CompoSecure Inc

Previous wording

The Company’s cost of sales includes the direct and indirect costs related to manufacturing products and providing related services. Product costs include the cost of raw materials and supplies, including various metals, EMV® chips, holograms, adhesives, magnetic stripes, and NFC assemblies; the cost of labor; equipment and facilities; operational overhead; depreciation and amortization; leases and rental charges; shipping and handling; and freight and insurance costs. Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, and promotional activity.

Current wording

The Company’s cost of sales includes the direct and indirect costs related to manufacturing products and providing related services. Product costs include the cost of raw materials and supplies, including various metals, EMV® chips, holograms, adhesives, magnetic stripes, and NFC assemblies; the cost of labor; equipment and facilities; operational overhead; depreciation and amortization; leases and rental charges; shipping and handling; and freight and insurance costs.

Previous wording

The Company’s operating expenses primarily comprised selling, general, and administrative expenses, which generally consist of personnel-related expenses for its corporate, executive, finance, information technology, and other administrative functions, and expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.

Current wording

The Company’s operating expenses are primarily comprised of selling, general, and administrative expenses, which generally consist of personnel-related expenses for its corporate, executive, finance, information technology, and other administrative functions, and expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.

Previous wording

Net income consists of the Company’s income from operations, less other expenses and income tax provision or benefit.

Current wording

Net (loss) income consists of the Company’s income from operations, less other expenses and income tax provision or benefit.

Previous wording

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges. Please see the factors discussed in this Quarterly Report on Form 10-Q, including those discussed in the sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for additional information.

Current wording

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges. Please see the factors discussed in this Quarterly Report on Form 10-Q, including those discussed in the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and "Recent Developments" for additional information.

Previous wording

Three months ended June 30, 2024 vsthree months ended June 30, 2023

Current wording

Three months ended September 30, 2024 vs. three months ended September 30, 2023

Previous wording

The Company’s net sales for the quarter ended June 30, 2024 increased $10.0 million, or 10%, to $108.6 million compared to $98.5 million for the quarter ended June 30, 2023. The increase was primarily driven by continued

Current wording

The Company’s net sales for the quarter ended September 30, 2024 increased $10.2 million, or 11%, to $107.1 million compared to $96.9 million for the quarter ended September 30, 2023. The increase was primarily driven by strong sales in the international market, which was up 115%, offset by lower domestic sales which decreased by 5%.

Previous wording

International: The Company’s international net sales for the quarter ended June 30, 2024 increased $2.8 million, or 14%, to $23.4 million compared to $20.5 million for the quarter ended June 30, 2023. International sales as a percentage of total sales remained consistent at 22% and 21% of the Company's total net sales for the quarter ended June 30, 2024 and 2023, respectively.

Current wording

International: The Company’s international net sales for the quarter ended September 30, 2024 increased $14.5 million, or 115%, to $27.1 million compared to $12.6 million for the quarter ended September 30, 2023. International sales as a percentage of total sales was higher at 25% and 13% of the Company's total net sales for the quarter ended

Previous wording

The Company’s gross profit for the quarter ended June 30, 2024 increased $2.1 million, or 4%, to $56.1 million compared to $53.9 million for the quarter ended June 30, 2023. The gross profit margin percentage decreased by 3% to 52% compared to 55% for the quarter ended June 30, 2023. The decrease was primarily due to product mix, specifically lower production efficiencies from new and innovative card constructions as well as the impact of inflationary pressure on wages and materials during the quarter ended June 30, 2024.

Current wording

The Company’s gross profit for the quarter ended September 30, 2024 increased $6.5 million, or 13%, to $55.4 million compared to $48.9 million for the quarter ended September 30, 2023. The gross profit margin percentage increased by 2%, to 52%, compared to 50% for the quarter ended September 30, 2023. The increase was primarily due to favorable product mix and improved product efficiencies.

Previous wording

Income from operations for the quarter ended June 30, 2024 increased $1.4 million, or 5% to $31.8 million compared to $30.3 million for the quarter ended June 30, 2023. The increase was primarily attributable to an increase in net sales. Operating margin for the quarter ended June 30, 2024 decreased by 2% to 29% compared to 31% for the quarter ended June 30, 2023. The decrease in operating margin was primarily attributable to the decrease in gross margin discussed above.

Current wording

Income from operations for the quarter ended September 30, 2024 increased $0.3 million, or 1%, to $29.1 million compared to $28.8 million for the quarter ended September 30, 2023. The increase was primarily attributable to an increase in net sales. Operating margin for the quarter ended September 30, 2024 decreased by 3%, to 27%, compared to 30% for the quarter ended September 30, 2023. The decrease in operating margin was primarily attributable to the increase in operating expenses described above.

