CPI Card Group(PMTS) - 2022 Q4 - Annual Report

Cautionary Statement Regarding Forward-Looking Information This section warns that forward-looking statements are subject to significant risks and uncertainties, potentially causing actual results to differ materially Summary of Forward-Looking Information This section warns that forward-looking statements are subject to significant risks and uncertainties, potentially causing actual results to differ materially - Forward-looking statements are inherently subject to many important risks and uncertainties that could cause actual results or other events to differ materially from those contemplated[13] - Key risks include a deterioration in general economic conditions, supply chain disruptions, failure to retain existing customers, unpredictability of operating results, costs associated with Sarbanes-Oxley Act Section 404 compliance, inability to recruit/retain qualified personnel, potential effects of COVID-19, system security risks and cyber-attacks, substantial indebtedness, disruptions in production, environmental, social and governance (ESG) preferences, climate change effects, intellectual property protection issues, software defects, limited ability to raise capital, and potential tax liabilities[14] PART I Part I covers the company's business operations, competitive landscape, risk factors, properties, and legal proceedings Item 1. Business CPI Card Group Inc. is a leading US payment technology company providing comprehensive financial payment card solutions and instant issuance - CPI Card Group Inc. is a US-based payment technology company specializing in comprehensive Financial Payment Card solutions (credit, debit, Prepaid Debit Cards) and instant card issuance, holding a leading market position with over 20 years of experience[21] - The company serves a diverse customer base, including some of the largest issuers of debit and credit cards, Prepaid Debit Card program managers, numerous fintechs, and independent community banks and credit unions[22] - CPI operates through a network of high-security production and card services facilities in the United States, each audited for compliance with Payment Card Industry Security Standards Council (PCI Security Standards Council) standards[23] Overview CPI Card Group Inc. is a leading US payment technology company specializing in financial payment card solutions - CPI Card Group Inc. is a US-based payment technology company specializing in comprehensive Financial Payment Card solutions (credit, debit, Prepaid Debit Cards) and instant card issuance, holding a leading market position with over 20 years of experience[21] - The company serves a diverse customer base, including some of the largest issuers of debit and credit cards, Prepaid Debit Card program managers, numerous fintechs, and independent community banks and credit unions[22] Segment | Segment | Primary Activity | | :--------------- | :----------------------------------------------------------------------------------------------------------- | | Debit and Credit | Primarily produces Financial Payment Cards and provides integrated card services to card-issuing financial institutions in the United States | | Prepaid Debit | Primarily provides integrated prepaid card services to Prepaid Debit Card program managers in the United States | | Other | Includes corporate expenses | Our Competitive Strengths CPI maintains a strong market position through long-term customer relationships, comprehensive solutions, and secure facilities - CPI maintains a strong market position with long-term customer relationships, having collaborated with its top 10 customers for over ten years on average, and has gained estimated overall market share each year from 2018 to 2022[27] - The company offers comprehensive end-to-end Financial Payment Card solutions, integrating card design, production, data personalization, and services, allowing customers to manage their card program needs with a single trusted partner[27] - CPI's network of high-security, PCI Security Standards Council compliant facilities, regularly audited by Payment Card Brands, serves as a barrier to new market entrants due to the complexity and investment required to obtain and retain these designations[27] - CPI leverages its technological, engineering, and operational expertise, including the production of EMV cards (contact and dual-interface), eco-focused cards (Second Wave® with recovered ocean-bound plastic, Earthwise® with upcycled plastic), CPI Metals®, and the proprietary Card@Once® instant card issuance system and SaaS solution[28][29] Our Strategy CPI's strategy focuses on customer partnership, market-leading quality, continuous innovation, and efficient operations - CPI's vision is to be the partner of choice for its customers by providing market-leading quality products, customer service, and continuous innovation with a market-competitive business model[30] - Strategic priorities include a deep customer focus, delivering market-leading quality products and customer service, continuous innovation to create next-generation products, and maintaining a market-competitive business model through dynamic and efficient operations[30][31][32][33][34][35] Our Products and Services CPI offers EMV, eco-focused, and metal financial payment cards, along with personalization, fulfillment, and instant issuance solutions - CPI produces EMV Financial Payment Cards (contact and contactless dual-interface), including eco-focused solutions like Second Wave® (featuring a core made with recovered ocean-bound plastic) and Earthwise® (made with upcycled plastic), as well as encased metal cards (CPI Metals®)[36][37][29] - The company also produces non-EMV cards, including those for government disbursement, transit, and health savings accounts, and retail gift cards[38] - Key services include technology-driven card data personalization and fulfillment, print-on-demand solutions for individualized offerings, and the proprietary Card@Once® instant card issuance