poSecure(CMPO) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements Presents CompoSecure, Inc.'s unaudited consolidated financial statements and detailed notes for periods ended September 30, 2023, and December 31, 2022 Consolidated Balance Sheets (Unaudited) Consolidated Balance Sheet Highlights (Unaudited) | Metric | Sep 30, 2023 ($ in thousands) | Dec 31, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :---------------------- | :--------- | | ASSETS | | | | | | Cash and cash equivalents | 23,817 | 13,642 | 10,175 | 74.59% | | Accounts receivable, net | 48,533 | 37,272 | 11,261 | 30.21% | | Inventories | 51,988 | 42,374 | 9,614 | 22.69% | | Total current assets | 128,249 | 97,112 | 31,137 | 32.06% | | Total assets | 195,047 | 162,943 | 32,104 | 19.70% | | LIABILITIES | | | | | | Current portion of long-term debt | 10,333 | 14,372 | (4,039) | -28.10% | | Accounts payable | 14,065 | 7,127 | 6,938 | 97.34% | | Total current liabilities | 52,869 | 47,360 | 5,509 | 11.63% | | Total liabilities | 433,890 | 454,941 | (21,051) | -4.63% | | Total stockholders' deficit | (835,430) | (892,232) | 56,802 | -6.37% | Consolidated Statements of Operations (Unaudited) Consolidated Statements of Operations Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2023 ($ in thousands) | Three Months Ended Sep 30, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :---------------------- | :--------- | | Net sales | 96,886 | 103,305 | (6,419) | -6.21% | | Gross profit | 48,896 | 61,758 | (12,862) | -20.83% | | Income from operations | 28,801 | 25,642 | 3,159 | 12.32% | | Net income | 38,049 | 21,894 | 16,155 | 73.80% | | Net income attributable to CompoSecure, Inc. | 7,475 | 2,817 | 4,658 | 165.39% | | Net income per share attributable to Class A common stockholders - basic | 0.39 | 0.18 | 0.21 | 116.67% | | Net income per share attributable to Class A common stockholders - diluted | 0.34 | 0.18 | 0.16 | 88.89% | | Metric | Nine Months Ended Sep 30, 2023 ($ in thousands) | Nine Months Ended Sep 30, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :---------------------- | :--------- | | Net sales | 290,729 | 284,687 | 6,042 | 2.12% | | Gross profit | 156,187 | 169,369 | (13,182) | -7.78% | | Income from operations | 88,560 | 90,044 | (1,484) | -1.65% | | Net income | 81,496 | 109,459 | (27,963) | -25.55% | | Net income attributable to CompoSecure, Inc. | 15,843 | 15,486 | 357 | 2.31% | | Net income per share attributable to Class A common stockholders - basic | 0.86 | 1.02 | (0.16) | -15.69% | | Net income per share attributable to Class A common stockholders - diluted | 0.75 | 0.94 | (0.19) | -20.21% | Consolidated Statements of Comprehensive Income (Unaudited) Consolidated Statements of Comprehensive Income Highlights (Unaudited) | Metric | Three Months Ended Sep 30, 2023 ($ in thousands) | Three Months Ended Sep 30, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :---------------------- | :--------- | | Net income | 38,049 | 21,894 | 16,155 | 73.80% | | Other comprehensive (loss) income, net | (264) | 3,642 | (3,906) | -107.25% | | Comprehensive income | 37,785 | 25,536 | 12,249 | 47.97% | | Metric | Nine Months Ended Sep 30, 2023 ($ in thousands) | Nine Months Ended Sep 30, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :---------------------- | :--------- | | Net income | 81,496 | 109,459 | (27,963) | -25.55% | | Other comprehensive (loss) income, net | (637) | 8,999 | (9,636) | -107.08% | | Comprehensive income | 80,859 | 118,458 | (37,599) | -31.74% | Consolidated Statements of Stockholders' Deficit (Unaudited) Stockholders' Deficit Changes (Unaudited) | Metric | As of Dec 31, 2022 ($ in thousands) | As of Sep 30, 2023 ($ in thousands) | Change ($ in thousands) | | :--------------------------------- | :---------------------------------- | :---------------------------------- | :---------------------- | | Class A Common Stock Shares | 16,446,748 | 19,293,287 | 2,846,539 | | Class B Common Stock Shares | 60,325,057 | 59,958,422 | (366,635) | | Additional Paid-in Capital | 24,107 | 34,765 | 10,658 | | Accumulated Other Comprehensive Income | 8,283 | 7,646 | (637) | | Accumulated Deficit | (924,630) | (877,849) | 46,781 | | Total Stockholders' Deficit | (892,232) | (835,430) | 56,802 | - During the nine months ended September 30, 2023, the company issued 2,479,904 new shares of Class A common stock primarily due to vesting of restricted stock units, exercise