Previous wording

The Company's income tax benefit for the six months ended June 30, 2024 was $0.6 million, compared to $0.3 million for the six months ended June 30, 2023. The increase in the income tax benefit is attributable to a change in the Company's interim effective tax rate. The Company's interim effective tax rate, inclusive of any discrete items, was (1.15)% and (0.68)% for the six months ended June 30, 2024 and June 30, 2023, respectively.

Current wording

The Company's income tax expense for the quarter ended September 30, 2024 was $0.6 million compared to $0.9 million for the quarter ended September 30, 2023.

Previous wording

The Company’s net sales for the six months ended June 30, 2024 increased $18.7 million, or 10%, to $212.6 million compared to $193.8 million for the six months ended June 30, 2023. The increase was primarily driven by continued domestic growth in the Company’s premium payment card business, which was up 17%. This was partially offset by lower international sales, which is a more variable market due to customer mix and a smaller sales base.

Current wording

The Company’s net sales for the nine months ended September 30, 2024 increased $29.0 million, or 10%, to $319.7 million compared to $290.7 million for the nine months ended September 30, 2023. The increase was primarily driven by domestic growth in the Company’s premium payment card business, which was up 9%. and international sales which were up by 13%

Previous wording

Domestic: The Company’s domestic net sales for the six months ended June 30, 2024 increased $26.3 million, or 17%, to 178.0 million compared to $151.7 million for the six months ended June 30, 2023. The increase was primarily due to higher customer acquisition by the Company’s clients as they continue to experience higher demand for their products.

Current wording

Domestic: The Company’s domestic net sales for the nine months ended September 30, 2024 increased $22.1 million, or 9%, to $258.0 million compared to $235.9 million for the nine months ended September 30, 2023. The increase was primarily due to higher customer acquisition by the Company’s clients as they continue to experience higher demand for their products.

Previous wording

International: The Company’s international net sales for the six months ended June 30, 2024 decreased $7.6, or 18%, to $34.6 million compared to $42.2 million for the six months ended June 30, 2023. This decrease was primarily due to current global economic conditions and international markets being a more variable market due to customer mix and a smaller sales base. International net sales were approximately 16% and 22% of the Company's total net sales for the six months ended June 30, 2024 and 2023, respectively. As mentioned above, the international market is more variable due to customer mix and a smaller sales base.

Current wording

International: The Company’s international net sales for the nine months ended September 30, 2024 increased $6.9 million, or 13%, to $61.7 million compared to $54.8 million for the nine months ended September 30, 2023. International net sales remained flat at 19% of the Company's total net sales for the nine months ended September 30, 2024 and 2023. As described above, the international market is more variable due to customer mix and a smaller sales base.

Previous wording

The Company’s gross profit for the six months ended June 30, 2024 increased $4.0 million, or 4% to $111.3 million compared to $107.3 million for the six months ended June 30, 2023. The gross profit margin percentage decreased to 52% compared to 55% for the six months ended June 30, 2023. The decrease was primarily due to product mix, specifically lower production efficiencies from new and innovative card constructions as well as the impact of inflationary pressure on wages and materials during the six months ended June 30, 2024.

Current wording

The Company’s gross profit for the nine months ended September 30, 2024 increased $10.5 million, or 7%, to $166.7 million compared to $156.2 million for the nine months ended September 30, 2023. The gross profit margin percentage decreased by 2%, to 52%, compared to 54% for the nine months ended September 30, 2023. The decrease was primarily due to product mix, specifically lower production efficiencies from new and innovative card constructions as well as the impact of inflationary pressure on wages and materials during the nine months ended September 30, 2024.

Previous wording

During the six months ended June 30, 2024, the Company had income from operations of $62.9 million compared to income from operations of $59.8 million for the six months ended June 30, 2023. The operating margin for the six months ended June 30, 2024 decreased to 30% compared to 31% for the six months ended June 30, 2023. The decrease in operating margin percentage was primarily due to the noted increases in operating expenses.

Current wording

During the nine months ended September 30, 2024, the Company had income from operations of $92.0 million compared to income from operations of $88.6 million for the nine months ended September 30, 2023. The operating margin for the nine months ended September 30, 2024 decreased to 29% compared to 30% for the nine months ended September 30, 2023. The decrease in operating margin percentage was primarily due to the noted decrease in gross margin and increases in operating expenses offset by revenue growth..