system and SaaS solution[39][40][43] - CPI offers specialized tamper-evident secure packaging products and services to reduce fraud for Prepaid Debit Cards sold through retail channels[45] Suppliers CPI relies on key suppliers for critical components, facing global supply chain strains and increased inventory levels - CPI aims to avoid single-source dependency but relies on a few key suppliers for critical components; approximately 97% of purchased microchips and antennas came from four main suppliers in 2022, with 68% from one supplier[46][344] - The company sources Recovered Ocean-Bound Plastic (ROBP) for its Second Wave cards from Haiti and Thailand, with a supply chain that includes single-source processors[46][225] - Global supply chain strains, including increased costs, delays, and unpredictability, led CPI to increase inventory levels in 2022 and enter a capacity reservation agreement with a chip supplier for $194.9 million through 2025[47][49] Customers CPI serves diverse customers including large issuers, fintechs, and prepaid debit program managers, with long-term relationships - CPI categorizes its customers as large issuers, small to mid-sized issuers, fintechs, prepaid debit issuers and program managers, and Group Service Providers[50] Customer Metrics | Metric | Value | | :----------------------------------- | :-------- | | Net sales from one customer (2022) | 16% | | Net sales from top ten direct customers (2022) | Nearly two-thirds | | Average relationship with top ten direct customers | >10 years | - Most contractual arrangements with customers do not include exclusivity clauses or commitments for specific product quantities on a medium or long-term basis[52][94] Production and Services CPI operates high-security US facilities for card production, personalization, packaging, and fulfillment, emphasizing sustainability - CPI operates a network of high-security facilities totaling approximately 386,000 square feet in the United States, dedicated to Financial Payment Card production, personalization, printer provisioning, packaging, and fulfillment services[53] - Facilities are designed to execute high-volume and lower-volume production runs and meet specific needs of Prepaid Debit Card customers, including tamper-evident secure card packaging[55] - Finished products are delivered via secure ground and air freight, with certain high-security products requiring armored vehicle transport, and personalized cards shipped directly to cardholders via USPS[54] - The company is committed to incorporating environmental sustainability practices at its facilities to limit environmental impact, preserve natural resources, and create innovative, responsible products[56] Sales and Marketing CPI markets itself as a leader in payments, strengthening existing relationships and attracting new customers with innovative solutions - CPI markets itself as a leader and trusted partner in payments, focusing on high quality, flexibility, innovative products, and value-driven pricing[57] - The sales and marketing strategy aims to strengthen existing customer relationships through a consultative approach and cross-selling, while attracting new customers with comprehensive end-to-end solutions[57] - Marketing efforts are tailored to specific customer segments and utilize various channels, including industry publications, conferences, webinars, podcasts, and blogs, to introduce innovations in the payments market[57] Competition The payment card industry is highly competitive and consolidated, with CPI competing on quality, security, and product comprehensiveness - The payment card industry is highly competitive, saturated, and increasingly consolidated, with some competitors possessing substantially greater financial, sales, and marketing resources[58] - Competitive factors include product quality, durability, security, service reliability, product line comprehensiveness, timely introduction of new products and features, and price[58] - CPI competes with other card solutions providers and certain existing/potential customers who have in-house production and/or personalization capabilities, listing companies like ABCorp, CompoSecure, Entrust, FIS, Fiserv, Giesecke & Devrient, IDEMIA, Thales, and others as competitors[59] Intellectual Property CPI owns and licenses various intellectual property rights, including patents and trademarks, protected globally - CPI owns, controls, or licenses various intellectual property rights, including patents, trade secrets, and trademarks, protected through a combination of statutory and contractual safeguards globally[60][61] Intellectual Property Counts | IP Type | Count | | :------------------------------------ | :---- | | U.S. and foreign trademark registrations and applications | 48 | | Existing U.S. patents | 39 | | Existing foreign patents | 42 | | Pending U.S. and foreign patent applications | 45 | | Average remaining patent maturity | ~13 years | Regulation CPI is subject to federal and state privacy provisions, PCI Security Standards, financial services regulations, and environmental laws - CPI handles personally identifiable cardholder information and is subject to federal and state privacy provisions (e.g., Gramm-Leach-Bliley Act, HIPAA) and PCI Security Standards Council requirements, necessitating adequate policies and safeguards[62][64] - As a service provider to financial institutions, CPI's operations may be examined by regulatory authorities and are indirectly affected by financial services regulations like the Dodd-Frank Act and CFPB guidance, which may impose compliance costs[67][69][70][71] - The company's operations are subject to environmental protection regulations governing emissions, wastewater, hazardous substances, waste disposal, and require environmental permits[72] Human Capital CPI's human capital strategy focuses on attracting and retaining personnel through compensation, benefits, and a diverse workplace - CPI's human capital strategy focuses on attracting and retaining qualified