poSecure(CMPO) - 2025 Q2 - Quarterly Report

EXPLANATORY NOTE REGARDING CHANGE TO EQUITY METHOD ACCOUNTING The company transitioned to the equity method for CompoSecure Holdings, L.L.C. (Holdings) due to a spin-off and Management Agreement, effective February 28, 2025 - Effective February 28, 2025, CompoSecure Holdings, L.L.C. (Holdings) is no longer consolidated in the Company's financial statements due to the spin-off of Resolute Holdings and a related Management Agreement Holdings' results are now accounted for under the equity method[10] - Under the equity method, Holdings' accounts are not reflected in the Company's consolidated balance sheets and statements of operations Instead, the Company's share of Holdings' earnings is reported as 'earnings from equity method investment,' and its carrying value as 'equity method investment' on the balance sheet[10] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements based on management's beliefs and assumptions, inherently subject to various risks and uncertainties - This report contains forward-looking statements based on management's beliefs and assumptions, which are inherently subject to risks, uncertainties, and assumptions and are not guarantees of performance[12][13] - Key factors that could cause actual results to differ materially include rapidly evolving domestic and global economic conditions, failure to retain existing customers, data and security breaches, system outages, inability to recruit qualified personnel, challenges in developing and commercializing new products (especially Arculus technology), supply chain disruptions, and risks related to the management of the business by Resolute Holdings[13][15] Part I. Financial Information This section presents the company's financial information, including statements and management's discussion and analysis Item 1. Financial Statements This section presents the unaudited consolidated financial statements of CompoSecure, Inc., including balance sheets, statements of operations, comprehensive income, stockholders' deficit, and cash flows, along with detailed notes The financial statements reflect significant changes due to the spin-off of Resolute Holdings and the subsequent accounting for CompoSecure Holdings, L.L.C. (Holdings) under the equity method, effective February 28, 2025 Consolidated Balance Sheets (Unaudited) The consolidated balance sheets reflect the company's financial position, highlighting assets, liabilities, and equity changes due to the spin-off | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------------- | :----------------------------- | :------------------------------- | :---------------------- | :--------- | | Total assets | 317,296 | 473,918 | (156,622) | -33.05% | | Total liabilities | 423,672 | 617,364 | (193,692) | -31.37% | | Total stockholders' deficit | (106,376) | (143,446) | 37,070 | 25.84% | | Cash and cash equivalents | 4,808 | 77,461 | (72,653) | -93.79% | | Accounts receivables | — | 47,449 | (47,449) | -100.00% | | Inventories, net | — | 44,833 | (44,833) | -100.00% | | Equity method investment | 44,739 | — | 44,739 | N/A | - The significant decrease in total assets and total liabilities is primarily due to the deconsolidation of Holdings and its subsidiaries, which are now accounted for as an equity method investment[10][18] Consolidated Statements of Operations (Unaudited) The consolidated statements of operations detail the company's financial performance, including net sales, gross profit, and net income, significantly impacted by deconsolidation | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net sales | — | 108,567 | (108,567) | -100.00% | | Gross profit | — | 56,072 | (56,072) | -100.00% | | (Loss) income from operations | (2,656) | 31,793 | (34,449) | -108.36% | | Other income (expense), net | (64,140) | 2,062 | (66,202) | -3210.57% | | (Loss) income before income taxes | (66,796) | 33,855 | (100,651) | -297.30% | | Income tax benefit (expense) | 1,762 | (258) | 2,020 | -782.95% | | (Loss) income before earnings in equity method investment | (65,034) | 33,597 | (98,631) | -293.57% | | Earnings in equity method investment | 38,909 | — | 38,909 | N/A | | Net (loss) income | (26,125) | 33,597 | (59,722) | -177.79% | | Net (loss) income attributable to CompoSecure, Inc. | (26,125) | 11,099 | (37,224) | -335.38% | | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- |\ | Net sales | 59,824 | 212,577 | (152,753) | -71.86% | | Gross profit | 28,749 | 111,285 | (82,536) | -74.17% | | Income from operations | 3,388 | 62,928 | (59,540) | -94.61% | | Other income (expense), net | (36,532) | (12,836) | (23,696) | 184.60% | | (Loss) income before income taxes | (33,144) | 50,092 | (83,236) | -166.17% | | Income tax (expense) benefit | (25,242) | 578 | (25,820) | -4467.13% | | (Loss) income before earnings in equity method investment | (58,386) | 50,670 | (109,056) | -215.24% | | Earnings in equity method investment | 53,753 | — | 53,753 | N/A | | Net (loss) income | (4,633) | 50,670 | (55,303) | -109.14% | | Net (loss) income attributable to CompoSecure, Inc. | (4,633) | 17,041 | (21,674) | -127.19% | - The 100% decrease in net sales and gross profit for the three months ended June 30, 2025, and significant decreases for the six-month period, are primarily due to the deconsolidation of Holdings, which is now accounted for under the equity method[19][160][171] - A new line item, 'Earnings in equity method investment,' reflects Holdings' performance, contributing $38,909 thousand for Q2 2025 and $53,753 thousand for H1 2025[19] - The company reported a net loss of $(26,125) thousand for Q2 2025 and $(4,633) thousand for H1 2025, a significant shift from net income in the prior year periods[19] Consolidated Statements of Comprehensive (Loss) Income (Unaudited) These statements present the company's comprehensive income or loss, including net income and other comprehensive income items | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net (loss) income | (26,125) | 33,597 | (59,722) | -177.79% | | Total other comprehensive loss | — | (595) | 595 | -100.00% | | Comprehensive (loss) income | (26,125) | 33,002 | (59,127) | -179.16% | | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net (loss) income | (4,633) | 50,670 | (55,303) | -109.14% | | Total other comprehensive loss | (502) | (143) | (359) | 251.05% | | Comprehensive (loss) income | (5,135) | 50,527 | (55,662) | -110.16% | - The company shifted from comprehensive income in 2024 to a comprehensive loss in 2025, mirroring the net loss reported, with a minor impact from unrealized loss on derivative interest rate swaps[20] Consolidated Statements of Stockholders' Deficit (Unaudited) These statements outline changes in stockholders' deficit, reflecting the impact of the deconsolidation and spin-off | Metric | December 31, 2024 ($ in thousands) | June 30, 2025 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------------- | :------------------------------- | :----------------------------- | :---------------------- | :--------- | | Total stockholders' deficit | (143,446) | (106,376) | 37,070 | 25.84% | | Additional paid-in-capital | 361,379 | 213,533 | (147,846) | -40.91% | | Accumulated deficit | (507,378) | (319,713) | 187,665 | 36.99% | - The deconsolidation of CompoSecure Holdings, L.L.C. resulted in a decrease of additional paid-in capital by $(138,443) thousand and an increase in accumulated deficit by $188,898 thousand as of March 31, 2025[22] - The spin-off of Resolute Holdings led to a decrease of additional paid-in capital by $(14,209) thousand and an increase in accumulated deficit by $3,400 thousand as of March 31, 2025[22] Consolidated Statements of Cash Flows (Unaudited) These statements detail the company's cash inflows and outflows from operating, investing, and financing activities | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net cash provided by operating activities | 3,048 | 66,000 | (62,952) | -95.38% | | Net cash used in investing activities | (60,690) | (3,520) | (57,170) | 1624.15% | | Net cash used in financing activities | (15,011) | (68,290) | 53,279 | -77.99% | | Net decrease in cash and cash equivalents | (72,653) | (5,820) | (66,843) | 1148.51% | | Cash and cash equivalents, end of period | 4,808 | 35,390 | (30,582) | -86.41% | - Cash used in investing activities increased substantially due to the deconsolidation of Holdings cash ($50,303 thousand) and Resolute Holdings cash ($10,000 thousand) as a result of the Spin-Off and Management Agreement[25] - Net cash provided by operating activities decreased significantly, primarily due to lower net income, non-cash charges, and the equity in net income of Holdings, partially offset by distributions from Holdings and changes in mark-to-market fair values[200] Notes to Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures supporting the consolidated financial statements 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS This note describes CompoSecure's business, recent corporate transactions, and the spin-off of Resolute Holdings - CompoSecure, Inc. manufactures and designs complex metal, composite, and proprietary financial transaction cards, and provides Arculus secure authentication and digital asset storage capabilities[26] - The company eliminated its dual-share class structure through the Tungsten Transactions on September 17, 2024, making Tungsten the majority owner with approximately 60% voting interest[29] - On February 28, 2025, CompoSecure completed the spin-off of Resolute Holdings Following this, Holdings is no longer consolidated and is accounted for under the equity method due to a Management Agreement with Resolute Holdings[30][33] - The spin-off resulted in an adjustment to the warrant exercise price, decreasing it from $11.50 to $7.97 per share, and the redemption trigger price from $18.00 to $14.47 per share[32] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the key accounting principles and policies applied in preparing the financial statements, including the new equity method for Holdings - The financial statements are prepared in conformity with U.S. GAAP and SEC rules, with all intercompany accounts and transactions eliminated[34] - Effective February 28, 2025, Holdings is accounted for under the equity method because it is now considered a Variable Interest Entity (VIE) for which CompoSecure is not the primary beneficiary, following the Spin-Off and Management Agreement[41] - Revenue is recognized when performance obligations are satisfied, typically upon transfer of control of goods to customers, and is measured net of variable consideration such as discounts and rebates[45][48] - The Company is assessing the impact of ASU 2025-03 (determining accounting acquirer in VIE acquisition) and ASU 2024-03 (disaggregation of income statement expenses) ASU 2023-09 (income tax disclosures) was adopted on January 1, 2025, without material impact[54][55][56] 3. INVENTORIES This note details the company's inventory composition and the impact of deconsolidation on its reporting | Inventory Class | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :---------------- | :----------------------------- | :------------------------------- | | Raw materials | — | 46,109 | | Work in process | — | 1,024 | | Finished goods | — | 505 | | Inventory reserve | — | (2,805) | | Total | — | 44,833 | - CompoSecure, Inc. no longer reports inventories on its consolidated balance sheet as of June 30, 2025, due to the change to equity method accounting for Holdings[59] 4. PROPERTY AND EQUIPMENT This note provides information on the company's property and equipment, net, and the effect of equity method accounting | Asset Class | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :------------------------------ | :----------------------------- | :------------------------------- | | Total