SEC Filing | CompoSecure, Inc.

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cmpo-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 001-39687

CompoSecure, Inc.

(Exact name of registrant as specified in its charter)


Delaware						85-2749902
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

309 Pierce St.

Somerset, NJ 08873

(908) 518-0500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share	CMPO	The Nasdaq Global Market
Redeemable Warrants, each whole warrant exercisable for one share of Class A Common Stock	CMPOW	The Nasdaq Global Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ☒

As of November 2, 2023, there were 19,356,819 shares of the registrant's Class A common stock outstanding and 59,958,422 shares of the registrant's Class B common stock outstanding.

COMPOSECURE, INC.

Table of Contents


		Page
Part I.	Financial Information	2
Item 1.	Financial Statements	2
	Consolidated Balance Sheets (Unaudited)	3
	Consolidated Statements of Operations (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Unaudited)	5
	Consolidated Statements of Stockholders’ Deficit (Unaudited)	6
	Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
Part II.	Other Information	40
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	63
Item 4.	Mine Safety Disclosures	63
Item 5.	Other Information	63
Item 6.	Exhibits	63
Signatures		64

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, and the documents incorporated by reference herein, may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of management. Although the Company believes that its plans, intentions, and expectations reflected in or suggested by these forward- looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions, or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. Generally, statements that are not historical facts, including statements concerning the Company’s possible or assumed future actions, business strategies, events, or results of operations, are forward- looking statements. In some instances, these statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates” or “intends” or the negatives of these terms or variations of them or similar terminology.

Forward-looking statements are not guarantees of performance. You should not put undue reliance on these statements which speak only as of the date hereof. You should understand that the following important factors, among others, could affect the Company’s future results and could cause those results or other outcomes to differ materially from those expressed or implied in the Company’s forward-looking statements:

•the ability of the Company to grow and manage growth profitably, maintain relationships with customers, compete within its industry and retain its key employees;

•the possibility that the Company may be adversely impacted by other global economic, business, and/or competitive factors;

•the outcome of any legal proceedings that may be instituted against the Company or others;

•future exchange and interest rates; and

•other risks and uncertainties indicated in this report, including those under “Risk Factors” herein, and other filings that have been made or will be made with the SEC.

These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk Factors” section. The risks described in “Risk Factors” are not exhaustive. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can the Company assess the impact of all such risk factors on its business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements. The Company undertakes no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Part I - Financial Statements

Item 1. Financial Statements


COMPOSECURE, INC.
Consolidated Balance Sheets
($ in thousands, except par value and share amounts)


	September 30, 2023		December 31, 2022
	Unaudited
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	23,817	$	13,642
Accounts receivable, net	48,533		37,272
Inventories	51,988		42,374
Prepaid expenses and other current assets	3,911		3,824
Total current assets	128,249		97,112

Property and equipment, net	23,076		22,655
Right of use assets operating, net	7,950		8,932
Deferred tax asset	27,693		25,569
Derivative asset - interest rate swap	8,055		8,651
Deposits and other assets	24		24
Total assets	$	195,047	$	162,943

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current portion of long-term debt	$	10,333	$	14,372
Current portion of lease liabilities, operating	1,910		1,846
Current portion of tax receivable agreement liability	1,668		2,367
Accounts payable	14,065		7,127
Accrued expenses	14,218		10,154

Commission payable	3,847		3,317
Bonus payable	6,828		8,177
Total current liabilities	52,869		47,360

Long-term debt, net of deferred finance costs	202,839		216,276
Convertible notes, net	127,708		127,348
Derivative liability - convertible notes redemption make-whole provision	650		285
Warrant liability	14,570		16,341

Lease liabilities, operating	6,751		7,766

Tax receivable agreement liability	23,953		24,475
Earnout consideration liability	4,550		15,090
Total liabilities	433,890		454,941

Commitments and contingencies (Note 13)

Redeemable non-controlling interest	596,587		600,234

Preferred stock, $0.0001 par value; 10,000,000 shares authorized, no shares issued and outstanding	—		—
Class A common stock, $0.0001 par value; 250,000,000 shares authorized, 19,293,287 and 16,446,748 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.	2		2
Class B common stock, $0.0001 par value; 75,000,000 shares authorized, 59,958,422 and 60,325,057 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively.	6		6
Additional paid-in capital	34,765		24,107
Accumulated other comprehensive income	7,646		8,283
Accumulated deficit	(877,849)		(924,630)
Total stockholders' deficit	(835,430)		(892,232)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	195,047	$	162,943

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Operations (Unaudited)
($ in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	96,886	$	103,305	$	290,729	$	284,687
Cost of sales	47,990		41,547		134,542		115,318
Gross profit	48,896		61,758		156,187		169,369
Operating expenses:
Selling, general and administrative expenses	20,095		36,116		67,627		79,325

Income from operations	28,801		25,642		88,560		90,044

Other income (expense):
Revaluation of earnout consideration liability	6,319		2,636		10,540		21,676
Revaluation of warrant liability	9,739		(1,678)		1,771		16,363
Change in fair value of derivative liability - convertible notes redemption make-whole provision	149		246		(364)		185
Interest expense, net	(5,696)		(5,299)		(17,067)		(14,537)
Amortization of deferred financing costs	(314)		(551)		(1,288)		(1,825)
Other income	—		1,291		—		1,291
Total other income (expense), net	10,197		(3,355)		(6,408)		23,153
Income before income taxes	38,998		22,287		82,152		113,197
Income tax expense	(949)		(393)		(656)		(3,738)
Net income	$	38,049	$	21,894	$	81,496	$	109,459

Net income attributable to redeemable non-controlling interests	$	30,574	$	19,077	$	65,653	$	93,973
Net income attributable to CompoSecure, Inc.	$	7,475	$	2,817	$	15,843	$	15,486

Net income per share attributable to Class A common stockholders - basic	$	0.39	$	0.18	$	0.86	$	1.02
Net income per share attributable to Class A common stockholders - diluted	$	0.34	$	0.18	$	0.75	$	0.94

Weighted average shares used to compute net income per share attributable to Class A common stockholders - basic (in thousands)	19,075		15,433		18,420		15,141
Weighted average shares used to compute net income per share attributable to Class A common stockholders - diluted (in thousands)	35,765		19,662		35,362		32,815

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
($ in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	38,049	$	21,894	$	81,496	$	109,459
Other comprehensive (loss) income, net:
Unrealized (loss) gain on derivative - interest rate swap, (net of tax)	(264)		3,642		(637)		8,999
Total other comprehensive (loss) income, net	(264)		3,642		(637)		8,999
Comprehensive income	$	37,785	$	25,536	$	80,859	$	118,458