of stock options, and employee stock purchase plan transactions. Additionally, 366,635 Class B units were exchanged for Class A common stock and subsequently canceled[77] Consolidated Statements of Cash Flows (Unaudited) Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Nine Months Ended Sep 30, 2023 ($ in thousands) | Nine Months Ended Sep 30, 2022 ($ in thousands) | Change ($ in thousands) | Change (%) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :---------------------- | :--------- | | Net cash provided by operating activities | 77,879 | 81,961 | (4,082) | -4.98% | | Net cash used in investing activities | (6,669) | (7,221) | 552 | -7.64% | | Net cash used in financing activities | (61,035) | (81,254) | 20,219 | -24.88% | | Net increase (decrease) in cash and cash equivalents | 10,175 | (6,514) | 16,679 | -256.04% | | Cash and cash equivalents, end of period | 23,817 | 15,430 | 8,387 | 54.36% | Notes to Consolidated Financial Statements (Unaudited) 1. Description of Organization and Business Operations - CompoSecure, Inc. is a manufacturer and designer of complex metal, composite, and proprietary financial transaction cards, serving global financial institutions, plastic card manufacturers, system integrators, and security specialists since 2000[28] - The company's offerings include innovative payment card technology and metal cards with Arculus secure authentication and digital asset storage capabilities, aiming to enhance customer acquisition, retention, and spending for banks and card issuers[29][30] - CompoSecure operates as an umbrella partnership C corporation (Up-C), consolidating CompoSecure Holdings, L.L.C.'s financial results and reporting a non-controlling interest for units not owned by CompoSecure, Inc[32] 2. Summary of Significant Accounting Policies - The financial statements are prepared in conformity with U.S. GAAP and SEC regulations, with all intercompany accounts and transactions eliminated in consolidation[33][34] - Revenue is recognized when performance obligations are satisfied, typically upon transfer of control of goods (metal cards, high security documents, pre-laminated materials) to customers, net of variable consideration like discounts and rebates[38][41] - The Company operates as one reportable operating segment, as its business is managed by a single team, and resource allocation and performance assessment are based on aggregate financial information[44][45] - The Company adopted ASU 2020-4 and ASU 2022-6 regarding Reference Rate Reform in Q1 2023, transitioning its 2021 Credit Facility from LIBOR to SOFR, which did not materially impact financial statements[48][49] 3. Inventories Inventory Breakdown ($ in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :-------------- | :----------- | :----------- | | Raw materials | 49,771 | 43,313 | | Work in process | 4,811 | 2,892 | | Finished goods | 454 | 450 | | Inventory reserve | (3,048) | (4,281) | | Total | 51,988 | 42,374 | - The company monitors inventory costs relative to selling prices and reviews for slow-moving or obsolete amounts, providing reserves as appropriate, which may fluctuate based on changing assumptions[51] 4. Property and Equipment Property and Equipment, Net ($ in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------- | :----------- | :----------- | | Machinery and equipment | 70,071 | 64,626 | | Leasehold improvements | 13,891 | 11,993 | | Construction in progress | 3,472 | 4,145 | | Total | 92,536 | 85,866 | | Less: Accumulated depreciation and amortization | (69,460) | (63,211) | | Property and equipment, net | 23,076 | 22,655 | Depreciation and Amortization Expense ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 2,078 | 2,010 | | Nine months ended September 30 | 6,249 | 6,577 | 5. Debt Exchangeable Senior Notes - The Company has Exchangeable Notes with an aggregate principal amount of $130,000, maturing on December 27, 2026, bearing 7% annual interest, and exchangeable into Class A common stock at $11.50 per share[54] - The Exchangeable Notes include an optional redemption with a make-whole provision, which is bifurcated and measured quarterly at fair value as a derivative liability. Its fair value was $650 at September 30, 2023, up from $285 at December 31, 2022[56][62] Interest Expense on Exchangeable Notes ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 2,416 | 2,407 | | Nine months ended September 30 | 7,167 | 7,127 | Term