gross property and equipment | — | 54,272 | | Less: Accumulated depreciation and amortization | — | (30,824) | | Property and equipment, net | — | 23,448 | - CompoSecure, Inc. no longer reports property and equipment on its consolidated balance sheet as of June 30, 2025, due to the adoption of equity method accounting for Holdings[60] 5. EQUITY METHOD INVESTMENT This note explains the company's investment in Holdings, accounted for under the equity method, and its financial performance - CompoSecure's 100% ownership in Holdings is accounted for as an equity method investment, with a carrying value of $44,739 thousand as of June 30, 2025[61][62] - The initial carrying value was $0, as Holdings waived collection of advances made to CompoSecure prior to deconsolidation[61] | Holdings Financials | Three Months Ended June 30, 2025 ($ in thousands) | Period from Feb 28, 2025 through June 30, 2025 ($ in thousands) | | :-------------------------- | :------------------------------------------ | :---------------------------------------------------------- | | Net sales | 119,592 | 163,657 | | Gross profit | 68,800 | 94,599 | | Income from operations | 41,018 | 56,740 | | Net income | 38,909 | 53,753 | | Holdings Financial Position | June 30, 2025 ($ in thousands) | | :-------------------------- | :----------------------------- | | Total assets | 243,432 | | Total liabilities | 248,836 | | Total members' deficit | (5,404) | 6. DEBT This note details the company's and Holdings' debt obligations, including credit facilities and interest rate swaps - All $130,000 thousand of Exchangeable Notes were surrendered and exchanged for 13,587,565 shares of Class A Common Stock prior to November 29, 2024[66] - Holdings refinanced its credit facility on August 7, 2024, establishing a $330,000 thousand 2024 Credit Facility, comprising a $200,000 thousand term loan and a $130,000 thousand revolving credit facility, maturing on August 7, 2029[70] | Debt Balance (CompoSecure) | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :------------------------- | :----------------------------- | :------------------------------- | | Term loan balance | — | 197,500 | | Total long term debt | — | 184,389 | - Holdings was in compliance with all financial covenants (minimum interest coverage ratio, maximum total debt to EBITDA ratio, minimum fixed charge coverage ratio) as of June 30, 2025, and December 31, 2024[76] - Holdings has a $125,000 thousand notional interest rate swap (December 2023 Swap) designated as a cash flow hedge, set to expire in December 2025[78] 7. EQUITY STRUCTURE This note describes the company's equity structure, including common stock, warrants, and the impact of the spin-off - In May 2025, the Company increased its authorized Class A Common Stock to 1,000,000,000 shares and eliminated Class B Common Stock[80][81] - As of June 30, 2025, there were 102,357,732 shares of Class A Common Stock issued and outstanding[81] - The warrant exercise price was adjusted from $11.50 to $7.97 per share, and the redemption trigger price from $18.00 to $14.47 per share, effective February 28, 2025, due to the spin-off of Resolute Holdings[84] - As of June 30, 2025, there were 21,989,079 warrants outstanding[84] - The Company no longer has a non-controlling interest as of June 30, 2025, and December 31, 2024, following the exchange of all Class B shares for Class A shares in the Tungsten Transactions[87] 8. EQUITY COMPENSATION This note outlines the company's stock-based compensation plans and related expenses | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Total stock-based compensation expense | 137 | 5,238 | (5,101) | -97.38% | | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Total stock-based compensation expense | 3,987 | 9,635 | (5,648) | -58.62% | - The decrease in stock-based compensation expense is primarily due to expenses related to Holdings and Resolute Holdings employees now being recognized at those entities post-Spin-Off[88] - Outstanding PSUs, RSUs, and stock options were adjusted due to the Spin-Off to maintain equal value for award holders, with no incremental compensation cost recognized[90] - The second phase of Earnouts (up to 3,750,000 shares) will be earned if Class A Common Stock trades at or above $17.10 per share (adjusted from $20.00) for 20 trading days within a 30-day period ending December 30, 2025[96] 9. RETIREMENT PLAN This note provides details on the company's retirement plan and associated expenses | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Retirement plan expense | — | 461 | (461) | -100.00% | | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Retirement plan expense | 563 | 1,052 | (489) | -46.48% | - Effective January 1, 2025, the Company increased its 401(k) matching contribution to 100% of the first 3% and 50% of the next 2% of employee contributions[98] 10. FAIR VALUE MEASUREMENTS This note discusses the valuation of financial instruments, including warrants and earnout consideration | Liability | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | | Warrants | 137,440 | 104,231 | | Earnout consideration | 20,024 | 20,533 | - The derivative asset for interest rate swaps is no longer reflected on CompoSecure's balance sheet as of June 30, 2025, due to the deconsolidation of Holdings[100][101] - The warrant liability was revalued, resulting in a $35,515 thousand expense for the six months ended June 30, 2025[103] - The earnout consideration liability was revalued, resulting in a $(509) thousand income for the six months ended June 30, 2025[105] Key Assumptions for Earnout Consideration Valuation (June 30, 2025): | Assumption | Value | | :---------------------- | :------ | | Valuation date share price | $14.09 | | Risk-free interest rate | 4.29 % | | Expected volatility | 42.5 % | | Expected dividends | 0 % | | Expected term (years) | 0.49 years | 11. GEOGRAPHIC INFORMATION AND CONCENTRATIONS This note