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Stockholders' Deficit (Unaudited)
($ in thousands, except share data)


	Class A Common Stock			Class B Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'		Redeemable Non-Controlling
	Shares	Amount		Shares	Amount		Capital		Income		Deficit		Deficit		Interest
Balance as of December 31, 2022	16,446,748	$	2	60,325,057	$	6	$	24,107	$	8,283	$	(924,630)	$	(892,232)	$	600,234
Distributions to non-controlling interests	—	—		—	—		—		—		(9,714)		(9,714)		—

Stock-based compensation	—	—		—	—		4,022		—		—		4,022		—
Net income	—	—		—	—		—		—		2,329		2,329		8,408
Class A common stock issued pursuant to equity awards, net of shares withheld for taxes, and employee stock purchase plan transactions	1,564,956	—		—	—		—		—		—		—		—
Proceeds from employee stock purchase plan and exercises of options	—	—		—	—		146		—		—		146		—
Class A common stock withheld related to net share settlement of equity awards	—	—		—	—		(2,409)		—		—		(2,409)		—
Class A common stock issued pursuant to Class B common stock exchanges	366,635	—		(366,635)	—				—		—		—		—
Unrealized loss on derivative - interest rate swap	—	—		—	—		—		(1,649)		—		(1,649)		—
Tax receivable agreement liability	—	—		—	—		(290)		—		—		(290)		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		12,055		12,055		(12,055)
Balance as of March 31, 2023	18,378,339	$	2	59,958,422	$	6	$	25,576	$	6,634	$	(919,960)	$	(887,742)	$	596,587
Distributions to non-controlling interests	—	—		—	—		0		—		(19,294)		(19,294)		—
Stock-based compensation	—	—		—	—		4,393		—		—		4,393		—
Net income	—	—		—	—		—		—		5,737		5,737		26,973
Class A common stock issued pursuant to equity awards, net of shares withheld for taxes, and employee stock purchase plan transactions	313,767	—		—	—		—		—		—		—		—
Proceeds from employee stock purchase plan and exercises of options	—	—		—	—		243		—		—		243		—
Class A common stock withheld related to net share settlement of equity awards	—	—		—	—		(74)		—		—		(74)		—

Unrealized gain on derivative - interest rate swap, net of tax	—	—		—	—		—		1,276		—		1,276		—
Tax receivable agreement liability	—	—		—	—		(1)		—		—		(1)		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		26,973		26,973		(26,973)

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Stockholders' Deficit (Unaudited)
(in thousands, except share data) - continued


Balance as of June 30, 2023	18,692,106	$	2	59,958,422	$	6	$	30,137	$	7,910	$	(906,544)	$	(868,489)	$	596,587


Distributions to non-controlling interests	—	—		—	—		—		—		(9,354)		(9,354)		—
Stock-based compensation	—	—		—	—		4,637		—		—		4,637		—
Proceeds from employee stock purchase plan and exercises of options	—	—		—	—		635		—		—		635		—
Net income	—	—		—	—		—		—		7,475		7,475		30,574
Class A common stock issued pursuant to equity awards, net of shares withheld for taxes, and employee stock purchase plan transactions	601,181	—		—	—		—		—		—		—		—
Class A common stock withheld related to net share settlement of equity awards	—	—		—	—		(643)		—		—		(643)		—

Unrealized loss on derivative - interest rate swap	—	—		—	—		—		(264)		—		(264)		—
Tax receivable agreement liability	—	—		—	—		(1)		—		—		(1)		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		30,574		30,574		(30,574)
Balance as of September 30, 2023	19,293,287	$	2	59,958,422	$	6	$	34,765	$	7,646	$	(877,849)	$	(835,430)	$	596,587

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Stockholders' Deficit (Unaudited)
(in thousands, except share data) - continued


	Class A Common Stock			Class B Common Stock			Additional Paid-in		Accumulated Other Comprehensive		Accumulated		Total Stockholders'		Redeemable Non-Controlling
	Shares	Amount		Shares	Amount		Capital		Income		Deficit		Deficit		Interest
Balance as of December 31, 2021	14,929,982	$	1	61,136,800	$	6	$	12,261	$	—	$	(1,028,229)	$	(1,015,961)	$	608,311
Issuance costs related to Business combination	—	—		—	—		(726)		—		—		(726)		—

Stock-based compensation	—	—		—	—		1,006		—		—		1,006		—
Net income	—	—		—	—		—		—		3,394		3,394		23,514
Class A common stock issued pursuant to equity awards	25,000	—		—	—		—		—		—		—		—
Unrealized gain on derivative - interest rate swap	—	—		—	—		—		3,869		—		3,869		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		23,514		23,514		(23,514)
Balance as of March 31, 2022	14,954,982	$	1	61,136,800	$	6	$	12,541	$	3,869	$	(1,001,321)	$	(984,904)	$	608,311
Distributions	—	—		—	—		—		—		(20,650)		(20,650)		—
Stock-based compensation	—	—		—	—		3,014		—		—		3,014		—
Net income	—	—		—	—		—		—		8,474		8,474		52,184
Class A common stock issued pursuant to equity awards, net of shares withheld for taxes	13,550	—		—	—		—		—		—		—		—
Class A common stock issued pursuant to Class B common stock exchanges	150,000	1		(150,000)	—		—		—		—		1		—
Unrealized gain on derivative - interest rate swap	—	—		—	—		—		1,488		—		1,488		—
Tax receivable agreement liability	—	—		—	—		2,055		—		—		2,055		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		53,677		53,677		(53,677)
Balance as of June 30, 2022	15,118,532	$	2	60,986,800	$	6	$	17,610	$	5,357	$	(959,820)	$	(936,845)	$	606,818
Distributions	—	—		—	—		—		—		(14,895)		(14,895)		—
Stock-based compensation	—	—		—	—		3,715		—				3,715		—
Proceeds from exercise of options							2						2
Net income	—	—		—	—		—		—		2,817		2,817		19,077
Class A common stock issued pursuant to equity awards, net of shares withheld for taxes	239,003	—		—	—		—		—		—		—		—
Class A common stock issued pursuant to Class B common stock exchanges	400,000	—		(400,000)	—		—		—		—		—		—
Unrealized gain on derivative - interest rate swap, net of tax	—	—		—	—		—		3,642		—		3,642		—
Tax receivable agreement liability	—	—		—	—		(272)		—		—		(272.00)		—
Adjustment of redeemable non-controlling interests to redemption value	—	—		—	—		—		—		23,055		23,055		(23,055)
Balance as of September 30, 2022	15,757,535	$	2	60,586,800	$	6	$	21,055	$	8,999	$	(948,843)	$	(918,781)	$	602,840

The accompanying notes are an integral part of these unaudited consolidated financial statements.


