Business context and reporting period
This is CompoSecure, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2023, filed August 14, 2023. The filing describes a designer and manufacturer of premium payment cards and related security products, including its Arculus authentication and digital-asset storage platform. The registrant in the filing is CompoSecure, Inc. (Nasdaq: CMPO; warrants: CMPOW), not GPGI, Inc.; verify that the filing matches the intended company.
Financial results and position
Amounts below are in millions of dollars unless stated otherwise. Quarterly and year-to-date comparisons are with the corresponding 2022 periods.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $98.5 | $97.2 | $193.8 | $181.4 |
| Gross profit / margin | $53.9 / 55% | $58.9 / 61% | $107.3 / 55% | $107.6 / 59% |
| Operating income / margin | $30.3 / 31% | $34.4 / 35% | $59.8 / 31% | $64.4 / 36% |
| Consolidated net income | $32.7 | $60.7 | $43.4 | $87.6 |
| Net income attributable to CompoSecure, Inc. | $5.7 | $8.5 | $8.1 | $11.9 |
| Diluted EPS attributable to Class A | $0.29 | $0.52 | $0.41 | $0.75 |
| Adjusted EBITDA (non-GAAP) | $36.9 | $39.7 | $72.3 | $73.0 |
For the six months ended June 30, operating cash flow was $53.0 million, capital expenditures were $5.7 million, and financing cash outflow was $38.3 million. Cash increased $9.0 million from year-end 2022 to $22.6 million. Working capital included a $6.5 million increase in inventories.
At June 30, cash was $22.6 million and debt principal was $358.1 million: $228.1 million under the credit facility and $130.0 million of 7% exchangeable notes. The $60.0 million revolver was undrawn and available, subject to facility terms. The credit facility’s effective rate was 7.99%; the company had an interest-rate swap with a $125.0 million notional amount. Management reported compliance with financial covenants and believed cash and operating cash flows were sufficient for liquidity needs for at least 12 months after filing. Total liabilities were $453.0 million; stockholders’ deficit was $868.5 million, alongside $596.6 million of redeemable non-controlling interest classified as temporary equity.
Material changes versus prior comparable periods
- Q2 sales rose 1%, while six-month sales increased 7%. Domestic sales grew 11% in Q2 and 14% year to date; international sales fell 24% and 14%, respectively.
- Gross margin declined six percentage points in Q2 and four points year to date, which management attributed to inflation-related material costs and product mix. Operating income and margins also declined.
- Consolidated net income fell 46% in Q2 and 50% year to date. Management attributed the decline primarily to smaller favorable fair-value changes in warrants, earnout consideration and related derivatives versus 2022; these non-cash items can make reported earnings volatile.
- Six-month interest expense increased to $12.3 million from $10.5 million, reflecting higher variable rates. Adjusted EBITDA was broadly flat year to date despite higher sales.
Outlook, commentary, risks and unusual items
The filing gives no specific revenue or earnings guidance. Management cited uncertain macroeconomic conditions, inflation, supply-chain disruption and customer order uncertainty. It described Arculus’ growth timing as uncertain amid disruption in digital-asset markets and said it was taking a measured approach to investment.
- Customer concentration is significant: three customers represented 76% of six-month 2023 revenue, and three customers accounted for approximately 73% of receivables at June 30.
- Debt is substantial and mostly variable-rate under the credit facility; the company estimated that a 100-basis-point rate change would affect annual interest expense by approximately $4.0 million, after considering the swap. The credit facility matures in 2025 and the exchangeable notes in 2026.
- The company disclosed $41.1 million of inventory-related purchase commitments, an estimated $25.6 million of tax-receivable-agreement payments, and continuing tax distributions to non-controlling holders. It cautioned that tax-receivable payments may reduce cash available for other purposes.
- Arculus faces commercialization, cybersecurity, digital-asset regulatory and partner risks. Other disclosed risks include customer retention, manufacturing or supplier disruption, competition, and potential cost pressure.
- Sales-representation expenses under a terminated agreement with a related party were $3.4 million for Q2 and $7.5 million for the first half; accrued commissions under the arrangement were $5.4 million at June 30.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material pending legal proceedings as of August 14, 2023.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is CompoSecure, Inc., not GPGI, Inc.
- Assess whether domestic growth can offset continued international softness and whether material-cost and product-mix pressures ease.
- Review customer concentration, purchase commitments, working-capital needs and the sustainability of operating cash flow.
- Verify debt terms, rate exposure, covenant headroom, the 2025 maturity profile and management’s liquidity assumptions.
- Separate operating performance from quarterly fair-value gains and losses; review the definitions and reconciliations of non-GAAP Adjusted EBITDA.
- Evaluate potential dilution from exchangeable notes, warrants, equity awards and Class B unit exchanges, as well as cash obligations under the tax receivable agreement.