provides insights into the company's net sales by region and customer/vendor concentrations | Net Sales by Region | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Domestic | — | 85,184 | (85,184) | -100.00% | | International | — | 23,383 | (23,383) | -100.00% | | Total | — | 108,567 | (108,567) | -100.00% | | Net Sales by Region | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Domestic | 54,480 | 177,974 | (123,494) | -69.39% | | International | 5,344 | 34,603 | (29,259) | -84.56% | | Total | 59,824 | 212,577 | (152,753) | -71.86% | - Holdings generated $119,592 thousand of net sales for the three months ended June 30, 2025, with $104,300 thousand from domestic sales and $15,300 thousand from international sales[160][162][163] - Four customers individually accounted for more than 10% of the Company's revenue, totaling 70.0% of total revenue for the six months ended June 30, 2025[107] - Three individual vendors accounted for more than 10% of purchases of supplies, totaling approximately 31% of total purchases for the six months ended June 30, 2025[108] 12. INCOME TAXES This note details the company's income tax provisions, effective tax rates, and the impact of the spin-off | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Income tax benefit (expense) | 1,762 | (258) | 2,020 | -782.95% | | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Income tax (expense) benefit | (25,242) | 578 | (25,820) | -4467.13% | - The significant increase in income tax expense for the six months ended June 30, 2025, was primarily related to a taxable gain on appreciated property resulting from the Spin-Off[113][179] - The Company's estimated annual effective tax rate, before discrete items, was 32.4% for the six months ended June 30, 2025, with discrete items impacting it by 67.0%[111] 13. NET (LOSS) EARNINGS PER SHARE This note presents the calculation of basic and diluted net earnings per share, reflecting the recent accounting changes | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----- | | Net (loss) income per share—basic | $(0.26) | $0.44 | $(0.70) | | Net (loss) income per share—diluted | $(0.26) | $0.32 | $(0.58) | | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Change | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----- | | Net (loss) income per share—basic | $(0.05) | $0.74 | $(0.79) | | Net (loss) income per share—diluted | $(0.05) | $0.49 | $(0.54) | - The shift to net loss per share is primarily due to the deconsolidation of Holdings and related accounting changes[19][116] - Potentially dilutive securities, including 21,989,079 warrants, 4,386,097 earnout consideration shares, and 1,936,232 equity awards, were excluded from diluted EPS calculation for the six months ended June 30, 2025, due to their anti-dilutive effect[117] 14. COMMITMENTS AND CONTINGENCIES This note outlines the company's contractual obligations, including the Tax Receivable Agreement, and legal proceedings Tax Receivable Agreement (TRA) Expected Payments: | Year | Amount ($ in thousands) | | :------------------------------------------ | :---------------------- | | 2025 (excluding H1 2025) | 436 | | 2026 | 14,122 | | 2027 | 14,283 | | 2028 | 14,516 | | 2029 | 14,762 | | Later years | 190,851 | | Total Payments | 248,970 | - The Company made a $4,735 thousand payment related to the tax receivable agreement liability during the six months ended June 30, 2025[120] - As of August 4, 2025, the Company was not a party to any material pending legal proceedings, other than ordinary routine claims incidental to the business[216] 15. SEGMENT REPORTING This note describes the company's operating and reportable segments, focusing on the equity method investment in Holdings - Subsequent to the Spin-Off, CompoSecure, Inc. has one operating segment and one reportable segment: the equity method investment in Holdings[124] - The Company's corporate entity is not considered an operating segment as its operations do not generate revenues and are limited to fair value adjustments related to warrant and earnout liabilities[125] - The Chief Operating Decision Maker (CODM), the CEO, evaluates Holdings' performance primarily based on net sales, gross profit, and net (loss) income[126] Holdings' Results of Operations (Six Months Ended June 30, 2025): | Metric | Amount ($ in thousands) | | :-------------------------- | :---------------------- | | Net sales | 163,657 | | Gross profit | 94,599 | | Income from operations | 56,740 | | Net income | 53,753 | 16. RELATED PARTY TRANSACTIONS This note details transactions and agreements with related parties, including Resolute Holdings - Following the Spin-Off, CompoSecure and Resolute Holdings are under common control by Tungsten[129] - Under the Management Agreement, Holdings pays Resolute Holdings a quarterly management fee equal to 2.5% of Holdings' last twelve months' Adjusted EBITDA[130] - The Management Fee for the three months ended June 30, 2025, was $3,419 thousand, and $4,548 thousand for the period from the Spin-Off date to June 30, 2025[131] - CompoSecure's primary sources of liquidity are its existing cash and cash equivalents balances and funding (distributions) from its wholly-owned subsidiary, Holdings[136] 17. SUBSEQUENT EVENT This note discloses significant events occurring after the balance sheet date, such as new tax legislation - On July 4, 2025, the 'One Big, Beautiful Bill Act' was signed into law, permanently extending certain expiring provisions of the Tax Cuts and Jobs Act and restoring favorable tax treatment for some business provisions[138] - The Company is currently evaluating the potential effects of this new legislation on its tax positions and financial reporting[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on CompoSecure, Inc.'s financial condition and results of operations, highlighting the significant impact of the spin-off of Resolute Holdings and the subsequent equity method accounting