COMPOSECURE, INC.
Consolidated Statements of Cash Flows (Unaudited)
($ in thousands)


	Nine Months Ended September 30,
	2023		2022

Cash flows from operating activities:
Net income	$	81,496	$	109,459
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization	6,249		6,577
Stock-based compensation expense	13,052		7,736
Amortization of deferred finance costs	1,262		1,798
Change in fair value of earnout consideration liability	(10,540)		(21,676)
Revaluation of warrant liability	(1,771)		(16,363)
Change in fair value of derivative liability	364		(185)
Deferred tax (benefit) expense	(1,485)		3,191
Changes in assets and liabilities
Accounts receivable	(11,261)		(17,871)
Inventories	(9,614)		(13,322)
Prepaid expenses and other assets	(87)		(225)
Deposits and other assets	—		(14)
Accounts payable	6,938		5,568
Accrued expenses	4,065		1,403
Other liabilities	(789)		15,885
Net cash provided by operating activities	77,879		81,961

Cash flows from investing activities:
Purchase of property and equipment	(6,669)		(7,221)
Net cash used in investing activities	(6,669)		(7,221)

Cash flows from financing activities:
Proceeds from employee stock purchase plan and exercises of equity awards	1,024		2
Payments for taxes related to net share settlement of equity awards	(3,126)		—
Payment of line of credit	—		(5,000)
Payment of Tax receivable agreement liability	(2,193)		—
Payment of term loan	(18,122)		(16,878)
Deferred finance costs related to debt modification	(256)		—
Distributions to non-controlling interest	(38,362)		(35,545)
Payment of issuance costs related to business combination	—		(23,833)
Net cash used in financing activities	(61,035)		(81,254)

Net increase (decrease) in cash and cash equivalents	10,175		(6,514)

Cash and cash equivalents, beginning of period	13,642		21,944

Cash and cash equivalents, end of period	$	23,817	$	15,430

Supplementary disclosure of cash flow information:
Cash paid for interest expense	$	18,296	$	14,937
Supplemental disclosure of non-cash financing activities:
Derivative asset - interest rate swap	$	8,055	$	9,392

The accompanying notes are an integral part of these unaudited consolidated financial statements.

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

CompoSecure, Inc. (“CompoSecure” or the “Company”) is a manufacturer and designer of complex metal, composite and proprietary financial transaction cards. The Company started operations in 2000 and provides products and services primarily to global financial institutions, plastic card manufacturers, system integrators, and security specialists. The Company is located in Somerset, New Jersey.

Founded in 2000, CompoSecure is a technology partner to market leaders, fintechs and consumers enabling trust for millions of people around the globe. The Company combines elegance, simplicity and security to deliver exceptional experiences and peace of mind in the physical and digital world. The Company’s innovative payment card technology and metal cards with Arculus secure authentication and digital asset storage capabilities deliver unique, premium branded experiences, enable people to access and use their financial and digital assets, and ensure trust at the point of a transaction.

The Company creates newly innovated, highly differentiated and customized quality financial payment products for banks and other payment card issuers to support and increase their customer acquisition, customer retention and organic customer spend. The Company’s customers consist primarily of leading international and domestic banks and other payment card issuers primarily within the United States (“U.S.”), Europe, Asia, Latin America, Canada, and the Middle East. The Company is a platform for next generation payment technology, security, and authentication solutions. The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers. The Company has established a niche position in the financial payment card market through nearly over 20 years of innovation and experience and is focused primarily on this attractive subsector of the financial technology market. The Company serves a diverse set of direct customers and indirect customers, including some of the largest issuers of credit cards in the U.S.

On December 27, 2021 (the "Closing Date"), Roman DBDR Tech Acquisition Corp ("Roman DBDR") consummated the merger pursuant to the Merger Agreement, dated April 19, 2021 (the "Merger Agreement"), by and among Roman DBDR, Roman Parent Merger Sub, LLC, a wholly-owned subsidiary of Roman DBDR incorporated in the State of Delaware ("Merger Sub"), and CompoSecure Holdings, L.L.C., a Delaware limited liability company ("Holdings"). Pursuant to the terms of the Merger Agreement, a business combination between the Company and Holdings was affected through the merger of Merger Sub with and into Holdings, with Holdings surviving as the surviving company and as a subsidiary of Roman DBDR (the "Business Combination"). Pursuant to the Business Combination, the merger was accounted for as a reverse recapitalization in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). On the Closing Date, and in connection with the closing of the Business Combination, Roman DBDR changed its name to CompoSecure, Inc. Holdings was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") 805.

CompoSecure is operated as an umbrella partnership C corporation (“Up-C”) meaning that the sole asset of CompoSecure, Inc. is its interest in CompoSecure Holdings, L.L.C. and the related deferred tax asset. CompoSecure Holdings, L.L.C. is an entity taxed as a partnership for U.S. federal income tax purposes and owned by both the historical owners and CompoSecure, Inc. By virtue of our control of CompoSecure Holdings, L.L.C.’s board of managers, CompoSecure, Inc. operates and controls the business and affairs of CompoSecure Holdings, L.L.C. As a result, we consolidate CompoSecure Holdings’ financial results and report a non-controlling interest related to the CompoSecure Holdings units not owned by the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements are presented in conformity U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”). The accompanying

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

consolidated financial statements include the results of operations of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform to the current year presentation. All dollar amounts are in thousands, unless otherwise noted. Share and per share amounts are presented on a post-conversion basis for all periods presented, unless otherwise noted.

Our significant accounting policies are detailed in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC.

Interim Financial Statements

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and Article 10 of Regulation S-X of the SEC for interim financial information. and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The financial statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, the Financial Statements reflect all adjustments, consisting solely of normal, recurring adjustments, necessary for the fair presentation of the financial statements for the periods presented. The results disclosed in the Consolidated Statements of Operations for the three months and nine months period ended September 30, 2023 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. The Company bases its estimates on historical experience, current business factors and various other assumptions believed to be reasonable under the circumstances, all of which are necessary in order to form a basis for determining the carrying values of assets and liabilities. Actual results may differ from those estimates and assumptions. The Company evaluates the adequacy of its reserves and the estimates used in calculations on an on-going basis. Significant areas requiring management to make estimates include the valuation of equity instruments, measurement of changes in the fair value of earnout consideration liability, estimates of derivative liability associated with the Exchangeable Notes, which are marked to market each quarter based on a Lattice model approach, derivative asset for the interest rate swap, changes in the fair value of warrant liabilities, valuation allowances on deferred tax assets which are based on an assessment of recoverability of the deferred tax assets against future taxable income and estimates of the inputs used to calculate the tax receivable agreement liability.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606 when the performance obligations under the terms of the Company’s contracts with its customers have been satisfied. This occurs at the point in time when control of the specific goods or services as specified by each purchase order are transferred to customers. Specific goods refers to the products offered by the Company, including metal cards, high security documents, and pre-laminated materials. Transfer of control passes to customers upon shipment or upon receipt, depending on the agreement with the specific customers. ASC 606 requires entities to record a contract asset when a performance obligation has been satisfied or partially satisfied, but the amount of consideration has not yet been received because the receipt of the consideration is conditioned on something other than the passage of time. ASC 606 also requires an entity to present a revenue contract as a contract liability in instances when a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (e.g. receivable), before the entity transfers a good or service to the customer. The Company did not have any contract assets or liabilities as of September 30, 2023 or December 31, 2022.