Loan - The 2021 Credit Facility, including a term loan and revolving loan, was amended in February 2023 to transition from LIBOR to SOFR-based interest rates and waive a technical default. It was further amended in May 2023, resulting in a write-off of $589 thousand in debt issuance costs[68][69] - The effective interest rate on the Revolver and Term Loan was 7.99% at September 30, 2023, up from 5.15% at September 30, 2022. The Company was in compliance with all financial covenants as of September 30, 2023[70][72] Interest Expense on Revolver and Term Loan ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 4,997 | 3,439 | | Nine months ended September 30 | 14,870 | 9,609 | Maturity of Borrowing Facilities & Interest Rate Swap Maturity of Borrowing Facilities ($ in thousands) | Year | Amount | | :------------ | :----- | | 2024 | 15,000 | | 2025 | 200,000 | | 2026 | 130,000 | | Total debt | 345,000 | - The Company uses an interest rate swap agreement with a notional amount of $125,000, maturing in December 2025, designated as an effective cash flow hedge. Its fair value was $8,055 at September 30, 2023[74] 6. Equity Structure - As of September 30, 2023, the Company had 19,293,287 Class A common shares and 59,958,422 Class B common shares outstanding. During the nine months ended September 30, 2023, 2,479,904 new Class A shares were issued, and 366,635 Class B units were exchanged for Class A shares and canceled[75][77] - The Company had 300,000 private warrants and 22,115,389 public warrants outstanding as of September 30, 2023, each exercisable for one Class A common stock at $11.50 per share[78][80] - Non-controlling interests, represented by Class B Units, are classified as temporary equity and adjusted to redemption value ($596,587 at September 30, 2023) based on the Class A common stock trading price[81] 7. Stock-Based Compensation Stock-Based Compensation Expense ($ in thousands) | Expense Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Stock option expense | 33 | 273 | 269 | 956 | | Restricted stock unit expense | 3,875 | 3,442 | 10,880 | 6,741 | | Performance stock unit expense | 698 | — | 1,796 | — | | Employee stock purchase plan | 31 | — | 107 | — | | Total | 4,637 | 3,715 | 13,052 | 7,736 | - Unrecognized compensation cost for unvested stock options, restricted stock awards, and performance stock units totaled $33,710 thousand as of September 30, 2023, expected to be recognized over approximately 2.1 years[88] 8. Retirement Plans Retirement Plan Expense ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 405 | 319 | | Nine months ended September 30 | 1,326 | 1,156 | - The Company's 401(k) plan matches 100% of the first 1% and 50% of the next 5% of employee contributions. A deferred compensation plan was terminated in 2021, with the remaining liability paid in the nine months ended September 30, 2023[89][90] 9. Fair Value Measurements Fair Value Measurements (Level 1, 2, 3) as of September 30, 2023 ($ in thousands) | Instrument | Level 1 | Level 2 | Level 3 | Total | | :----------------------------------------------- | :------ | :------ | :------ | :------ | | Assets Carried at Fair Value: | | | | | | Derivative asset - interest rate swap | — | 8,055 | — | 8,055 | | Liabilities Carried at Fair Value: | | | | | | Public warrants | 14,375 | — | — | 14,375 | | Private warrants | — | — | 195 | 195 | | Earnout consideration | — | — | 4,550 | 4,550 | | Derivative liability - redemption make-whole provision | — | — | 650 | 650 | - The fair value of private warrants and earnout consideration is classified as Level 3 liabilities, requiring substantial judgment and estimation of unobservable market factors[97][99] Earnout Consideration Liability Reconciliation ($ in thousands) | Metric | Amount | | :----------------------------------- | :----- | | Estimated fair value at Dec 31, 2022 | 15,090 | | Change in estimated fair value | (10,540) | | Estimated fair value at Sep 30, 2023 | 4,550 | 10. Geographic Information and Concentrations Net Sales by Region ($ in thousands) | Region | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Domestic | 84,277 | 83,842 | 235,933 | 216,335 | | International | 12,609 | 19,463 | 54,796 | 68,352 | | Total | 96,886 | 103,305 | 290,729 | 284,687 | - Three customers accounted for 84.6% of total revenue for the three months ended September 30, 2023, and 79.1% for the nine months ended September 30, 2023, indicating high