personnel through competitive compensation, benefits, ongoing leadership development, and employee engagement surveys[73] - The company prioritizes employee health and safety, promotes a diverse and inclusive workplace with ethical conduct standards, and analyzes employment procedures for equal opportunities and equitable pay[74][75] Employee Demographics (as of Dec 31, 2022) | Metric | Value | | :----------------------------------- | :---------- | | Total Full-time Employees (Dec 31, 2022) | ~1,375 | | Male Employees | ~55% | | Female Employees | ~45% | | Minority Category Employees | ~59% | | Production and Service Facility Staff | ~74% | - CPI is transitioning positions previously staffed with temporary workers to permanent employee positions to better manage its workforce and operations[76] Available Information CPI makes its SEC filings available free of charge on its investor relations website and the SEC's website - CPI Card Group Inc. makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K available free of charge on its investor relations website (www.cpicardgroup.com) and the SEC's website (www.sec.gov)[77](index=77&type=chunk) - The company qualifies as a smaller reporting company and has been classified as an accelerated filer with respect to SEC regulations and filing requirements since the year ended December 31, 2021[78][79] Item 1A. Risk Factors This section outlines numerous business, industry, and common stock ownership risks that could materially and adversely affect CPI's financial condition - The company's business is exposed to risks from deteriorating general economic conditions, disruptions and increasing costs in its supply chain, and challenges in retaining existing key customers and attracting new ones[81][86][88][93] - Operational risks include the unpredictability of operating results, costs associated with Sarbanes-Oxley Act Section 404 compliance, failure to recruit and retain qualified personnel, and potential interruptions from IT system failures or production disruptions at facilities[81][96][98][100][112][128] - Industry-specific risks encompass the highly competitive and consolidated marketplace, delays or interruptions in sourcing raw materials from foreign countries, adverse effects from geopolitical conflicts (e.g., Russia-Ukraine), challenges with data privacy and security compliance, and the threat of technological obsolescence from new payment systems[84][161][164][169][170][172] - Risks related to common stock ownership include the concentrated ownership by majority stockholders (Tricor Funds), potential conflicts of interest, the influence of securities analysts, failure to meet Nasdaq listing standards, the impact of stockholder activism, and certain anti-takeover provisions in organizational documents[84][185][188][192][193] Risks Relating to our Business This section details business risks including economic conditions, supply chain disruptions, customer retention, and operational challenges - Adverse economic conditions, including rising inflation, reduced consumer confidence, and decreased spending, can negatively impact demand for CPI's products and increase operational costs[86][87] - Supply chain disruptions, particularly reliance on single-source suppliers for key components like microchips (68% from one supplier in 2022) and recovered ocean-bound plastic (ROBP), can lead to increased costs, extended lead times, and an inability to meet customer demand[88][90][92] - Failure to retain existing customers (one customer accounted for 16% of net sales in 2022) or attract new ones, due to competitive offerings, pricing pressures, or customer financial health, would materially adversely affect the business[93][94] - The company faces risks from maintaining effective internal control over financial reporting as an accelerated filer, labor shortages impacting production and increasing compensation expenses, and potential cyber-attacks or IT system interruptions compromising sensitive data and business operations[98][100][107][112] - Substantial indebtedness limits the company's ability to use cash flow for investments and growth, while restrictive covenants in debt agreements constrain business strategies and increase vulnerability to economic downturns[119][124] - Disruptions in production at facilities, problems in production quality or materials, and increasing stakeholder expectations regarding environmental, social, and governance (ESG) matters (e.g., plastic waste, emissions) could adversely affect operations, reputation, and financial performance[128][131][134][135][137] Risks Relating to our Industry This section covers industry risks such as intense competition, supply chain interruptions, data privacy, and technological obsolescence - The highly competitive, saturated, and consolidating payment card marketplace, with competitors possessing substantially greater financial, sales, and marketing resources and in-house customer capabilities, poses risks of market share loss and declining profitability[161][162][163] - Delays or interruptions in sourcing raw materials and components from foreign countries, coupled with trade restrictions and geopolitical conflicts (e.g., Russia-Ukraine military action), can disrupt supply chains and increase costs[164][169] - Evolving data privacy and security regulations (e.g., CCPA, CPRA, HIPAA) and customer contractual requirements increase operational costs and potential liabilities for non-compliance[170] - New and developing technology solutions, such as digital payment systems or mobile payments, could render existing products obsolete, and failure to timely introduce innovative products could materially adversely affect the business[172][173] - Failure to operate in accordance with the standards of the PCI Security Standards Council or other Payment Card Brand compliance standards could lead to loss of eligibility to provide products and services, significantly disrupting the business[175][178] - Environmental, health, and safety laws and regulations, including