The Company invoices its customers at the time at which control is transferred, with payment terms ranging between 15 and 60 days depending on each individual contract. As the payment is due within 90 days of the invoice, a significant financing component is not included within the contracts.

The majority of the Company’s contracts with its customers have the same performance obligation of manufacturing and transferring the specified number of cards to the customer. Each individual card included within an

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

order constitutes a separate performance obligation, which is satisfied upon the transfer of goods to the customer. The contract term as defined by ASC 606 is the length of time it takes to deliver the goods or services promised under the purchase order or statement of work. As such, the Company's contracts are generally short term in nature.

Revenue is measured in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Revenue is recognized net of variable consideration such as discounts, rebates, and returns.

The Company’s products do not include an unmitigated right of return unless the product is non-conforming or defective. If the goods are non-conforming or defective, the defective goods are replaced or reworked or, in certain instances, a credit is issued for the portion of the order that was non-conforming or defective. A provision for sales returns and allowances is recorded based on experience with goods being returned. Most returned goods are re-worked and subsequently re-shipped to the customer and recognized as revenue. Historically, returns have not been material to the Company.

Additionally, the Company has a rebate program with certain customers allowing for a rebate based on achieving a certain level of shipped sales during the calendar year. This rebate is estimated and updated throughout the year and recorded against revenues and the related accounts receivable.

Segment Information

The Company is managed and operated as one business as the entire business is managed by a single management team that reports to the Chief Executive Officer and President. The Company's chief operating decision-maker ("CODM") is its Chief Executive Officer and President, who makes resource allocation decisions and assesses performance based on financial information presented on an aggregate basis. The Company does not operate separate lines of business with respect to any of its products and does not review discrete financial information to allocate resources to separate products or by location. Accordingly, the Company views its business as one reportable operating segment.

Characteristics of the organization which were relied upon in making the determination that the Company operates in one reportable segment include the similar nature of all of the products that the Company sells, the functional alignment of the Company’s organizational structure, and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.

Net Income Per Share

The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. Net income per common share is computed by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding for the period. The weighted-average number of common shares outstanding during the period includes Class A common stock but is exclusive of Class B common stock as these shares have no economic or participating rights.

Diluted net income per share is computed by dividing the net income allocated to potential dilutive instruments attributable to controlling interest by the basic weighted-average number of common shares outstanding during the period, adjusted for the potentially dilutive shares of common stock equivalents resulting from the assumed exercise of the warrants, payment of the earnouts, exercise of the equity awards, exchange of the Class B units and Exchangeable Notes ("securities") only if the effect is not anti-dilutive.

Recent Accounting Pronouncements – Adopted in current fiscal year

In March 2020, the FASB issued ASU No. 2020-4, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" (ASU 2020-4), and in December 2022, the FASB issued ASU No. 2022-6, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date for Topic 848" (ASU 2022-6). ASU 2020-4 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance is elective and applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2022-6 defers the sunset date of Topic 848 from December 31,

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. During the first quarter of fiscal 2023, the Company adopted the expedient in accounting for the amendments to the Company's 2021 Credit Facility agreement which were made as a result of the replacement of LIBOR as a reference rate. On February 28, 2023, the Company amended the 2021 Credit Facility to, among other things, transition from bearing interest based on LIBOR to Secured Overnight Financing Rate ("SOFR") or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin. See Note 5, Debt, for further details regarding the interest rate effected by these amendments, which will be applied prospectively. The adoption of these ASUs did not have a material impact to the Company's consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, which eliminates the accounting guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-402 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The amendments in ASU 2020-04 are effective for years beginning after December 15, 2022 for entities that have adopted current expected credit loss ("CECL") model under ASC 326. The Company adopted the CECL model effective January 1, 2022. The adoption of this ASU did not have any impact on the Company's financial statements.

3. INVENTORIES

The major classes of inventories were as follows:


	September 30, 2023		December 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)
	$	51,988	$	42,374

We monitor inventory costs relative to selling prices and perform physical cycle count procedures on inventories throughout the year to determine if a lower of cost or net realizable value reserve is necessary. The Company reviews inventory for slow-moving or obsolete amounts based on expected product sales volume and provides reserves against the carrying amount of inventory as appropriate. This reserve may fluctuate as our assumptions change due to new information, discrete events, or changes in our business, such as entering new markets or discontinuing a specific product.

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:


	Useful Life	September 30, 2023		December 31, 2022
Machinery and equipment	5 - 10 years	$	70,071	$	64,626
Furniture and fixtures	3 - 5 years	987		987
Computer equipment	3 - 5 years	927		927
Leasehold improvements	Shorter of lease term or estimated useful life	13,891		11,993
Vehicles	5 years	264		264
Software	1 - 3 years	2,924		2,924
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 on property and equipment was $2,078 and $2,010 for the three months ended September 30, 2023 and 2022, respectively. Depreciation and amortization expense on property and equipment was $6,249 and $6,577 for the nine months ended September 30, 2023 and 2022, respectively.

5. DEBT

Exchangeable Senior Notes

On April 19, 2021, concurrent 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 the Company and guaranteed by the Company's subsidiary, Holdings in an aggregate principal amount of up to $130,000 that are exchangeable into shares of Class A common stock at a conversion price of $11.50 per share, subject to the terms and conditions of an Indenture entered by the Company and its subsidiary, Holdings, and the trustee under the Indenture. The Exchangeable Notes bear interest at a rate of 7% per year, payable semiannually in arrears on each June 15 and December 15, commencing on June 15, 2022, to holders of record at the close of business on the preceding June 1 and December 1 (whether or not such day is a Business Day), respectively. The Exchangeable Notes mature in five years on December 27, 2026. 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. In connection with the issuance of the Exchangeable Notes, the Company entered into a Registration Rights Agreement, pursuant to which the Notes Investors received certain registration rights with respect to the Class A common stock.

