refers to complete our initial business combination with a company or business that may be financially unstable or in its early stages of development or growth, which would subject us to the numerous risks inherent in such companies and businesses.If our initial business combination is paid for using equity or debt securities, or not all of the funds released from the trust account are used for payment of the consideration in connection with our initial business combination or used for redemptions of our Class A common stock, we may apply the balance of the cash released to us from the trust account for general corporate purposes, including for maintenance or expansion of operations of the post-transaction company, the payment of principal or interest due on indebtedness incurred in completing our initial business combination, to fund the purchase of other companies or for working capital.
We may seek to raise additional funds through a private offering of debt or equity securitiesoutstanding registered warrants issued in connection with the completion of our initial business combination, and we may effectuate our initial business combination using the proceeds of such offering rather than using the amounts held in the trust account. In addition, we intend to target businesses larger than we could acquire with the net proceeds of ourregistrant’s initial public offering and the sale of the private placement warrants, and may as a result be required to seek additional financing to complete such proposed initial business combination. Subject to compliance with applicable securities laws, we would expect to complete such financing only simultaneously with the completion of our initial business combination. In the case of an initial business combination funded with assets other than the trust account assets, our proxy materials or tender offer documents disclosing the initial business combination would disclose the terms of the financing and, only if required by law, we would seek stockholder approval of such financing. There are no prohibitions on our ability to raise funds privately or through loans in connection with our initial business combination. At this time, we are not a party to any arrangement or understanding with any third party with respect to raising any additional funds through the sale of securities or otherwise.
Sources of Target Businesses
Target business candidates may be brought to our attention from various unaffiliated sources, including investment bankers and investment professionals. Target businesses may be brought to our attention by such unaffiliated sources as a result of being solicited by us by calls or mailings. These sources may also introduce us to target businesses in which they think we may be interested on an unsolicited basis, since many of these sources will have read the prospectus for our initial public offering and know what types of businesses we are targeting. Our officers and directors, as well as our sponsor and their affiliates, may also bring to our attention target business candidates that they become aware of through their business contacts as a result of formal or informal inquiries or discussions they may have, as well as attending trade shows or conventions. In addition, we expect to receive a number of proprietary deal flow opportunities that would not otherwise necessarily be available to us as a result of the business relationships of our officers and directors and our sponsor and their respective industry and business contacts as well as their affiliates. While we do not presently anticipate engaging the services of professional firms or other individuals that specialize in business acquisitions on any formal basis, we may engage these firms or other individuals in the future, in which event we may pay a finder’s fee, consulting fee, advisory fee or other compensation to be determined in an arm’s length negotiation based on the terms of the transaction. We will engage a finder only to the extent our management determines that the use of a finder may bring opportunities to us that may not otherwise be available to us or if finders approach us on an unsolicited basis with a potential transaction that our management determines is in our best interest to pursue. Payment of finder’s fees is customarily tied to completion of a transaction, in which case any such fee will be paid out of the funds held in the trust account. In no event, however, will our sponsor or any of our existing officers or directors, or any entity with which our sponsor or officers are affiliated, be paid any finder’s fee, reimbursement, consulting fee, monies in respect of any payment of a loan or other compensation by the company prior to, or in connection with any services rendered for any services they render in order to effectuate, the completion of our initial business combination (regardless of the type of transaction that it is). Although none of our sponsor, executive officers or directors, or any of their respective affiliates, will be allowed to receive any compensation, finder’s fees or consulting fees from a prospective business combination target in connection with a contemplated initial business combination, we do not have a policy that prohibits our sponsor, executive officers or directors, or any of their respective affiliates, from negotiating for the reimbursement of out-of-pocket expenses by a target business. We pay our sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support and to reimburse our sponsor for any out-of-pocket expenses related to identifying, investigating and completing an initial business combination. Some of our officers and directors may enter into employment or consulting agreements with the post-transaction company following our initial business combination. The presence or absence of any such fees or arrangements will not be used as a criterion in our selection process of an initial business combination candidate.
We are not prohibited from pursuing an initial business combination with an initial business combination target that is affiliated with our sponsor, officers or directors or making the initial business combination through a joint venture or other form of shared ownership with our sponsor, officers or directors. In the event we seek to complete our initial business combination with an initial business combination target that is affiliated with our sponsor, officers or directors, we, or a committee of independent directors, would obtain an opinion from an independent investment banking firm or from another independent entity that commonly renders valuation opinions that such an initial business combination is fair to our company from a financial point of view. We are not required to obtain such an opinion in any other context.
If any of our officers or directors becomes aware of an initial business combination opportunity that falls within the line of business of any entity to which he or she has pre-existing fiduciary or contractual obligations, he or she may be required to present such business combination opportunity to such entity prior to presenting such business combination opportunity to us. Our officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take priority over their duties to us.
Selection of a Target Business and Structuring of our Initial Business Combination
Nasdaq rules require that we must complete one or more business combinations having an aggregate fair market value of at least 80% of the value of the assets held in the trust account (excluding the deferred underwriting commissions and taxes payable on the interest earned on the trust account) at the time of our signing a definitive agreement in connection with our initial business combination. The fair market value of our initial business combination will be determined by our board of directors based upon one or more standards generally accepted by the financial community, such as discounted cash flow valuation, a valuation based on trading multiples of comparable public businesses or a valuation based on the financial metrics of M&A transactions of comparable businesses. If our board of directors is not able to independently determine the fair market value of our initial business combination, we will obtain an opinion from an independent investment banking firm or another independent entity that commonly renders valuation opinions with respect to the satisfaction of such criteria. While we consider it unlikely that our board of directors will not be able to make an independent determination of the fair market value of our initial business combination, it may be unable to do so if it is less familiar or experienced with the business of a particular target or if there is a significant amount of uncertainty as to the value of a target’s assets or prospects. Additionally, pursuant to Nasdaq rules, any initial business combination must be approved by a majority of our independent directors.
We do not intend to purchase multiple businesses in unrelated industries in conjunction with our initial business combination. Subjectup to this requirement, our management will have virtually unrestricted flexibility in identifying and selecting one or more prospective target businesses, although we will not be permitted to effectuate our initial business combination with another blank check company or a similar company with nominal operations. We anticipate structuring our initial business combination either (i) in such a way so that the post-transaction company in which our public stockholders own shares will own or acquire 100% of the equity interests or assets of the target business or businesses, or (ii) in such a way so that the post-transaction company owns or acquires less than 100% of such interests or assets of the target business in order to meet certain objectives of the target management team or stockholders. However, we will only complete an initial business combination if the post-transaction company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act of 1940, as amended, or the “Investment Company Act”. Even if the post-transaction company owns or acquires 50% or more of the voting securities of the target, our stockholders prior to the initial business combination may collectively own a minority interest in the post-transaction company, depending on valuations ascribed to the target and us in the initial business combination. For example, we could pursue a transaction in which we issue a substantial number of new shares in exchange for all of the outstanding capital stock of a target. In this case, we would acquire a 100% controlling interest in the target. However, as a result of the issuance of a substantial number of new shares, our stockholders immediately prior to our initial business combination could own less than a majority of our outstanding shares subsequent to our initial business combination. If less than 100% of the equity interests or assets of a target business or businesses are owned or acquired by the post-transaction company, the portion of such business or businesses that is owned or acquired is what will be taken into account for purposes of Nasdaq’s 80% fair market value test. If the initial business combination involves more than one target business, the 80% fair market value test will be based on the aggregate value of all of the transactions and we will treat the target businesses together as the initial business combination for purposes of a tender offer or for seeking stockholder approval, as applicable.
To the extent we effect our initial business combination with a company or business that may be financially unstable or in its early stages of development or growth we may be affected by numerous risks inherent in such company or business. Although our management will endeavor to evaluate the risks inherent in a particular target business, we cannot assure you that we will properly ascertain or assess all significant risk factors.
The time required to select and evaluate a target business and to structure and complete our initial business combination, and the costs associated with this process, are not currently ascertainable with any degree of certainty. Any costs incurred with respect to the identification and evaluation of a prospective target business with which our initial business combination is not ultimately completed will result in our incurring losses and will reduce the funds we can use to complete another business combination.
Lack of Business Diversification
For an indefinite period of time after the completion of our initial business combination, the prospects for our success may depend entirely on the future performance of a single business. Unlike other entities that have the resources to complete business combinations with multiple entities in one or several industries, it is probable that we will not have the resources to diversify our operations and mitigate the risks of being in a single line of business. In addition, we intend to focus our search for an initial business combination in a single industry. By completing our initial business combination with only a single entity, our lack of diversification may:
• subject us to negative economic, competitive and regulatory developments, any or all of which may have a substantial adverse impact on the particular industry in which we operate after our initial business combination, and
• cause us to depend on the marketing and sale of a single product or limited number of products or services.
Limited Ability to Evaluate the Target’s Management Team
Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting our initial business combination with that business, our assessment of the target business’ management may not prove to be correct. In addition, the future management may not have the necessary skills, qualifications or abilities to manage a public company. Furthermore, the future role of members of our management team, if any, in the target business cannot presently be stated with any certainty. The determination as to whether any of the members of our management team will remain with the combined company will be made at the time of our initial business combination. While it is possible that one or more of our directors will remain associated in some capacity with us following our initial business combination, it is unlikely that any of them will devote their full efforts to our affairs subsequent to our initial business combination. Moreover, we cannot assure you that members of our management team will have significant experience or knowledge relating to the operations of the particular target business.
We cannot assure you that any of our key personnel will remain in senior management or advisory positions with the combined company. The determination as to whether any of our key personnel will remain with the combined company will be made at the time of our initial business combination.
Following an initial business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management.
Stockholders May Not Have the Ability to Approve Our Initial Business Combination
We may conduct redemptions without a stockholder vote pursuant to the tender offer rules of the SEC. However, we will seek stockholder approval if it is required by law or applicable stock exchange rule, or we may decide to seek stockholder approval for business or other legal reasons. Presented in the table below is a graphic explanation of the types of initial business combinations we may consider and whether stockholder approval is currently required under Delaware law for each such transaction.
Type of Transaction | | Whether
Stockholder
Approval is
Required |
Purchase of assets | | No |
Purchase of stock of target not involving a merger with the company | | No |
Merger of target into a subsidiary of the company | | No |
Merger of the company with a target | | Yes |
Under Nasdaq’s listing rules, stockholder approval would be required for our initial business combination if, for example:
• we issue shares of Class A common stock that will be equal to or in excess of 20% of the number of11,578,000 shares of our Class A common stock then outstanding;
• any of our directors, officers or substantial stockholders (as defined by Nasdaq rules) has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the target business or assets
“RFID” refers to be acquired or otherwise and the present or potential issuance of common stock could result inradio-frequency identification which uses electronic tags placed on objects to relay
identifying information to an
increase in outstanding common shares or voting power of 5% or more; or• the issuance or potential issuance of common stock will result in our undergoing a change of control.
Permitted Purchases of our Securities
If we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuantelectronic reader through radio waves.
“Resale Warrants” refers to the tender offer rules, our sponsor, initial stockholders, directors, officers, advisors or their affiliates may purchase shares or public warrants in privately negotiated transactions or in the open market either prior to or following the completion of our initial business combination. There is no limit on the number of shares our initial stockholders, directors, officers, advisors or their affiliates may purchase in such transactions, subject to compliance with applicable law and Nasdaq rules. However, they have no current commitments, plans or intentions to engage in such transactions and have not formulated any terms or conditions for any such transactions. If they engage in such transactions, they will not make any such purchases when they are in possession of any material nonpublic information not disclosed to the seller or if such purchases are prohibited by Regulation M under the Exchange Act. We do not currently anticipate that such purchases, if any, would constitute a tender offer subject to the tender offer rules under the Exchange Act or a going-private transaction subject to the going-private rules under the Exchange Act; however, if the purchasers determine at the time of any such purchases that the purchases are subject to such rules, the purchasers will comply with such rules. Any such purchases will be reported pursuant to Section 13 and Section 16 of the Exchange Act to the extent such purchasers are subject to such reporting requirements. None of the funds held in the trust account will be used to purchase shares or public warrants in such transactions priorup to completion of our initial business combination.The purpose of any such purchases of shares could be to vote such shares in favor of the initial business combination and thereby increase the likelihood of obtaining stockholder approval of the initial business combination or to satisfy a closing condition in an agreement with a target that requires us to have a minimum net worth or a certain amount of cash at the closing of our initial business combination, where it appears that such requirement would otherwise not be met. The purpose of any such purchases of public warrants could be to reduce the number of public warrants outstanding or to vote such warrants on any matters submitted to the warrantholders for approval in connection with our initial business combination. Any such purchases of our securities may result in the completion of our initial business combination that may not otherwise have been possible. In addition, if such purchases are made, the public “float” of our10,837,400 shares of Class A common stockCommon Stock of the Company originally issued in a private placement in connection with the initial public offering of Roman DBDR and registered for resale pursuant to our registration statement on Form S-1, filed with the SEC on January 25, 2022 and declared effective on February 10, 2022.
“Roman Sponsor” means Roman DBDR Tech Sponsor LLC, a Delaware limited liability company.
“SEC” means the U.S. Securities Exchange Commission or warrants may be reduced andany successor organization.
“Securities Act” means the numberSecurities Act of beneficial1933, as amended.
“Stockholders” means the holders of our securities may be reduced, which may make it difficultClass A Common Stock and Class B Common Stock.
“Tax Receivable Amount” means the aggregate amount of all payments to maintain or obtain the quotation, listing or trading of our securities on a national securities exchange.Our sponsor, officers, directors and/or their affiliates anticipate that they may identify the stockholders with whom our sponsor, officers, directors or their affiliates may pursue privately negotiated purchases by either the stockholders contacting us directly or by our receipt of redemption requests submitted by stockholders following our mailing of proxy materials in connection with our initial business combination. To the extent that our sponsor, officers, directors, advisors or their affiliates enter into a private purchase, they would identify and contact only potential selling stockholders who have expressed their election to redeem their shares for a pro rata share of the trust account or vote against our initial business combination, whether or not such stockholder has already submitted a proxy with respect to our initial business combination. Our sponsor, officers, directors, advisors or their affiliates will only purchase shares if such purchases comply with Regulation M under the Exchange Act and the other federal securities laws.
Any purchases by our sponsor, officers, directors and/or their affiliates who are affiliated purchasers under Rule 10b-18 under the Exchange Act will only be made to the extent such purchases are able to be made in compliance with Rule 10b-18, which is a safe harbor from liability for manipulation under Section 9(a)(2) and Rule 10b-5holders of the Exchange Act. Rule 10b-18 has certain technical requirements that must be complied with in order for the safe harbor to be availableCompoSecure Units prior to the purchaser. Our sponsor, officers, directors and/or their affiliates will not make purchases of common stock if the purchases would violate Section 9(a)(2) or Rule 10b-5 of the Exchange Act. Any such purchases will be reportedClosing pursuant to Section 13the Tax Receivables Agreement.
“Wallet” means a device or service which enables storage of, and Section 16 ofaccess to, Digital Assets, such as Cryptocurrency.
“Warrants” means the Exchange ActPublic Warrants and the Resale Warrants.
BUSINESS
Unless the context otherwise requires, all references in this subsection to the
extent such purchases are subject“Company,” “we,” “us” or “our” refer to
such reporting requirements.Redemption Rights for Public Stockholders upon Completion of our InitialCompoSecure, Inc. and its consolidated subsidiaries following the Business Combination,
We will provide our public stockholders with the opportunity to redeem all or a portion of their shares of Class A common stock upon the completion of our initial business combination at a per-share price, payable in cash, equal other than certain historical information that refers to the aggregate amount then on deposit in the trust account asbusiness of two business daysHoldings prior to the consummation of the initial businessBusiness Combination.Overview
The Company is a world-class platform for next generation payment technology, security, and an emergent provider of Cryptocurrency and Digital Asset storage and security solutions. For two decades, through its combination
including interest earned onof large-scale, advanced manufacturing capabilities and deep technological expertise, the
funds heldCompany has driven key Payments Industry innovations in
the trust accountmaterials science, Metal Form Factor design, dual interface functionality, and
not previously released to us to pay our taxes, divided by the number of then outstanding public shares, subject to the limitations described herein.security. The
amount in the trust account is initially anticipated to be approximately $10.20 per public share. The per-share amount we will distribute to investors who properly redeem their shares will not be reduced by the deferred underwriting commissions we will pay to the underwriters. The redemption rights will include the requirement that a beneficial holder must identify itself in order to validly redeem its shares. Our sponsor, officers and directors have entered into a letter agreement with us, pursuant to which they have agreed to waive their redemption rights with respect to any founder shares and any public shares held by them in connection with the completion of our initial business combination.Manner of Conducting Redemptions
We will provide our public stockholders with the opportunity to redeem all or a portion of their shares of Class A common stock upon the completion of our initial business combination either (i) in connection with a stockholder meeting called to approve the initial business combination or (ii) by means of a tender offer. The decision as to whether we will seek stockholder approval of a proposed initial business combination or conduct a tender offer will be made by us, solely in our discretion, and will be based on a variety of factors such as the timingdistinct value proposition of the transactionCompany’s products has resulted in widespread adoption by major banks, financial institutions and whetherleading FinTech innovators to support their acquisition and retention of consumer and business card customers. The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers.
From 2010 through 2021, the terms ofCompany produced and sold 114 million metal Payment Cards worldwide. In 2021 alone, the transaction would require us to seek stockholder approval under the law or stock exchange listing requirement. Under Nasdaq rules, asset acquisitions and stock purchases would not typically require stockholder approval while direct mergers with our company where we do not survive and any transactions where we issueCompany provided metal payment card solutions for more than 20%100 of our outstanding common stock or seek to amend our amendedbranded and restated certificateco- branded card programs, totaling more than 22 million Payment Cards sold. The Company’s metal payment card solutions generate
a significant base of incorporation would require stockholder approval. If we structure an initial business combination withgrowing, highly-profitable revenue. For the fiscal years ended December 31, 2021 and 2020, the Company achieved net revenue of $268 and $261 million, respectively and Adjusted EBITDA of $102 and $116 million, respectively, representing a target company in38% and 44% Adjusted EBITDA margin, respectively. Adjusted EBITDA is a mannernon-GAAP financial measure that requires stockholder approval, we will not have discretion as to whether to seek a stockholder vote to approve the proposed initial business combination. We may conduct redemptions without a stockholder vote pursuant to the tender offer rules of the SEC unless stockholder approval is required by law or stock exchange listing requirements or we choose to seek stockholder approval for business or other legal reasons. So long as we obtain and maintain a listing for our securities on Nasdaq, we will be required to comply with such rules.If a stockholder vote is not required and we do not decide to hold a stockholder vote for business or other legal reasons, we will, pursuant to our amended and restated certificate of incorporation:
• conduct the redemptions pursuant to Rule 13e-4 and Regulation 14E of the Exchange Act, which regulate issuer tender offers, and
• file tender offer documents with the SEC prior to completing our initial business combination which contain substantially the same financial and other information about the initial business combination and the redemption rights as is required under Regulation 14A of the Exchange Act, which regulates the solicitation of proxies.