customer concentration[102] - Two customers accounted for approximately 73% of accounts receivable as of September 30, 2023. One vendor accounted for approximately 15% of total purchases for the nine months ended September 30, 2023[102][103] 11. Income Taxes Income Tax Provisions ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 949 | 393 | | Nine months ended September 30 | 656 | 3,738 | Interim Effective Tax Rates | Period | 2023 | 2022 | | :----------------------------------- | :----- | :----- | | Three months ended September 30 | 1.48% | 1.76% | | Nine months ended September 30 | 0.80% | 3.30% | | :----------------------------------- | :----- | :----- | | Effective tax rate | 0.80% | 3.30% | - The effective tax rate differs from the U.S. statutory rate primarily due to the non-controlling interest adjustment, as income attributable to non-controlling interest is pass-through income[106] 12. Earnings Per Share Net Income Per Share Attributable to Class A Common Stockholders (Unaudited) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income attributable to Class A Common Stockholders - basic ($ in thousands) | 7,475 | 2,817 | 15,843 | 15,486 | | Weighted average common shares outstanding - basic | 19,074,679 | 15,433,438 | 18,420,069 | 15,141,169 | | Net income per share - basic | 0.39 | 0.18 | 0.86 | 1.02 | | Net income attributable to Class A Common Stockholders after adjustment ($ in thousands) | 12,285 | 3,550 | 26,548 | 30,932 | | Weighted average common shares outstanding - diluted | 35,764,654 | 19,662,060 | 35,362,059 | 32,814,683 | | Net income per share - diluted | 0.34 | 0.18 | 0.75 | 0.94 | - Potentially dilutive securities, including warrants, Class B common units, exchangeable notes, and equity awards, are excluded from diluted EPS calculation if their effect is anti-dilutive[112][113] 13. Commitments and Contingencies Future Minimum Operating Lease Commitments ($ in thousands) | Year | Amount | | :------------ | :----- | | 2023 (remainder) | 552 | | 2024 | 2,245 | | 2025 | 2,319 | | 2026 | 2,083 | | 2027 | 912 | | Later years | 1,205 | | Total lease payments | 9,316 | | Less: Imputed interest | (655) | | Present value of lease liabilities | 8,661 | Tax Receivable Agreement Obligations ($ in thousands) | Year | Amount | | :------------ | :----- | | 2023 (remainder) | 174 | | 2024 | 1,494 | | 2025 | 1,484 | | 2026 | 1,513 | | 2027 | 1,544 | | Later years | 19,412 | | Total payments | 25,621 | - The Company expects significant cash obligations under the tax receivable agreement, which will generally reduce cash flows available to the Company. The liability is expected to increase with future purchases, redemptions, or exchanges of Holdings' interests[115][117] 14. Related Party Transactions Sales Representation Agreement Expenses ($ in thousands) | Period | 2023 | 2022 | | :----------------------------------- | :--- | :--- | | Three months ended September 30 | 2,414 | 13,356 | | Nine months ended September 30 | 9,876 | 19,435 | - The Company made a $2,193 thousand payment related to the tax receivable agreement liability in Q3 2023. Holdings distributed $38,362 thousand in net tax distributions to non-controlling interest holders for the nine months ended September 30, 2023[120][121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses CompoSecure's financial condition, operational results, key drivers, economic impacts, and liquidity, comparing performance for the three and nine months ended September 30, 2023, versus prior year Overview - CompoSecure designs and manufactures customized financial payment card products for banks and card issuers globally, focusing on customer acquisition, retention, and spending[123] - The company's Arculus platform offers secure authentication and digital asset storage solutions, including the Arculus Cold Storage Wallet, addressing consumer needs for enhanced digital asset protection amidst volatile digital asset market conditions[125] - Uncertain and volatile economic conditions, including inflation and geopolitical conflicts, make forecasting difficult and could adversely affect business, financial condition, and results of operations[124] Key Components of Results of Operations - Net sales are primarily from the design and manufacturing of metal cards and Prelams, net of discounts and volume-based rebates[126] - Cost of sales includes direct and indirect manufacturing costs, raw materials, labor, equipment, operational