After the three-year anniversary of the Closing Date, the Exchangeable Notes will be redeemable at any time and from time to time by the Company, in whole or in part, (i) if the Last Reported Sale Price of the Class A common stock exceeds 130% of the exchange price as defined in Indenture then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption and (ii) so long as a registration statement registering the resale of all Exchange Shares is effective and available for use by holders of

Exchangeable Notes during the entirety of the period from and including the date notice of redemption is given to and including the date of redemption. The notice period for any redemption will be no less than 30 scheduled trading days. The redemption price in any such redemption shall be equal to (a) 100% of the principal amount of the Exchangeable Notes to be redeemed, plus (b) accrued and unpaid interest to, but excluding, the redemption date. The redemption price is payable in cash.

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

Per the terms of the Indenture, holders of Exchangeable Notes in connection with any such redemption will receive a make-whole payment equal to the aggregate dollar value of all interest payable from the date the Company delivers notice of such redemption through the maturity of the Exchangeable Notes. The redemption Make-Whole Amount is payable, at the Company’s option, in cash or through an increase in the exchange rate then applicable to the Exchangeable Notes by an amount equal to (i) the redemption Make-Whole Amount divided by (ii) the five day Volume Weighed Average Price ("VWAP") with regard to the Class A common stock during the five trading period beginning on the trading day immediately following the notice of redemption.

Holders of Exchangeable Notes may exchange their notes in whole or in part, at any time or from time to time, for shares of the Company’s Class A common stock, par value $0.0001 per share up, to a maximum exchange rate of 99.9999 shares per $1,000 principal amount after adjustments as defined in the indenture.

The Exchangeable Notes contain customary anti-dilution adjustments, taking into account the agreed terms in the Indenture. To avoid doubt, among other customary adjustments, this includes anti-dilution protections for dividends and distributions of the Company's capital stock, assets and indebtedness. Per the terms of the Indenture, the following are the anti-dilution adjustments of the Exchange Rate:

a.If the Company exclusively issues shares of common stock as a dividend or distribution on shares of the common stock, or if the Company effects a share split or share combination;

b.If the Company issues to all or substantially all holders of the common stock any rights, options or warrants (other than pursuant to a stockholders rights plan) entitling them, for a period of not more than 45 calendar days after the announcement date of such issuance, to subscribe for or purchase shares of the common stock at a price per share that is less than the average of the last reported sale prices of the common stock for the 10 consecutive trading day period ending on, and including, the trading day immediately preceding the date of announcement of such issuance;

c.If the Company distributes shares of its capital stock, evidences of its indebtedness, other assets or property of the Company or rights, options or warrants to acquire its capital stock or other securities of the Company, to all or substantially all holders of the common stock;

d.If any cash dividend or distribution is made to all or substantially all holders of the common stock;

e.If the Company or any of its Subsidiaries make a payment in respect of a tender or exchange offer for the common Stock, to the extent that the cash and value of any other consideration included in the payment per share of the common stock exceeds the average of the last reported sale prices of the common stock over the 10 consecutive trading day period commencing on, and including, the trading day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer.

The exchange rate will in no event be adjusted down pursuant to the provisions described above, except to the extent a tender or exchange offer is announced but not consummated.

If the Company undergoes a “fundamental change” (as defined in the Indenture), subject to certain conditions, the Exchange Rate will be adjusted per the adjustment table included in the Indenture. If a fundamental change occurs at any time prior to the maturity date, each holder shall have the right, at such holder’s option, to require the Company to repurchase for cash all of such holder’s Exchangeable Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased, plus accrued and unpaid interest thereon. There is no make-whole payment associated with a fundamental change redemption.

Holders of Exchangeable Notes will be entitled to the resale registration rights under the resale Registration Rights Agreement. If a Registration default occurs, additional interest will accrue, equal to 0.25% in the first 90 days and 0.50%

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

after the 91st day after the Registration Default (which includes that the Registration Statement has not been filed, or deemed effective or ceases to be effective).

The Indenture contains customary terms and covenants and events of default. Upon an event of default as defined in the Indenture, the trustee or the holders of at least 25% in aggregate principal amount of the Exchangeable Notes may declare 100% of the principal of, and accrued and unpaid interest on, all the Exchangeable Notes to be due and payable immediately, and upon any such declaration, the same shall become and shall automatically be immediately due and payable. Upon an event of default in the payment of interest, the Company may elect the sole remedy to be the payment of additional interest of 0.25% for the first 90 days after the occurrence of such an event of default and 0.50% for day s 91-180 after the occurrence of such an event of default.

The Company assessed all of the terms and features of the Exchangeable Notes in order to identify any potential embedded features that would require bifurcation. As part of this analysis, the Company assessed the economic characteristics and risks of the Exchangeable Notes, including the conversion, put and call features. In consideration of these provisions, the Company determined that the optional redemption with a make-whole provision feature required bifurcation as it is a derivative. The fair value of this derivative was determined based on the difference between the fair value of the Exchangeable Notes with the redemption with a make-whole provision feature and the fair value of the Exchangeable Notes without the redemption with a make-whole provision feature. The Company employed a Lattice model to determine the fair value of the derivative upon issuance of the Exchangeable Notes and recorded this amount as derivative liability with an offsetting amount as a debt discount as a reduction to the carrying value of the Exchangeable Notes on the Closing Date, or December 27, 2021. The optional redemption with a make-whole provision feature is measured at fair value on a quarterly basis and the change in the fair value for the period is recorded on the consolidated statements of operations. The Company performed a valuation of the derivative liability and determined that the fair value of the derivative liability was $650 at September 30, 2023 and $285 at December 31, 2022. The Company recorded a favorable change in fair value of $149 and $246 for the three months ended September 30, 2023 and September 30, 2022, respectively. The Company recorded an unfavorable change in fair value of $364 and a favorable change of $185 for the nine months ended September 30, 2023 and September 30, 2022, respectively.

The expected term of the Exchangeable Notes was equal for the period through December 27, 2026 as this represents the point at which the Exchangeable Notes will mature unless earlier converted in accordance with their terms prior to such date. For the quarter ended September 30, 2023 and September 30, 2022, the Company recognized $2,416 and $2,407 of interest expense related to the Exchangeable Notes at the effective interest rate of 7.4%. For the nine-months ended September 30, 2023 and September 30, 2022, the Company recognized $7,167 and $7,127 of interest expense related to the Exchangeable Notes at the effective interest rate of 7.4%. The fair value of the Company’s Exchangeable Notes approximate the carrying value of the debt.

