increased for the three and nine months ended September 30, 2024, primarily due to operating leverage from sales growth described above.

Income from Operations:

Income from operations for Debit and Credit for the three and six months ended June 30, 2024, was impacted primarily by the factors discussed in “Gross Profit and Gross Profit Margin” above, as well as increased compensation-related operating expenses.

Income from operations for Debit and Credit increased for the three months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above, partially offset by increased compensation-related operating expenses.

Income from operations for Debit and Credit was relatively consistent for the nine months ended September 30, 2024.

Prepaid Debit:

Three Months Ended

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Gross profit margin

Net sales for Prepaid Debit increased for the three and six months ended June 30, 2024, primarily due to increased sales to existing customers.

Net sales for Prepaid Debit increased for the three and nine months ended September 30, 2024, primarily due to increased sales to existing customers of higher-priced packaging solutions.

Gross Profit and Gross Profit Margin:

Gross profit for Prepaid Debit increased for the three months ended June 30, 2024, primarily due to higher net sales, partially offset by increased labor costs.

Gross profit margin decreased compared to the prior year period primarily due to increased labor costs .

Gross profit and gross profit margin for Prepaid Debit increased for the six months ended June 30, 2024, primarily due to higher net sales.

Gross profit for Prepaid Debit increased for the three months ended September 30, 2024, primarily due to higher net sales.

Gross profit margin was relatively consistent compared to the prior year period .

Gross profit and gross profit margin for Prepaid Debit increased for the nine months ended September 30, 2024, primarily due to higher net sales.

Gross profit and gross profit margin in the prior year period were negatively impacted by expenses related to the implementation of a change in our production staffing model as we completed the transition of temporary worker positions to permanent employee positions.

Income from Operations:

Income from operations for Prepaid Debit for the three and six months ended June 30, 2024, was impacted primarily by the factors discussed in “Gross Profit and Gross Profit Margin” above and higher operating expenses in the second quarter of 2024.

Income from operations for Prepaid Debit increased for the three and nine months ended September 30, 2024, primarily due to the factors discussed in “Gross Profit and Gross Profit Margin” above.

As the Other segment is comprised entirely of corporate expenses, income from operations for Other consists of operating expenses shown below.

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

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Operating Expenses:

Other operating expenses increased for the three and six months ended June 30, 2024, primarily due to an increase in compensation related expenses, including the factors discussed in consolidated “Operating Expenses” above, partially offset by lower professional fees for the six months ended June 30, 2024.

Other operating expenses increased for the three and nine months ended September 30, 2024, primarily due to an increase in compensation-related expenses, including the factors discussed in consolidated “Operating Expenses” above.

Liquidity and Capital Resources

At June 30, 2024, we had $7.5 million of cash and cash equivalents.

At September 30, 2024, we had $14.7 million of cash and cash equivalents.

Our primary source of liquidity has been cash generated from our operating activities, which has been driven from net income and fluctuations in working capital.

Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, share repurchases (including the repurchase of incremental shares from Parallel49), payments of employee incentive programs and interest payments on our outstanding debt, with the interest payments being due in the first and third quarters of the year.

Our working capital fluctuates primarily due to the timing of tax payments, timing of receipts from customers, inventory purchases, share repurchases (including the repurchase of incremental shares from Parallel49), payments of employee incentive programs and interest payments on our outstanding Senior Notes, with the interest payments being due in the first and third quarters of the year.

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

Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, and our senior secured revolving credit facility (the “2026 ABL Revolver”) with available borrowing capacity of $69.6 million as of June 30, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share repurchases and working capital needs.

Although we can provide no assurances, we believe that our cash flows from operations, combined with our current cash levels, and our senior secured revolving credit facility (the “2029 ABL Revolver”) with available borrowing capacity of $72.7 million as of September 30, 2024, will be adequate to fund debt service requirements and provide cash, as required, to support our ongoing operations, capital expenditures, lease obligations, share repurchases and working capital needs.

Our future cash flows could be impacted by a variety of factors, some of which are beyond our control.

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Cash Flows from Operating Activities

Cash provided by operating activities decreased for the six months ended June 30, 2024 to $4.1 million from $10.3 million for the six months ended June 30, 2023 primarily due to lower net income and changes in working capital.

Working capital changes included incentives related to a customer contract entered into in the first quarter of 2024, and a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024, partially offset by lower employee performance incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance.

We anticipate inventory levels to continue to be higher in 2024 compared to 2023 levels as a result of the capacity reservation agreement we entered into with one of our suppliers in 2022, which will be in effect through 2025.

Cash provided by operating activities decreased for the nine months ended September 30, 2024 to $16.7 million from $22.3 million for the nine months ended September 30, 2023 primarily due to changes in working capital.