climate change regulations (e.g., GHG emissions, plastic recycling), expose the company to additional costs, potential fines, and operational restrictions[179][181][183] Risks Relating to Ownership of our Common Stock This section outlines risks related to common stock ownership, including concentrated ownership and potential conflicts of interest - The concentrated ownership by Tricor Funds (approximately 58% as of December 31, 2022) allows them to control significant corporate activities, potentially resulting in reduced liquidity and volatility in the trading price of common stock[186][187] - Conflicts of interest may arise due to directors affiliated with Parallel49 Equity (which controls the Tricor Funds) serving on the board, potentially prioritizing their interests over other stockholders[188] - Lack of substantial research coverage by securities analysts can negatively influence the trading market and price of the common stock[191] - Failure to meet the continued listing standards of the Nasdaq Global Market could lead to delisting, adversely affecting the market price and liquidity of the common stock[192] - Stockholder activism (e.g., director nominations) and securities litigation can result in substantial costs, divert management's attention, and negatively impact the trading price and volatility of the common stock[193][194] - Certain provisions in the company's organizational documents and a director nomination agreement with the Tricor Funds may delay or prevent a change in control and make it difficult for stockholders other than the majority stockholders to change the composition of the board of directors[195][197][198][199] General Risk Factors This section addresses general risks related to compliance with complex laws and regulations and potential legal proceedings - The company is required to comply with numerous evolving and complex laws and regulations in the United States and potentially other countries, covering financial reporting, corporate governance, data privacy, tax, trade, environmental, labor, and health and safety, with non-compliance potentially leading to fines or sanctions[201][202] - CPI is exposed to business risks associated with legal and regulatory proceedings, lawsuits, and other claims in the normal course of business, where an adverse ruling, settlement, or unfavorable development could materially adversely affect its business and financial results[203] Item 1B. Unresolved Staff Comments No unresolved staff comments were reported for this period - No unresolved staff comments were reported[204] Item 2. Properties CPI operates four leased US facilities totaling approximately 386,000 square feet for card production, personalization, and fulfillment services CPI Facilities | Location | Operations | Square Footage | Ownership | | :------------------ | :---------------------------------------------------------------------- | :------------- | :-------- | | Littleton, Colorado | Financial Payment Card production, corporate facility | 65,000 | Leased | | Roseville, Minnesota | Financial Payment Card production, card personalization, packaging, fulfillment | 205,000 | Leased | | Fort Wayne, Indiana | Financial Payment Card production | 45,000 | Leased | | Nashville, Tennessee | Financial Payment Card personalization, instant issuance, fulfillment | 71,000 | Leased | - The company operates facilities comprising approximately 386,000 square feet in the United States[53] Item 3. Legal Proceedings CPI is involved in a patent infringement lawsuit by SPS, currently stayed pending IPR proceedings, with an unestimable outcome - Smart Packaging Solutions, SA (SPS) filed a patent infringement lawsuit against CPI in April 2021, alleging infringement of four patents related to antenna technology[206] - The lawsuit is currently stayed pending Inter Parties Review (IPR) proceedings concerning each of the four patents, with proceedings scheduled to run through September 2023[208] - CPI intends to defend the suit vigorously should the patents survive review, but the outcome or possible loss associated with this matter is not currently reasonably estimable[208][130] Item 4. Mine Safety Disclosures This item is not applicable to CPI Card Group Inc - This item is not applicable to the registrant[210] PART II Part II details market information for common equity, management's discussion and analysis, and consolidated financial statements Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CPI's common stock trades on Nasdaq under 'PMTS', with 11,391,580 shares outstanding and no expected cash dividends - CPI's common stock trades on the Nasdaq Global Market under the symbol 'PMTS'[212] Common Stock Metrics (as of March 1, 2023) | Metric | Value | | :------------------------- | :------------ | | Stockholders of record (as of March 1, 2023) | 25 | | Shares outstanding (as of March 1, 2023) | 11,391,580 | - The company does not currently expect to pay any cash or other dividends to holders of its common stock in the near future[214] - No shares were repurchased during the years ended December 31, 2022, and 2021[215] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[216] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of CPI's financial condition, operational results, liquidity, and critical accounting policies - CPI is a payment technology company and leading provider of comprehensive Financial Payment Card solutions in the United States[217] - Key factors impacting financial performance include labor availability issues, inflationary pressure in the supply chain, delays and difficulties in sourcing key materials (e.g., microchips, ROBP), and increased compliance costs as an accelerated filer[222][223][224][225] - The company's business consists of three reportable segments: Debit and Credit, Prepaid Debit, and Other (corporate expenses)[228][229][230] Company Overview CPI Card Group Inc. is a leading US provider of comprehensive financial payment card solutions with strong market positions - CPI Card Group