for Holdings It details the company's business overview, recent developments, economic conditions, key components of results, and a comparative analysis of financial performance for the three and six months ended June 30, 2025, versus 2024, along with discussions on liquidity and capital resources Overview This section provides a general overview of CompoSecure's business, its market position, and customer base - CompoSecure, Inc., through its subsidiary Holdings, creates innovative, highly differentiated, and customized financial payment card products and provides next-generation payment technology, security, and authentication solutions[140] - The Company's customers primarily consist of leading international and domestic banks and other payment card issuers in the U.S., Europe, Asia, Latin America, Canada, and the Middle East[140] - CompoSecure has established a niche position in the financial payment card market with over 20 years of innovation and experience[140] Recent Developments This section highlights key recent events, including the spin-off of Resolute Holdings and its accounting implications - On February 28, 2025, CompoSecure completed the spin-off of Resolute Holdings, distributing its common stock pro rata to CompoSecure Class A Common Stockholders[141] - In connection with the Spin-Off, Holdings entered into a Management Agreement with Resolute Holdings, under which Resolute Holdings provides management services in exchange for quarterly management fees based on 2.5% of Holdings' Adjusted EBITDA[141] - Following the Spin-Off and Management Agreement, CompoSecure no longer consolidates Holdings and now accounts for its investment in Holdings using the equity method[144] - The Spin-Off resulted in an adjustment to the warrant price, decreasing it from $11.50 to $7.97 per share, and the redemption trigger price from $18.00 to $14.47 per share[142][143] Economic Conditions - globally and in the digital asset marketplace This section discusses the global economic environment and its potential impact on the company's operations and the digital asset market - The Company operates in uncertain and volatile global economic conditions, including geopolitical conflicts (Ukraine, Israel-Gaza), sustained inflation, recession concerns, and supply chain disruptions, making future business activity forecasting difficult[145] - Potential for further U.S. tariffs or other trade restrictions, particularly with China, could increase raw material costs and materially adversely affect the Company's business, financial condition, and results of operations[146] - The rapidly evolving digital assets industry presents uncertainty for the anticipated ramp-up of the Arculus technology, leading the Company to take a measured approach to investments[147] Key Components of Results of Operations This section explains the primary drivers and components of the company's financial performance post-Spin-Off - Post-Spin-Off, CompoSecure's operations are limited to non-revenue generating activities such as stock market listing, public company compliance, tax receivable agreement obligations, and earnout consideration[149] - Net sales are primarily generated from the design and manufacturing of metal cards and Prelams, recognized net of discounts and allowances[150] - Cost of sales includes direct and indirect manufacturing costs, raw materials, labor, equipment, facilities, operational overhead, depreciation, amortization, and shipping[151] - Earnings in Holdings Equity Method Investment represents the net income of Holdings attributable to the Company, following the shift to equity method accounting[156] Factors Affecting the Company's Operating Results This section outlines various internal and external factors that influence the company's operating performance and future success - The Company's performance and future success are dependent on various factors, including those discussed in the 'Risk Factors' and 'Cautionary Note Regarding Forward-Looking Statements' sections of this report[158] Results of Operations This section provides a comparative analysis of the company's financial performance for the reported periods Three Months Ended June 30, 2025 compared with Three Months Ended June 30, 2024 This section compares the company's financial results for the three months ended June 30, 2025, against the prior year period | Metric | Three Months Ended June 30, 2025 ($ in thousands) | Three Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net sales | — | 108,567 | (108,567) | -100.00% | | Gross profit | — | 56,072 | (56,072) | -100.00% | | Operating expenses | 2,656 | 24,279 | (21,623) | -89.06% | | Net (loss) income attributable to CompoSecure, Inc. | (26,125) | 11,099 | (37,224) | -335.38% | | Earnings in equity method investment | 38,909 | — | 38,909 | N/A | - Net sales and gross profit decreased by 100% to $0 for Q2 2025, primarily due to the deconsolidation of Holdings on February 28, 2025[159][160][164] - Other income (expense), net, shifted from $2.1 million income in Q2 2024 to $(64.1) million expense in Q2 2025, mainly driven by a $(53.4) million revaluation of warrant liability[159][167] - Holdings generated $119.6 million of net sales and $68.8 million of gross profit for the three months ended June 30, 2025[160][164] Six Months Ended June 30, 2025 compared with Six Months Ended June 30, 2024 This section compares the company's financial results for the six months ended June 30, 2025, against the prior year period | Metric | Six Months Ended June 30, 2025 ($ in thousands) | Six Months Ended June 30, 2024 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------- | :--------- | | Net sales | 59,824 | 212,577 | (152,753) | -71.86% | | Gross profit | 28,749 | 111,285 | (82,536) | -74.17% | | Operating expenses | 25,361 | 48,357 | (22,996) | -47.55% | | Net (loss) income attributable to CompoSecure, Inc. | (4,633) | 17,041 | (21,674) | -127.19% | | Earnings