Working capital changes included increased inventory purchases related to the capacity reservation agreement we entered into with one of our suppliers in 2022, incentives related to a customer contract entered into in the first quarter of 2024, and a $5.0 million payment pursuant to an agreement entered into on June 2, 2023 with the Company’s prior Chief Executive Officer, who departed in the first quarter of 2024, partially offset by lower employee performance-based incentive compensation payments in 2024 related to 2023 performance as compared to those made in 2023 related to 2022 performance.

Additionally, we anticipate cash flows from operating activities to be negatively impacted in the fourth quarter of 2024 due to incentives related to the customer contract as described above.

As of June 30, 2024, we had the following outstanding borrowings:

As of September 30, 2024, we had the following outstanding borrowings:

September 30,

(dollars in thousands)

2029 Senior Notes

2026 ABL Revolver

2026 Senior Notes

Unamortized deferred financing costs

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2029 Senior Notes

On March 15, 2021, we completed an offering of $310.0 million aggregate principal amount of 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”) and related guarantees at an issue price of 100%.

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

Interest is payable on the 2026 Senior Notes on March 15 and September 15 of each year.

On July 11, 2024 (the “Closing Date”), we completed a private offering by our wholly-owned subsidiary, CPI CG Inc.

(the “Issuer”), of $285.0 million aggregate principal amount of 10.000% Senior Secured Notes due 2029 and related guarantees at an issue price of 100%.

The notes and related guarantees were offered and sold in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended, to persons reasonably believed to be qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States to certain non-U.S.

persons in compliance with Regulation S under the Securities Act.

Net proceeds from the 2029 Senior Notes, together with cash on hand, were used to redeem the entire principal balance of $267.9 million of 8.625% Senior Secured Notes due 2026 (the “2026 Senior Notes”) as of the Closing Date, and to pay related fees, an early redemption premium of 2.156%, and other expenses.

The early redemption premium paid is recorded in “Interest, net” on the condensed consolidated statement of operations and comprehensive income for the three and nine months ended September 30, 2024.

The 2029 Senior Notes mature on July 15, 2029.

Interest is payable on the 2029 Senior Notes on January 15 and July 15 of each year, beginning on January 15, 2025.

The 2029 Senior Notes are guaranteed by us and our domestic subsidiaries (other than the Issuer), and are secured by substantially all of the assets of the Issuer and the guarantors, subject to customary exceptions.

We may be required to make an offer to repurchase the 2029 Senior Notes, upon the occurrence of certain events including a change of control or certain asset sales.

2029 ABL Revolver

On March 15, 2021, we entered into a Credit Agreement with Wells Fargo Bank, National Association providing for the 2026 ABL Revolver.

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

1 to the Credit Agreement, which amended the 2026 ABL Revolver.

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

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

2 to the Credit Agreement, which amended the 2026 ABL Revolver to adjust certain monthly document delivery terms and to clarify the treatment of certain inventory.

We primarily utilize our 2026 ABL Revolver to provide general liquidity and to support shorter term financing requirements.

Borrowings under the amended 2026 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.

The applicable interest rate margin ranges from 1.25% to 1.75% depending on the average excess availability of the facility for the most recently completed quarter.

The unused portion of the 2026 ABL Revolver commitment accrues a monthly unused line fee, between 0.375% to 0.50% per annum, multiplied by the aggregate amount of Revolver commitments less the average Revolver usage during the immediately preceding month.

Amounts borrowed and outstanding under the 2026 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 2026 Senior Notes (and may be subject to earlier mandatory prepayment upon certain events).

Refer to Note 15, “Subsequent Events” of the Condensed Consolidated Financial Statements in this report for information regarding the refinancing of both the 2026 Senior Notes and the 2026 ABL Revolver that occurred in July 2024.

On the Closing Date, we and CPI CG Inc.

as borrower (the “Borrower”), entered into a credit agreement (the “ABL Credit Agreement”) with JPMorgan Chase Bank, N.A., as lender, administrative agent and collateral agent, providing for an asset-based, senior secured revolving credit facility (the “2029 ABL Revolver”) of up to $75.0 million (the “Maximum Revolver Amount”).

The 2029 ABL Revolver is guaranteed by us and our subsidiaries (other than certain excluded subsidiaries), and is secured by substantially all of the assets of the Company, the Borrower and the subsidiary guarantors, subject to customary exceptions.

The 2029 ABL Revolver consists of revolving loans, letters of credit and swing line loans provided by lenders, with a sublimit on letters of credit outstanding at any time of $10.0 million.

The 2029 ABL Revolver also includes an uncommitted accordion feature whereby the Borrower may increase the 2029 ABL Revolver commitment by an aggregate amount not to exceed $25.0 million, subject to certain conditions.

The 2029 ABL Revolver matures on the earliest to occur of July 11, 2029 and the date that is 91 days prior to the maturity of the 2029 Senior Notes.