Inc. is a leading US provider of comprehensive Financial Payment Card solutions, including credit, debit, and Prepaid Debit Cards, with over 20 years of experience[217][219] - The company holds strong positions in the U.S. prepaid debit, small to mid-sized financial institutions, large issuer, and fintech markets[222] - Key factors affecting financial performance include labor availability issues, inflationary pressure in the supply chain, delays and difficulties in sourcing key materials (e.g., microchips, ROBP), and increased compensation and professional fees due to accelerated filer status and Sarbanes-Oxley Act compliance[222][223][224][225] COVID-19 Update The COVID-19 pandemic continues to impact CPI's supply chain, production, labor, and costs, with uncertain long-term implications - The COVID-19 pandemic continues to impact CPI's supply chain, production lead times, labor availability, employee absenteeism, and costs, with long-term implications on results of operations and financial performance remaining uncertain[225][335] - CPI deferred employer social security payments in 2020 in accordance with the CARES Act, with the second and final installment repayment made in the fourth quarter of 2022[227][336] Segment Overview CPI operates through Debit and Credit, Prepaid Debit, and Other segments, each audited for PCI Security Standards compliance - The Debit and Credit segment primarily produces Financial Payment Cards (EMV, non-EMV, eco-focused, metal) and provides integrated card services, including personalization, fulfillment, print-on-demand, and Card@Once® instant issuance solutions[228] - The Prepaid Debit segment primarily provides integrated prepaid card services, including tamper-evident security packaging, to Prepaid Debit Card providers[229] - Both Debit and Credit and Prepaid Debit segment operations are audited for compliance with the standards of the PCI Security Standards Council by one or more Payment Card Brands[228][229] - The 'Other' segment includes corporate general and administrative expenses[230] Key Components of Results of Operations This section defines key components of CPI's financial results, including net sales, cost of sales, and operating expenses - Net sales include revenue from products (Financial Payment Cards, Card@Once systems, private label, retail gift cards) and services (personalization, fulfillment, tamper-evident security packaging, SaaS personalization)[232][233][234] - Cost of sales encompasses direct and indirect costs of products and services, including raw materials (microchips, antennas), labor, equipment, facilities, overhead, depreciation, amortization, leases, and transport costs[235] - Operating expenses are primarily selling, general and administrative (SG&A) expenses, covering personnel, benefits, stock-based compensation, bad debt, legal, IT, customer service, human resources, research and development, and administrative fees, along with depreciation and amortization[237] - Key profitability metrics include Gross Profit, Gross Margin, Income from Operations, Operating Margin, Other Expense (net), Income Tax Expense, and Net Income[236][238][239][240][241] Results of Operations This section analyzes CPI's consolidated financial performance for 2022 versus 2021, detailing net sales, gross profit, and net income Consolidated Results of Operations (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | $ Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :--------------------- | :------- | | Net sales | $475,745 | $375,119 | $100,626 | 26.8% | | Products Net sales | $281,190 | $199,586 | $81,604 | 40.9% | | Services Net sales | $194,555 | $175,533 | $19,022 | 10.8% | | Cost of sales | $299,978 | $233,693 | $66,285 | 28.4% | | Gross profit | $175,767 | $141,426 | $34,341 | 24.3% | | Operating expenses | $96,637 | $81,962 | $14,675 | 17.9% | | Income from operations | $79,130 | $59,464 | $19,666 | 33.1% | | Interest, net | $(29,616) | $(30,608) | $992 | (3.2%) | | Loss on debt extinguishment | $(474) | $(5,048) | $4,574 | * | | Income before taxes | $49,147 | $23,822 | $25,325 | * | | Income tax expense | $(12,607) | $(7,881) | $(4,726) | * | | Net income | $36,540 | $15,941 | $20,599 | 129.2% | | Basic EPS | $3.24 | $1.42 | | | | Diluted EPS | $3.11 | $1.36 | | | Net Sales by Segment (Year Ended December 31, 2022 vs. 2021) | Segment | 2022 ($ thousands) | 2021 ($ thousands) | $ Change ($ thousands) | % Change | | :-------------- | :----------------- | :----------------- | :--------------------- | :------- | | Debit and Credit | $390,559 | $296,204 | $94,355 | 31.9% | | Prepaid Debit | $86,136 | $79,213 | $6,923 | 8.7% | - Debit and Credit net sales increased by 31.9% primarily due to increased volumes from existing customers, new portfolio acquisitions, the transition to eco-focused and other contactless cards, and higher Card@Once instant issuance sales[242] Gross Profit and Gross Margin by Segment (Year Ended December 31, 2022 vs. 2021) | Segment | 2022 Gross Profit ($ thousands) | 2022 Gross Margin (%) | 2021 Gross Profit ($ thousands) | 2021 Gross Margin (%) | $ Change ($ thousands) | % Change | | :-------------- | :------------------------------ | :-------------------- | :------------------------------ | :-------------------- | :--------------------- | :------- | | Debit and Credit | $144,214 | 36.9% | $110,006 | 37.1% | $34,208 | 31.1% | | Prepaid Debit | $31,553 | 36.6% | $31,420 | 39.7% | $133 | 0.4% | | Total | $175,767 | 36.9% | $141,426 | 37.7% | $34,341 | 24.3% | - Gross profit margin decreased slightly for both segments in 2022, primarily due to higher production costs (materials), partially offset by operating leverage from higher sales and price increases[246][247] - Other operating expenses increased by $9.6 million (20.4%) in 2022, mainly due to a $7.2 million increase in compensation expenses (employee headcount, higher salaries) and $2.2 million in stock compensation, along with a $2.4 million increase in professional services fees related to Sarbanes-Oxley Act