in equity method investment | 53,753 | — | 53,753 | N/A | - Net sales decreased by $152.8 million (72%) and gross profit decreased by $82.5 million (74%) for H1 2025, primarily due to the deconsolidation of Holdings[170][171][174] - Income tax expense increased significantly from a benefit of $0.6 million in H1 2024 to an expense of $25.2 million in H1 2025, primarily due to a taxable gain on appreciated property resulting from the Spin-Off[170][179] - Other expense, net, increased from $(12.8) million in H1 2024 to $(36.5) million in H1 2025, mainly due to a $(35.5) million revaluation of warrant liability[170][177] Critical Accounting Policies and Estimates This section discusses the accounting policies and estimates that require significant judgment and could materially affect financial results - Critical accounting policies are detailed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024[194] - A new critical accounting policy is the equity method of accounting for Holdings, adopted effective February 28, 2025, as Holdings is now a Variable Interest Entity (VIE) for which CompoSecure is not the primary beneficiary[195] Recently Adopted Accounting Policies This section provides information on new accounting pronouncements adopted by the company - Information concerning recent accounting pronouncements adopted since the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2024, is provided in Note 2 of the Notes to Financial Statements[196] Liquidity and Capital Resources This section analyzes the company's ability to generate and manage cash, including its sources of liquidity and capital - CompoSecure, Inc.'s primary liquidity sources are its existing cash and cash equivalents and funding (distributions) from its wholly-owned subsidiary, Holdings[197] - Holdings' primary liquidity sources are its existing cash and cash equivalents, cash flows from operations, and borrowings on its term loan and revolving credit facility[197] | Metric | June 30, 2025 ($ in thousands) | December 31, 2024 ($ in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | CompoSecure Cash & Equivalents | 4,808 | 77,461 | | Holdings Cash & Equivalents | 91,700 | N/A | | Holdings Total Debt Principal | 192,500 | 197,500 | - The Company believes Holdings' cash flows from operations, available cash ($91.7 million), and available $130.0 million under the 2024 Revolver are sufficient to meet liquidity needs for at least the next 12 months[199] Net Cash Provided by Operations This section details the cash generated or used by the company's core business activities - Net cash provided by CompoSecure's operating activities decreased by $63.0 million, from $66.0 million for the six months ended June 30, 2024, to $3.0 million for the six months ended June 30, 2025[200] - The decrease was primarily attributable to decreases in net income ($55.3 million), non-cash charges ($10.0 million), and equity in net income of Holdings ($53.8 million), partially offset by a $15.9 million distribution from Holdings and $33.6 million in changes in mark-to-market fair values[200] Net Cash Used in Investing This section outlines the cash flows related to the company's investment activities, including asset acquisitions and divestitures - Cash used in CompoSecure's investing activities increased substantially to $60.7 million for the six months ended June 30, 2025, compared to $3.5 million in the prior year[201] - This increase was primarily related to $50.3 million of Holdings cash and $10.0 million of Resolute Holdings cash deconsolidated as a result of the Spin-Off and Management Agreement[25][201] Net Cash Used in Financing This section describes the cash flows associated with the company's financing activities, such as debt and equity transactions - Cash used in CompoSecure's financing activities decreased to $15.0 million for the six months ended June 30, 2025, from $68.3 million in the prior year[202] - For H1 2025, cash used primarily related to $15.3 million in payments for taxes related to net share settlement of equity awards and $4.7 million for tax receivable agreement liability payments, partially offset by $4.9 million from warrant exercises[202][203] - For H1 2024, cash used included $26.2 million in distributions to non-controlling interest holders, $15.6 million in special distributions, $9.4 million in term loan payments, and $8.9 million in dividends to Class A shareholders[203] Contractual Obligations This section summarizes the company's material outstanding contractual commitments and payment obligations - A summary of Holdings' material outstanding contractual commitments, including long-term contractual obligations and estimated purchase obligations, is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2024[204] - CompoSecure, Inc. itself did not have any material contractual obligations[204] Financing This section provides details on the company's financing arrangements, including credit facilities - Holdings is party to the 2024 Credit Facility with various banks, with more information available in Note 6 to the Company's financial statements and its Annual Report on Form 10-K for the fiscal year ended December 31, 2024[205] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to market risks, primarily focusing on interest rate risk related to Holdings' variable rate debt Holdings uses an interest rate swap to hedge against fluctuations Interest Rate Risk This section assesses the company's exposure to fluctuations in interest rates, particularly on its variable-rate debt - Holdings is exposed to interest rate risk on its variable rate debt obligations, with $192.5 million in debt outstanding under the 2024 Credit Facility as of June 30, 2025[206] - A sensitivity analysis indicates that a 100 basis point increase or decrease in the applicable interest rate would cause an approximate $1.9 million increase or decrease in annual interest expense[207] - Holdings