Upon the public announcement of our initial business combination, we or our sponsor will terminate any plan establishedprepared in accordance with Rule 10b5-1 to purchase shares of our Class A common stockaccounting principles generally accepted in the open market if we elect to redeem our public shares throughUnited States (“GAAP”) and that may be different from non-GAAP financial measures used by other companies. For a tender offer, to comply with Rule 14e-5 under the Exchange Act.
In the event we conduct redemptions pursuantreconciliation of Adjusted EBITDA to the tender offer rules, our offer to redeem will remain open for at least 20 business days,most comparable GAAP measure, please see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations—Use of Non-GAAP Financial Measures.”
Commencing with the commercial launch in accordance with Rule 14e-1(a) under the Exchange Act,third quarter of 2021, the Company is extending its multi-decade track record of growth through innovation and we will not be permitted to complete our initial business combination untilPayments Industry leadership into the expirationDigital Assets revolution. The Company has entered the Cryptocurrency and Digital Asset market through the launch of the tender offer period. In addition, we will not redeem any public shares unless our net tangible assets will be at least $5,000,001 either immediately prior to or upon consummation of our initial business combination and after payment of underwriters’ fees and commissions (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our initial business combination. If public stockholders tender more shares than we have offered to purchase, we will withdraw the tender offer and not complete the initial business combination.If, however, stockholder approval of the transaction is required by law or stock exchange listing requirement, or we decide to obtain stockholder approval for business or other legal reasons, we will, pursuant to our amended and restated certificate of incorporation:
• conduct the redemptions in conjunctionArculus Platform, a three-factor security platform with a proxy solicitation pursuant to Regulation 14A of the Exchange Act, which regulates the solicitation of proxies, and not pursuant to the tender offer rules, and
• file proxy materialsbroad industry applicability. The Arculus Platform was created with the SEC.
Inmission to promote Digital Asset and Cryptocurrency adoption by making it safe, simple and secure for the eventaverage person to buy, swap and store Digital Assets. The Arculus Platform is envisioned to solve a chronic industry need for reliable, trusted and safe storage of digital Blockchain-based Digital Assets, including Cryptocurrencies. Today’s Digital Asset and Cryptocurrency storage solutions leave consumer assets exposed. It is estimated that we seek stockholder approval of our initial business combination, we will distribute proxy materialsin 2021 nearly $10 billion, up from $4.2 billion in 2020, in Cryptocurrencies have been stolen from user Wallets and in connection therewith, provide our public stockholdersCryptocurrency exchanges. Users are faced with antiquated and expensive security solutions that have complicated user experiences. The Arculus launch commenced with the redemption rights described above upon completionArculus Key™ card hardware device and companion Arculus Wallet
TM App for secure storage of the initialPrivate Keys and crypto-to-crypto and fiat-to-crypto transaction processing and account management. The Company is offering its Arculus Cold Storage Wallet to its existing Payments Industry business combination.If we seek stockholder approval, we will complete our initialcustomers, new business combination only if a majority of the outstanding shares of common stock votedcustomers identified within existing and emerging Digital Asset markets, and directly to consumers. Revenues are voted in favor of the initial business combination. A quorum for such meeting will consist of the holders present in person or by proxy of shares of outstanding capital stock of the company representing a majority of the voting power of all outstanding shares of capital stock of the company entitled to vote at such meeting. Our initial stockholders will count toward this quorum and pursuant to the letter agreement, our sponsor, officers and directors have agreed to vote their founder shares and any public shares purchased during or after our initial public offering (including in open market and privately negotiated transactions) in favor of our initial business combination. For purposes of seeking approval of the majority of our outstanding shares of common stock voted, non-votes will have no effect on the approval of our initial business combination once a quorum is obtained. As a result, in addition to our initial stockholders’ founder shares, we would need only 8,683,501, or 37.5%, of the 23,156,000 public shares sold in our initial public offeringinitially expected to be voted in favorderived from sales of an initial business combination (assuming all outstanding sharesArculus Cold Storage Wallets and from transaction processing fees. The Company’s Arculus products and services are votedexpected to evolve over time to span a broad ecosystem of hardware, software, payments, and our sponsor, officers and directors do not purchase any public shares) in order to have our initial business combination approved. We intend to give approximately 30 days (but not less than 10 days nor more than 60 days) prior written notice of any such meeting, if required, at which a vote shall be taken to approve our initial business combination. These quorum and voting thresholds, and the voting agreements of our initial stockholders, may make it more likely that we will consummate our initial business combination. Each public stockholder may elect to redeem its public shares irrespective of whether they voteservices for or against the proposed transaction.
Our amended and restated certificate of incorporation provides that we may not redeem our public shares unless our net tangible assets are at least $5,000,001 either immediately prior to or upon consummation of our initial business combination and after payment of underwriters’ fees and commissions (so that we are not subject to the SEC’s “penny stock” rules) or any greater net tangible asset or cash requirement which may be contained in the agreement relating to our initial business combination. For example, the proposed initial business combination may require: (i) cash consideration to be paid to the target or its owners, (ii) cash to be transferred to the target for working capital or other general corporate purposes or (iii) the retention of cash to satisfy other conditions in accordance with the terms of the proposed initial business combination. In the event the aggregate cash consideration we would be required to pay for all shares of Class A common stock that are validly submitted for redemption plus any amount required to satisfy cash conditions pursuant to the terms of the proposed initial business combination exceed the aggregate amount of cash available to us, we will not complete the initial business combination or redeem any shares, and all shares of Class A common stock submitted for redemption will be returned to the holders thereof.
Limitation on Redemption upon Completion of our Initial Business Combination if we Seek Stockholder Approval
Notwithstanding the foregoing, if we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our initial business combination pursuant to the tender offer rules, our amended and restated certificate of incorporation provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from seeking redemption rights with respect to more than 15% of the shares sold in our initial public offering,Digital Assets which we refer to as the “Excess Shares.” Such restriction shall alsoArculus Ecosystem, with its foundation in three-factor authentication security technology providing safe storage of Digital Assets.
The Company has a long history of creating branded solutions for partners such as American Express and JP Morgan Chase. The Arculus Platform is expected to be
applicable to our affiliates. We believe this restriction will discourage stockholders from accumulating large blocks of shares, and subsequent attempts by such holders to use their ability to exercise their redemption rights againstoffered through partner-branded solutions which may include a
proposed initial business combination as a means to force us or our management to purchase their shares at a significant premium to the then-current market price or on other undesirable terms. Absent this provision, a public stockholder holding more than an aggregate of 15%partner-branded version of the
shares sold in our initial public offering could threaten to exercise its redemption rights if such holder’s shares are not purchased by us or our management at a premium to the then-current market price or on other undesirable terms. By limiting our stockholders’ ability to redeem no more than 15% of the shares sold in our initial public offering without our prior consent, we believe we will limit the ability of a small group of stockholders to unreasonably attempt to block our ability to complete our initial business combination, particularly in connection with an initial business combination with a target that requires as a closing condition that we have a minimum net worth or a certain amount of cash. Our amended and restated certificate of incorporation does not restrict our stockholders’ ability to vote all of their shares (including Excess Shares) for or against our initial business combination.Tendering Stock Certificates in Connection with Redemption Rights
We may require our public stockholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to either tender their certificates to our transfer agent prior to the meeting held to approve a proposed initial business combination by a date set forth in the proxy materials mailed to such holders or to deliver their shares to the transfer agent electronically using the DWAC System, at the holder’s option. The proxy materials that we will furnish to holders of our public shares in connection with our initial business combination will indicate whether we are requiring public stockholders to satisfy such delivery requirements. Accordingly, a public stockholder would have from the time we send out our proxy materials until the date set forth in such proxy materials to tender its shares if it wishes to seek to exercise its redemption rights. Given the relatively short exercise period, it is advisable for stockholders to use electronic delivery of their public shares.
There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC System. The transfer agent will typically charge the tendering broker $80.00 and it would be up to the broker whether or not to pass this cost on to the redeeming holder. However, this fee would be incurred regardless of whether or not we require holders seeking to exercise redemption rights to tender their shares. The need to deliver shares is a requirement of exercising redemption rights regardless of the timing of when such delivery must be effectuated.
The foregoing is different from the procedures used by many blank check companies. In order to perfect redemption rights in connection with their business combinations, many blank check companies would distribute proxy materials for the stockholders’ vote on an initial business combination, and a holder could simply vote against a proposed initial business combination and check a box on the proxyArculus Key card indicating such holder was seeking to exercise his or her redemption rights. After the initial business combination was approved, the company would contact such stockholder to arrange for him or her to deliver his or her certificate to verify ownership. As a result, the stockholder then had an “option window” after the completion of the initial business combination during which he or she could monitor the price of the company’s stock in the market. If the price rose above the redemption price, he or she could sell his or her shares in the open market before actually delivering his or her shares to the company for cancellation. As a result, the redemption rights, to which stockholders were aware they needed to commit before the stockholder meeting, would become “option” rights surviving past the completion of the initial business combination until the redeeming holder delivered its certificate. The requirement for physical or electronic delivery prior to the meeting ensures that a redeeming holder’s election to redeem is irrevocable once the initial business combination is approved.
Any request to redeem such shares, once made, may be withdrawn at any time up to the date set forth in the proxy materials. Furthermore, if a holder of a public share delivered its certificate in connection with an election of redemption rights and subsequently decides prior to the applicable date not to elect to exercise such rights, such holder may simply request that the transfer agent return the certificate (physically or electronically). It is anticipated that the funds to be distributed to holders of our public shares electing to redeem their shares will be distributed promptly after the completion of our initial business combination.
If our initial business combination is not approved or completed for any reason, then our public stockholders who elected to exercise their redemption rights would not be entitled to redeem their shares for the applicable pro rata share of the trust account. In such case, we will promptly return any certificates delivered by public holders who elected to redeem their shares.
If our initial proposed initial business combination is not completed, we may continue to try to complete an initial business combination with a different target until May 10, 2022.
Redemption of Public Shares and Liquidation if no Initial Business Combination
Our amended and restated certificate of incorporation provides that we will have only 18 months from the closing of our initial public offering to complete our initial business combination. If we are unable to complete our initial business combination by May 10, 2022, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. There will be no redemption rights or liquidating distributions with respect to our warrants, which will expire worthless if we fail to complete our initial business combination within the 18-month time period.
Our sponsor, officers and directors have entered into a letter agreement with us, pursuant to which they have waived their rights to liquidating distributions from the trust account with respect to any founder shares held by them if we fail to complete our initial business combination by May 10, 2020. However, if our sponsor, officers or directors acquire public shares in or after our initial public offering, they will be entitled to liquidating distributions from the trust account with respect to such public shares if we fail to complete our initial business combination within the allotted 18-month time period.
Our sponsor, officers and directors have agreed, pursuant to a written agreement with us, that they will not propose any amendment to our amended and restated certificate of incorporation (i) to modify the substance or timing of our obligation to redeem 100% of our public shares if we do not complete our initial business combination within 18 months from the closing of our initial public offering or (ii) with respect to any other provision relating to stockholders’ rights or pre-initial business combination activity, unless we provide our public stockholders with the opportunity to redeem their shares of Class A common stock upon approval of any such amendment at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes divided by the number of then outstanding public shares. However, we may not redeem our public shares unless our net tangible assets are at least $5,000,001 either immediately prior to or upon consummation of our initial business combination and after payment of underwriters’ fees and commissions (so that we are not subject to the SEC’s “penny stock” rules). If this optional redemption right is exercised with respect to an excessive number of public shares such that we cannot satisfy the net tangible asset requirement (described above), we would not proceed with the amendment or the related redemption of our public shares at such time.
We expect that all costs and expenses associated with implementing our plan of dissolution, as well as payments to any creditors, will be funded from amounts remaining out of the proceeds held outside the trust account, although we cannot assure you that there will be sufficient funds for such purpose. We will depend on sufficient interest being earned on the proceeds held in the trust account to pay any tax obligations we may owe. However, if those funds are not sufficient to cover the costs and expenses associated with implementing our plan of dissolution, to the extent that there is any interest accrued in the trust account not required to pay taxes on interest income earned on the trust account balance, we may request the trustee to release to us an additional amount of up to $100,000 of such accrued interest to pay those costs and expenses.
If we were to expendsome or all of the net proceedsArculus Cold Storage Wallet and other Arculus products and/or services. The partnering approach will allow Arculus- derived products to reach consumers through a variety of our initial public offeringchannels, while solving both the consumer’s and partner’s need for enhanced security of their Digital Assets and Cryptocurrencies.
The Company expects that the use of a partnering model, with multiple levels of product and service integration, will allow for future Arculus revenue streams to diversify into a combination of hardware sales and recurring revenues from transaction processing fees, subscription fees, and other sources. Currently, the Company expects that it will primarily generate revenue from the Arculus Platform through sales fees (for example, upfront fees paid upon the sale of the private placement warrants,Arculus KeyTM card to a consumer), subscription fees (i.e. monthly fees paid for use of the Arculus Platform), and revenue sharing arrangements (whereby the Company receives a portion of the transaction fees paid upon execution of a transaction between the consumers of the Arculus Platform and our existing or future third party partners). The Company does not expect to directly buy or swap Cryptocurrencies for its customers. Instead, all buy and swap transactions by consumers using the Arculus WalletTM, including exchanging fiat currencies for Cryptocurrencies (and vice versa) and exchanging one Cryptocurrency for another Cryptocurrency, are expected to be implemented and executed between the consumer and one or more third-party partners, such as our existing partners Simplex and Changelly. The Company expects that trading activity will take place solely through these partners and that the Arculus Wallet will provide Arculus customers a link to the trading platforms of such third parties. The Company’s partnership with Changelly is expected to enable Arculus users to exchange Cryptocurrencies for other thanCryptocurrencies, and the proceeds depositedCompany’s partnership with Simplex is expected to enable Arculus users to purchase Cryptocurrency with Fiat Currency. Following the external purchase or swap transaction between the consumer and one of the Company’s third-party partners, confirmation of the exchanged or purchased Cryptocurrency can be viewed on the consumer’s Arculus WalletTM. Future Arculus Ecosystem products
may include solutions for payments, Digital Assets, eGaming (i.e., online gaming markets), warranty and insurance that may be developed in-house, with industry partners and/or through third-party App developers. The Company presently expects that the Arculus Key card, with its familiar Form Factor and tap-to-authenticate functionality could serve as the primary Cold Storage solution for the Arculus Ecosystem, including its future array of Apps, services, and infrastructure.
The Arculus Platform, with its three-factor authentication security technology, is expected to have broad industry applicability. Security attacks are increasing, with both external and internal threats of growing concern to consumers and industry participants. Use of the Arculus Platform’s three-factor authentication system, including the physical Arculus Key card, provides a level of security which the Company hopes will become the gold standard for Digital Asset security in the trust account,future. The Company’s hardware and without taking into account interest, if any, earned onsoftware offerings are designed to serve the trust account,convergence of large and growing addressable markets across Payments, Cryptocurrency, Digital Assets, and all emerging Blockchain-based assets. These markets are supported by industry dynamics, including increasing business and consumer demand for solutions supporting contactless payments, security and fraud protection, and Cryptocurrency and Digital Assets. Globally, an estimated four billion addressable Payment Cards are issued annually, and the per-share redemption amount received by stockholders upon our dissolution would bemarket is undergoing a long-term transformation from plastic to metal card form factors. Though metal card penetration is growing, adoption remains nascent, with the Company, even as a metal card industry leader, representing just approximately $10.20. 0.5% of annual global Payment Card issuance volumes in 2021.
The proceeds depositedCompany believes there is a unique and compelling near-term market opportunity in Cryptocurrency and a longer-term opportunity in the trust account could, however,broader Digital Assets and Blockchain-based asset markets. In December 2021, the daily trading volume for the top 200 Cryptocurrencies averaged approximately $290 billion (i.e., the top 200 Cryptocurrencies based on total market capitalization of such Cryptocurrencies, per publicly available data obtained from www.coinmarketcap.com), which includes any Digital Asset that uses cryptographic technologies to maintain its operations as a currency or decentralized application, and includes stablecoins and tokens. The total market capitalization of the Cryptocurrency market, based on publicly available data obtained from www.coinmarketcap.com, increased from $0.7 trillion as of December 31, 2020 to approximately $2.2 trillion as of December 2021 and is projected to rise to approximately $5.5 trillion by 2027 (based on a publicly available report published by Verified Market Research and available at www.verifiedmarketresearch.com). These market capitalization figures include all Cryptocurrencies, including stablecoins and tokens. This asset class, its growth, and the broader ecosystem require solutions to securely and seamlessly store and access Digital Assets as they become subjectincreasingly ubiquitous. The landscape for crypto-related products and services is highly fragmented today, with significant opportunity for organic and inorganic value creation as the market continues to grow and mature.
Leveraging its foundation of world-class security technology, high-volume hardware manufacturing capabilities, deep financial institution relationships, and existing payments, and newly-developed Cryptocurrency, hardware and software products, the Company aims to build a premier, diversified ecosystem in the rapidly growing market for payments, Cryptocurrency, and Digital Asset solutions.