In connection with the issuance of the Exchangeable Notes, the Company incurred approximately $2,600 of debt issuance costs, which primarily consisted of underwriting fees, and allocated these costs to the liability component and recorded as a reduction in the carrying amount of the debt liability on the balance sheet. The portion allocated to the Exchangeable Notes is amortized to interest expense over the expected term of the Exchangeable Notes using the effective interest method.

Term Loan

In November 2020, the Company's subsidiaries entered into a new agreement with a bank group arranged by JP Morgan Chase Bank ("JPMC") to refinance the then existing July 2019 credit facility, increasing the maximum aggregate amount available under the term loan to $240,000 bringing total credit facility to $300,000. In addition, the maturity date of both the revolver and term loan was amended to November 5, 2023. This amendment was accounted for as a modification and approximately $3,200 of additional costs incurred in connection with the modification were capitalized as debt issuance costs.

In December 2021, the Company entered into a new agreement with JPMC to refinance its then existing November 2020 credit facility (the "2021 Credit Facility"), increasing the maximum aggregate amount available under the term loan to $250,000 bringing total credit facility to $310,000. In addition, the maturity dates of both the revolver and

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

term loan were amended to December 16, 2025. This amendment was accounted for as a modification and approximately $1,800 of additional costs incurred in connection with the modification were capitalized as debt issuance costs.

In February 2023, the Company amended the 2021 Credit Facility to, among other things, transition from bearing interest based on LIBOR to SOFR or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin, and to reflect the waiver of a technical default under the 2021 Credit Facility, related to the delayed delivery of a pledge of its interests in Holdings by the parent company (i.e., CompoSecure, Inc.). Holdings had already pledged all of its assets in favor of the lenders as per the terms of the debt agreement. After the amendment on February 28, 2023, the interest rate spreads and fees under the 2021 Credit Facility are based on a quoted SOFR plus a SOFR adjustment of 0.10% and an applicable margin ranging from 1.75% to 2.75% as determined by the Company’s prevailing Leverage Ratio for the revolving and term loan Term Benchmark and RFR Spread debt (as each term is defined in the 2021 Credit Facility).

The Company further amended its 2021 Credit Facility in May 2023. Pursuant to the amendment, approximately $257 of additional costs incurred in connection with the modification were capitalized as debt issuance costs. In connection with the amendment, two of the lenders in the original agreement did not participate in the amended debt agreement. As a result, the remaining debt issuance cost of approximately $589 related to these two lenders were written off by the Company recorded in amortization of deferred financing cost reflected in Statements of Operations.

Interest on the Revolver and Term Loan are based on the outstanding principal amount during the interest period multiplied by the fluctuating bank prime rate plus the applicable margin of 1.75% or for portions of the debt converted to Term Benchmark Loan, the quoted SOFR rate plus the applicable margin of 2.85%. At September 30, 2023 and 2022, the effective interest rate on the Revolver and Term Loan was 7.99% and 5.15% per year, respectively. Interest is payable monthly in arrears or upon maturity of the Euro loans that can run 30, 90, 120, 180 day time periods. The Company must pay quarterly an annual commitment fee of 0.35% on the unused portion of the $60,000 Revolver.

The credit facility is secured by substantially all of the assets of the Company. The Company recognized $4,997 and $3,439 of interest expense related to the Revolver and the Term Loan for the quarter ended September 30, 2023 and 2022, respectively. The Company recognized $14,870 and $9,609 of interest expense related to the Revolver and the Term Loan for the nine months ended September 30, 2023 and 2022, respectively.

The terms of the credit facilities contain certain financial covenants including a minimum interest coverage ratio, a maximum total debt to EBITDA ratio and a minimum fixed charge coverage ratio. The Company made a prepayment of $8,417 related to the credit facilities in the nine-month period ended September 30, 2023. At September 30, 2023 and December 31, 2022, the Company was in compliance with all financial covenants. The fair value of the Company's debt approximates the carrying value for all periods presented.

As of September 30, 2023 and December 31, 2022, there were no balances outstanding on the Revolver. At September 30, 2023, there was $60,000 available for borrowing under the Revolver.

The balances payable under all borrowing facilities are as follows:


	September 30, 2023						December 31, 2022
	Term Loan		Exchangeable Notes		Total debt		Term Loan		Exchangeable Notes		Total debt
Loan Balance	$	215,000	$	130,000	$	345,000	$	233,122	$	130,000	$363,122
Less: current portion of term loan (scheduled payments)	(10,333)		—		(10,333)		(14,372)		—		(14,372)
Less: net deferred financing costs	(1,828)		(2,292)		(4,120)		(2,474)		(2,652)		(5,126)
Total Long Term debt	$	202,839	$	127,708	$	330,547	$	216,276	$	127,348	$	343,624
Derivative liability - redemption with make-whole provision			$	650					$	285

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

The maturity of all the borrowings facilities is as follows:


Remainder of 2023	$	—
2024	15,000
2025	200,000
2026	130,000
Total debt	$	345,000

The Company is exposed to interest rate risk on variable interest rate debt obligations. To manage interest rate risk, the Company had entered into an interest rate swap agreement on November 5, 2020 to hedge forecasted interest rate payments on its variable rate debt. In January 2022, the Company cancelled the November 2020 swap agreement and entered into a new interest rate swap agreement. The Company recognized $400 gain upon the settlement of the November 2020 interest rate swap agreement in interest income reflected in statements of operations. At September 30, 2023, the Company’s interest rate swap contract outstanding had a notional amount of $125,000 maturing in December 2025. The Company has designated the interest rate swap agreement as a cash flow hedge for accounting purposes, that was determined to be effective. The Company determined the fair value of the interest rate swap to be zero at the inception of the agreement and $8,055 and $8,651 at September 30, 2023 and December 31, 2022, respectively. The Company reflects the realized gains and losses of the actual monthly settlement activity of the interest rate swap through interest income or expense in its consolidated statements of operations. The Company reflects the unrealized changes in fair value of the interest rate swap at each reporting period in other comprehensive income and a derivative asset or liability will be recognized at each reporting period in the Company’s financial statements. The interest rate swap converted to SOFR from LIBOR at the same time as the amendment of 2021 Credit Facility in February 2023.

6. EQUITY STRUCTURE

Shares Authorized

As of September 30, 2023, the Company had authorized a total of 250,000,000 shares for issuance designated as Class A common stock, 75,000,000 designated as Class B common stock and 10,000,000 shares designated as preferred stock. As of September 30, 2023, there were 19,293,287 shares of Class A Common Stock issued and outstanding, 59,958,422 shares of Class B Common Stock issued and outstanding and no shares of Preferred Stock issued and outstanding.