uses an interest rate swap agreement (December 2023 Swap) with a notional amount of $125,000 thousand, designated as a cash flow hedge, to manage interest rate risk[208][209] Item 4. Controls and Procedures This section details the evaluation of CompoSecure's disclosure controls and procedures, concluding their effectiveness as of June 30, 2025 It also confirms no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures This section describes management's assessment of the effectiveness of the company's disclosure controls and procedures - As of June 30, 2025, management, including the principal executive and financial officers, concluded that disclosure controls and procedures were functioning effectively to provide reasonable assurance for timely and accurate reporting[212] - The Company acknowledges that no control system can provide absolute assurance that all objectives are met or that all control issues and instances of fraud are detected[213] Changes in Internal Control Over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the quarter - There have been no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2025, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[214] Part II. Other Information This section covers other information, including legal proceedings, risk factors, and equity security details Item 1. Legal Proceedings This section states that CompoSecure, Inc. was not involved in any material legal proceedings as of August 4, 2025 - As of August 4, 2025, the Company was not a party to, nor were any of its properties the subject of, any material pending legal proceedings, other than ordinary routine claims incidental to the business[216] Item 1A. Risk Factors This comprehensive section outlines substantial risks associated with investing in CompoSecure's securities It categorizes risks related to the Company's business operations, the Tungsten Transaction, the Management Agreement with Resolute Holdings, the Company's indebtedness, and general risks related to the ownership of its securities, emphasizing potential adverse effects on business, financial condition, and results of operations Summary of Risk Factors This section provides a concise overview of the substantial risks associated with investing in the company's securities - An investment in CompoSecure's securities involves substantial risk, with various factors potentially causing a material adverse effect on business, cash flows, financial condition, and results of operations[217][218] - Key risk categories include those related to business operations (e.g., economic conditions, customer retention, data breaches, new products, digital assets), the Tungsten Transaction, the Management Agreement, indebtedness, and ownership of securities[217][221] Risks Related to Our Business This section details various risks that could materially affect the company's business operations and financial performance - Rapidly evolving domestic and global economic conditions, including geopolitical conflicts, inflation, and supply chain disruptions, are beyond the Company's control and could materially adversely affect its business[220] - The Company's revenue growth rate may not be sustainable due to factors like slowing demand, increased competition, or inability to engage and retain customers[222] - The Company relies heavily on two largest customers (JPMorgan Chase and American Express), which represented approximately 63% and 71% of net sales for 2024 and 2023, respectively, posing a risk if these relationships are adversely affected[223] - Data and security breaches could compromise systems and confidential information, causing reputational and financial damage, and increasing litigation risks[227][230] - Future growth depends on the ability to develop, introduce, manufacture, and commercialize new products, which is a lengthy and complex process, especially for the Arculus technology in the rapidly evolving digital assets industry[234][237][241] - Regulatory uncertainty surrounding the digital asset environment, including potential classification of digital assets as securities, could restrict the use of the Arculus Cold Storage Wallet, impose significant costs, or lead to regulatory enforcement actions[245][257][261][262] - Escalating U.S. tariffs or other trade restrictions on imported raw materials could drive up costs and materially harm revenue, margins, and overall results of operations[277] Risks Related to the Resolute Holdings Management Agreement This section outlines risks arising from the management agreement with Resolute Holdings, including influence and potential conflicts - CompoSecure's business is managed by Resolute Holdings, which exercises substantial influence over its business, operations, and strategy, including establishing objectives, financing, management oversight, and M&A activities[282][284] - The Company relies heavily on the skill and expertise of Resolute Holdings' management team, and the loss of key personnel could adversely affect operations and profitability[286] - The Management Agreement does not create a mutually exclusive relationship, meaning Resolute Holdings' resources are not fully dedicated to CompoSecure and may be diverted to other managed companies or new business activities[287] - The Management Agreement can be terminated, potentially requiring a significant termination fee payable by Holdings, which could materially adversely affect financial results or dilute Class A Common Stockholders[288] - Resolute Holdings maintains a contractual, not fiduciary, relationship with Holdings, has limited liability under the Management Agreement, and is indemnified for certain acts, meaning CompoSecure may experience poor performance or losses for which Resolute Holdings is not liable[289] - Potential conflicts of interest may arise with Resolute Holdings and its affiliates, as they may engage in other activities that conflict with