overhead, and shipping, influenced by volume, efficiency, and procurement costs[128] - Operating expenses mainly comprise selling, general, and administrative expenses, covering personnel, professional services, facilities, and marketing[130] Results of Operations Three months ended September 30, 2023 vs three months ended September 30, 2022 Key Financial Performance (Three Months Ended September 30) | Metric | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($ in thousands) | % Change | | :------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Net sales | 96,886 | 103,305 | (6,419) | -6% | | Cost of sales | 47,990 | 41,547 | 6,443 | 16% | | Gross profit | 48,896 | 61,758 | (12,862) | (21)% | | Selling, general and administrative expenses | 20,095 | 36,116 | (16,021) | (44)% | | Income from operations | 28,801 | 25,642 | 3,159 | 12% | | Other income (expense), net | 10,197 | (3,355) | 13,552 | (404)% | | Net income | 38,049 | 21,894 | 16,155 | 74% | | Gross Margin | 50.5% | 59.8% | -9.3% | | | Operating margin | 29.7% | 24.8% | 4.9% | | - Net sales decreased by 6% due to lower international sales (-35%), while domestic sales increased by 1%. Gross profit declined by 21% due to lower production efficiencies and inflationary pressures on wages and materials[137][138][140] - Operating expenses decreased by 44%, primarily driven by reductions in bonus ($3.3M), commission ($10.9M), marketing ($1.8M), and insurance ($1.0M) expenses. This led to a 12% increase in income from operations[141][142] - Net income increased by 74%, largely due to favorable operating expenses and positive changes in the fair value of warrant and earnout consideration liabilities, despite the decrease in gross profit[143][144] Nine months ended September 30, 2023 vs nine months ended September 30, 2022 Key Financial Performance (Nine Months Ended September 30) | Metric | 2023 ($ in thousands) | 2022 ($ in thousands) | Change ($ in thousands) | % Change | | :------------------------- | :-------------------- | :-------------------- | :---------------------- | :------- | | Net sales | 290,729 | 284,687 | 6,042 | 2% | | Cost of sales | 134,542 | 115,318 | 19,224 | 17% | | Gross profit | 156,187 | 169,369 | (13,182) | -8% | | Selling, general and administrative expenses | 67,627 | 79,325 | (11,698) | -15% | | Income from operations | 88,560 | 90,044 | (1,484) | -2% | | Other (expense) income, net | (6,408) | 23,153 | (29,561) | -128% | | Net income | 81,496 | 109,459 | (27,963) | -26% | | Gross Margin | 53.7% | 59.5% | -5.8% | | | Operating margin | 30.5% | 31.6% | -1.1% | | - Net sales increased by 2% driven by 9% domestic growth, offset by a 20% decrease in international sales due to global economic uncertainty. Gross profit decreased by 8% and gross margin fell to 53.7% due to lower production efficiencies and inflationary pressures[147][148][149][151] - Operating expenses decreased by 15% ($11.7M), primarily from lower bonus ($1.5M), commission ($9.6M), marketing ($4.5M), and insurance ($2.9M) expenses, partially offset by increased stock-based compensation ($5.3M) and salaries ($2.8M)[152] - Net income decreased by 26% ($28.0M), mainly due to a reduction in favorable changes in the fair value of warrant liabilities, earnout consideration liability, and derivative liability, despite controlled operating expenses[155] Use of Non-GAAP Financial Measures - The Company uses non-GAAP measures like EBITDA, Adjusted EBITDA, and non-GAAP earnings per share to evaluate financial performance, manage the business, and measure incentive compensation, believing they reflect true business performance by focusing on relevant and controllable events[157] EBITDA and Adjusted EBITDA Reconciliation ($ in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | 38,049 | 21,894 | 81,496 | 109,459 | | Depreciation and amortization | 2,078 | 2,010 | 6,249 | 6,577 | | Interest expense, net | 6,010 | 5,850 | 18,355 | 16,362 | | Income tax expense | 949 | 393 | 656 | 3,738 | | EBITDA | 47,086 | 30,147 | 106,756 | 136,136 | | Stock-based compensation expense | 4,637 | 3,715 | 13,052 | 7,736 | | Mark-to-market adjustments, net | (16,207) | (1,204) | (11,947) | (38,224) | | Adjusted EBITDA | 35,516 | 32,658 | 107,861 | 105,648 | Non-GAAP Adjusted Net Income and EPS Reconciliation | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Adjusted net income ($ in thousands) | 21,709 | 19,779 | 65,254 | 