Issuance of Common Stock

In the quarter ended September 30, 2023, the Company issued 601,181 new shares of class A common stock pursuant primarily to the vesting of certain restricted stock units ("RSUs"), and exercises of stock options, as well as employee stock purchase plan transactions ("ESPP") during the quarter. The Class A common stock issued pursuant to the vesting of RSUs were issued net of shares withheld for applicable taxes.

In the nine month period ended September 30, 2023, the Company issued 2,479,904 new shares of class A common stock pursuant primarily to the vesting of certain restricted stock units ("RSUs"), and exercises of stock options, as well as ESPP transactions during the nine month period. The Class A common stock issued pursuant to the vesting of RSUs were issued net of shares withheld for applicable taxes. Additionally, certain holders of the shares of Class B common stock exchanged an aggregate of 366,635 Class B units in Holdings (together with the corresponding number of shares of the Company's Class B common stock) in exchange for 366,635 shares of Class A common stock. Upon the exchange, the exchanged shares of Class B common stock and the corresponding number of shares of Class B units were canceled.

Warrants

As of September 30, 2023, the Company had 300,000 private warrants outstanding. Each private warrant entitles the registered holder to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustment,

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

at any time commencing 30 days after the completion of the Business Combination. The exercise price and number of common shares issuable upon exercise of the private warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. However, the private warrants will not be adjusted for issuance of common stock at a price below its exercise price. As of September 30, 2023, the holder of private warrants had sold an aggregate of 10,537,400 private warrants in open market transactions resulting in such private warrants becoming public warrants.

As of September 30, 2023, the Company had 22,115,389 public warrants outstanding. Each public warrant entitles the registered holder to purchase one share of the Company’s Class A Common Stock at a price of $11.50 per share, subject to adjustment, at any time commencing 30 days after the completion of the Business Combination. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares.

Non-Controlling Interest

Non-controlling interests represent direct interests held in Holdings other than by the Company immediately after the Business Combination. The non-controlling interests in the Company are represented by Class B Units, or such other equity securities in the Company as the Board may establish in accordance with the terms hereof. Since the potential cash redemptions of the non-controlling interests are outside the control of the Company, such non-controlling interests are classified as temporary equity on the consolidated balance sheet in accordance with ASC 480. Income tax benefit or expense is applied to the income attributable to the controlling interest as the income attributable to the non-controlling interest is pass-through income. The non-controlling interest has been adjusted to redemption value as of September 30, 2023 in accordance with ASC 480-10. This measurement adjustment results in a corresponding adjustment to shareholders’ deficit through adjustments to additional paid-in capital and retained earnings. The redemption value of the Class B Units was $596,587 on September 30, 2023. The redemption value was calculated by multiplying the 59,958,422 Class B Units outstanding at September 30, 2023 by the $9.95 trading price of our Class A common stock on December 27, 2021.

7. STOCK-BASED COMPENSATION

The following table summarizes share-based compensation expense included in Selling, general and administrative expenses within the consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		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		—
Incentive units	—		—		—		39
Total stock-based compensation expense	$	4,637	$	3,715	$	13,052	$	7,736

The following table sets forth the options activity under the Holdings' equity plan, which was assumed by the Company, for the nine month period ended September 30, 2023:

Stock Option Activity

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)


	Number of Shares	Weighted Average Exercise Price Per Shares		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2023	4,765,545	$	1.44	4.8	$	16,939
Granted	—	—
Exercised	(1,395,562)	$	0.40	1.6	$	9,020

Outstanding at September 30, 2023	3,369,983	$	1.77	4.4	$	15,495
Vested and expected to vest at September 30, 2023	3,369,983	$	1.77	6.3	$	15,495
Exercisable at September 30, 2023	3,345,417	$	1.72	3.0	$	15,493

Restricted Stock Unit Activity


			Number of Shares
Outstanding at January 1, 2023			5,497,066
Granted			1,649,498
Vested			(1,567,217)
Forfeited			(120,150)
Nonvested at September 30, 2023			5,459,197

Performance Stock Unit Activity


			Number of Shares
Outstanding at January 1, 2023			449,380
Granted			658,156
Vested			—

Nonvested at September 30, 2023			1,107,536

Earnouts


			Number of Shares
Outstanding at January 1, 2023			657,160
Granted			—
Vested			—

Nonvested at September 30, 2023			657,160

Incentive Units

Upon consummation of the Business Combination on December 27, 2021, all of the incentive units, whether vested or unvested, outstanding immediately prior to the merger that were not settled as part of the transaction, were assumed by the Company and converted into class B common stock and such shares of converted class B common stock outstanding were 1,236,027 as of September 30, 2023.

Unrecognized compensation cost for unvested stock options, restricted stock awards and performance stock units as of September 30, 2023 totaled $33,710, and is expected to be recognized over a weighted average period of approximately 2.1 years. No unrecognized compensation expense remained for the incentive units as of September 30, 2023.

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

8. RETIREMENT PLANS

Defined Contribution Plan

The Company has a 401(k) profit sharing plan for all full-time employees who have attained the age of 21 and completed 90 days of service. The Company matches 100% of the first 1% and then 50% of the next 5% of employee contributions. Retirement plan expense for the three months ended September 30, 2023 and 2022 was approximately $405 and $319, respectively. Retirement plan expense for the nine months ended September 30, 2023 and 2022 was approximately $1,326 and $1,156, respectively.

Deferred Compensation Plan

The Company had a self-administered deferred compensation plan that accrues a liability for the benefit of certain employees equal to 0.25% of the year-over-year change in Earnings Before Interest Depreciation “EBITDA” that began in 2014. The total liability was $0 and $242 at September 30, 2023 and December 31, 2022, respectively and was recorded in other liabilities on the balance sheet. The plan was terminated during the year ended December 31, 2021 and the remaining liability was paid in the nine months ended September 30, 2023.

9. FAIR VALUE MEASUREMENTS

The Company determines fair value in accordance with ASC 820 which established a hierarchy for the inputs used to measure the fair value of financial assets and liabilities based on the source of the input, which generally range from quoted prices for identical instruments in a principal trading market (i.e., Level 1) to estimates determined using significant unobservable inputs (i.e., Level 3). The fair value hierarchy prioritizes the inputs, which refer to assumptions that market participants would use in pricing an asset or liability, based upon the highest and best use, into three levels as follows:

The standard describes three levels of inputs that may be used to measure fair value:

•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.