As of the Closing Date, we had $4.0 million of outstanding borrowings under a prior Credit Agreement with Wells Fargo Bank, N.A.

entered into in March 2021 (the “2026 ABL Revolver”).

We used initial borrowings under the 2029 ABL Revolver, together with cash on hand and proceeds under the notes, to repay in full and terminate the 2026 ABL Revolver and to pay related fees and expenses, and will use future borrowings for general corporate purposes.

Borrowings under the 2029 ABL Revolver bear interest at a rate per annum that ranges based on the applicable term secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York plus 1.50% to 1.75%, (subject, in each case, to a credit spread adjustment of 0.10%) based on the average daily borrowing capacity under the 2029 ABL Revolver over the most recently completed month.

The unused portion of the 2029 ABL Revolver commitment accrues a commitment fee, which ranges from 0.375% to 0.50% per annum, based on the average daily excess availability under the 2029 ABL Revolver over the immediately preceding month.

The 2029 ABL Revolver includes limitations on the Borrower’s ability to borrow in certain situations, including limitations based on the calculation of borrowing capacity and further limitations that are triggered if the amount available to borrow under the ABL Revolver is less than the greater of $7.5 million and 10% of the Maximum Revolver Amount.

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 (“Borrowing Base”) and b) the Maximum Revolver Amount.

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 capacity is below the greater of $7.5 million and 10% of the Maximum Revolver Amount and until such time that borrowing capacity equals or exceeds the greater of $7.5 million and 10% of the Maximum Revolver Amount for 30 consecutive days, the Company must maintain a fixed charge coverage ratio (as defined in the Credit Agreement for the ABL Revolver) of at least 1.00 to 1.00, calculated for the trailing 12 months, in order to borrow under the ABL Revolver.

Cash Priorities

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We primarily use cash in investing activities for capital expenditures.

During the six months ended June 30, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $2.7 million.

During the nine months ended September 30, 2024, capital expenditures, including investments to support the business, such as machinery and information technology equipment, totaled $4.2 million.

During 2023, we commenced work on relocating and modernizing our production facility in Indiana.

We anticipate this project will extend into 2025.

Total capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in both 2024 and 2025.

Total capital expenditures, net for this project are anticipated to increase cash used in investing activities and assets acquired under lease arrangements in 2025.

Share Repurchase Authorization and Activity

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This authorization expires on December 31, 2024.

During the six months ended June 30, 2024, the Company repurchased 352,750 shares of its common stock at an average price of $18.14 per share, excluding commissions, or $6.4 million in aggregate, on a trade date basis.

This amount includes 244,314 shares purchased from one of our majority shareholders at an average price of $18.03 per share, in accordance with the Stock Repurchase Agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”).

As of June 30, 2024, the Company is obligated to repurchase an additional 120,534 shares at an average price of $18.23 per share from Parallel49.

This obligation is based on a multiple of the number of shares the Company purchased in the open market between April 1, 2024 and June 30, 2024, payment for which is due in the third quarter of 2024.

We had $11.2 million remaining in our share repurchase authorization as of June 30, 2024.

During the nine months ended September 30, 2024, we repurchased 473,284 shares of its common stock at an average price of $18.16 per share, excluding commissions, or $8.6 million in aggregate, on a trade date basis.

This amount includes 364,848 shares purchased from a stockholder that was part of our majority stockholder group at an average price of $18.09 per share, in accordance with the Stock Repurchase Agreements entered into with Tricor Pacific Capital Partners (Fund IV) US, LP (“Parallel49”).

We had $11.2 million remaining in our share repurchase authorization as of September 30, 2024.

We may purchase shares through open market purchases or through privately negotiated transactions, the extent and timing of which will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by us.

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Debt Service Requirements

As described in Note 15, “Subsequent Events” of the Condensed Consolidated Financial Statements in this report, we refinanced our 2026 Senior Notes and 2026 ABL Revolver in July 2024.

As of July 11, 2024, the total projected principal and interest payments on our borrowings are $433.9 million, primarily related to the 2029 Senior Notes, of which $15.0 million of interest is expected to be paid in the next 12 months.

These expected interest payments do not include premium and accrued interest of $13.2 million that was paid in connection with the refinancing of the 2026 Senior Notes.

As of September 30, 2024, the total projected principal and interest payments on our borrowings are $429.7 million, primarily related to the 2029 Senior Notes, of which $29.2 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 2029 Senior Notes, which mature in 2029, 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.

As of June 30, 2024, 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, 2023.

As of September 30, 2024, 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, 2023.

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, 2023, for which there were no material changes as of June 30, 2024, included:

Our Critical Accounting

Policies and Estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, for which there were no material changes as of September 30, 2024, included:

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

1 unchanged sentence

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