65,461 | | Adjusted net income per share - basic | 0.27 | 0.26 | 0.83 | 0.86 | | Adjusted net income per share - diluted | 0.24 | 0.22 | 0.72 | 0.74 | Liquidity and Capital Resources - Primary liquidity sources include existing cash, cash flows from operations, and borrowings from its term loan, revolving credit facility, and Exchangeable Notes. Cash and cash equivalents increased to $23.8 million as of September 30, 2023, from $13.6 million at December 31, 2022[165][166] - The Company believes current liquidity is sufficient for at least the next 12 months, with additional liquidity potentially from revolving credit facility borrowings or other indebtedness[167] - As of September 30, 2023, total debt outstanding was $345.0 million, including $215.0 million under the 2021 Credit Facility (with $60.0 million available on the revolving loan) and $130.0 million in Exchangeable Notes[166][168][173] - Net cash provided by operating activities decreased by $4.1 million to $77.9 million for the nine months ended September 30, 2023. Net cash used in financing activities decreased by $20.2 million to $61.0 million, primarily due to lower distributions to non-controlling interests and reduced debt repayments[174][176] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details the Company's exposure to market risks, primarily interest rate risk on variable rate debt, and strategies like interest rate swaps to manage this risk Interest Rate Risk - As of September 30, 2023, CompoSecure had $215.0 million in variable rate debt under its 2021 Credit Facility and $130.0 million in Exchangeable Notes. A 100 basis point change in interest rates would impact annual interest expense by approximately $4.0 million[180][181] - The Company uses an interest rate swap agreement with a notional amount of $125.0 million, maturing in December 2025, designated as a cash flow hedge. The swap converted from LIBOR to SOFR in February 2023, aligning with the 2021 Credit Facility amendment[182][183] Item 4. Controls and Procedures Outlines the Company's evaluation of disclosure controls and procedures, confirming their effectiveness and no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were functioning effectively as of September 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[184][185] Changes in Internal Control Over Financial Reporting - There have been no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting[188] Part II. Other Information Item 1. Legal Proceedings CompoSecure, Inc. was not involved in any material pending legal proceedings beyond ordinary routine business claims as of November 2, 2023 - As of November 2, 2023, the Company was not a party to any material pending legal proceedings, other than ordinary routine claims incidental to the business[191] Item 1A. Risk Factors Outlines substantial risks that could materially affect CompoSecure's business, financial condition, and operations, categorized by business, Tax Receivable Agreement, indebtedness, and securities ownership Summary of Risk Factors - Investment in CompoSecure securities involves substantial risk, including those related to business operations, indebtedness, and ownership of securities, which could materially adversely affect the company's performance[192][194] Risks Related to Our Business - Rapidly evolving global economic conditions, including inflation, geopolitical conflicts, and supply chain disruptions, create uncertainty and could materially adversely affect the business, particularly the new Arculus segment[197] - The Company faces risks related to sustaining revenue growth, retaining major customers (American Express and JPMorgan Chase accounted for 67% of 2022 net sales), and potential adverse impacts from data breaches, system outages, and disruptions at its primary production facility[202][203][205][208][209] - Challenges include developing and commercializing new products, especially in the digital assets industry (Arculus Platform), where the company has limited experience and faces regulatory uncertainty regarding digital asset classification and potential misuse[211][220][221][223] - Other risks include supply chain disruptions, dependence on distribution partners, intense competition, potential impairment of long-lived assets, compliance with payment card industry security standards, and adverse effects from product liability claims and international sales[216][245][246][248][250][253][256] Risks