Competitive Strengths
As a pioneer in payments and security technology, the Company possesses key competitive differentiators it is leveraging to expand its leadership position in metal Payment Card solutions and in commercializing Arculus’ three-factor authentication technology in the market for Cryptocurrency and Digital Asset solutions. These differentiators include:
Innovation. The Company has been a leader and innovator for decades in the Payment Cards industry, including the first metal Payment Card (2003), the first mass affluent metal Payment Card (2010), the first metal “tap-to-pay” credit card (2016), the first metal NFC-enabled Cold Storage device for the Arculus launch in 2021, and a pipeline of new product features including biometric security, dynamic CVV, keychain cards, LED display features, new Payment Card constructions, and substantial product and solution expansion planned for the Arculus business. In addition to new products and revenue opportunities, the Company’s research and development efforts are continually focused on improvements in manufacturing processes to improve efficiency, increase capacity, and reduce waste to support enhanced operating leverage and profitability.
Embedded Client Relationships. The Company has been serving its two largest clients, American Express and JP Morgan Chase, for over ten years, building strong relationships with key personnel. For these major and numerous other clients, the Company has produced metal Payment Cards for over 100 card programs, including issuer proprietary and co-branded programs. The Company has also steadily grown the number of customers it serves, increasing from approximately 30 in 2016 to 100 in 2021, adding 50 new clients in 2021 alone.
Scale. In 2021, the Company produced approximately 22 million metal Payment Cards. Leveraging its three manufacturing facilities in Somerset, New Jersey, with an aggregate of approximately 173,000 square feet of space, the Company has developed the ability to provide volume and quality at scale much larger than current metal Payment Card competitors’ existing metal card output. The Company believes that its ability to produce metal Payment Card volume and quality at scale, is critical to the claimssuccess of our creditors which would have higher priority thanvery large Payment Card programs, while also driving manufacturing efficiencies and related cost advantages. The Company expects to apply its manufacturing expertise and cost efficiency for the claims of our public stockholders. We cannot assure you that the actual per-share redemption amount received by stockholders will not be substantially less than $10.20. Under Section 281(b)launch of the DGCL, our plan of dissolution must provide for all claims against us to be paid in full or make provision for payments to be made in full, as applicable, if there are sufficient assets. These claims must be paid or provided for before we make any distribution of our remaining assets to our stockholders. While we intend to pay such amounts, if any, we cannot assure you that we will have funds sufficient to pay or provide for all creditors’ claims.Although we will seek to have all vendors, service providers, prospective target businesses or other entities with which we do business execute agreements with us waiving any right, title, interest or claim of any kind in or to any monies heldArculus’ three-factor authentication technology in the trust accountmarket for Cryptocurrency and Digital Asset solutions. In addition, the benefitCompany has separate manufacturing operations designed to optimize smaller quantity production runs for pilot or specialized card programs.
Patents and Trade Secrets. Leveraging its decades of our public stockholders, there is no guarantee that they will execute such agreements or even if they execute such agreements that they would be prevented from bringing claims againstexperience, the trust account including but not limited to fraudulent inducement, breach of fiduciary responsibility or other similar claims,Company has developed extensive trade secrets in creating graphic effects on metal cards, heavily customized equipment and machinery and proprietary coatings, as well as claims challenging the enforceabilityknowledge and ability to blend various metals and polymers to create unique composites. The Company has a strong focus on protecting its proprietary intellectual property. As of March 2022, the Company had more than 45 U.S. and foreign (utility and design) patents issued, more than 30 U.S. and foreign patent applications (utility and design) pending, and new technologies under development. The Company expects to continue to develop innovations for Payment Card form factor design, components and manufacturing methods, many of which are reflected in patent applications, which may include further technological innovations for the Arculus Cold Storage Wallet products.
Key Products
Metal Payment Card Solutions
The Company is a category leader in the design and manufacture of premium metal Payment Cards. Its metal Payment Cards are currently issued on the Visa®, Mastercard®, American Express®, and China Union Pay® Payment Networks.
The Company has a track record of two decades of pioneering continuous Payment Card innovation in Metal Form Factors. In 2003, for the American Express® Centurion® program the Company created the world’s first metal Payment Card, and in 2009 the Company developed the first commercialized metal Payment Cards with embedded EMV® chips. In 2010, for the JP Morgan Chase Sapphire Preferred® program, the Company created the first metal Payment Card targeting the mass affluent segment, significantly expanding the potential number of cardholders that issuers could address with metal Payment Cards. In 2017, for the American Express® Platinum® program, the Company introduced the first NFC-integrated Dual-Interface metal Payment Cards. Typically sold at a higher price point than contact-only cards, Dual-Interface Payment Cards today comprise the majority of the waiver, in each caseCompany sales volume because of the speed and convenience they offer to cardholders. The Company has key US and international patents and trade secrets relating to the integration of NFC technology into metal Payment Cards.
The Company provides its issuer clients customized and highly differentiated financial payment products in order to gainsupport and grow the acquisition, retention, and spending of their cardholders. The Company leverages the latest innovations in security and functionality to provide its issuer clients with Payment Cards that deliver elevated, premium experiences to their cardholders. The Company offers a variety of metal Payment Cards, at different price points and using an advantagearray of metal and metal-polymer hybrid constructions, that allow issuers to customize each of their Payment Card programs to target specific cardholder segments. The Company Payment Cards are tailored to specific issuer and Payment Card program requirements. The Company’s primary Metal Form Factors include:
| | | | | | | | | | | |
| Embedded Metal | Metal Veneer Lite | Metal Veneer | Full Metal |
| Metal core with polymer front and back faces | Metal front with polymer back | Metal front with polymer back | Greatest metal density and weight |
| Features Dual-Interface technology | Features Dual- Interface technology | Heavier version of Metal Veneer Lite | Features Dual-Interface technology |
| Flexible design options | Weighs approximately 13 grams | Features Dual- Interface technology | Supports 2D/3D engraved graphics |
| Weighs approximately 12 grams | | Can be engraved | Weighs approximately 21-28 grams |
| | Weighs approximately 16 grams | |
Arculus
At the Consumer Electronics Show in January 2021, the Company launched the Arculus Cold Storage Wallet, a three-factor authentication solution, as the first element of an envisioned future ecosystem of Arculus Cryptocurrency and Digital Asset solutions. The Arculus Cold Storage Wallet is comprised of the Arculus Key card Cold Storage hardware device and companion Arculus Wallet mobile App. The three-factor authentication solution, which is designed to keep the Private Key in the Arculus KeyTM card highly secure, involves (i) a biometric feature found on the vast majority of mobile devices, which is a difficult-to-replicate security factor that requires personal presence of the registered user, (ii) a personal identification number, or PIN, which is stored in the secure element of the Arculus KeyTM card, and (iii) possession of the Arculus KeyTM card itself and presentation of that Arculus KeyTM card to the Arculus WalletTM App. The Arculus Key card is a premium, metal card with respectan EMV chip used to permit the card to communicate with a claim against oursmart phone or similar NFC-enabled device operating the Arculus Wallet App for “tap-to-transact” functionality, which refers to the action of bringing the Arculus KeyTM card near to the back of the phone to digitally sign blockchain transactions with a user’s Private Keys through the use of NFC technology. The Arculus Wallet App was developed by the Company and is available for download on the Apple Store® and Google Play® store. The Arculus Key card was designed, and is manufactured, by the Company at its existing manufacturing facilities.
The Arculus Cold Storage Wallet allows users to easily and securely buy and swap Cryptocurrencies and store their Private Keys, providing the convenience of a Hot Storage Wallet with the security of Cold Storage. Commercial sales of the Arculus Cold Storage Wallet commenced in the fourth quarter of 2021. Compared with existing Cold Storage Wallet products available in the market, the Company’s Arculus Cold Storage Wallet offers a secure, user-friendly, and feature-rich solution that utilizes the Company’s expertise in NFC-integrated metal card design and production. To the Company’s knowledge, the following features of the Arculus Cold Storage Wallet are unique in the industry as such features are not currently available in the wallet offerings of the Company’s competitors:
•Cold Storage: Private Keys remain in an offline environment kept in a Metal Form Factor using a CC EAL 6 secure element (which refers to Common Criteria Evaluation Assurance Level 6, an international standard established by www.commoncriteriaportal.org which is used to evaluate the security implementation in information technology software and hardware).
•Three-Factor Authentication: Advanced security across: (1) biometric (i.e., fingerprint and/or facial recognition); (2) personal identification number (PIN); and (3) NFC connection with the Arculus Key card.
•Innovative Form Factor: Cryptocurrency key storage solution contained in a slim, Metal Form Factor card, which does not require a battery or charging, offering a premium user experience and heightened hardware protection through an easy-to-use, NFC connection (“tap-to-transact”).
•Fully Featured Mobile Wallet App: Easily send, receive, purchase and swap Cryptocurrency assets including the funds held in the trust account. If any third party refuses to execute an agreement waiving such claims to the monies held in the trust account, our management will perform an analysis of the alternatives available to itfiat-to-crypto and will only enter into an agreement with a third party thatcrypto-to-crypto.
The Company’s wholly-owned subsidiary, Arculus Holdings, L.L.C., has
not executed a waiver if management believes that such third party’s engagement would be significantly more beneficial to us than any alternative. Examples of possible instances where we may engage a third party that refuses to execute a waiver include the engagement of a third-party consultant whose particular expertise or skills are believed by management to be significantly superior to those of other consultants that would agree to execute a waiver or in cases where management is unable to find a service provider willing to execute a waiver. Marcum LLP, our independent registered public accounting firm, and the underwriters of the offering will not execute agreements with us waiving such claims to the monies held in the trust account.In addition, there is no guarantee that such entities will agree to waive any claims they may have in the future as a result of, or arising out of, any negotiations, contracts or agreements with us and will not seek recourse against the trust account for any reason. Our sponsor has agreed that it will be liable to us if and to the extent any claims by a third party for services rendered or products sold to us, or a prospective target business with which we have entered into a partner agreement with Simplex (the “Simplex Agreement”). Under the Simplex Agreement, Simplex has appointed the Company, on a non-exclusive basis, to enable Simplex’s services for its end users to function as an intermediate layer between the end user customers and Simplex’s Cryptocurrency liquidity partners.
Specifically, this provides Arculus customers with the option to perform purchase transactions with the liquidity partners whereby such liquidity partners sell Cryptocurrency to the end user customer through a designated web page owned and designed by the Company that is located on Simplex’s servers. Under the Simplex Agreement, Simplex is expected to pay the Company referral fees calculated as a portion of the total amount that the end user customer pays to Simplex for the relevant purchase transaction. The term of the Simplex Agreement continues until terminated by either party, with or without cause, with 30 days advance written letternotice. Additionally, either party may terminate the Simplex Agreement with immediate effect if the other party commits a material breach and does not remedy it within 30 days.
The Company’s wholly-owned subsidiary, Arculus Holdings, L.L.C., has entered into an affiliate program with Changelly under which the Company gains access to services offered on Changelly’s website for swapping Cryptocurrency, and the Company is entitled to referral commissions calculated as a portion of intent, confidentiality or similar agreement or business combination agreement, reduce the amount of fundsChangelly’s revenue from Cryptocurrency-to-Cryptocurrency swap transactions. To participate in the trust accountaffiliate program, the Company has agreed to belowbinding terms and conditions with Changelly, pursuant to which either party may terminate the lesser of (i) $10.20 per public share and (ii)affiliate program at any time for any reason.
In addition, the actual amount per public share held inCompany believes that the trust account asuse of the date ofArculus KeyTM card and Arculus WalletTM to effect peer-to-peer/send & receive transfers, with its Cold Storage Wallet and three-factor authentication technology, provides the liquidation of the trust account, if less than $10.20 per share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of anyend user significantly more protection against theft, fraud and all rightshacking as compared to the monies held inuse of custodial Hot Wallets or other Cold Storage Wallets. The Company is not compensated for such user-directed activities.
For illustrative purposes, the trust accountfollowing is a step-by-step example of how an Arculus end user can leverage the Arculus KeyTM card and Arculus WalletTM to:
•receive Cryptocurrency directly peer-to-peer;
•send Cryptocurrency directly peer-to-peer;
•purchase Cryptocurrencies using Fiat Currency; and
•swap one Cryptocurrency for another Cryptocurrency.
Example 1 — Peer to Peer/Receive
Goal: An Arculus end user seeks to receive Bitcoin from a peer (whether or not such waiverpeer is enforceable) nor will it applyan Arculus end user).
Steps:
1.End user activates the Arculus Wallet App on a mobile phone (or other NFC-enabled mobile device) by using the Arculus Key card or personal biometrics to any claims under our indemnityauthenticate the end user;
2.End user then navigates to “Receive” screen in the Arculus Wallet App;
3.In the Arculus Wallet App, the end user selects “BTC” as the input Cryptocurrency to receive;
4.The end user then presses “Receive” in the Arculus Wallet App to initiate the transfer;
5.The end user either shows his QR code to the sender or sends the QR code (or his address) to the sender (via email, instant message or other process);
6.The sender then processes the transfer on his wallet, device or system (which may or may not be an Arculus Wallet), or through his custodial account;
7.The sender submits a direction to the Blockchain to move the BTC from the sender’s address to the recipient’s address;
8.Once the transfer is validated on the Blockchain, the received BTC would be displayed in the end user’s Arculus Wallet App, completing the transfer.
Example 2 — Peer to Peer/Send
Goal: An Arculus end user seeks to send Bitcoin to a peer (whether or not such peer is an Arculus end user).
Steps:
1.End user activates the Arculus Wallet App on a mobile phone (or other NFC-enabled mobile device) by using the Arculus Key card or personal biometrics to authenticate the end user;
2.End user then navigates to “Send” screen in the Arculus Wallet App;
3.In the Arculus Wallet App, the end user selects “BTC” as the input Cryptocurrency to send, with the amount of the underwritersinput Cryptocurrency specified;
4.In the Arculus Wallet App, the end user enters the address of our initial public offering against certain liabilities, including liabilities under the Securities Act. However, we haverecipient’s holdings on the Blockchain (either by capturing a QR code (an acronym for “quick response” code, a type of barcode which contains data which points to a particular website, application or, in this case, to a specific Blockchain address) provided by the recipient or by typing the recipient’s address into the Arculus Wallet);
5.The end user then presses “Send” in the Arculus Wallet App to initiate the transfer, and then taps the Arculus Key card to the back of the mobile phone (or other NFC-enabled mobile device) and inputs the user’s PIN to authenticate the transfer;
6.The Arculus Wallet App immediately submits a direction to the Blockchain to move the BTC from the sender’s address to the recipient’s address;
7.Once the transfer is validated on the Blockchain, the transfer will be displayed in the transfer log in the end-user’s Arculus Wallet App.
Example 3 — Fiat Currency to Cryptocurrency
Goal: An Arculus end user seeks to purchase Bitcoin with US dollars using a personal credit or debit card.
Steps:
1.End user activates the Arculus Wallet App on a mobile phone (or other NFC-enabled mobile device) by using the Arculus Key card or personal biometrics to authenticate the end user;
2.End user then navigates to “Buy/Swap” screen in the Arculus Wallet App;
3.In the Arculus Wallet App, the user selects “USD” as the input and “BTC” as output to purchase, with a specific purchase amount denominated in US dollars;
4.The end user then presses “Buy/Swap” in the Arculus Wallet App to initiate the transaction, and then taps the Arculus Key card to the back of the mobile phone (or other NFC-enabled mobile device) and inputs the user’s PIN to authenticate the purchase transaction;
5.The Arculus Wallet App immediately redirects the end user to the website of Simplex, Arculus’ current unaffiliated third-party liquidity partner for Fiat Currency transactions, to complete the requested transaction (noting that Arculus may use one or more other third-parties in the future to fulfill specific purchases);
6.Simplex, through its proprietary website, algorithms and processes, and/or Simplex’s third-party liquidity provider, conducts a series of KYC/AML compliance screening functions and, if the end user passes those screens, Simplex, would then connect the user with one or more of its third-party liquidity partners (e.g., Binance, HitBTC, etc.) via Simplex’s applicable programming interface (“API”)(noting that Arculus does not asked our sponsorcontrol or direct which liquidity partners are used by Simplex, and these liquidity partners may change from time-to-time in the future, solely in Simplex’s discretion);
7.In order to reservefulfill the identified purchase, Simplex processes the credit or debit card transaction to obtain Fiat Currency for such indemnification obligations, nor have we independently verified whether our sponsorthe intended transaction (i.e., as a purchase and/or cash advance depending on the user’s card choice and issuing bank’s procedures);
8.Once the Fiat Currency is received by Simplex (or its merchant processing partner), Simplex then instructs to its relevant liquidity partner via API to send Bitcoin to the user’s address in the Arculus Wallet and update the Blockchain to reflect the end user’s ownership of the Bitcoin;
9.Once validated on the Blockchain, the purchased Bitcoin is displayed in the end user’s Arculus Wallet App, completing the purchase transaction.
Example 4 — Cryptocurrency to Cryptocurrency
Goal: An Arculus end user seeks to swap Bitcoin for Ethereum.
Steps:
1.End user activates the Arculus Wallet App on a mobile phone (or other NFC-enabled mobile device) by using the Arculus Key card or personal biometrics to authenticate the end user;
2.End user then navigates to “Buy/Swap” screen in the Arculus Wallet App;
3.In the Arculus Wallet App, the end user selects “BTC” as the input Cryptocurrency to swap and “ETH” as the output Cryptocurrency to swap, with the amount of the input Cryptocurrency specified;
4.The Arculus Wallet App obtains from Arculus’ current unaffiliated third-party API partner, Changelly.com, quotation data on its currency exchange rates.
5.The end user then presses “Buy/Send” in the Arculus Wallet App to initiate the swap transaction, and then taps the Arculus Key card to the back of the mobile phone (or other NFC-enabled mobile device) and inputs the user’s PIN to authenticate the transaction;
6.Changelly then applies its KYC/AML processes (as applicable), and the Arculus Wallet App provides a destination address, which Changelly provides to its liquidity partner to send the input Cryptocurrency (noting that Arculus does not control or direct which liquidity partners are used by Changelly, and these liquidity partners may change from time-to-time in the future, solely in Changelly’s discretion);
7.The end user sends the input Cryptocurrency to the applicable Changelly.com API partner, which may include Coinbase, Binance or other third parties (noting that Changelly.com may use one or more other third-party liquidity partners in the future), using the destination address provided by Changelly.com;
8.Once the input Cryptocurrency has sufficient fundsbeen received, the Changelly.com (or its API liquidity partner) sends the desired output Cryptocurrency is sent to satisfy its indemnity obligations and believe that our sponsor’s only assets are securities of our company. Therefore, we cannot assure you that our sponsorthe end user’s address in the Arculus Wallet;
9.Once validated on the Blockchain, the received Ethereum would be displayed in the end user’s Arculus Wallet App, completing the swap transaction.