CompoSecure's business[290] Risks Related to the Tax Receivable Agreement This section discusses risks associated with the company's obligations under the Tax Receivable Agreement, including substantial payments - CompoSecure's only significant asset is its ownership interest in Holdings, and its ability to meet financial obligations, including those under the Tax Receivable Agreement (TRA), depends on distributions from Holdings[292] - Payments under the TRA are expected to be substantial, representing 90% of the realized benefits from additional tax depreciation or amortization deductions[294] - TRA payments may be accelerated in certain changes of control or early termination, potentially significantly exceeding actual tax benefits and impairing liquidity or change of control transactions[295][298] Risks Related to Indebtedness This section highlights risks stemming from Holdings' substantial debt, including limited flexibility and increased vulnerability - Holdings has substantial indebtedness ($197.5 million as of December 31, 2024), which limits operating flexibility, increases vulnerability to adverse economic conditions, and requires a substantial portion of cash flow for debt servicing[300][302] - The debt outstanding under Holdings' credit facility has a variable interest rate based on SOFR, which may increase borrowing costs and has unpredictable consequences[303] - An event of default in Holdings' credit facility could lead to acceleration of payments and foreclosure against the collateral, which includes substantially all of Holdings' assets[301] - The Holdings credit facility contains restrictive operating and financial covenants that may impair its ability to conduct business, raise additional financing, or take advantage of new business opportunities[304] General Risks Related to Ownership of our Securities This section covers risks pertinent to owning the company's securities, such as stock price volatility and dilution - CompoSecure, Inc. has no direct operations and depends on its subsidiaries' profitability for debt repayment, public company expenses, and dividends[306] - Provisions in the Company's Charter and Delaware law may inhibit takeovers, potentially limiting the price investors are willing to pay for Class A Common Stock and entrenching management[307][308][309] - The Company incurs significant costs as a public company, which will increase after it ceases to be an 'emerging growth company' at the end of 2025[310][311] - The trading price of the Company's securities could be volatile and subject to wide fluctuations due to various factors, including financial results, competition, market expectations, and general economic conditions[319][320] - Warrants may not remain 'in the money' and could expire worthless; their terms can be amended adversely to holders with majority approval; and they may be redeemed prior to exercise at a disadvantageous time[321][323][324] - The exercise of outstanding warrants (21,989,079 shares as of June 30, 2025) could increase the number of shares eligible for future resale and result in dilution to stockholders[325] - Tungsten's beneficial ownership of approximately 50.5% of Class A Common Stock allows it to influence major corporate decisions, potentially leading to conflicts of interest with other stockholders[332][333] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section confirms no unregistered sales of equity securities during the quarter and details the Company's share repurchase program, which had no activity in the quarter but retains $100.0 million in authorization Unregistered Sales of Equity Securities This section reports on any unregistered sales of equity securities during the period - There were no unregistered sales of equity securities during the quarter ended June 30, 2025[341] Repurchases of Equity Securities This section details the company's share repurchase program and any activity during the quarter - The Board authorized a repurchase program in March 2024 (increased to $100.0 million in February 2025) for Class A Common Stock or warrants, effective through March 7, 2027[342] - There was no repurchase activity during the quarter ended June 30, 2025[343] - As of June 30, 2025, $100.0 million of the repurchase authorization remained available under the program[343] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the quarter ended June 30, 2025 - There were no defaults upon senior securities during the quarter ended June 30, 2025[344] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable to the Company[345] Item 5. Other Information This section discloses a Rule 10b5-1 trading plan entered into by an officer during the quarter and confirms no other such plans were adopted or terminated by directors or officers Rule 10b5-1 Trading Plans This section discloses any Rule 10b5-1 trading plans adopted or terminated by directors or officers - On June 12, 2025, Adam Lowe, Chief Product & Innovation Officer, entered into a Rule 10b5-1 trading plan for the potential sale of 55,521 shares of Class A Common Stock, scheduled to terminate by June 30, 2026[346] - No other directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[346] Item 6. Exhibits This section provides a list of exhibits filed with the Form 10-Q, including amendments to corporate governance documents, equity incentive plans, various agreements, and certifications - Exhibits include the Third Amended and Restated Certificate of Incorporation, amendments to the 2021 Equity Incentive Plan, an Amended and Restated Waiver Agreement, a Transition and Consulting Agreement, the Fifth Amended and Restated Non-Employee Director Compensation Policy, and certifications from the CEO and CFO[347][348] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers - The report was signed on August 7, 2025, by Jonathan C. Wilk, President and Chief Executive Officer, and Timothy Fitzsimmons, Chief Financial Officer[352]