Previous wording

Other expenses for the six months ended June 30, 2024 decreased $3.8 million, or 22.7%, to $12.8 million compared to $16.6 million for the six months ended June 30, 2023. The overall decrease in other expenses was primarily due to changes in the fair value of earnout consideration liability and warrant liability of $2.4 million and changes in a derivative liability related to a make-whole provision as discussed in Note 5 in the unaudited financial statements of $0.4 million. The balance of the decrease was primarily related to lower interest resulting from principal payments made on the outstanding term loan.

Current wording

Other expenses for the nine months ended September 30, 2024 increased $120.4 million, or 1878%, to $126.8 million compared to $6.4 million for the nine months ended September 30, 2023. The overall increase in other expenses was primarily due to changes in the fair value of earnout consideration liability and warrant liability of $122.6 million, based on changes in the fair value of such liabilities resulting primarily from the significant improvement in the market price of our Class A Common Stock. and changes in a derivative liability related to a make-whole provision of $0.8 million. The balance is offset by lower interest expense resulting from principal payments made on the outstanding term loan.

Previous wording

The Company's income tax expense for the quarter ended June 30, 2024 was $0.3 million compared to $1.0 million for the quarter ended June 30, 2023. The decrease in the income tax expense is attributable to a change in the Company's interim effective tax rates. The Company's interim effective tax rate, inclusive of any discrete items, was 3.94% and 12.65% for the three months ended June 30, 2024 and June 30, 2023, respectively.

Current wording

The Company's income tax expense for the nine months ended September 30, 2024 was $0.1 million, compared to $0.7 million for the nine months ended September 30, 2023. The decrease in the income tax expense is attributable to a change in the Company's interim effective tax rate. The Company's interim effective tax rate, inclusive of any discrete items, was (0.15)% and 0.80% for the nine months ended September 30, 2024 and September 30, 2023, respectively.

Previous wording

(1)Includes amortization of deferred financing cost for the three and six months ended June 30, 2024 and 2023, respectively.

Current wording

(1)Includes amortization of deferred financing cost and loss on extinguishment of debt for the three and nine months ended September 30, 2024 and 2023, respectively.

Previous wording

(2)Includes the changes in fair value of warrant liability, derivative liabilities and earnout consideration liability for the three and six months ended June 30, 2024 and 2023, respectively.

Current wording

(2)Includes the changes in fair value of warrant liability, derivative liabilities and earnout consideration liability for the three and nine months ended September 30, 2024 and 2023, respectively.

Previous wording

The Company’s primary sources of liquidity are its existing cash and cash equivalents balances, cash flows from operations and borrowings on its term loan, revolving credit facility and Exchangeable Notes. The Company’s primary cash requirements include operating expenses, debt service payments (principal and interest), and capital expenditures (including property and equipment).

Current wording

The Company’s primary sources of liquidity are its existing cash and cash equivalents balances, cash flows from operations and borrowings on its term loan, revolving credit facility and Exchangeable Notes. The Company’s primary cash requirements include operating expenses, debt service payments (principal and interest), including possible repurchase of exchangeable notes (as described above), and capital expenditures (including property and equipment).

Previous wording

As of June 30, 2024, the Company had cash and cash equivalents of $35.4 million and debt principal outstanding of $330.9 million. As of December 31, 2023, the Company had cash and cash equivalents of $41.2 million and total debt principal outstanding of $340.3 million.

Current wording

As of September 30, 2024, the Company had cash and cash equivalents of $52.7 million and debt principal outstanding of $330.0 million. As of December 31, 2023, the Company had cash and cash equivalents of $41.2 million and total debt principal outstanding of $340.3 million.

Previous wording

The Company believes that cash flows from its operations and available cash and cash equivalents are sufficient to meet its liquidity needs, including the repayment of its outstanding debt, for at least the next 12 months from the date of filing of this Form 10-Q. The Company anticipates that to the extent that it requires additional liquidity, it will be funded through borrowings on its revolving credit facility, the incurrence of other indebtedness, or a combination thereof and offering of its shares in capital markets. The Company cannot be assured that it will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, the Company’s liquidity and its ability to meet its obligations and fund its capital requirements are also dependent on its future financial performance, which is subject to general economic, financial and other factors that are beyond its control. Accordingly, the Company cannot be assured that its business will generate sufficient cash flows from operations or that future borrowings will be available from additional indebtedness or otherwise to meet its liquidity needs. Although the Company has no specific current plans to do so, if the Company decides to pursue one or more significant acquisitions, the Company may incur additional debt to finance such acquisitions.