Market Opportunity
Metal Payment Card Solutions
Edgar, Dunn and Company, a global financial services and payments consulting firm (“Edgar Dunn”), estimates in 2021 globally 8.3 billion addressable Payment Cards will be in circulation and 4.2 billion addressable Payment Cards will be issued. Edgar Dunn projects by 2025 these figures will grow to 10.9 billion cards in circulation and 5.5 billion cards issued. Similarly, McKinsey & Company, a leading management consulting firm, estimates that global Payment Card spend is expected to grow from $26.3 trillion in 2018 to $38.6 trillion by 2023. Ongoing Payment Card innovations such as Dual-Interface functionality is expected to support continued physical card use among other payment modalities.
Payment Cards may be offered by banks and other non-bank issuers through proprietary issuer brands or as co-branded cards that leverage the brand equity and customer base of non-issuer program partners. Issuers dedicate significant resources to acquire new customers, retain existing customers, and grow customer spend as intense competition drives the need to differentiate their Payment Card programs. Issuers use advertising and program benefits to attract cardholders and also use brand recognition that relies upon the physical attributes of the Payment Card itself, including the look, feel and composition of the physical cards.
Traditional plastic card programs are highly commoditized and have historically relied upon offering benefits such as introductory interest rates, discounts, and rewards to win customers. These benefit costs are variable and can be unpredictable. Use of Metal Form Factors has become an increasingly key differentiator among Payment Card programs. Relative to traditional program incentives, the cost of a metal Payment Card is relatively low and predictable, giving metal Payment Cards a strong return on investment to issuers. The Company’s metal Payment Cards offer issuers the opportunity to provide a premium experience to their cardholders as part of a Payment Card program’s overall combination of benefits.
Higher-priced metal Payment Cards were initially designed and marketed to Payment Card issuers targeting relatively small segments of high-net-worth cardholders. Leveraging innovative design and manufacturing
capabilities, the Company has been able to satisfy those obligations. Nonereduce the price paid by issuers for metal Payment Cards, thereby enabling its clients to expand their metal Payment Card offerings to target mass affluent and other customer segments. Issuance of our officers or directors will indemnify usMetal Payment Cards is growing quickly but remains in early phases of adoption globally. With an estimated 2021 global addressable market of 4.2 billion Payment Cards issued, the Company’s total penetration is estimated to be 0.5%.
The following key market dynamics support issuer decisions to add metal Payment Cards to their programs:
•Based on market survey data collected by Edgar Dunn, consumers globally favor Metal Form Factors as superior to existing plastic cards, and have even said they would switch banks to obtain a metal Payment Card. Technological and manufacturing innovations enable the Company to offer issuers an array of different Metal Form Factors, with a variety of price points to provide issuers competitive differentiation in their card programs. This range of card offerings is expected to continue to drive adoption of metal Payment Cards across segments in issuer card portfolios (consumer, small business, corporate, etc.) and card types (credit, debit, loyalty, etc.).
•The Company believes that dual-interface metal Payment Cards are easier to use than most mobile payment platforms, and that entrenched consumer preference for claims by third parties including, without limitation, claims by vendors and prospective target businesses.Inphysical form factors are expected to maintain the event that the proceedsrole of Payment Cards in the trust accountmarketplace notwithstanding the introduction of mobile payment platforms such as Apple Pay® and Google Pay®. It is expected that mobile payment platforms will continue to grow, but not replace physical cards as the dominant transaction model. For example, the Apple Pay® platform’s share of U.S. in-store sales were estimated by pymnts.com, an independent payment industry news and information resource, to be 1.5% in 2020, up from 0.1% in 2015.
•Issuers are reduced below (i) $10.20 per public share or (ii) such lesser amount per public share heldconsidering the adoption of new Payment Card technologies, including dynamic card verification value (“CVV”), biometrics, and LED display features, among others. The incremental costs of adding these technologies to Payment Cards favors the use of Metal Form Factors instead of plastic cards. The Company believes Metal Form Factors provide a more durable physical housing versus plastic, thus better preserving the integrity and functionality of any added technologies, driving efficiency in issuer acquisition costs.
•Payment Cards remain the trust account asprimary payment instrument at the point of sale. Even with the dateongoing global expansion of e-commerce, the liquidationneed for physical card products is not expected to significantly diminish. After more than two decades of the trust account, due to reductions ine-commerce activity, it is estimated that only 13% of total U.S. retail sales are completed through e-commerce channels (2020 U.S. Census Bureau report).
Cryptocurrency and Digital Assets
Cryptocurrency is a burgeoning asset class and is rapidly evolving. The value of the trustCryptocurrency asset class was estimated to total $1.8 trillion in 2021 and is projected to grow to $32 trillion by 2027. Bitcoin addresses with non-zero balances have grown from 7 million at year end 2016 to an estimated 37.5 million by year end 2021. Cryptocurrencies and other Digital Assets are forming the basis of new global financial and security frameworks with significant monetization opportunities.
Cryptocurrency Wallets enable users to access and monitor their Cryptocurrency assets in each case netand sign transactions. Hot Storage Wallets generate and store private and public keys and digitally sign transactions within Internet-connected devices where storage of the amountkeys is hosted by a third party. For example, Cryptocurrency exchanges today typically provide their customers Hot Storage Wallets with the exchange having custody of interestthe user’s Private Keys. Cold Storage Wallets store Private Keys and sign transactions in an offline device, with the Private Key in the custody of the user, protecting the Wallet from network-based security vulnerabilities. Though typically more convenient for day-to-day transaction activity than Cold Storage, Hot Storage Wallets are more prone to risk of cyber-theft. Since November 2013, Cryptocurrency exchanges have experienced dozens of cyberattacks
resulting in billions of dollars in aggregate loss of assets. The risk of cyberattacks and other theft of Cryptocurrency assets is driving demand for the enhanced security of Cold Storage over exchange-provided Hot Storage Wallets.
The risk of loss of valuable Cryptocurrencies and other Digital Assets by consumers and other industry participants is driving the need for more advanced security solutions to protect these assets against fraud and theft. Use of the Arculus Cold Storage Wallet with its three-factor authentication security solution, could substantially reduce the risk of this type of catastrophic loss of valuable assets.
Crypto.com reported that global cryptocurrency users increased from 74 million in July 2020 to 295 million at year end 2021. Blockchain.com reported 11 million active Cryptocurrency Wallet users (inclusive of Hot and Cold storage) at year end 2016. This figure grew to 82.2 million by year end 2021. The Company's management projects active Wallet users will total more than 230 million by 2025. The Cold Storage Wallet market is nascent but projected to grow rapidly, as consumers seek out the increased security for storage of their Digital Assets and look to maintain custody of their Private Keys.
The eGaming and related Digital Asset markets are also significant opportunities for adoption and monetization of Blockchain-based and similar applications. Video games represent a $159 billion market spanning 3.0 billion individual eGamers (i.e., customers for eGaming products and services) globally. Free-to-play games generate 85% of all video game revenue through purchase of in-game assets. Over 1.3 billion eGamers made at least one in-game transaction in 2020. Adoption of Blockchain-based or similar non-fungible tokens are moving in-game assets to tradeable/saleable valuable Digital Assets. Enterprise eGaming platforms require security of user assets and ease of recovery for potentially lost assets, as well as the ability to accept a growing list of Cryptocurrencies. Consumers increasingly need portability for Digital Assets, multiple currencies, and security of their assets/accounts from hacking and loss. Arculus’ Ecosystem solutions could provide the security and ease of use needed to facilitate the continued growth of these markets.
Growth Opportunities
The Company is a high-growth, profitable technology company, focused on innovative payments, security, and Cryptocurrency and Digital Asset solutions. The Company has a demonstrated track record of achieving growth in operational scale and financial performance, including:
•Card programs served grew from approximately 60 in 2018 to over 100 in 2021;
•Metal Payment Card unit sales grew from 12.6 million in 2018 to approximately 22 million in 2021 (20% compound annual growth rate or “CAGR”);
•Net revenues grew from $155 million in 2018 to $268 million in 2021 (20% CAGR); and
•Adjusted EBITDA grew from $69 million in 2018 to $102 million in 2021 (17% CAGR).
Metal Payment Card Solutions
Even with its long-term track record of growth and leadership in metal Payment Card solutions, the Company’s sales volume in 2021 represented just 0.5% of estimated addressable market, indicating substantial opportunity for further penetration of the global Payment Card market. Presently, metal Payment Card growth activities are targeted in three primary areas:
Domestic Expansion. In 2021, the Company produced metal Payment Cards for seven of the top ten U.S. card issuers. The Company believes there are substantial opportunities to expand adoption of Metal Form Factors existing clients’, proprietary and co-branded mass affluent card programs which do not currently offer metal Payment Cards. The number of issuers adopting metal programs continues to increase, and the Company’s marketing and sales activities target opportunities to introduce Metal Form Factors to new card issuer clients in the U.S.
International Expansion. The Company’s net revenue from non-U.S. metal Payment Card programs in 2021 totaled $49.5 million, nearly 3 times its 2018 net revenue of $19 million from non-U.S. programs. The Company believes that issuers in international markets are still in the early stages of adoption of Metal Form Factors and largely untapped opportunities exist across major markets, in Europe, Asia, the Middle East, and Latin America. In these regions, issuers are developing awareness of the relatively low cost and attractive economics of metal Payment Card programs. The Company intends to continue growing its team of international direct sales representatives and third-party distribution partners to further support growth in markets outside of the U.S.
FinTech Issuers. Innovative new issuers, including digital challenger banks and other emerging consumer FinTechs, are increasingly seeking premium physical touch points to enhance their otherwise digital-only customer relationships.
Technology and Innovation. Since its founding, the Company’s growth has been underpinned by the transformative security and payments technologies it has developed and commercialized for large, mainstream markets. The Company expects to maintain its technological advantages over competitors with consistent research and development investment to drive innovations that provide opportunities for expanded revenues and profitability, including biometric, dynamic CVV, LED display features, and new card constructions. In addition to new products and revenue opportunities, the Company’s research and development efforts are continually focused on improvements in manufacturing processes to improve efficiency, increase capacity, and reduce waste to support enhanced operating leverage and profitability.
Arculus
There has been explosive growth in Cryptocurrencies and usage of Cryptocurrency in multiple segments of the financial markets, representing a substantial growth opportunity for the Company’s Arculus Platform.
The Company believes its Arculus Platform can develop into an entire ecosystem of hardware, infrastructure, direct applications and services, and third-party applications and services, focused on serving the needs of users of Cryptocurrencies, as well as for in-game financial transactions in the eGaming industry (today mostly conducted in Fiat Currency) and warranty and insurance programs focused on Cryptocurrency products and Digital Assets being stored. Leveraging the Company’s history of innovation and Payment Card expertise, the Company expects it can rapidly expand the Arculus Platform to include developments in Hot Storage Wallets and Payment Card functionality, as well as further developments in Cold Storage Wallets. The opportunities are likely to drive hardware sales revenue (for the Arculus Key card), transaction fee revenue (from Fiat Currency to Cryptocurrency and Cryptocurrency to Cryptocurrency transactions), and recurring fees (e.g., subscription and other fees).
The Arculus Platform roadmap for the next several years focuses on rapid expansion and market launch of the following products and services:
| | | | | | | | | | | |
| In Market | 2022 | 2022 | 2023 |
| Cryptocurrency Solutions | Digital Authentication/Arculus Payments | NFTs & Gaming | Warranty & Insurance |
Store Private Keys and sign transactions with an offline device (Arculus KeyTM card) | Adds payment card functionality to hot and cold Cryptocurrency storage platform | Improves security and portability of Digital Assets, including NFTs within and across gaming platforms | Establish crypto asset insurance protection for users that addresses loss of Cryptocurrencies and other Digital Assets |
| Protects Wallets from network-based vulnerabilities, alleviating burdens of existing solutions | Adds digital authentication functionality to card payments platform | Enables eGames to accept growing list of Cryptocurrencies and protect accounts from hacking and loss in the quickly expanding gaming market | |
| Enables tap card to phone for authentication, turns internet payments into card present transactions, authorizing high-dollar transactions, and authenticating a new device | | |
The Company expects to leverage its business-to-business (“B2B”) channel to expand into the Cryptocurrency markets. Specifically, the Company will target its existing Payment Card issuer clients and their co-brand partners, including traditional financial institutions, FinTech companies and other Cryptocurrency exchanges to offer the Arculus Platform in the Digital Asset, eGaming (i.e., online gaming markets), and other Blockchain-based markets. Further, the Company may create a partner-branded (or “white-labeled”) version of the Arculus Key™ card, as well as some or all of the Arculus Cold Storage Wallet and other Arculus products and/or services. The Company believes this model solves both the consumer’s and the partner’s need for enhanced security of their Digital Assets and Cryptocurrencies and anticipates that it will allow the Arculus Platform products and services to reach consumers through a variety of channels, while also diversifying the Arculus revenue streams into a combination of hardware sales and recurring revenues from transaction processing fees, subscription fees, and other sources in various markets.
The eGaming market is well established, with published data (Source: Bloomberg; Mordor; Newzoo) showing approximately 3.0 billion users in 2021, expected to grow to approximately 3 billion by 2023 (and the Company believes this growth will continue through 2025), and approximately $180 billion dollars spent in 2021, expected to grow to over $257 billion by 2025. The Company has identified four primary unmet needs in the eGaming market, from both platform providers and users, for increased security, authentication and ease-of-use, which provide support for the Company to enter this market and achieve meaningful revenues, including:
•The need for improved authentication for user registrations and logins to the gaming platform;
•The need to reduce fraud and/or eliminate in-game “card not present” transactions, in which the gaming platform is charged a higher processing fee, in favor of in-game “card present” transactions, saving the platform significant money in processing fees;
•The need for users to have a safe, secure and easy-to-use Cold Storage device for NFTs and other Digital Assets purchased within the gaming platform; and
•The need for platform providers to enable users to pay for in-game transactions using Cryptocurrencies.
Importantly, the eGaming market has extensive experience using prior and existing security devices, but the Company believes the Arculus Platform technology reflects a safer and more secure device for this market.
The Company expects to continue development of the Arculus Platform, in-house, with industry partners and/or through third-party App developers and expects that associated internal development costs will not involve expenses in excess of 1% of net revenues per year. The Company may also consider the acquisition of businesses and/or assets which might accelerate market entry for various elements of the Arculus Platform.
Clients
The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers. The Company has developed long-term relationships with its largest customers, including eighteen years with American Express and thirteen years with JP Morgan Chase, across multiple RFP cycles with both companies, as well as six years with CapitalOne and four years with Fiserv.
The proven value proposition of the Company’s premium metal Payment Cards support card issuers’ acquisition and retention of consumer and business card customers. For each of its largest issuer relationships, the Company serves numerous distinct issuer-branded and co-branded card programs, diversifying the Company’s revenues even within individual clients. For example, the Company supports the following proprietary and co-branded programs:
| | | | | | | | | | | | | | |
| Issuer/Reseller | JPMorgan Chase | American Express | Capital One | Fiserv |
| Proprietary Programs | Sapphire Preferred® | Centurion® | Venture® | N/A |
| Sapphire Reserve® | Platinum® | Savor® | |
| JPM Reserve® | Gold® | Spark Business® | |
| | | | |
| Co-Branded Programs | Amazon Prime® | Amazon Prime Business® | N/A | Verizon® |
| Whole Foods® | Marriott® | | Morgan Stanley® |
| United® | Delta® | | |
These card portfolios create recurring revenue streams driven by issuer demand for the Company metal Payment Cards to support customer acquisition and replacement card activity for lost and stolen cards, account fraud, and natural card reissuance cycles that occur each year.
As Payment Card issuers seek ways to drive differentiation in their market, the Company’s premium metal Payment Cards have become a key component of its clients’ customer-facing marketing messages. Moreover, issuers who do not offer a premium card product are increasingly realizing that they risk losing market share over the long term.
For example, at its March 2018 investor day, American Express reported results from its recent Platinum® program relaunch which included conversion of the cards to the Company’s premium metal form factor. The Platinum® program experienced a 52% increase in new account acquisitions and upgrades. The Company’s analytics suggest that a typical issuer would require only a 1% to 3% increase in new card acquisition to generate a positive return from the adoption of the Company’s metal Payment Cards. American Express also highlighted increased cardholder spending of 17% over the prior year and the Company estimates that only a 3% to 4% increase in average cardholder spending would generate a positive return from the adoption of the Company’s premium metal form factor. Furthermore, 290,000 existing customers proactively called American Express to request the new metal card and 47% of the new Platinum® card customers were millennials, a key growth factor for the portfolio.
The Company and its major clients have entered into multi-year master agreements which provide general terms and conditions. These clients then typically provide single-order, blanket-order and/or multi-year statements
of work which set forth prices and quantities of Payment Cards. For most other clients, the relationship is governed by individual purchase orders instead of master agreements.
The Company’s largest clients are American Express and JP Morgan Chase. Together these clients represented 71.9% (or individually, approximately 34.5% and 37.4%, respectively) of our net revenue for the year ended December 31, 2021 and 72.1% (or individually, approximately 38.4% and 33.7%, respectively) of our net revenue for the year ended December 31, 2020.
The Company has a master service agreement with American Express (the “Amex Agreement”) will be up for renewal on December 31, 2024. Typically, the Company renews such client agreements upon their expiration in the ordinary course of business. Under the Amex Agreement, American Express reserves annual capacity of products and is required to order a certain percentage of that capacity from the Company, and the Company may charge American Express for a portion of that capacity even if American Express orders below capacity for any given year. Subject to compliance by American Express with any existing purchase commitments, American Express may terminate the Amex Agreement (i) for convenience pursuant to written notice, or (ii) for cause if the Company commits a material breach and does not remedy it within a prescribed time period. The Company may terminate the Amex Agreement if American Express does not make required payments, and does not remedy the non-payment within a prescribed time period. In addition, subject to compliance by American Express with any existing purchase commitments, American Express may terminate individual orders entered into under the Amex Agreement with prior written notice.