•Level 2: Observable inputs other than unadjusted quoted prices in active markets for identical assets or liabilities such as:

◦Quoted prices for similar assets or liabilities in active markets

◦Quoted prices for identical or similar assets or liabilities in inactive markets

◦Inputs other than quoted prices that are observable for the asset or liability

◦Inputs that are derived principally from or corroborated by observable market data by correlation or other mean

•Level 3: Unobservable inputs in which there is little or no market data available, which are significant to the fair value measurement and require the Company to develop its own assumptions.

The Company’s financial assets and liabilities measured at fair value on a recurring basis, consisted of the following types of instruments as of the following dates:

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)


	Level 1		Level 2		Level 3		Total
September 30, 2023
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 with make-whole provision	—		—		650		650
December 31, 2022
Assets Carried at Fair Value:
Derivative asset - interest rate swap	$	—	$	8,651	$	—	$	8,651
Liabilities Carried at Fair Value:
Public warrants	$	8,105	$	—	$	—	$	8,105
Private warrants	—		—		8,236		8,236
Earnout consideration	—		—		15,090		15,090
Derivative liability - redemption with make-whole provision	—		—		285		285

Additional information is provided below about assets and liabilities remeasured at fair value on a recurring basis and for which the Company utilizes Level 3 inputs to determine fair value.

Derivative asset - interest rate swap

The Company is exposed to interest rate risk on variable interest rate debt obligations. To manage interest rate risk, the Company entered into an interest rate swap agreement on January 5, 2022. See Note 5.

Warrant liabilities

As a result of the Business Combination, the Company assumed warrant liability related to previously issued warrants in connection with Roman DBDR's initial public offering. The warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on our consolidated balance sheet. The warrant liabilities were remeasured at September 30, 2023, with changes in fair value presented within revaluation of warrant liabilities in the consolidated statement of operations.

The following table provides a reconciliation of the ending balances for the warrant liabilities remeasured at fair value:


	Warrant Liabilities


Estimated fair value at December 31, 2022	$	16,341
Change in estimated fair value	(1,771)
Estimated fair value at September 30, 2023	$	14,570

The Public warrants were valued using the quoted market price as the fair value at the end of each balance sheet date. The Private Placement Warrants were valued using the Black Scholes Option Pricing Model.

The fair value of private warrants has been classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently readily observable in the market. If different assumptions were

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

used for the various inputs to the valuation approach, the estimated fair value could be significantly higher or lower than the fair value determined.

Earnout Consideration

Holdings' equity holders have the right to receive an aggregate of up to 7,500,000 additional (i) shares of the Company's class A common stock or (ii) Holdings Units (and a corresponding number of shares of the Company's class B common stock), as applicable, in Earnout consideration based on the achievement of certain stock price thresholds. Earnout Considerations held by Holdings' holders (not including the holders under ASC 718) were determined to be derivative instruments in accordance with ASC 815 and were accounted as derivative liabilities, initially valued at fair value in accordance with ASC 815-40-30-1. The liability for Earnouts are remeasured at each reporting period at fair value, with changes in fair value recorded in earnings in accordance with ASC 815. The Company established the initial fair value for the earnouts at the closing date on December 27, 2021 using a Monte Carlo simulation model. The following table provides a reconciliation of the ending balances for the earnout consideration liabilities remeasured at fair value:


	Earnout Consideration Liability

Estimated fair value at December 31, 2022	$	15,090
Change in estimated fair value	(10,540)
Estimated fair value at September 30, 2023	$	4,550

The following assumptions were used to determine the fair value of the Earnout considerations as of September 30, 2023:


	September 30, 2023
Common stock market value	$	6.45
Risk-free interest rate	4.97% - 5.36%
Expected volatility	40.0% - 45.0%
Expected dividends	0		%
Expected term (years)	1.2-2.2 years

The fair value of Earnouts has been classified as a Level 3 liability as its valuation requires substantial judgment and estimation of factors that are not currently readily observable in the market. If different assumptions were used for the various inputs to the valuation approach, the estimated fair value could be significantly higher or lower than the fair value determined.

10. GEOGRAPHIC INFORMATION AND CONCENTRATIONS

The Company headquarters and substantially all of its operations, including its long-lived assets, are located in the United States. Geographical sales information based on the location of the customer was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales by region:
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

The Company’s principal direct customers as of September 30, 2023 consist primarily of leading international, foreign and domestic banks and other credit card issuers primarily within the U.S., Europe, Asia, Latin America, Canada,

COMPOSECURE, INC.

Notes to Consolidated Financial Statements - Unaudited


("$ in thousands" - except share data)

and the Middle East. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses, if necessary.

Three customers individually accounted for more than 10% of the Company’s revenue or 84.6% combined, of total revenue for the three months ended September 30, 2023. Three customers individually accounted for more than 10% of the Company’s revenue or 76.4%, combined, of total revenue for the three months ended September 30, 2022. Three customers individually accounted for more than 10% of the Company’s revenue or 79.1%, combined, of total revenue for the nine months ended September 30, 2023. Three customers individually accounted for more than 10% of the Company’s revenue or 76.8%, combined, of total revenue for the nine months ended September 30, 2022. Two customers individually accounted for more than 10% of the Company’s accounts receivable or approximately 73% and two customers individually accounted for more than 10% or approximately 63% of total accounts receivable as of September 30, 2023 and December 31, 2022, respectively.

One individual vendor accounted for more than 10% of purchases of supplies, or approximately 15% of total purchases, for the nine months ended September 30, 2023. One individual vendor accounted for more than 10% of purchases of supplies for the nine months ended September 30, 2022.

11. INCOME TAXES

The Company recorded income tax provisions of $949 and $393 for the three months ended September 30, 2023 and September 30, 2022, respectively. The Company recorded income tax provisions of $656 and $3,738 for the nine months ended September 30, 2023 and September 30, 2022.

Federal, state and local income tax returns for years prior to 2018 are no longer subject to examination by tax authorities. The Company is currently under audit by federal tax authorities for fiscal 2020. There have been no proposed adjustments at this stage of the examination. The examination is expected to be finalized in fiscal 2023. The Company does not expect any material impact to the financial statements due to settlement of this audit.

In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon currently known facts and circumstances and applies that rate to its year-to-date earnings or losses. The Company’s effective tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of discrete items, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or regulatory or tax law changes. The Company's interim effective tax rate, inclusive of any discrete items, was 1.48% and 1.76% for the three months ended September 30, 2023 and September 30, 2022, respectively. The Company's interim effective tax rate, inclusive of any discrete items, was 0.80% and 3.30% for the nine months ended September 30, 2023 and September 30, 2022, respectively. The Company’s effective income tax rate differs from the U.S. statutory rate primarily due to the non-controlling interest adjustment as the income attributable to the non-controlling interest is pass-through income.