compliance[251][252] - Net income for 2022 was $36.5 million, a 129.2% increase from $15.9 million in 2021, driven by higher gross profit and a decrease in other expenses (due to debt refinancing costs incurred in 2021), partially offset by increased operating expenses and income tax expense[260] Liquidity and Capital Resources This section discusses CPI's cash position, working capital, debt facilities, and cash flow activities for 2022 versus 2021 Cash and Working Capital (as of December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | Change ($ thousands) | | :---------------------- | :----------------- | :----------------- | :------------------- | | Cash and cash equivalents | $11,037 | $20,683 | $(9,646) | | Working capital | $99,600 | $80,900 | $18,700 | - The ABL Revolver's available borrowing capacity was increased to $75.0 million in March 2022, and its interest rate provisions were revised to replace LIBOR with SOFR[263][264] - CPI redeemed $20.0 million of Senior Notes in March 2022 using ABL Revolver capacity and purchased an additional $5.0 million in December 2022 using cash on hand, resulting in $285.0 million aggregate principal amount outstanding on Senior Notes as of December 31, 2022[271][272] Cash Flow Activities (Year Ended December 31, 2022 vs. 2021) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | | :------------------------- | :----------------- | :----------------- | | Cash provided by operating activities | $31,336 | $20,229 | | Cash used in investing activities | $(17,772) | $(9,918) | | Cash used in financing activities | $(23,163) | $(47,232) | | Net decrease in cash and cash equivalents | $(9,646) | $(36,920) | - Cash provided by operating activities increased to $31.3 million in 2022, partially offset by working capital increases, including a $19.7 million increase in accounts receivable and a $10.7 million increase in inventories[274] Material Cash Requirements This section outlines CPI's projected debt service requirements and outstanding purchase obligations, including a chip supplier agreement Projected Debt Service Requirements (as of December 31, 2022) | Metric | Total ($ thousands) | Next 12 Months ($ thousands) | | :----------------------------------- | :------------------ | :--------------------------- | | Principal and interest payments on borrowings | $377,400 | $25,200 | Outstanding Purchase Obligations (as of December 31, 2022) | Metric | Total ($ thousands) | Next 12 Months ($ thousands) | | :----------------------------------- | :------------------ | :--------------------------- | | Outstanding purchase obligations | $221,700 | $94,900 | | Chip supplier capacity reservation agreement | $194,900 | $69,600 | - The $194.9 million capacity reservation agreement with a chip supplier commits CPI to purchase a set quantity of chips from 2023 through 2025, with the supplier subject to liquidated damages for non-delivered products[286] Cyclical and Seasonal Nature of Business CPI's business is influenced by economic cycles and seasonal demand, with higher net sales typically in Q3 and Q4 - CPI's business is influenced by broader cyclical changes in the economy, with economic downturns potentially decreasing demand for products and services, and upturns increasing it[287] - Net sales are historically higher in the third and fourth quarters due to increased consumer purchases of Prepaid Debit Cards for the holiday season and the timing related to the production of health insurance and health savings account cards[287] Critical Accounting Policies and Estimates This section details CPI's significant accounting policies and estimates for revenue, inventory, income taxes, and other financial items - The company's financial statements rely on significant estimates and assumptions for items such as property and equipment, goodwill and intangible assets, leases, inventory valuation, deferred taxes, revenue recognition, and uncertain tax positions[288] - Product net sales are recognized over time as cards are produced for specific customers with no alternative use, while service net sales are recognized as services are performed, with unbilled revenue estimated using historical margins[289][290] - Income tax accounting involves significant judgment in computing deferred tax assets and liabilities, maintaining valuation allowances, and establishing reserves for tax-related uncertainties[293][294][295] - The valuation allowance as of December 31, 2022, primarily relates to a capital loss carryover from the sale of a foreign subsidiary and a partial valuation allowance on certain state interest deduction limitations[296] Recent Accounting Pronouncements CPI adopted ASU 2016-13, 'Measurement of Credit Losses on Financial Instruments,' effective January 1, 2023, with no material impact - CPI adopted ASU 2016-13, 'Measurement of Credit Losses on Financial Instruments,' effective January 1, 2023, which changes the credit loss recognition model from an incurred loss model to an expected loss model[363] - The adoption of ASU 2016-13 did not have a material impact on the company's consolidated financial position or results of operations[363] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not required due to the company's smaller reporting company status - This item is not required due to the company's smaller reporting company status[299] Item 8. Financial Statements and Supplementary Data This section presents CPI's audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes - The section includes the audited consolidated financial statements of CPI Card Group Inc. for the years ended December 31, 2022 and 2021[303] - KPMG LLP issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[303][304][314] - A critical audit matter identified was the evaluation of the company's assessment of non-deductible excess compensation under IRC Section 162(m), which involved subjective auditor judgment and specialized tax professionals[307][310] Reports of Independent Registered Public Accounting Firm KPMG LLP issued unqualified