poSecure(CMPO) - 2023 Q4 - Annual Report

Part I Business CompoSecure provides premium metal payment cards and the Arculus digital security platform to global financial institutions and fintechs - The company produced and sold approximately 175 million metal payment cards worldwide from 2010 through 2023, with about 31 million sold in 2023 alone[22] - CompoSecure's Arculus platform transforms a metal payment card into a multifunctional device for traditional payments and 'tap-to-authenticate' hardware token for passwordless, multi-factor authentication and digital asset storage[22][48] - The global addressable market for payment cards was estimated at 9.6 billion in 2023, with CompoSecure's penetration estimated at less than 0.7%, indicating substantial room for growth[23][27] Overview, Mission, and Market Opportunity CompoSecure delivers trust via metal cards and Arculus, addressing a 9.6 billion card market with growing security demand - The company's mission is to deliver exceptional experiences and peace of mind in the physical and digital world by combining elegance, simplicity, and security[22] Market Size and Fraud Statistics | Metric | Value/Statistic | Source Year | | :--- | :--- | :--- | | Addressable Payment Cards (Global) | 9.6 billion in circulation | 2023 | | Identity Fraud Losses (U.S.) | $43 billion | 2022 | | Payment Card Fraud Losses (Worldwide) | >$34 billion | 2022 | | Passwordless Authentication Market (Est.) | $21.6 billion (2024), growing to $53.6 billion (2030) | 2024/2030 | Growth Opportunities Growth focuses on expanding metal card presence globally, targeting fintechs, and innovating with Arculus and sustainable manufacturing - Metal payment card unit sales grew from 12.6 million in 2018 to approximately 31 million in 2023[40] - International net sales grew from $19 million in 2018 to $70 million in 2023, indicating strong overseas expansion[41] - The company is focusing on technology and innovation, including the Arculus portfolio and manufacturing process improvements, such as using 65% post-consumer recycled stainless steel[43] Key Products The company offers premium metal payment cards with advanced features and the Arculus platform for secure authentication and digital asset storage Primary Metal Card Form Factors | Form Factor | Key Features | | :--- | :--- | | Embedded Metal | Metal core with polymer faces, dual-interface, ~12 grams | | Metal Veneer | Metal front with polymer back, dual-interface, ~16 grams | | Full Metal | Greatest metal density and weight (21-28 grams), dual-interface | | Lux Glass™ | Corning® Gorilla® Glass with metal bezel, ~8 grams | | Echo Mirror™ | Buffed stainless-steel with mirror-like finish | | Ceramic Metal Hybrid | Metal front with polymer back, ceramic coating, ~20 grams | - Arculus Business Solutions offer customizable, FIDO2 certified 'tap-to-authenticate' hardware tokens integrated into metal payment cards for passwordless and multi-factor authentication[48][49] - The consumer Arculus Cold Storage Wallet provides a three-factor authentication solution (biometric, PIN, physical card) for securing digital assets, recognized by ABI Research as the most innovative in the industry[55] Competitive Strengths and Clients Competitive strengths include innovation, long-term client relationships, large-scale manufacturing, and IP, with American Express and JP Morgan Chase as major clients - The company has served American Express and JP Morgan Chase for nearly sixteen years, producing cards for over 150 distinct programs[61] - As of February 2024, the company held over 60 U.S. and foreign patents and had more than 35 pending patent applications[63][90] Client Concentration | Year | American Express & JP Morgan Chase (% of Net Sales) | | :--- | :--- | | 2023 | 70.5% | | 2022 | 67.3% | Sales, Marketing, and Competition Sales channels include direct and indirect for metal cards, and B2B/B2C for Arculus, competing with traditional card and digital security providers - Sales channels include a direct sales force in the U.S., Europe, Asia, and South America, as well as indirect sales through card ecosystem partners[74][75] - Key competitors in the metal card market include Idemia France S.A.S., Thales DIS France SA, and CPI Card Group[78] - Primary competitors for Arculus include Yubikey in secure authentication and Ledger SAS and Trezor in the cold storage wallet market[82] Manufacturing, Supply Chain, and Intellectual Property Manufacturing is centralized in New Jersey, supported by a global supply chain and protected by over 60 patents and numerous trade secrets - All manufacturing is conducted in five leased facilities in Somerset, New Jersey, totaling approximately 241,000 square feet[86] - The company has a multi-year purchase commitment with an EMV chip supplier to mitigate supply chain risks[87] - As of February 2024, the company's IP portfolio included over 60 issued U.S. and foreign patents, with more than 35 applications pending[90] Government Regulations The company operates in a highly regulated payments industry, requiring network certifications, while Arculus digital assets face evolving regulatory uncertainty - The company must obtain and maintain certifications from payment