Related to the Tax Receivable Agreement - CompoSecure's ability to pay dividends or meet financial obligations, including under the Tax Receivable Agreement (TRA), depends on distributions from Holdings, which may be insufficient[261] - The Company is obligated to pay certain holders 90% of the tax benefits realized from increased tax basis, and these payments are expected to be substantial and could exceed actual cash tax benefits, potentially impairing liquidity[262][265] - Payments under the TRA may be accelerated upon certain changes of control, potentially exceeding actual benefits and negatively impacting the value received by Class A Common Stock owners in such transactions[264][266] - Holdings is required to make pro rata tax distributions to unit holders, which may exceed CompoSecure's tax liabilities and TRA obligations, potentially benefiting Class B unit holders upon exchange for Class A Common Stock[267][269] Risks Related to Our Indebtedness - The Company has substantial indebtedness ($363.1 million as of December 31, 2022), which limits operating flexibility, requires significant cash flow for debt service, and restricts ability to borrow additional funds[271][272] - An event of default under the credit facility could lead to accelerated payments and termination of credit commitments, with lenders potentially foreclosing on collateral[273] - The variable interest rate on the credit facility, now based on SOFR, introduces unpredictability and may increase borrowing costs. Restrictive covenants in the credit facility limit business operations and may impair the ability to raise capital[274][275] - Guarantees of indebtedness, including for Exchangeable Notes, could limit cash flow, expose the company to risks, and potentially lead to default if obligations are not met[277][278] General Risks Related to Ownership of our Securities - CompoSecure's profitability and ability to pay dividends depend on its subsidiaries' business operations, which may be limited by legal and contractual restrictions[280] - Provisions in the Company's Charter and Delaware law, including classified board and anti-takeover measures, may discourage unsolicited takeover proposals and entrench management[281][282][284] - Failure to maintain Nasdaq listing requirements, significant costs as a public company, and reliance on 'emerging growth company' exemptions could adversely affect securities trading and investor attractiveness[285][286][287][288] - The Public Warrants and Resale Warrants may expire worthless as their exercise price ($11.50) exceeds the current Class A Common Stock market price ($5.97 as of Nov 2, 2023). Warrant terms can be amended adversely to holders with majority approval, and the Company may redeem unexpired warrants at a disadvantageous time[294][295][296] - Future sales of securities, including from warrant exercises and registration rights, could dilute existing stockholders and depress market prices. Significant shareholder control (LLR Parties 44%, Logan Parties 27%) may influence corporate decisions that conflict with other stockholders' interests[297][303][304] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no Class B Units were exchanged for Class A Common Stock during the quarter ended September 30, 2023, with such exchanges exempt from registration under Section 4(a)(2) of the Securities Act - During the quarter ended September 30, 2023, no Class B Units were tendered for exchange into Class A Common Stock. Shares issued in such exchanges are exempt from registration under Section 4(a)(2) of the Securities Act[312][313] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities for the period - There were no defaults upon senior securities[314] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[315] Item 5. Other Information This item is not applicable to the Company - Other Information is not applicable to the Company[316] Item 6. Exhibits Lists all exhibits filed as part of the Form 10-Q, including certifications, XBRL financial data, and the interactive data file - The exhibits include certifications from the CEO and CFO (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), XBRL formatted financial statements, and the interactive data file[324][325] Signatures - The report was signed on November 13, 2023, by Jonathan C. Wilk, President and Chief Executive Officer, and Timothy Fitzsimmons, Chief Financial Officer[322]