The Company’s master service agreement with JP Morgan Chase (the “Chase Agreement”) will be up for renewal on December 31, 2023. Typically, the Company renews such client agreements upon their expiration in the ordinary course of business. Under the Chase Agreement, JP Morgan Chase agreed to purchase its metal Payment Cards only from the Company during the term of the Chase Agreement. Under the Chase Agreement, JP Morgan Chase reserves annual capacity of products. Subject to compliance by JP Morgan Chase with any purchase commitments to the Company, JP Morgan Chase may terminate the Chase Agreement (i) for convenience pursuant to written notice, or (ii) if the Company commits a material breach and does not remedy it within a prescribed time period. The Company may terminate the Chase Agreement if JP Morgan Chase does not make required payments, and does not remedy the non-payment within a prescribed time period.
Sales and Marketing
Metal Payment Card Solutions
The Company markets and sells its metal Payment Card products to U.S. and international card issuers, including banks and other non-bank issuers of Payment Cards. Sales activities are designed to develop and foster deep relationships with key Payment Cards issuers throughout the world. Through these activities, the Company works to strengthen relationships and expand metal Payment Card programs with existing clients and to identify and complete sales to new clients. The Company has two primary sales channels, as follows:
Direct Sales. The Company presently deploys nine direct sales representatives located in the U.S., Europe, India and South America along with nine client relationship managers and solutions architects. The Company establishes direct engagement between its sales team and issuers in various regions across the world, with success driven by an iterative and collaborative process. The Company’s sales team focuses on issuer portfolios on a program-by-program basis.
Indirect Sales. The Company has been expanding its relationships with a variety of card ecosystem partners, such as plastic card manufacturers and Personalization partners throughout the world. These relationships enable the Company to reach more issuers (primarily non-U.S.), some of whom prefer to run all card purchasing through their existing relationships. Distribution partners are able to offer their customers a broader range of card form factors, bringing the Company into a sale as the metal Payment Card expert. The Company’s numerous distribution partners operate global sales teams. In these relationships, the Company typically sells its metal Payment Cards to its distribution partners at a wholesale price; and the distributor then resells the cards to its
customers, typically on an integrated basis with the distributor’s Personalization, fulfillment and other card-related services (with prices to their customers under the sole control of the distribution partner). The Company also uses a variety of marketing communications, including conferences and trade show attendance, print and digital advertisements and social media posts, targeted at card issuers and consumers, and designed to demonstrate and expand the demand for metal Payment Cards.
Arculus
The Arculus Platform is selling in business-to-business (“B2B”) and direct-to-consumer channels. The Company plans to invest significantly in sales and marketing over the next several years to scale its Arculus solutions business. The Company has already commenced marketing activities, including social media marketing, and has expanded its marketing and business development activities to build brand awareness for the Arculus Cold Storage Wallet and entire Arculus Ecosystem, and to identify opportunities to deploy the Arculus Platform. These activities emphasize the ease of use of the Arculus Cold Storage Wallet, and its three-factor authentication advantages. The Company has already hired additional personnel, and expects to add marketing and other vendors, to expand its marketing and business development activities, to develop a pipeline of partnering opportunities for its Arculus Platform.
Business Sales and Partnering Programs. The Company’s B2B strategy involves targeting its existing Payment Card issuer clients and their co-brand partners who seek to enter the Cryptocurrency marketplace. The Arculus Platform, with its three-factor authentication security solution including the Arculus Cold Storage Wallet, is expected to be offered through partner-branded solutions which may include a partner-branded version of the Arculus Key card, as well as some or all of the Arculus Cold Storage Wallet and other Arculus products and/or services. The partnering approach will allow Arculus derived products to reach consumers through a variety of channels. The Company expects that the use of a partnering model, with multiple levels of product and service integration, will allow for future Arculus revenue streams to diversify into a combination of hardware sales and recurring revenues from transaction processing fees, subscription fees, and other sources. Future Arculus Ecosystem products may include solutions for payments, Digital Assets, eGaming (i.e., online gaming markets), other Blockchain-based markets, and insurance that may be withdrawndeveloped in-house, with industry partners and/or through third-party App developers. The Company expects to pay taxes,initially target the eGaming, insurance and the Fintech markets. The Company presently expects end-user customers of our sponsor assertsbusiness-to-business sales to use the Arculus Key card and/or other Arculus Ecosystem solutions to conduct transactions in Fiat Currency and Cryptocurrency. However, to date, the Company has not made any sales of its Arculus products to such customers.
Consumer Sales. The Company’s direct-to-consumer strategy expects to generate sales via the Internet, physical retail and other channels. The Company’s online direct-to-consumer strategy include selling products through its own Arculus-branded e-commerce website, as well as other Internet distribution channels, including Amazon.com® and other online distributors.
Competition
Metal Payment Card Solutions
The market for Payment Cards is highly competitive. The Company competes for bank, non-bank and brand decision-making on their card programs with providers of other incentives and initiatives, including rewards programs and traditional plastic card manufacturers. The Company also competes with several other manufacturers of cards containing some metal. Some of the Company’s competitors possess substantially greater financial, sales, and marketing resources than the Company and have substantial flexibility in competing, including through the use of integrated product offerings and competitive pricing. However, most of the Company’s competitors in card manufacturing are large, diversified businesses with areas of strategic focus outside of the Payment Cards market, and their card operations focus primarily on lower margin core plastic card manufacturing. The Company believes that itmost competitive metal card manufacturers have substantially less production capacity, less technical expertise in the Metal Form Factor, a limited selection of metal card designs and constructions, and less extensive supplier relationships for the raw materials needed for metal cards. The Company’s metal card products compete with other
card manufacturers, including Idemia France S.A.S. (formerly Oberthur Technologies SA), Thales DIS France SA (formerly Gemalto SA), CPI Card Group, Giesecke & Devrient GmbH, Kona I and BioSmart Co., Ltd.
Competitive factors in selling metal Payment Cards include primarily product quality, the ability to manufacture high volumes of cards, the ability to deliver finished cards on fixed schedules enabling card issuers (and their Personalization partners) to meet consumer demand for metal Payment Cards, the range of products offered, innovation in Metal Form Factor design and construction and technological innovation to enhance the cardholder experience, product features and price. The Company competes favorably across all of these factors, in the following ways:
•The Company is unablethe pioneer and market leader in production of metal Payment Cards, with over a decade of experience in designing and manufacturing metal Payment Cards to satisfymeet the needs of large card issuers and brands.
•The Company has the facilities, personnel, manufacturing equipment, and processes to manufacture metal Payment Cards at scale while maintaining high quality standards.
•The Company has developed valuable relationships with clients, raw material suppliers, Personalization partners, distributors, and equipment manufacturers.
•The Company maintains long-term contracts with its indemnification obligationslargest clients, which are also some of the largest card issuers in the world, across a diversified portfolio of proprietary and co-brand Payment Card programs.
Arculus
The market for Cold Storage Wallets is highly competitive. Presently, most Cold Storage Wallets are sold directly to consumers, and the Company expects to face competition from existing products and potential new product launches from existing storage businesses and new entrants. The Company expects to compete for business sales with other providers of Cryptocurrency storage products and services. Some of the Company’s competitors may possess greater financial, sales and marketing resources than the Company. However, most of the Company’s competitors in the Cold Storage Wallet market do not presently offer products and services with the range of security features and enhanced user interface/user experience of the Company’s Arculus Key card and companion Arculus Wallet App. The Company expects its primary competitors in the Cold Storage Wallet market will include Ledger SAS, Trezor® from Satoshi Labs SRO, CoolWallets® by CoolBitX Ltd., KeepKey® by ShapeShift AG, ColdcardTM by Coinkite Inc., BitBox® by Shift Cryptosecurity and PalletTM by Penta Security Systems, Inc., among others.
Cold Storage Wallets also compete as a category of products against Hot Storage Wallets to serve Digital Asset holders. Hot Storage Wallets generate and store private and public keys and digitally sign transactions within Internet-connected devices where a Digital Asset holder’s keys are under the custody of a third party, typically in a cloud-based, hosted environment that may be vulnerable to cyber-theft. The Company believes that Cryptocurrency users will increasingly demand self-custody of their private and public keys via Cold Storage Wallets for the enhanced security benefits. Further, the Company also believes that its Arculus Key card and companion Arculus Wallet App deliver a Cold Storage Wallet solution that eliminates much of the user experience friction historically associated with competing legacy Cold Storage Wallet products. The Company provides a physical, branded touchpoint through the Arculus Key card that the Company believes will be preferred by financial institutions and other branded stakeholders in the market for Digital Assets over less tangible, digital-only Hot Storage Wallets. Hot Storage Wallets and related solutions include Wallets typically provided by Cryptocurrency exchanges to their customers and the related backend software solutions enabling Hot Storage Wallets.
Manufacturing
The Company designs and manufactures its metal Payment Cards using highly specialized equipment, significantly modified to meet the Company’s particular production methods and card constructions. The
Company’s engineers have designed and implemented proprietary equipment modifications, process automation, and efficiency initiatives to drive significant improvements in manufacturing scale and productivity. The rollout of these initiatives is an ongoing process and continues with an increased focus on automation throughout the manufacturing process, which is expected to result in further improvements in manufacturing yields and labor efficiency, enabling the Company to meet client demand and withstand competitive pricing pressures. The Company’s research and development personnel bring substantial expertise in material science enabling the Company to design and produce difficult-to-replicate Metal Form Factors, and to be a leader in technological innovations for Payment Cards.
Payment Cards require high security throughout the manufacturing process, and the Company maintains extensive policies, procedures and staff to assure compliance with the PCI Security Standard, Payment Network and client requirements.
The Company’s manufacturing operations are designed to meet the needs of its diverse range of client Payment Card programs. The following diagram demonstrates the Company’s role in the Payment Card marketplace:
The Company leases an aggregate of approximately 173,000 square feet in three (3) facilities, all located in Somerset, New Jersey (U.S.A.), within about a mile of each other, enabling the Company to manufacture its products on an integrated basis across its facilities. The Company uses high-security ground freight (such as armored vehicles) for delivery of finished Payment Cards to the Company’s clients or, more frequently, directly to Personalization partners selected by the Company’s clients. Personalization partners provide cardholder Personalization and fulfillment services.
Supply Chain
The Company has developed and maintains a valuable and extensive network of suppliers, which provide the Company with EMV® chips, various types of metal, adhesives, signature panels, magnetic stripes, Payment Network logos (including holographic) and other materials for Payment Card production. The Company does not have any long-term purchase commitments for its supplies, and believes that itthe raw materials needed to produce its Payment Card products are available from multiple sources at reasonable prices, and does not anticipate any raw
materials shortages. The Company obtains its raw materials from suppliers located in the U.S., Japan, China, Italy and France. Primary suppliers for EMV® chips are leading semiconductor manufacturers. The Company maintains constant vigilance concerning supply chain risks and evaluates alternate suppliers to assure availability, quality, performance, service, price and other features.
Intellectual Property
The Company has no indemnification obligations relatedextensive and global intellectual property rights, such as design and utility patents and patent applications, trade secrets, confidential information, trademarks, service marks, trade names, and copyrights. The Company also maintains licensed rights to certain manufacturing technology relating to Dual-Interface antennae, and may, from time to time, enter into similar commercial agreements if needed or desirable for its manufacturing operations.
The Company relies on a particular claim, our independent directors would determine whethercombination of registered (such as patents, trademarks, service marks, etc.) and unregistered (such as trade secrets, confidential information, etc.) programs for its intellectual property protection throughout the world. As of March 2022, the Company had more than 45 U.S. and foreign patents issued, more than 30 pending U.S. and foreign patent applications, 16 families of U.S. and foreign trademarks/service marks registered and/or applied for across 27 jurisdictions. The Company’s 40 distinct utility patent families have an average remaining lifetime of over 14 years (of their 20-year terms from filing date, assuming eventual grant and all annuities paid); its 8 design patent families have an average 92% of their remaining lifetime remaining (of 10 – 25-year terms, depending upon jurisdiction), and its registered trademarks/service marks have ten year terms renewable indefinitely with ongoing use. The Company expects to take legal action against our sponsorcontinue to enforcedevelop innovations for Payment Card form factor design, components and manufacturing methods, many of which are reflected in patent applications, which may include further technological innovations for the Arculus Cold Storage Wallet products.
Environmental Protection
The Company’s manufacturing operations are subject to compliance with Federal, state and local environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination. The Company believes that its indemnification obligations. While we currently expectoperations are in material compliance with environmental requirements and that our independent directors would take legal actionenvironmental matters will not have a material adverse effect on our behalf against our sponsorits business, operations, financial condition or results of operations.
The metal raw material used in the manufacture of the Company’s metal Payment Cards is typically comprised of mostly post-consumer recycled materials. In addition, the Company believes that its Metal Form Factors permit a greater opportunity for recycling and/or repurposing expired Payment Cards as compared to enforceplastic cards. Most of the Company’s clients provide postage paid return shipping materials to their cardholders so that the expired cards are returned to the client for destruction/recycling (as metal Payment Cards cannot typically be shredded with consumer shredding machines).
Government Regulations
The Payments Industry is generally subject to extensive government regulation — both in the United States and internationally (where its indemnification obligationsproducts are sold, including in the UK, the EU and Asia) — and any new laws and regulations, or industry standards or revisions made to us, it is possibleexisting laws, regulations or industry standards (or changes in interpretations or enforcement) affecting the Payments Industry may materially or adversely affect the Company’s business.
Metal Payment Card Solutions
As a Metal Form Factor supplier, the Company has obtained and maintains certifications from the Payment Networks enabling the Company to manufacture Payment Cards that our independent directorsoperate on their networks. Payment Network certification requires compliance with the PCI Security Standards for physical card characteristics and for card
manufacturing operations and facilities. The Payment Networks and their member financial institutions routinely update, generally expand and modify applicable requirements. Any changes in
exercising their business judgment may choose not to do so if, for example,Payment Network rules or standards that increase the cost of
such legal action is deemed bydoing business or limit the
independent directorsCompany’s ability to
be too high relative tomanufacture Payment Cards that operate on their networks may adversely affect the
amount recoverable or if the independent directors determine that a favorable outcome is not likely. We have not asked our sponsor to reserve for such indemnification obligations and we cannot assure you that our sponsor would be able to satisfy those obligations. Accordingly, we cannot assure you that due to claimsresults of
creditors the actual valueoperations of the
per-share redemption price will not be less than $10.20 per public share.We will seekCompany’s business. The Company is required to reduce the possibility that our sponsor will havesubmit to indemnify the trust account due to claims of creditors by endeavoring to have all vendors, service providers, prospective target businessesperiodic audits, self-assessments, or other entitiesassessments of its compliance with which we do business execute agreements with us waiving any right, title, interest or claimthe PCI Security Standards. The Company has maintained Payment Network certifications for many years and believes that it can continue to renew such certifications. The Company also recognizes that the expensive and complex certification process, and the operational compliance required to obtain and maintain certification, acts as a significant barrier to new businesses seeking to enter the Payment Cards market.
The Company ships certain of
any kind in orits products to
monies heldcustomers (or their personalization partners) located in the
trust account. Our sponsor will also not be liable as to any claims under our indemnity ofUK, the
underwriters of our initial public offering against certain liabilities, including liabilities underEU and Asia. In connection with such shipments, the
Securities Act.Under the DGCL, stockholders may be held liable for claims by third parties against a corporation to the extent of distributions received by them in a dissolution. The pro rata portion of our trust account distributed to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination within 18 months from the closing of our initial public offering may be considered a liquidating distribution under Delaware law. If the corporation complies with certain procedures set forth in Section 280 of the DGCL intended to ensure that it makes reasonable provision for all claims against it, including a 60-day notice period during which any third-party claims can be brought against the corporation, a 90-day period during which the corporation may reject any claims brought, and an additional 150-day waiting period before any liquidating distributions are made to stockholders, any liability of stockholders with respect to a liquidating distributionCompany is limited to the lesser of such stockholder’s pro rata share of the claim or the amount distributed to the stockholder, and any liability of the stockholder would be barred after the third anniversary of the dissolution.
Furthermore, if the pro rata portion of our trust account distributed to our public stockholders upon the redemption of our public shares in the event we do not complete our initial business combination within 18 months from the closing of our initial public offering, is not considered a liquidating distribution under Delaware law and such redemption distribution is deemed to be unlawful (potentially due to the imposition of legal proceedings that a party may bring or due to other circumstances that are currently unknown), then pursuant to Section 174 of the DGCL, the statute of limitations for claims of creditors could then be six years after the unlawful redemption distribution, instead of three years, as in the case of a liquidating distribution. If we are unable to complete our initial business combination within 18 months from the closing of our initial public offering, we will: (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay our taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law. Accordingly, it is our intention to redeem our public shares as soon as reasonably possible following our 18th month and, therefore, we do not intendsometimes required to comply with thoseimport regulations and related procedures. As such, our stockholders could potentially be liable for any claimsIn addition, the products which the Company ships to the extent of distributions received by them (but no more)non-U.S. locations are designed and any liability of our stockholders may extend well beyond the third anniversary of such date.
If we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, the proceeds held in the trust account could be subjectmanufactured to applicable bankruptcy law, and may be included in our bankruptcy estate and subject to the claims of third parties with priority over the claims of our stockholders. To the extent any bankruptcy claims deplete the trust account, we cannot assure you we will be able to return $10.20 per share to our public stockholders. Additionally, if we file a bankruptcy petition or an involuntary bankruptcy petition is filed against us that is not dismissed, any distributions received by stockholders could be viewed under applicable debtor/creditor and/or bankruptcy laws as either a “preferential transfer” or a “fraudulent conveyance.” As a result, a bankruptcy court could seek to recover some or all amounts received by our stockholders. Furthermore, our board of directors may be viewed as having breached its fiduciary duty to our creditors and/or may have acted in bad faith, thereby exposing itself and our company to claims of punitive damages, by paying public stockholders from the trust account prior to addressing the claims of creditors. We cannot assure you that claims will not be brought against us for these reasons.