networks, which requires compliance with strict security standards for manufacturing operations and facilities[92] - The regulatory framework for digital assets and the Arculus Cold Storage Wallet is not yet clearly defined, creating uncertainty; recent market events have led to increased scrutiny from regulators[96][98] - The company relies on legal analysis to determine if a digital asset is a security before supporting purchase and swap transactions to avoid inadvertently acting as an unlicensed broker-dealer[100][155] ESG and Human Capital CompoSecure's ESG program includes carbon-neutral operations and recycled materials, with a diverse workforce of 934 employees - Achieved carbon neutral operations in 2022 and 2023 through production efficiencies and carbon offsets[107] - In 2023, the company was awarded the Ecovadis Silver Medal, placing it in the top 15% of over 150,000 rated companies for sustainability[109] - As of March 1, 2024, the company had 934 employees, with over 85% being racial/ethnic minorities and 46% female[112] Risk Factors The company faces risks from customer concentration, cybersecurity, production disruptions, digital asset regulatory uncertainty, and substantial indebtedness - A significant business risk is the concentration of revenue from its two largest customers, American Express and JPMorgan Chase, which represented approximately 71% of net sales in 2023[127] - The company faces regulatory uncertainty regarding its Arculus Cold Storage Wallet and the classification of digital assets, which could restrict use or impose significant compliance costs[145][146] - The company has a substantial amount of indebtedness ($340.3 million as of Dec 31, 2023), which may limit operating flexibility and requires a significant portion of cash flow for debt service[192] - The Tax Receivable Agreement requires the company to pay certain historical owners 90% of tax benefits realized, which could result in substantial payments that may exceed actual cash tax savings[183] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None Cybersecurity Cybersecurity risk management, overseen by the Audit Committee and CIO/CISO, follows NIST and PCI standards, with no material impact from threats - The Board of Directors, through its Audit Committee, provides oversight of cybersecurity risks[238] - The cybersecurity program is managed by the CIO/CISO, who has over 25 years of relevant industry experience[239] - The company's information security programs are designed to be consistent with PCI standards and the National Institute of Standards and Technology (NIST) Cybersecurity Framework[236] Properties The company leases five facilities in Somerset, New Jersey, totaling 241,000 square feet, deemed adequate for current and future operations Leased Facilities in Somerset, NJ | Location (Street) | Operations | Approx. Square Footage | | :--- | :--- | :--- | | Pierce Street | Sales, QA, Design, Marketing, Production | 116,000 | | Memorial Drive | Quality Assurance, Production | 46,000 | | Apgar Drive | Prelams and Subassembly Production | 11,000 | | Roosevelt Avenue | Warehouse and Related Activities | 53,000 | | Davidson Avenue | Executive and Administrative Offices | 15,000 | Legal Proceedings As of March 2024, the company was not a party to any material pending legal proceedings - The company is not involved in any material pending legal proceedings[245] Mine Safety Disclosures This item is not applicable to the company - Not applicable Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Class A Common Stock and Public Warrants trade on Nasdaq; no cash dividends paid, and a $40 million securities repurchase program was approved - Class A Common Stock and Public Warrants trade on the Nasdaq Global Market under symbols "CMPO" and "CMPOW"[248] - The company has not paid any cash dividends on its Common Stock to date[250] - In February 2024, the Board approved a repurchase program for up to $40 million of outstanding securities, effective for three years starting March 7, 2024[251] Selected Financial Data This item is reserved and not applicable - Item 6 is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net sales increased 3% to $390.6 million, while net income decreased 15% to $112.5 million, primarily due to mark-to-market adjustments Results of Operations In 2023, net sales grew 3% to $390.6 million, but net income fell 15% to $112.5 million due to lower gross margin and mark-to-market adjustments Consolidated Results of Operations (2023 vs. 2022) | Financial Metric | 2023 (in thousands) | 2022 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $390,629 | $378,476 | $12,153 | 3% | | Gross Profit | $209,082 | $219,644 | ($10,562) | (5%) | | Gross Margin | 54% | 58% | - | - | | Income from Operations | $119,087 | $114,895 | $4,192 | 4% | | Net Income | $112,520 | $131,815 | ($19,295) | (15%) | Net Sales by Region (2023 vs. 2022) | Region | 2023 (in thousands) | 2022 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Domestic | $321,470 | $295,423 | $26,047 | 9% | | International | $69,159 | $83,053 | ($13,894) | (17%) | Consolidated Results of Operations (2022 vs. 2021) | Financial Metric | 2022 (in thousands) | 2021 (in