opinions on CPI's consolidated financial statements and internal control over financial reporting - KPMG LLP issued an unqualified opinion on CPI's consolidated financial statements for the years ended December 31, 2022 and 2021, affirming fair presentation in conformity with U.S. GAAP[303] - KPMG LLP also expressed an unqualified opinion on the effectiveness of CPI's internal control over financial reporting as of December 31, 2022[304][314] - The evaluation of non-deductible excess compensation under IRC Section 162(m) was identified as a critical audit matter, requiring subjective auditor judgment and the involvement of tax professionals with specialized skills and knowledge[307][310] Consolidated Balance Sheets This section presents CPI's consolidated balance sheets, highlighting total assets, liabilities, and stockholders' deficit Consolidated Balance Sheet Highlights (as of December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | Change ($ thousands) | | :-------------------------- | :----------------- | :----------------- | :------------------- | | Total assets | $296,666 | $268,140 | $28,526 | | Current assets | $167,570 | $145,701 | $21,869 | | Cash and cash equivalents | $11,037 | $20,683 | $(9,646) | | Accounts receivable, net | $80,583 | $60,953 | $19,630 | | Inventories | $68,399 | $58,009 | $10,390 | | Total liabilities | $378,743 | $389,160 | $(10,417) | | Long-term debt | $285,522 | $303,626 | $(18,104) | | Total stockholders' deficit | $(82,077) | $(121,020) | $38,943 | - Total assets increased by $28.5 million to $296.7 million in 2022, driven by increases in accounts receivable and inventories[322] - Total liabilities decreased by $10.4 million to $378.7 million, primarily due to a reduction in long-term debt[322] - Stockholders' deficit improved by $38.9 million to $(82.1) million, reflecting accumulated earnings during the year[322] Consolidated Statements of Operations and Comprehensive Income This section presents CPI's consolidated statements of operations and comprehensive income, detailing net sales and net income Consolidated Statements of Operations Highlights (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :---------------------- | :----------------- | :----------------- | | Total net sales | $475,745 | $375,119 | | Products net sales | $281,190 | $199,586 | | Services net sales | $194,555 | $175,533 | | Gross profit | $175,767 | $141,426 | | Income from operations | $79,130 | $59,464 | | Net income | $36,540 | $15,941 | | Basic earnings per share | $3.24 | $1.42 | | Diluted earnings per share | $3.11 | $1.36 | - Net income for the year ended December 31, 2022, was $36.5 million, a 129.2% increase compared to $15.9 million in the prior year[324] - Total net sales grew by 26.8% to $475.7 million in 2022, driven by a 40.9% increase in product net sales and a 10.8% increase in services net sales[324] - Income from operations increased by 33.1% to $79.1 million in 2022[324] Consolidated Statements of Stockholders' Deficit This section presents CPI's consolidated statements of stockholders' deficit, showing changes in equity over the period Stockholders' Deficit Highlights (as of December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :-------------------------- | :----------------- | :----------------- | | Total stockholders' deficit | $(82,077) | $(121,020) | | Accumulated earnings (loss) | $26,291 | $(10,249) | | Common Stock Shares Outstanding | 11,390,355 | 11,255,466 | - The total stockholders' deficit improved from $(121.0) million in 2021 to $(82.1) million in 2022, primarily due to the net income generated during the year[328] - Accumulated earnings shifted from a loss of $(10.2) million in 2021 to earnings of $26.3 million in 2022[328] Consolidated Statements of Cash Flows This section presents CPI's consolidated statements of cash flows, detailing operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Year Ended December 31, 2022 vs. 2021) | Activity | 2022 ($ thousands) | 2021 ($ thousands) | | :------------------------- | :----------------- | :----------------- | | Cash provided by operating activities | $31,336 | $20,229 | | Cash used in investing activities | $(17,772) | $(9,918) | | Cash used in financing activities | $(23,163) | $(47,232) | | Net decrease in cash and cash equivalents | $(9,646) | $(36,920) | | Cash and cash equivalents, end of period | $11,037 | $20,683 | - Cash provided by operating activities increased to $31.3 million in 2022, up from $20.2 million in 2021, benefiting from higher net income but partially offset by increases in accounts receivable and inventories[274][331] - Cash used in investing activities increased to $17.8 million in 2022, primarily due to higher capital expenditures for plant, equipment, and leasehold improvements[275][331] - Cash used in financing activities decreased significantly to $23.2 million in 2022, compared to $47.2 million in 2021, which included substantial debt refinancing activities[277][278][331] Notes to Consolidated Financial Statements This section provides detailed notes to CPI's consolidated financial statements, covering policies, segments, and debt - The notes provide a detailed overview of CPI's business as a payment technology company and its reportable segments: Debit and Credit, Prepaid Debit, and Other[332][334] - Significant accounting policies include revenue recognition (products over time, services as performed), inventory valuation (lower of cost or net realizable value), and income tax accounting (deferred taxes, valuation allowances, uncertain tax positions)[356][358][343][351][352][353] Net Sales by Segment (Year Ended December 31, 2022 vs. 2021) | Segment | 2022 Total ($ thousands) | 2021 Total ($ thousands) | | :-------------- | :----------------------- | :----------------------- | | Debit and Credit | $390,559 | $296,204 | | Prepaid Debit | $86,136 | $79,213 | Inventories (as of December 31, 2022 vs. 2021) | Category | 2022 ($ thousands) | 2021 ($ thousands) | | :-------------- | :----------------- | :----------------- | | Raw