Our public stockholders will be entitled to receive funds from the trust account only upon the earlier to occur of: (i) the completion of our initial business combination, (ii) the redemption of any public shares properly tendered in connection with a stockholder vote to amend any provisions of our amended and restated certificate of incorporation (A) to modify the substance or timing of our obligation to offer redemption rights in connection with any proposed initial business combination or to redeem 100% of our public shares if we do not complete our initial business combination within 18 months from the closing of our initial public offering or (B) with respect to any other provision relating to stockholders’ rights or pre-initial business combination activity, and (iii) the redemption of all of our public shares if we are unable to complete our business combination within 18 months from the closing of our initial public offering, subject to applicable law. In no other circumstances will a stockholder have any right or interest of any kind to or in the trust account. In the event we seek stockholder approval in connection with our initial business combination, a stockholder’s voting in connection with the initial business combination alone will not result in a stockholder’s redeeming its shares to us for an applicable pro rata share of the trust account. Such stockholder must have also exercised its redemption rights as described above. These provisions of our amended and restated certificate of incorporation, like all provisions of our amended and restated certificate of incorporation, may be amended with a stockholder vote.
Competition
In identifying, evaluating and selecting a target business for our initial business combination, we may encounter competition from other entities having a business objective similar to ours, including other blank check companies, private equity groups and leveraged buyout funds, and operating businesses seeking strategic business combinations. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Moreover, many of these competitors possess greater financial, technical, human and other resources than we do. Our ability to acquire larger target businesses will be limited by our available financial resources. This inherent limitation gives others an advantage in pursuing the initial business combination of a target business. Furthermore, our obligation to pay cash in connection with our public stockholders who exercise their redemption rights may reduce the resources available to us for our initial business combination and our outstanding warrants, and the future dilution they potentially represent, may not be viewed favorably by certain target businesses. Either of these factors may place us at a competitive disadvantage in successfully negotiating an initial business combination.
Facilities
Our executive offices are located at 2877 Paradise Rd. #702, Las Vegas, NV 89109 and our telephone number is (650) 618-2524. Our executive offices are provided to us by our sponsor. We pay our sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. We consider our current office space adequate for our current operations.
Employees
We currently have three officers. These individuals are not obligated to devote any specific number of hours to our matters but they devote as much of their time as they deem necessary to our affairs until we have completed our initial business combination. The amount of time they devote in any time period varies based on whether a target business has been selected for our initial business combination and the stage of the initial business combination process we are in. We do not intend to have any full-time employees prior to the completion of our initial business combination.
Periodic Reporting and Financial Information
On November 5, 2020, we registered our units, Class A common stock and warrants under the Exchange Act and have reporting obligations, including the requirement that we file annual, quarterly and current reports with the SEC. In accordancecomply with the requirements of the Exchange Act, our annual reports will contain financial statements auditedPayment Networks located in those locations, including American Express, Visa, MasterCard and reported on by our independent registered public accountants.
We will provide stockholdersJCB, among others
In addition, the Company is prohibited from doing business with audited financial statementsindividuals, entities, countries, and territories that are targets of economic or trade sanctions that the U.S. Department of the prospective targetTreasury’s Office of Foreign Assets Controls (“OFAC”), the U.S. Department of Commerce’s Bureau of Industry and Security, and various foreign authorities administer or enforce. If the Company’s compliance programs are found to be deficient, it could lose key relationships with clients or their Personalization partners. Fines or penalties for violations of these rules may be severe and efforts to remediate any violations issues may be costly, may result in diversion of management and staff time and effort, and may still not guarantee compliance.
The Company’s metal payment card fabrication business does not receive any cardholder personally identifiable information, as partthat information is handled directly by the Company’s clients or their Personalization partners. As a result, the Company’s Payment Card operations are not directly subject to compliance with federal, state and foreign privacy statutes and regulations relating to protection of such information.
Arculus
Cryptocurrency and Digital Assets are recent technological innovations, and the regulatory schemes to which these Digital Assets may be subject have not been fully explored or developed. Regulation of Digital Assets varies from country to country as well as within countries. In some cases, existing laws have been interpreted to apply to Digital Assets, while in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect Digital Assets, and some jurisdictions have not taken any regulatory stance on Digital Assets and or have expressly declined to apply regulation. Accordingly, there is no clear regulatory framework applicable to our Arculus Cold Storage Wallet, or to Digital Assets, and laws that do apply at times may overlap.
As of the tender offer materialsdate of this report, the Arculus WalletTM supports the following Cryptocurrencies and other Digital Assets:
The Company expects that support for storage and peer-to-peer transfers, as well as support for purchase and swap transactions may, in the future, include additional or proxy solicitation materials sentexclude previously supported Cryptocurrencies and other Digital Assets. The Company’s decisions on whether to stockholders to assist themsupport purchase and swap transactions in assessing the target business. In all likelihood, these financial statementsparticular Cryptocurrencies or other Digital Assets will needbe based on a combination of consumer demand, technical integration capabilities, regulatory compliance, third-party liquidity partner capabilities and management discretion. There is substantial regulatory uncertainty concerning whether certain Cryptocurrencies or other Digital Assets may be deemed “securities.” Cryptocurrencies or other Digital Assets determined to be preparedsecurities under applicable laws would subject such assets to the regulatory framework of such laws, including (among others) registration requirements for the securities and licensing or registration requirements for businesses that trade in accordance with,such securities. In order to determine whether a particular Cryptocurrency or reconciledother Digital Asset is a security prior to GAAP, or IFRS, dependingsupporting purchase and swap transactions on the circumstances,Arculus Platform in such Cryptocurrency or other Digital Asset, the Company relies upon legal and regulatory analysis of legal counsel with expertise in the Digital Asset industry. This legal and regulatory analysis is informed not only by existing U.S. federal securities law, including case law, but also takes into account relevant U.S. federal and state enforcement actions, guidance and commentary of relevant U.S. regulators and staff thereof — including speeches and published securities law frameworks, other published analyses and ratings by market participants, securities litigation, those digital assets listed by what the Company believes to be respected Digital Asset trading platforms, published news and other data and materials that may from time to time become available to the Company. Accordingly, the Company’s determinations concerning which Cryptocurrencies and other Digital Assets are likely to be securities is updated regularly, in light of ongoing developments, and the historical financial statements may be requiredCompany expressly reserves the right (as reflected in its terms and conditions) to discontinue purchase and swap transaction support for any Cryptocurrencies and other Digital Assets, should the Company determine that such Cryptocurrencies or other Digital Assets have a meaningful risk of being characterized as securities (i.e., that there is a current reasonable likelihood that U.S. regulators or judicial authorities definitively determine, through legislation, rulemaking, case law or enforcement activity, that a particular Cryptocurrency or other Digital Asset is a security under the federal securities laws). To date, based on such analysis, including
guidance and commentary of the SEC and its staff, the Company has determined that the Cryptocurrencies or other Digital Assets for which the Arculus WalletTM supports purchase and swap transactions (see the “Support for Purchase and Swap Transactions” column in the chart immediately preceding this paragraph) are presently not subject to a meaningful near-term risk of being determined to be auditedsecurities. It is not presently anticipated that the Arculus WalletTM would support purchase and swap transactions in accordanceXRP or other Cryptocurrencies or other Digital Assets (see “Support for Purchase and Swap Transactions” column in the chart immediately preceding this paragraph) which the Company believes have a current and meaningful risk of being characterized as securities under the federal securities laws, unless the Company determines in the future to partner with a third-party securities broker/dealer or to, itself, register as a securities broker/dealer. The Company does not believe the standardsstorage and peer-to-peer/send & receive functionality provided by the Arculus WalletTM involves purchases, sales or other transactions effected by the Company (or any party other than the sender and the recipient). Further, the Company is not compensated for such user-directed activities. However, it is possible that regulators may determine that user-directed peer- to-peer transfers using the Arculus WalletTM would require registration and compliance with broker-dealer and/or securities exchange regulations. While the methodology the Company has used, and expects to continue to use, to determine if purchase and swap transactions in particular Cryptocurrencies or other Digital Assets will be supported in the Arculus Platform is ultimately a risk-based assessment, it does not preclude legal or regulatory action based on the presence of a security. Further, if the Company is found to be in violation of the PCAOB. These financial statement requirementsfederal securities laws, the Company could be subject to significant monetary penalties, censure or other actions that may limithave a material and adverse effect on the pool of potential targets we may conduct an initial business combination with because some targets mayCompany.
The Company does not expect to directly buy, swap or exchange Cryptocurrencies for its Arculus customers. Instead, all purchase and swap transactions by consumers using the Arculus WalletTM, including exchanging fiat currencies for Cryptocurrencies (and vice versa) and exchanging one Cryptocurrency for another Cryptocurrency, are expected to be unable to provideexecuted between the consumer and one or more third-party liquidity partners, such statements in time for us to disclose such statements in accordance with federal proxy rulesas Simplex and complete our initial business combination within the prescribed time frame. We cannot assure you that any particular target business identified by us as a potential business combination candidate will have financial statements prepared in accordance with GAAP or that the potential target business will be able to prepare its financial statements in accordance with the requirements outlined above.Changelly. To the extent that these requirements cannot be met, wepopular Cryptocurrencies are designated by regulators as securities or commodities, the Company may need to partner with third-party registered securities or commodities brokers or dealers, or exchanges, to facilitate purchase and swap transactions by Arculus customers. If the Company is not be able to acquire the proposed target business. While this may limit the pool of potential business combination candidates, weobtain such partnering arrangements or if a regulator determines that such partnering arrangements, standing alone, do not believerelieve the Company of an independent licensing obligation, and if the Company does not itself register as a broker, dealer or exchange, the inability to support purchase and swap transactions in such Cryptocurrencies could have a material adverse effect on the Company’s business, financial condition and results of operations.
It is possible that
this limitation will be material.We will be required to evaluate our internal control procedures for the fiscal year ending December 31, 2021 as required by the Sarbanes-Oxley Act. Onlyany jurisdiction may, in the event we are deemednear or distant future, adopt laws, regulations, interpretations, policies, rules or guidance directly or indirectly affecting a Digital Asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use Digital Assets, or to exchange Digital Assets for either fiat currency or other virtual currency. It is also possible that government authorities may claim ownership over mathematical Digital Asset network source codes and protocols or law enforcement agencies (of any or all jurisdictions, foreign or domestic) may take direct or indirect investigative or prosecutorial action related to, among other things, the use, ownership or transfer of virtual currencies, resulting in a change to its value or to the development of a Digital Asset network.
As Digital Assets have grown in both popularity and market size, the U.S. Congress and a number of
U.S. federal and state agencies, including FinCEN, have been examining the operations of Digital Asset networks, with particular focus on the extent to which Digital Assets can be used to launder the proceeds of illegal activities or fund criminal or terrorist enterprises and the safety and soundness of exchanges or other service providers that take custody of Digital Assets for users. Many of these state and federal agencies have issued consumer advisories regarding the risks posed to investors in Digital Assets. In addition, federal and state agencies, and other regulatory bodies in other countries have issued rules or guidance about the treatment of Digital Asset transactions or requirements for businesses engaged in Digital Asset activity. Additionally, U.S. state and federal, and foreign regulators and legislatures have taken action against Digital Asset businesses or enacted restrictive regimes in response to adverse publicity arising from hacks, consumer harm, or criminal activity stemming from Digital Asset activity with respect to Digital Assets. Accordingly, government authorities may engage in future actions that interpret existing laws and regulations, or propose new ones, to regulate certain Wallet providers as intermediaries in
Cryptocurrency transactions. In addition, governments or regulatory authorities may impose new or additional licensing, registration or other compliance requirements on participants in the Digital Asset industry, which may include the Company’s present or future Arculus Platform activities. For an additional discussion of regulatory risks related to future government actions, please see “Risk Factors — Regulatory changes or actions may restrict the use of the Arculus Wallet or Cryptocurrencies in a manner that adversely affects the Company’s business, prospects or operations”. These ongoing and future regulatory actions may alter, perhaps to a materially adverse extent, the nature of an investment in Digital Asset derivatives and/or the ability of the Arculus Platform to continue to operate.
Various foreign jurisdictions may adopt policies, laws, regulations or directives that affect Digital Assets or a Digital Asset network, generally. The effect of any existing regulation or future regulatory change on the Arculus Platform or Digital Assets is impossible to predict, but such change could be substantial and adverse to the Arculus Platform. Various foreign jurisdictions have, and may continue to in the near future, adopt laws, regulations or directives that affect Digital Assets, particularly with respect to Digital Asset exchanges and service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of Digital Assets by users, merchants and service providers outside the United States and may therefore impede the growth or sustainability of the Digital Asset economy in these jurisdictions as well as in the United States and elsewhere, or otherwise negatively affect the value of Digital Assets.
Employees
As of March 1, 2022, the Company had approximately 715 employees, all of whom were full-time employees, performing the following primary functions (on an approximate basis):
•630 in manufacturing;
•20 in research and development;
•20 in sales and marketing; and
•45 in finance, human resources, information technology and administration.
With the Company’s significant growth rate, expansion of staff has been continuous, as well as process innovations and automation to streamline operations. The Company considers relations with its employees to be
a large accelerated filergood and has never experienced any work stoppages or
an accelerated filer, and no longer qualifystrikes as
an emerging growth company, will we be required to have our internal control procedures audited. A target company may not be in compliance with the provisions of the Sarbanes-Oxley Act regarding adequacy of their internal controls. The development of the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act may increase the time and costs necessary to complete any such business combination. We have filed a Registration Statement on Form 8-A with the SEC to voluntarily register our securities under Section 12 of the Exchange Act. As a result
we are subject to the rules and regulations promulgated under the Exchange Act. We have no current intention of
filing a Form 15 to suspend our reporting or other obligations under the Exchange Act prior or subsequent to the consummation of our initial business combination.We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following November 10, 2025, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our shares of Class A common stock that are held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
labor disputes. Item 1A. Risk Factors
Summary of Risk Factors
An investment in our securities involves substantial risk. The occurrence of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may have a material adverse effect on our business, cash flows, financial condition and results of operations. Important factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others, the following:
•Risks Related to our Business
◦The COVID-19 pandemic and the measures implemented to contain the spread of the virus have had a negative impact on our business and result of operations and, if continued, could be amplified and have a material adverse effect on our business, financial condition and results of operations.
◦We may not be able to sustain our revenue growth rate in the future.
◦Failure to retain existing customers or identify and attract new customers could adversely affect our business, financial condition and results of operations.
◦Data and security breaches could compromise our systems and confidential information, cause reputational and financial damage, and increase risks of litigation, which could adversely affect our business, financial condition and results of operations.
◦System outages, data loss or other interruptions affecting our operations could adversely affect our business and reputation.
◦Disruptions at our primary production facility may adversely affect our business, results of operations and/or financial condition.
◦We may not be able to recruit, retain and develop qualified personnel, including for areas of newer specialized technology which could adversely affect our ability to grow our business.
◦Our future growth may depend upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected.
◦A disruption in our operations or supply chain could adversely affect our business and financial results.
◦We have limited experience in the Cryptocurrency industry and may not succeed in fully commercializing the Arculus Platform.
◦Digital Asset Wallet storage systems, such as the Arculus Cold Storage Wallet, are subject to risks related to a loss of funds due to theft of Digital Assets, security and cybersecurity risks, system failures and other operational issues, which could cause damage to our reputation and brand.
◦Regulatory changes or actions may restrict the use of the Arculus Wallet or Digital Assets in a manner that adversely affects our business, prospects or operations.
◦We rely on third-party partners to provide certain features of the Arculus Wallet, and any interruptions in services provided by these third parties may impair our ability to support our customers.
◦Production quality and manufacturing process disruptions could adversely affect our business.
◦We are dependent on certain distribution partners for distribution of our products and services. A loss of distribution partners could adversely affect our business.
◦We face competition that may result in a loss of our market share and/or a decline in profitability.
•Risks Related to our Indebtedness
◦We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations.
◦Upon the occurrence of an event of default relating to Holdings’ credit facility, the lenders could elect to accelerate payments due and terminate all commitments to extend further credit.
◦The debt outstanding under Holdings’ existing credit facility has a variable rate of interest that is based on the London Interbank Offered Rate (“LIBOR”) which may have consequences for Holdings that cannot be reasonably predicted and may increase its cost of borrowing in the future.
•Risks Related to the ownership of our Securities
◦Our only significant asset is our ownership of Holdings. If Holdings’ business is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations.
◦Provisions in our charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.
◦As an “emerging growth company,” we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.
◦If our performance does not meet market expectations, the price of our securities may decline.
◦The Warrants may never be in the money, and they may expire worthless.Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations. As a smaller reporting company,result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this report, or in any document incorporated by reference herein, are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business.
Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this report,or in any document incorporated by reference herein, are not the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business.
Risks Related to Our Business
The COVID-19 pandemic and the measures implemented to contain the spread of the virus have had a negative impact on our business and result of operations and, if continued, could be amplified and have a material adverse effect on our business, financial condition and results of operations.
Global health concerns relating to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have affected the macroeconomic environment, significantly increased economic uncertainty and reduced economic activity. The pandemic has also led to governmental authorities implementing numerous measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. These measures and the COVID-19 pandemic have caused economic and financial disruptions that have negatively impacted, and may continue to negatively impact, our business, results of operations and financial condition. The extent to which the pandemic will continue to negatively impact our business and results of operations will depend on numerous evolving factors and future developments that we are not able to predict, including the duration and severity of the pandemic; the nature, extent and effectiveness of containment measures; the extent and duration of the effect on our customers and suppliers, the economy, unemployment, consumer confidence and consumer and business spending; and how quickly and to what extent normal economic and operating conditions resume.
The pandemic and containment measures have caused us to modify its operations, and we may take further actions that we determine to be in the best interests of its employees, customers and business partners. If we do not respond appropriately to the pandemic, or if customers or other stakeholders do not perceive our response to be adequate, we could suffer damage to our reputation and brand, which could materially adversely affect our business.
If the COVID-19 pandemic is prolonged, it could amplify the negative impacts on our business and results of operations, and may also heighten many of the other risks described in this “Risk Factors” section. It is also possible that any adverse effects of the pandemic and containment measures may continue once the pandemic is
controlled and the containment measures are lifted. We do not yet know, nor can we predict, the full extent of how COVID-19 and the containment measures will affect our business, results of operations and financial condition, or the global economy as a whole. However, the continuing effects could have a material adverse impact on our financial condition.
We may not be able to sustain our revenue growth rate in the future.