Current wording

The Company believes that cash flows from its operations and available cash and cash equivalents, as well as the availability of a revolving credit facility of $130.0 million (as described below), are sufficient to meet its liquidity needs, including the repayment of its outstanding debt, including possible repurchase of exchangeable notes (as described above), for at least the next 12 months from the date of filing of this Form 10-Q. The Company anticipates that to the extent that it requires additional liquidity, it will be funded through borrowings on its revolving credit facility, the incurrence of other indebtedness, or a combination thereof and offering of its shares in capital markets. The Company cannot be assured that it will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, the Company’s liquidity and its ability to meet its obligations and fund its capital requirements are also dependent on its future financial performance, which is subject to general economic, financial and other factors that are beyond its control. Accordingly, the Company cannot be assured that its business will generate sufficient cash flows from operations or that future borrowings will be available from additional indebtedness or otherwise to meet its liquidity needs. Although the Company has no specific current plans to do so, if the Company decides to pursue one or more significant acquisitions, the Company may incur additional debt to finance such acquisitions.

Previous wording

At June 30, 2024, there was $200.9 million of total debt outstanding under the Company’s existing credit facilities (the “2021 Credit Facility”). The 2021 Credit Facility comprised a term loan of $250.0 million (initial principal amount) as well as a $60.0 million revolving loan facility, of which $60.0 million was available for borrowing as of June 30, 2024. Additional amounts may be available for borrowing during the term of the revolving loan, up to the remaining full $60.0 million, as long as the Company maintains a net leverage ratio as stipulated in the credit facility agreement. As of June 30, 2024, the Company’s net leverage ratio met the requirement for the available borrowing as defined in the terms of the credit facility agreement. The 2021 Credit Facility will mature on December 16, 2025.

Current wording

On August 7, 2024, the Company entered into a Fourth Amended and Restated Credit Agreement with JPMC (the “2024 Credit Facility” and collectively with the 2021 Credit Facility, the “Credit Facilities”) to refinance the 2021 Credit Facility. In conjunction with the 2024 Credit Facility, the maximum borrowing capacity of the overall credit facility was increased to $330 million comprising of a term loan of $200,000 (the “2024 Term Loan”) and a revolving credit facility of $130 million (the “2024 Revolver”). At September 30, 2024, there was $200 million of total debt outstanding under the Company’s existing credit facilities (the “2024 Credit Facility”). No amounts were drawn on the revolving credit facility as of September 30, 2024. Additional amounts may be available for borrowing during the term of the revolving loan, up to the full $130 million, as long as the Company maintains a net leverage ratio as stipulated in the credit facility agreement. As of September 30, 2024, the Company’s net leverage ratio met the requirement for the available borrowing as defined in the terms of the credit facility agreement. The 2024 Credit Facility will mature on August 7, 2029.

Previous wording

On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its subsidiary, Holdings entered into subscription agreements (the “Note Subscription Agreements”) with certain investors ("Notes Investors") pursuant to which such Notes investors, severally and not jointly, purchased on the Closing Date of the Business Combination, senior notes (the “Exchangeable Notes”) issued by Holdings and guaranteed by its operating subsidiaries, CompoSecure, L.L.C. and Arculus Holdings, L.L.C., in an aggregate principal amount of up to $130.0 million that are exchangeable into shares of Class A common stock at a conversion price of $10.98 per share, subject to the terms and conditions of an Indenture entered into with the trustee under the Indenture. The Exchangeable Notes bear interest at a rate of 7% per year, payable semiannually in arrears. The Exchangeable Notes will mature on December 27, 2026, and are exchangeable for shares of Class A common stock at a present conversion price of $10.98 per share. The Company will settle any exchange of the Exchangeable Notes in shares of Class A common stock, with cash payable in lieu of any fractional shares. Additional interest may be payable as set forth in the Indenture. See Note 5 in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Current wording

On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its subsidiary, Holdings entered into subscription agreements (the “Note Subscription Agreements”) with certain investors ("Notes Investors") pursuant to which such Notes investors, severally and not jointly, purchased on the Closing Date of the Business Combination, senior notes (the “Exchangeable Notes”) issued by Holdings and guaranteed by its operating subsidiaries, CompoSecure, L.L.C. and Arculus Holdings, L.L.C., in an aggregate principal amount of up to $130.0 million that are exchangeable into shares of Class A common stock at a conversion price of $11.50, subject to adjustments. The conversion price is currently $9.57 for the period from September 19, 2024 to November 29, 2024. After that period, the conversion price will return to $10.98 per share, subject to the terms and conditions of the Indenture entered into with the trustee under the Indenture. The Exchangeable Notes bear interest at a rate of 7% per year, payable semiannually in arrears. The Exchangeable Notes will mature on December 27, 2026, and are exchangeable for shares of Class A common stock. The Company will settle any exchange of the Exchangeable Notes in shares of Class A common stock, with cash payable in lieu of any fractional shares. Additional interest may be payable as set forth in the Indenture. See Note 5 in Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. Through November 6, 2024, an aggregate of $51.4 million of the Notes have been surrendered and exchanged for an aggregate of 5.4 million newly-issued shares of Class A Common Stock.