materials | $61,434 | $54,254 | | Finished goods | $10,300 | $6,778 | | Inventory reserve | $(3,335) | $(3,023) | | Total | $68,399 | $58,009 | Long-Term Debt (as of December 31, 2022 vs. 2021) | Debt Type | 2022 ($ thousands) | 2021 ($ thousands) | | :-------------- | :----------------- | :----------------- | | Senior Notes | $285,000 | $310,000 | | ABL Revolver | $5,000 | $0 | | Total long-term debt, net of current maturities | $285,522 | $303,626 | - The effective income tax rate decreased to 25.7% in 2022 from 33.1% in 2021, primarily due to a decrease in unrecognized tax benefits from the lapse of the statute of limitations and favorable settlements with state tax authorities[396] Stock-Based Compensation Expense (Year Ended December 31, 2022 vs. 2021) | Metric | 2022 ($ thousands) | 2021 ($ thousands) | | :---------------------- | :----------------- | :----------------- | | Compensation expense | $3,479 | $1,250 | | Total unrecognized compensation expense (as of Dec 31, 2022) | $1,477 | N/A | Segment EBITDA (Year Ended December 31, 2022 vs. 2021) | Segment | 2022 EBITDA ($ thousands) | 2021 EBITDA ($ thousands) | | :-------------- | :------------------------ | :------------------------ | | Debit and Credit | $118,478 | $87,499 | | Prepaid Debit | $27,844 | $29,156 | | Other | $(52,673) | $(47,127) | | Total | $93,649 | $69,528 | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported - No changes in or disagreements with accountants on accounting and financial disclosure were reported[443] Item 9A. Controls and Procedures Management concluded CPI's disclosure controls and procedures were effective as of December 31, 2022, after remediating prior material weaknesses - Management, including the CEO and CFO, concluded that CPI's disclosure controls and procedures were effective as of December 31, 2022[444] - Previously disclosed material weaknesses in internal control over financial reporting, identified in 2021, were remediated as of December 31, 2022[448][452] - The material weaknesses included inadequate personnel experience in control design, ineffective general IT controls (user access administration, change management), ineffective journal entry controls (segregation of duties), and ineffective controls over sales price accuracy and purchasing process review/authorization[448][450] - Remediation efforts involved conducting trainings, hiring additional qualified resources, engaging an accounting firm, implementing system controls, enhancing user access and change management, and strengthening review and documentation processes for revenue and purchasing[451] Item 9B. Other Information No other information is reported under this item - No other information is reported under this item[454] Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - This item is not applicable[454] PART III Part III provides information on directors, executive compensation, security ownership, related transactions, and accountant fees Item 10. Directors, Executive Officers and Corporate Governance Information regarding CPI's directors, executive officers, and corporate governance is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[456] Item 11. Executive Compensation Information relating to the compensation of CPI's executive officers and directors is incorporated by reference from the Proxy Statement - Information relating to executive officer and director compensation is incorporated by reference to the Proxy Statement[457] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information relating to the security ownership of certain beneficial owners of CPI's common stock and the registrant's management is incorporated by reference from the Proxy Statement - Information relating to security ownership of certain beneficial owners of common stock and the registrant's management is incorporated by reference to the Proxy Statement[459] Item 13. Certain Relationships and Related Transactions, and Director Independence Information relating to certain relationships and related transactions, as well as director independence, is incorporated by reference from the Proxy Statement - Information relating to certain relationships and related transactions, and director independence is incorporated by reference to the Proxy Statement[460] Item 14. Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement[461] PART IV Part IV lists exhibits, financial statement schedules, and confirms no Form 10-K Summary is provided Item 15. Exhibits and Financial Statement Schedules This item lists filed financial statements and a comprehensive list of exhibits, with schedules omitted as not required - The item includes the financial statements filed as a part of this document under Item 8, such as the Reports of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations and Comprehensive Income, Stockholders' Deficit, Cash Flows, and Notes to Consolidated Financial Statements[464] - A comprehensive list of exhibits is provided, including organizational documents (Certificate of Incorporation, Bylaws), debt agreements (Indenture, Credit Agreement), registration rights, director nomination agreements, indemnification agreements, various incentive plans, and employment agreements[465][468][469][470] - All financial statement schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto[464] Item 16. Form 10-K Summary No Form 10-K Summary is provided - No Form 10-K Summary is provided[472] Signatures This section contains the official signatures of the company's authorized officers and Board of Directors Signatures Details The Annual Report on Form 10-K is duly signed by CPI's authorized officers and Board of Directors as of March 8, 2023 - The Annual Report on Form 10-K is duly signed by the President, Chief Executive Officer, and Director (Scott Scheirman), Chief Financial Officer (Amintore Schenkel), Chief Accounting Officer (Donna Abbey), and members of the Board of Directors of CPI Card Group Inc.[476] - The report was signed on March 8, 2023[475][476]