Our net revenue increased by 3% from $260.6 million in 2020 to $267.9 million in 2021, but, as an example, declined by 21% from $80.4 million during the first quarter of 2020 compared to $63.7 million during the first quarter of 2021. Accordingly, we may not achieve revenue growth in the future and you should not consider our revenue growth in fiscal 2021 as indicative of its future performance. Our growth rate may slow in future periods due to a number of factors, which may include slowing demand for its products, increased competition, decreasing growth of its overall market, or its inability to engage and retain customers. If we are unable to maintain consistent revenue or continue its revenue growth, it may be difficult for us to maintain profitability.
Failure to retain existing customers or identify and attract new customers could adversely affect our business, financial condition and results of operations.
Our two largest customers are American Express and JPMorgan Chase. Together, these customers represented approximately 72% of our net revenue for the years ended December 31, 2021 and 2020. Our ability to meet our customers’ high-quality standards in a timely manner is critical to our business success. If we are unable to provide our products and services at high quality and in a timely manner, our customer relationships may be adversely affected, which could result in the loss of customers.
Our ability to maintain relationships with our customers may be impacted by several factors beyond our control, including more attractive product offerings from our competitors, pricing pressures or the financial health of these customers, many of whom operate in competitive businesses and depend on favorable macroeconomic conditions. In addition, we may also be limited in the products we can offer and the pricing we can receive for such products due to restrictions present in certain of our customer contracts, which may negatively impact our ability to retain existing customers or attract new customers. If we experience difficulty retaining customers and attracting new customers, our business, financial condition and results of operations may be materially and adversely affected.
Data and security breaches could compromise our systems and confidential information, cause reputational and financial damage, and increase risks of litigation, which could adversely affect our business, financial condition and results of operations.
Our information technology (“IT”) infrastructure’s ability to reliably and securely protect the sensitive confidential information of our customers, which include large financial institutions, is critical to our business. Security breaches have become more common across many industries. Cyber incidents have been increasing in sophistication and can include third parties gaining access to employee or customer data using stolen or inferred credentials, computer malware, viruses, spamming, phishing attacks, ransomware, card skimming code, and other deliberate attacks and attempts to gain unauthorized access. The occurrence of these types of incidents in our computer networks, databases or facilities could lead to the inappropriate use or disclosure of personal information, including sensitive personal information of customers and employees, which could harm our business and reputation, adversely affect consumers’ confidence in our business and products, result in inquiries and fines or penalties from regulatory or governmental authorities, cause a loss of customers, pose increased risks of lawsuits and subject us to potential financial losses.
Additionally, it is possible that unauthorized access to sensitive customer and business data may be obtained through inadequate use of security controls by our customers, suppliers or other vendors. For example, SolarWinds, an information technology company, was recently the subject of a cyberattack that created security vulnerabilities for thousands of its clients. While we are not currently aware of any impact that the SolarWinds supply chain attack had on our business, we may be subject to the risk of similar cyberattacks on our customers,
suppliers and other vendors in the future and there is residual risk that we may experience a security breach arising from the SolarWinds supply chain attack.
We have administrative, technical, and physical security measures in place, and we have policies and procedures in place to both evaluate the security protocols and practices of our vendors and to contractually require service providers to whom we disclose data to implement and maintain reasonable privacy and security measures. However, although cybersecurity remains a high priority, our activities and investment may not sufficiently protect our system or network against cyber threats, nor sufficiently prevent or limit the damage from any future security breaches. As these threats continue to evolve, we may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants, which could materially and adversely affect our business, financial condition and results of operations. Although we maintain cyber liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. Furthermore, any material breach of our security systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to mitigate or remedy any damage resulting from system or network disruptions, whether caused by cyberattacks, security breaches or otherwise, which could ultimately adversely affect our business, financial condition and results of operations.
System outages, data loss or other interruptions affecting our operations could adversely affect our business and reputation.
The ability to efficiently execute and operate business functions and systems without interruption is critical to our business. A significant portion of the communication between our employees, customers, and suppliers rely upon our integrated and complex IT systems. We depend on the reliability of our IT infrastructure and software, and our ability to expand and innovate our technologies and technological processes in response to changing needs. A system outage or data loss or interruption could cause damage to our brand and reputation. Such operational interruptions could also cause us to become liable to third parties, including our customers. We must be able to protect our processing and other systems from interruption to successfully operate our business. In an effort to do so, we have taken preventative actions and adopted protective procedures to ensure the continuation of core business operations in the event that normal operations could not be performed because of events outside of our control. These actions and procedures taken and adopted by us may, however, insufficiently prevent or limit the damage from future disruptions, if any, and any such disruptions could adversely affect our business, financial condition and results of operations.
Disruptions at our primary production facility may adversely affect our business, results of operations and/or financial condition.
A substantial portion of our manufacturing capacity is located at our primary production facility. Any serious disruption at such facility could impair our ability to manufacture enough products to meet customer demand, and could increase our costs and expenses and adversely affect our revenues. Our other facilities may not have the requisite equipment or sufficient capacity, may have higher costs and expenses, or may experience significant delays to adequately increase production to satisfactorily meet our customers’ expectations or requirements. Long-term production disruptions may cause our customers to modify their Payment Card programs to use plastic cards or to seek alternative supply of metal cards. Any such production interruptions or disruptions could adversely impact our business, financial condition and results of operations.
For example, government-imposed measures in response to the COVID-19 pandemic led us to temporarily limit operations at some of our facilities. As a result, our credit card production rate was negatively affected. The continuation of the COVID-19 pandemic and the containment measures instituted as a result thereof could amplify the negative impact on our credit card production and, as a result, have a material adverse effect on our business, financial condition and results of operations.
Our future growth may depend upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected.
The markets for our products and services are subject to technological changes, frequent introductions of new products and services and evolving industry standards. The process for developing innovative or technologically enhanced products can deplete time, money and resources, and requires the ability to accurately forecast technological, market and industry trends. In order to achieve successful technical execution of new products, we may need to undertake time-consuming and expensive research and development activities, which could negatively impact the servicing of our existing customers. We may also experience difficult market conditions that could delay or prevent the successful research and development, marketing launches and consumer deployment of such newly designed products, whereby we could incur significant additional cost and expense. In addition, competitors may develop and commercialize competing products faster and more efficiently than we are able to do so, which could further negatively impact our business.
Our product and service offerings could be rendered obsolete if we are unable to develop and introduce innovative products in a cost-effective and timely manner. In particular, the rise in the adoption of wireless or mobile payment systems may make physical metal cards less attractive as a method of payment, which could result in less demand for these products. Although to date we have not witnessed a material reduction in card-based payments in the United States resulting from the emergence of wireless or mobile payment systems, such payment systems offer consumers an alternative method to make purchases without the need to carry a physical card by relaying on cellular telephones or other technological products to make payments. If these wireless or mobile payment systems are widely adopted, it could result in a reduction of the number of physical Payment Cards issued to consumers. Moreover, other developing or unforeseen technology solutions and products could render our existing products unpopular, irrelevant or obsolete altogether.
Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: effectively identify and capitalize upon opportunities in new and emerging product markets; invest resources in innovation and research and development; complete and introduce new products and integrated services solutions in a timely manner; license any required third-party technology or intellectual property rights; qualify for and obtain required industry certification for our products; and retain and hire talent experienced in developing new products and services. Our business and growth also depend in part on the success of our strategic relationships with third parties, including technology partners or other technology companies whose products are integrated with our products. Failure of any of these technology companies to maintain, support or secure their technology platforms in general, and our integrations in particular, or errors or defects in their technologies or products, could adversely affect our relationships with customers, damage our brand and reputation, and could adversely affect our business, financial condition and results of operations.
Our ability to enhance our existing products and to develop and introduce innovative new products that continue to meet the needs of our customers may affect our future success. We may experience difficulties that could delay or prevent the successful development, marketing or deployment of these products, or our newly enhanced services may not meet market demands or achieve market traction. Our potential failure to complete or gain market acceptance of new products, services and technologies could adversely affect our ability to retain existing customers or attract new ones.
A disruption in our operations or supply chain could adversely affect our business and financial results.
As a company engaged in manufacturing and distribution, we are subject to the risks inherent in such activities, including disruptions or delays in supply chain or information technology, product quality control, as well as other external factors over which we have no control. Some of the key components for our products are metals, and EMV chips, which we source from several key suppliers. We obtain our components from multiple suppliers located in the United States and abroad, on a purchase order basis. Changes in the financial or business condition of our suppliers could subject us to losses or adversely affect our ability to bring products to market. Additionally, the failure of our suppliers to comply with applicable standards and deliver goods and services in a timely manner in
sufficient quantities could adversely affect our customer service levels and overall business. Any increases in the costs of goods and services for our business may also adversely affect our profit margins particularly if we are unable to achieve higher price increases or otherwise increase cost or operational efficiencies to offset the higher costs.
The COVID-19 pandemic and related government measures in response to the pandemic negatively affected our suppliers, which in turn negatively affected our production and business. In addition, there is an increased demand for microchips worldwide in various industries and manufacturers of chips are experiencing shortages in supply, which could adversely effect our ability to obtain sufficient chips for our manufacturing operations.
We have limited experience in the Cryptocurrency industry and we may not succeed in commercializing the Arculus Platform.
With our business operations historically focused on the Payment Card industry, we are a new entrant into the Cryptocurrency industry. The Arculus Platform was commercially launched in the third quarter of 2021. It is possible that consumers of Digital Asset storage products may not be willing to purchase or use the Arculus products, and we may not be able to establish partnerships with our existing and/or new customers to drive partner-branded versions of the Arculus Key card or other Arculus Ecosystem products or services. If we are unable to successfully establish sufficient consumer sales, commercial partnerships and/or business-to- business sales channels, that would likely have a material adverse effect on our business, financial condition and results of operations. Furthermore, a significant portion of our future growth is expected to come from our Arculus Platform business. If the Arculus Platform fails to gain market acceptance, or the Arculus Platform otherwise fails to be as successful as we expect, our ability to achieve its currently-forecasted performance will be significantly impaired.
In addition, we must rely on vendors and development partners for certain components of our Arculus Cold Storage Wallet products, and must source and procure NFC-enabled chips to be embedded in our Arculus Key cards, as well as other materials used in the manufacture of the Arculus Key card. The performance of our vendors and development partners, and the availability of NFC-enabled chips and other materials, is essential to the success of the Arculus Wallet and Arculus Key card. There is currently a global shortage of chips due to increased demand and interruptions of production, both resulting from the COVID-19 pandemic. If our vendors and development partners do not perform as expected, or if we are not able to source and procure sufficient quantities of NFC-enabled chips and other materials, the success of our Arculus Cold Storage Wallet and Arculus Key card could be negatively impacted, which could have a material adverse effect on our business, financial condition and results of operations. In addition, changes or delays in supply or pricing of NFC-enabled chips, or other necessary materials, could materially negatively impact the potential margins and profitability of our Arculus business.
Digital Asset Wallet storage systems, such as the Arculus Cold Storage Wallet, are subject to potential illegal misuse, risks related to a loss of funds due to theft of Digital Assets, security and cybersecurity risks, system failures and other operational issues, which could cause damage to our reputation and brand.
Blockchain-related products and services, in particular Digital Assets (including Cryptocurrencies), have the potential to be used for financial crimes or other illegal activities. Because the Blockchain platform that we are developing is novel, there are uncertainties regarding any legal and regulatory requirements for preventing Blockchain-related products and services from being put to such unlawful uses, and there are uncertainties regarding the liabilities and risks to us if we are unable to prevent such unlawful uses. Even if we comply with all laws and regulations regarding financial and Blockchain-related products and services, we have no ability to ensure that our customers, partners or others to whom we license or sell our products and services comply with all laws and regulations applicable to them and their transactions. Any negative publicity we receive regarding any allegations of unlawful uses of the Arculus Platform, including the Arculus Key card or the Arculus Wallet product could damage our reputation and such damage could be material and adverse, including to aspects of our business that are unrelated to the Arculus Platform. More generally, any negative publicity regarding unlawful uses of Blockchain technology or Digital Assets in the marketplace could materially reduce the demand for our products and services, including the Arculus Platform.
The initial Arculus Cold Storage Wallet product is comprised of a Cold Storage device and a mobile Wallet App. A Cold Storage Wallet uses an architecture where the Private Keys needed to access Digital Assets, such as Cryptocurrencies, are stored outside of the Internet. In the Arculus Platform, the Arculus Cold Storage Wallet comprises the Arculus Key card, which stores the Private Keys on a secure NFC-enabled chip embedded in the card, and the Arculus Wallet App configured to communicate via NFC with the Arculus Key card. A user may choose to store his or her Digital Assets in a Cold Storage Wallet if such user has no immediate plan to use those Digital Assets because a Cold Storage Wallet potentially may be safer than a Hot Storage Wallet because the Hot Storage Wallet being consistently connected to the Internet makes it potentially more vulnerable to hacking. Through the use of Cold Storage Wallet technology, the Arculus Platform, with our three-factor authentication technology, may be able to increase the safety of users’ assets during storage, as compared to storing such Digital Assets in a Hot Storage Wallet. Further, Digital Assets are controllable only by the possessor of both the unique public and Private Keys relating to the local or online digital Wallet in which they are held, which Wallet’s public key or address is reflected in the network’s public Blockchain. Notwithstanding the increased security of the Cold Storage Wallet system as compared to a Hot Storage Wallet system, any loss of Private Keys, or hack or other compromise of, the Cold Storage Wallets could materially and adversely affect our customers’ ability to access or sell their Digital Assets and could cause significant reputational harm to us and, our Arculus Platform.
The Arculus Cold Storage Wallet employs security measures common to Blockchain technologies, and specifically includes an advanced three-factor authentication, including biometric, PIN, and key card authentication, as well as passcode storage that is separate from the private keys located on the Arculus Key card. The effectiveness of these security measures for users of the Arculus Cold Storage Wallet have not yet been determined. There is no guarantee that these security measures or any that we may develop in the future will be effective. Any failure of these security features may result in the loss of customers’ Digital Assets and cause reputational harm, which may be material to us, the occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Regulatory changes or actions may restrict the use of the Arculus Wallet or Digital Assets in a manner that adversely affects our business, prospects or operations.
Regulatory Uncertainty Surrounding the Digital Asset Environment, including Cryptocurrencies
As Digital Assets, including cryptocurrencies, have grown in both popularity and market size, governments around the world have reacted differently to Digital Assets, with certain governments deeming them illegal and others allowing their use and trade under certain circumstances. In addition, governments or regulatory authorities may impose new or additional licensing, registration or other compliance requirements on participants in the Digital Asset industry. Ongoing and future regulatory actions may impact our ability of to develop and offer products involving the use of Digital Assets, including the Arculus Wallet, or may impose additional costs, which may be material, on us in connection with such products, and such impact may be material and adverse. For example, the Commodities Futures Trading Commission (“CFTC”) has designated bitcoin, a form of Digital Asset that frequently is referred to as a Cryptocurrency, as a commodity, and as such, trades in bitcoin are subject to the CFTC’s antifraud authority.
Regulatory Risks Resulting from Potential Designation of Certain Digital Assets as Securities
Moreover, the Securities and Exchange Commission (“SEC”) staff has stated that bitcoin is not a security, but has asserted that certain other Digital Assets, such as XRP, are securities subject to the SEC’s substantive and antifraud authority. Further, derivatives on these Digital Assets, tokens that represent certain derivatives, and certain leveraged transactions on Digital Assets, may be subject to substantive regulation by the CFTC and/or SEC. In sum, these federal regulators, and various U.S. state and non-U.S. regulators, are still developing their frameworks for regulating Digital Assets.
There is currently no uniformly applicable legal or regulatory regime governing Digital Assets in certain jurisdictions, including in the U.S. A particular Digital Asset’s status as a “security” or other regulatory investment
or the treatment of digital currency for tax purposes, in any relevant jurisdiction is subject to a high degree of uncertainty and potential inconsistency across regulatory regimes, and if we are unable to properly characterize a Digital Asset or assess our tax treatment, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition. Some jurisdictions have taken a broad-based approach to classifying Digital Assets as “securities,” while other foreign jurisdictions have adopted a narrower approach. As a result, certain Digital Assets may be deemed to be a “security” under the laws of some jurisdictions but not others. In the future, jurisdictions may adopt additional heterogeneous laws, regulations, or directives that affect the characterization of Digital Assets as “securities.”
In order to determine whether a particular Cryptocurrency or other Digital Asset is a security prior to supporting purchase and swap transactions on the Arculus Platform in such Cryptocurrency or other Digital Asset, we rely upon legal and regulatory analysis of legal counsel with expertise in the Digital Asset industry. This legal and regulatory analysis is informed not only by existing U.S. federal securities law, including case law, but also takes into account relevant U.S. federal and state enforcement actions, guidance and commentary of relevant U.S. regulators and staff thereof — including speeches and published securities law frameworks, other published analyses and ratings by market participants, securities litigation, those digital assets listed by what we believe to be respected Digital Asset trading platforms, published news and other data and materials that may from time to time become available to us. Accordingly, our determinations concerning which Cryptocurrencies and other Digital Assets are likely to be securities is updated regularly, in light of ongoing developments, and we expressly reserve the right (as reflected in the Arculus Platform terms and conditions) to discontinue support for any Cryptocurrencies and other Digital Assets, should we determine that such Cryptocurrencies or other Digital Assets have a meaningful risk of being characterized as securities (i.e., that there is a current reasonable likelihood that U.S. regulators or judicial authorities definitively determine, through legislation, rulemaking, case law or enforcement activity, that a particular Cryptocurrency or other Digital Asset is a security under the federal securities laws). While the methodology we have used, and expect to continue to use, to determine if purchase and swap transactions in a Cryptocurrency or other Digital Asset will be supported in the Arculus Platform is ultimately a risk-based assessment, it does not preclude legal or regulatory action based on the presence of a security. If we are found to have supported purchase and swap transactions in the Arculus Platform for Cryptocurrencies or other Digital Assets which are subsequently
determined to be securities, it is possible that we could be viewed as inadvertently acting as an unlicensed broker-dealer which could subject us to, among other things, regulatory enforcement actions, censure, monetary fines, restrictions on the conduct of the Arculus business operations and/or rescission/damages claims by customers who use the Arculus Platform. Our failure to comply with applicable laws or regulations, or the costs associated with defending any action alleging our noncompliance with applicable laws or regulations, could materially and adversely affect us, our business and our results of operations.