Previous wording

Cash provided by the Company’s operating activities for the six months ended June 30, 2024 was $66.0 million compared to cash provided by operating activities of $53.0 million during the six months ended June 30, 2023. The increase in cash provided by operating activities of $13.0 million was primarily attributable to net income of $50.7 million, the favorable mark to market fair value net changes of $1.4 million, equity compensation expense of $9.6 million, depreciation and amortization expense of $4.6 million, changes in working capital of $1.9 million, and amortization of deferred financing costs of $0.7 million. This was partially offset by deferred tax benefit of $2.9 million.

Current wording

Cash provided by the Company’s operating activities for the nine months ended September 30, 2024 was $94.1 million compared to cash provided by operating activities of $77.9 million during the nine months ended September 30, 2023. The increase in cash provided by operating activities of $16.3 million was primarily attributable to non-cash charges of $109.8 million related to changes in the Company's earnout consideration liability and warrant liability based on changes in the fair value of such liabilities resulting primarily from the significant improvement in the market price of our Class A Common Stock, equity compensation expense of $15.3 million, depreciation and amortization expense of $6.9 million, amortization of deferred financing costs of $1.0 million and changes in working capital of $0.6 million. This was partially offset by net loss of $34.8 million, and deferred tax benefit of $4.8 million

Previous wording

Cash used in the Company’s investing activities for the six months ended June 30, 2024 was $3.5 million primarily relating to capital expenditures of $3.1 million and capitalized software expenditures of $0.4 million, compared to cash used in investing activities for the six months ended June 30, 2023 of $5.7 million.

Current wording

Cash used in the Company’s investing activities for the nine months ended September 30, 2024 was $5.5 million primarily relating to capital expenditures of $4.8 million and capitalized software expenditures of $0.7 million, compared to cash used in investing activities for the nine months ended September 30, 2023 of $6.7 million.

Previous wording

Cash used in the Company’s financing activities for the six months ended June 30, 2024 was $68.3 million compared to cash used in the Company's financing activities for the six months ended June 30, 2023 of $38.3 million. Cash used in financing activities for the six months ended June 30, 2024 primarily related to distributions to non-controlling interest holders of $26.2 million, special distribution to non-controlling interest holders of $15.6 million, repayment of scheduled principal payments of the term loan of $9.4 million, dividends to Class A shareholders $8.9 million and payments for taxes related to net share settlement of equity awards of $8.5 million. This was partially offset by proceeds of $0.2 million pursuant to the exercise of equity awards and issuance of shares for ESPP transactions. Cash used in financing activities for the six months ended June 30, 2023, primarily related to payment of distributions to non-controlling interests, repayment of scheduled term loan principal payments, payments for taxes related to net share settlement of equity awards, payments of tax receivable agreement liability and proceeds from employee stock purchase plan and exercise of equity awards.

Current wording

$15.6 million, repayment of scheduled principal payments of the term loan of $10.3 million, dividends to Class A shareholders $8.9 million, payments for taxes related to net share settlement of equity awards of $8.5 million and deferred cost related to debt modification of $1.9 million. This was partially offset by proceeds of $2.9 million pursuant to the exercise of equity awards and issuance of shares for ESPP transactions. Cash used in financing activities for the nine months ended September 30, 2023, primarily related to payment of distributions to non-controlling interests, repayment of scheduled term loan principal payments, payments for taxes related to net share settlement of equity awards, payments of tax receivable agreement liability and proceeds from employee stock purchase plan and exercise of equity awards.

Previous wording

A summary of our minimum contractual obligations related to our material outstanding contractual commitments is included in Notes 7, 8 and 16 of our Annual report on Form 10-K for the year ended December 31, 2023 as filed with the SEC. Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. As of June 30, 2024, the Company had inventory-related purchase commitments totaling approximately $31.8 million.

Current wording

A summary of our minimum contractual obligations related to our material outstanding contractual commitments is included in Notes 7, 8 and 16 of our Annual report on Form 10-K for the year ended December 31, 2023 as filed with the SEC. Our long-term contractual obligations include commitments and estimated purchase obligations entered into in the normal course of business. As of September 30, 2024, the Company had inventory-related purchase commitments totaling approximately $32.3 million.