thousands) | $ Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $378,476 | $267,948 | $110,528 | 41% | | Gross Profit | $219,644 | $144,849 | $74,795 | 52% | | Gross Margin | 58% | 54% | - | - | | Income from Operations | $114,895 | $81,425 | $33,470 | 41% | | Net Income | $131,815 | $83,414 | $48,401 | 58% | Use of Non-GAAP Financial Measures The company uses non-GAAP measures like Adjusted EBITDA, which increased to $145.0 million in 2023, to assess performance and align objectives Reconciliation of Net Income to EBITDA and Adjusted EBITDA | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net income | $112,520 | $131,815 | $83,414 | | Depreciation | $8,387 | $8,575 | $10,428 | | Taxes | $4,556 | $4,360 | ($857) | | Interest expense, net | $24,156 | $22,544 | $11,928 | | EBITDA | $149,619 | $167,294 | $104,913 | | Equity compensation expense | $17,562 | $11,465 | $6,113 | | Mark to market adjustments | ($22,145) | ($42,533) | ($13,060) | | Adjusted EBITDA | $145,036 | $136,226 | $102,350 | Liquidity and Capital Resources As of December 31, 2023, the company had $41.2 million cash and $340.3 million debt, with operating cash flow at $104.3 million, ensuring liquidity Liquidity Position | Metric (in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $41.2 | $13.6 | | Total debt principal | $340.3 | $363.1 | Cash Flow Summary | (in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operations | $104.3 | $92.8 | | Net Cash Used in Investing | ($10.9) | ($9.1) | | Net Cash Used in Financing | ($65.8) | ($92.0) | - As of December 31, 2023, the company had full availability of its $60.0 million revolving loan facility[336] Quantitative and Qualitative Disclosures About Market Risk Primary market risk is interest rate fluctuations on $210.3 million variable-rate debt, mitigated by an interest rate swap - The company is exposed to interest rate risk on its $210.3 million of variable-rate debt outstanding under its 2021 Credit Facility[351] - A 100 basis point (1%) increase or decrease in the applicable interest rate would cause an approximate $4.0 million change in annual interest expense[352] - The company utilizes an interest rate swap agreement with a notional amount of $125 million, effective through December 2025, to hedge its exposure to variable interest rate payments[353] Audited Financial Statements This section presents the company's audited consolidated financial statements for 2021-2023, with an unqualified opinion from Grant Thornton LLP - The independent registered public accounting firm, Grant Thornton LLP, issued an unqualified audit opinion on the consolidated financial statements[360] Consolidated Financial Statements Consolidated financial statements show $201.0 million in total assets, $406.8 million in liabilities, and $112.5 million net income for 2023 Key Balance Sheet Data (as of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $139,377 | | Total Assets | $201,041 | | Total Current Liabilities | $40,910 | | Total Liabilities | $406,814 | | Total Stockholders' Deficit | ($802,360) | Key Income Statement Data (Year Ended Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Net Sales | $390,629 | | Gross Profit | $209,082 | | Income from Operations | $119,087 | | Net Income | $112,520 | Notes to Financial Statements Notes detail accounting policies, the 2021 Business Combination, customer concentration, $340.3 million debt, equity compensation, and fair value measurements - The 2021 merger was accounted for as a reverse recapitalization, with CompoSecure Holdings, L.L.C. treated as the accounting acquirer[377] - Two major customers accounted for 70.5% of total revenue in 2023, highlighting significant customer concentration[431][510] - As of Dec 31, 2023, total debt consisted of a $210.3 million term loan and $130.0 million in exchangeable senior notes[456] Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, based on the COSO framework - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[543] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the criteria set forth in the Internal Control-Integrated Framework (2013) by COSO[546] Other Information The company reports no other information for this item - None Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2024 Proxy Statement[550][551][553] Executive Compensation Information regarding executive compensation is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2024 Proxy Statement[556] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding security ownership is incorporated by reference from the forthcoming 2024 Proxy Statement[557] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the forthcoming 2024 Proxy Statement[559] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2024 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2024 Proxy Statement[560] Part IV Exhibits, Financial Statement Schedules This section lists financial statements and all exhibits filed or incorporated by reference, with schedules omitted as information is included elsewhere - This item contains a list of all exhibits filed with the Form 10-K, including material contracts, debt agreements, and corporate charters[563] Form 10-K Summary The company reports no information for this item - None