Because the Arculus Platform may facilitate purchase and swap transactions in Digital Assets that could be classified as “securities,” our business may be subject to additional risk because such Digital Assets are subject to heightened scrutiny including under customer protection, anti-money laundering, counter terrorism financing and sanctions regulations. To the extent the Arculus Platform supports purchase and swap transactions in any Digital Assets that are deemed to be securities under any of the laws of the U.S. or another jurisdiction, or in a proceeding in a court of law or otherwise, it may have adverse consequences. For instance, all purchase and swap transactions in such supported Digital Assets would have to be registered with the SEC, or conducted in accordance with an exemption from registration, which could severely limit Digital Asset liquidity, usability and transactability within the Arculus Platform. Comparable or other requirements may be imposed by authorities in other jurisdictions. Further, such limitations could result in negative publicity and a decline in the general acceptance of Digital Assets and would make it difficult for such purchase and swap transactions in such supported Digital Assets to be traded, cleared, and custodied as compared to other Digital Assets that are not considered to be securities. To counter such risks, we may have to remove Arculus Platform support for purchase and swap transactions in certain Digital Assets if and when such Digital Assets are designated as securities, which could hurt our business. Alternatively, we may be required to partner with third-party registered securities broker/dealers to facilitate securities trading by Arculus customers, and we may be unsuccessful in efforts to establish such a partnership.
In addition, we do not presently intend to effect or otherwise facilitate trading in securities by our Arculus customers through the use of our Arculus Wallet if such activities would require the use of a registered broker-dealer
or investment adviser. Although we are establishing policies and procedures to ensure that our Arculus business activities do not result in us inadvertently acting as an unregistered broker-dealer or investment adviser, there can no assurance that such policies and procedures will be effective. If we are found by relevant regulatory agencies to have inadvertently acted as an unregistered broker-dealer with respect to purchase and swap transactions in particular Cryptocurrencies, we would expect to immediately cease supporting purchase and swap transactions in those Cryptocurrencies unless and until either the Cryptocurrency at issue is determined by the SEC or a judicial ruling to not be a security or we partner with a third-party registered broker-dealer or investment adviser, acquire a registered broker-dealer or investment adviser or register the Company as a securities broker-dealer or investment adviser, any of which we may elect not to do or may not be successful in doing. For any period of time during which we are found to have inadvertently acted as an unregistered broker-dealer or investment adviser, we could be subject to, among other things, regulatory enforcement actions, monetary fines, censure, restrictions on the conduct of our Arculus business operations and/or rescission/damages claims by customers who use the Arculus Platform. Our failure to comply with applicable laws or regulations, or the costs associated with defending any action alleging our noncompliance with applicable laws or regulations, could materially and adversely affect us,our business and our results of operations.
We do not believe the storage and peer-to-peer/send & receive functionality provided by the Arculus WalletTM involves purchases, sales or other transactions effected by us (or any party other than the sender and the recipient). Further, we are not compensated for such user- directed activities. However, it is possible that regulators may determine that user-directed peer-to-peer transfers using the Arculus WalletTM would require registration and compliance with broker-dealer and/or securities exchange regulations.
Regulatory Risks of Operating as an Unregistered Exchange or as Part of an Unregistered Exchange Mechanism
Any venue that brings together purchasers and sellers of Cryptocurrencies or other Digital Assets that are characterized as securities in the United States is generally subject to registration as a national securities exchange, or must qualify for an exemption, such as by being operated by a registered broker-dealer as an alternative trading system (or ATS). To the extent that any venue accessed via the Arculus Platform is not so registered (or appropriately exempt), we may be unable to permit continued support for purchase and swap transactions for Cryptocurrencies or other Digital Assets that become subject to characterization as securities. While we do not believe that the Arculus Platform, which facilitates purchase and swap transactions in certain Cryptocurrencies and other Digital Assets, is itself a securities exchange or ATS or is part of an unregistered exchange mechanism, regulators may determine that this is the case, and we would then be required to register as a securities exchange or qualify and register as an ATS, either of which could cause us to discontinue our purchase and swap support for such Cryptocurrencies or other Digital Assets or otherwise limit or modify Arculus Platform functionality or access. Any such discontinuation, limitation or other modification could negatively impact our business, operating results, and financial condition. In addition, to the extent other Cold Storage Wallets continue to provide access to such unregulated exchanges or are deemed to be part of an unregistered exchange mechanism, the discontinuation of access for users of the Arculus Wallet may be unpopular with users and may reduce our ability to attract and retain customers. Further, if we are found to be in violation of the Exchange Act due to operation of an unregistered exchange or as part of an unregistered exchange mechanism, we could be subject to significant monetary penalties, censure or other actions that may have a material and adverse effect on us. Notably, in September 2022, the SEC announced a proposed rule change that included, among other things, proposed amendments to Exchange Act rule 3b-16, concerning the definition of “exchange.” While it is not yet clear whether, and if so, in what form, such proposed amendments may be adopted, it is possible that a change to the definition of “exchange” could result in regulators determining that the Arculus Platform is functioning as a securities exchange or ATS or is part of an unregistered exchange mechanism, in which case, the potential registration requirements, or cessation, limitation or other modifications, in each case contemplated above, could become necessary or advisable.
We rely on third-party partners to provide certain features of the Arculus Wallet, and any interruptions in services provided by these third parties may impair our ability to support our customers.
We partner with third-party development partners and exchanges to offer customers an option to use fiat currency to purchase Cryptocurrencies, and/or to swap one Cryptocurrency for another Cryptocurrency, using the Arculus Key card and Arculus Wallet. For additional information regarding our existing Arculus Wallet partner
relationships, as well as our expectations regarding future partner relationships, please see the section of this report entitled, “Business — Overview.” If these third parties experience operational interference or disruptions, breach their agreements with us, fail to perform their obligations and meet our expectations, or experience a cybersecurity incident, our operations could be disrupted or otherwise negatively affected. If we are unable to procure alternatives in a timely and efficient manner and on acceptable terms, or at all, third-party service unavailability could result in customer dissatisfaction, regulatory scrutiny, and damage to our reputation and brand, and other consequences that could materially and adversely affect our business. Furthermore, although the agreements with our existing partners contractually allocate liability to the partners for their actions, including liability relating to anti-money laundering, know your customer and other transaction-related regulatory compliance requirements, these provisions include limitations on liability. There can be no guarantee that we would not be held liable for the actions of our partners, or that the liabilities would not exceed the contractual limitations on liability. Any liabilities incurred by us for the actions of our third-party partners could have a material adverse effect on our business operations, financial condition and results of operations.
Our inability to safeguard against misappropriation or infringement of our intellectual property may adversely affect our business.
Our patents, trade secrets and other intellectual property rights are critical to our business. Our ability to safeguard our proprietary product designs and production processes against misappropriation by third parties is necessary to maintain our competitive position within our industry. Therefore, we routinely enter into confidentiality agreements with our employees, consultants and strategic partners to limit access to, and distribution of, our proprietary information in an effort to safeguard our proprietary rights and trade secrets. However, such efforts may not adequately protect our intellectual property against infringement and misappropriation by unauthorized third parties. Such third parties could interfere with our relationships with customers if successful in attempts to misappropriate our proprietary information or copy our products designs, or portions thereof. Additionally, because some of our customers purchase products on a purchase order basis and not pursuant to a detailed written contract, where we do not have the benefit of written protections with respect to certain intellectual property terms beyond standard terms and conditions, we may be exposed to potential infringement of our intellectual property rights. Enforcing our intellectual property rights against unauthorized use may be expensive and cause us to incur significant costs, all of which could adversely affect our business, financial condition and results of operations. There is no assurance that our existing or future patents will not be challenged, invalidated or otherwise circumvented. The patents and intellectual property rights we obtain, including our intellectual property rights which are formally registered in the United States and abroad, may be insufficient to provide meaningful protection or commercial advantage. Moreover, we may have difficulty obtaining additional patents and other intellectual property protections in the future. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we provide our products or services. Any of the foregoing factors may have a material adverse effect on our business.
We may incur substantial costs because of litigation or other proceedings relating to patents and other intellectual property rights.
Companies in our industry have commenced litigation to properly protect their intellectual property rights. Any proceedings or litigation that we initiate to enforce our intellectual property rights, or any intellectual property litigation asserted against us, could be costly and divert the attention of managerial and other personnel and further, could result in an adverse judgement or other determination that could preclude us from enforcing our intellectual property rights or offering some of our products to our customers. Royalty or other payments arising in settlements could negatively impact our profit margins and financial results. If we are unable to successfully defend against claims that we have infringed the intellectual property rights of others, we may need to indemnify some customers and strategic partners related to allegations that our products infringe the intellectual property rights of others. Additionally, some of our customers, suppliers and licensors may not be obligated to indemnify us for the full costs and expenses of defending against infringement claims. We may also be required to defend against alleged infringement of the intellectual property rights of third parties because our products contain technologies properly sourced from suppliers or customers. We may be unable to determine in a timely manner or at all whether such
intellectual property use infringes the rights of third parties. Any such litigation or other proceedings could adversely affect our business, financial condition and results of operations.
Production quality and manufacturing process disruptions could adversely affect our business.
Our products and our technological processes are highly complex, require specialized equipment to manufacture and are subject to strict tolerances and requirements. We could experience production disruptions due to machinery or technology failures, or as a result of external factors such as delays or quality control issues regarding materials provided by our suppliers. Utilities interruption or other factors beyond our control like natural disasters may also cause production disruptions. Such disruptions can reduce product yields and product quality, or interrupt or halt production altogether. As a result, we may be required to deliver products at a lower quality level in a less timely or cost-effective manner, rework or replace products, or may not be able to deliver products at all. Any such event could adversely affect our business, financial condition and results of operations.
We are dependent on certain distribution partners for distribution of our products and services. A loss of distribution partners could adversely affect our business.
A small number of distribution partners currently deliver a significant percentage of our products and services to customers. We intend to continue devoting resources in support of our distribution partners, but there are no guarantees that these relationships will remain in place over the short-or long-term. In addition, we cannot be assured that any of these distribution partners will continue to generate current levels of customer demand. A loss of any of these distribution partners could have a material adverse effect on our business, financial condition and results of operations.
We face competition that may result in a loss of our market share and/or a decline in profitability.
Our industry is highly competitive and we expect it to remain highly competitive as competitors cut production costs, new product markets develop, and other competitors attempt to enter the markets in which we operate or new markets in which we may enter. Some of our existing competitors have more sales, greater marketing, more specialized manufacturing, and highly efficient distribution processes. We may also face competition from new competitors that may enter our industry or specific product market. Such current or new competitors may develop technologies, processes or products that are better suited to succeed in the marketplace as a result of enhanced features and functionality at lower costs, particularly as technological sophistication of such competitors and the size of the market increase. These factors could lower our average selling prices and reduce gross margins. If we cannot sufficiently reduce our production costs or develop innovative technologies or products, we may not be able to compete effective in our product markets and maintain market share, which could adversely affect our business, financial condition and results of operations.
Our long-lived assets represent a significant portion of our total assets, and their full value may never be realized.
Our long-lived assets recorded as of December 31, 2021 were $27.4 million, representing approximately 26% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $22.2 million, as our operations require significant investments in machinery and equipment.
We review other long-lived assets for impairment on an as-needed basis and when circumstances, alterations, or other events indicate that an asset group or carrying amount of an asset may not be recoverable. Examples of these other long-lived assets include intangible but identifiable assets and plant, equipment, and leasehold improvements. Such write-downs of long-lived assets may result from a drop in future expected cash flows and worsening performance, among other factors. If we must write-down long-lived assets, we record the appropriate charge, which may adversely affect our results of operations.
Our failure to operate our business in compliance with the standards of the PCI Security Standards Council or other industry standards applicable to our customers, such as Payment Networks certification standards, could adversely affect our business.
Many of our customers issue their cards on the Payment Networks that are subject to the standards of the PCI Security Standards Council or other standards and criteria relating to product specifications and supplier facility physical and logical security that we must satisfy in order to be eligible to supply products and services to such customers. Our contractual arrangements with our customers may be terminated if we fail to comply with these standards and criteria.
We make significant investments to our facilities in order to meet these industry standards, including investments required to satisfy changes adopted from time to time in industry standards. We may become ineligible to provide products and services to our customers if we are unable to continue to meet these standards. Many of the products we produce and services we provide are subject to certification with one or more of the Payment Networks. We may lose the ability to produce cards for or provide services to banks issuing credit or debit cards on the Payment Networks if we were to lose our certification from one or more of the Payment Networks or PCI certification for one or more of our facilities. If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such Payment Networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations.
As consumers and businesses spend less, our business, operation outcomes, and financial state may be adversely affected.
Companies that rely heavily on consumer and business spending are exposed to changing economic conditions and are impacted by changes in consumer confidence, consumer spending, discretionary income levels or consumer purchasing habits. A continuous decline in general economic conditions, particularly in the United States, or increases in interest rates, may reduce demand for our products, which could negatively impact our sales. An economic downturn could cause credit card issuers to switch card programs to plastic cards, seek lower-priced metal hybrid card suppliers, reduce credit limits, close accounts, and become more selective with respect to whom they issue credit cards. Such conditions and potential outcomes could adversely affect our financial performance, business, and results of operations.
Product liability and warranty claims and their associated costs may adversely affect our business.
The nature of our products is highly complex. As a result, we cannot guarantee that defects will not occur from time to time. We may incur extensive costs as a result of these defects and any resulting claims. For example, product recalls, writing down defective inventory, replacing defective items, lost sales or profits, and third-party claims can all give rise to costs incurred by us. We may also face liability for judgments and/or damages in connection with product liability and warranty claims. Damage to our reputation could occur if defective products are sold into the marketplace, which could result in further lost sales and profits. To the extent that we rely on purchase orders to govern our commercial relationships with our customers, we may not have specifically negotiated the allocation of risk for product liability obligations. Instead, we typically rely on warranties and limitations of liability included in our standard forms of order acceptance, invoice and other contract documents with our customers. Similarly, we obtain products and services from suppliers, some of which also use purchase order documents which may include limitations on product liability obligations with respect to their products and services. As a result, we may bear all or a significant portion of any product liability obligations rather than transferring this risk to our customers. Our reputation would be harmed and there could be a material adverse effect on our business, financial condition and results of operations if any of these risks materialize.
If tariffs and other restrictions on imported goods are imposed by the U.S. government, our revenue and operations may be materially and adversely affected.
A portion of the raw materials used by us to manufacture our products are obtained, directly or indirectly, from companies located outside of the United States. Recently, tariffs have been imposed on imports from certain countries outside of the United States. As a result, further trade restrictions and/or tariffs may be forthcoming. Certain international trade agreements may also be at risk, as the current U.S. administration has voiced some opposition in respect thereof. These factors may stagnate the economy, impact relationships with and access to suppliers, and/or materially and adversely affect our business, financial condition and results of operations. These
and future tariffs, as well as any other global trade developments, bring with them uncertainty. We cannot predict future changes to imports covered by tariffs or which countries will be included or excluded from such tariffs. The reactions of other countries and resulting actions on the United States and similarly situated companies could negatively impact our business, financial condition and results of operations.
Our international sales subject us to additional risks that can adversely affect our business, operating results and financial condition.
During each of 2021 and 2020, we derived approximately 18% of our revenue from sales to customers located outside the U.S. Our ability to convince customers to expand their use of our products or renew their agreements with us are directly correlated to our direct engagement with such customers. To the extent that we are unable to engage with non-U.S. customers effectively, we may be unable to grow sales to international customers to the same degree we have experienced in the past.
Our international operations subject it to a variety of risks and challenges, including:
• fluctuations in currency exchange rates and related effect on our operating results;
• general economic and geopolitical conditions in each country or region;
• the impact of Brexit; reduction in billings, foreign currency exchange rates, and trade with the EU;
• the effects of a widespread outbreak of an illness or disease, or any other public health crisis, including the
COVID-19 pandemic, in each country or region;
• economic uncertainty around the world; and
• compliance with U.S. laws and regulations imposed by other countries on foreign operations, including the
Foreign Corrupt Practices Act, the U.K. Bribery Act, import and export control laws, tariffs, trade barriers,
economic sanctions and other regulatory or contractual limitations on our ability to sell our products in
certain foreign markets, and the risks and costs of non-compliance.
For example, in response to the rapidly developing conflict between Russia and Ukraine, the United States has imposed and may further impose, and other countries may additionally impose, broad sanctions or other restrictive actions against governmental and other entities in Russia. We presently produce metal credit cards for a distributor that distributes such cards for resale by a Russian-based bank. While the existing sanctions do not currently prohibit the production and sale of our metal credit cards to this customer, additional sanctions may be imposed in the future that could prevent us from selling to this customer or other customers in the affected regions. Additionally, further escalation of geopolitical tensions could have a broader impact that extends into other markets where we do business. Any of these risks could adversely affect our international sales, reduce our international revenues or increase our operating costs, adversely affecting our business, financial condition and operating results.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business.
Many of our products integrate third-party technologies that we license or otherwise obtain the right to use. We have entered into licensing agreements that provide access to technology owned by third parties. The terms of our licensing arrangements vary. These different terms could have a negative impact on our performance to the extent new or existing licensees demand a greater proportion of royalty revenues under our licensing arrangements. Additionally, such third parties may not continue to renew their licenses with us on similar terms or at all, which could negatively impact our net sales. If we are unable to continue to successfully renew these agreements, we may lose our access to certain technologies relied upon to develop certain of our products. The loss of access to those technologies, if not replaced with internally-developed or other licensed technology, could have a material adverse effect on our business and result of operations.
The adoption of new tax legislation could affect our financial performance.
We are subject to income and other taxes in the United States. Our effective tax rate in the future could be adversely affected by changes in tax laws. More generally, it is possible that U.S. federal income or other tax laws or the interpretation of tax laws will change. For example, the Biden Administration has proposed an increase in the
U.S. corporate income tax rate and a minimum corporate tax based on book income. It is difficult to predict whether and when there will be tax law changes having a material adverse effect on our business, financial condition, results of operations and cash flows.
Risks Related to the Tax Receivable Agreement
Our only significant asset is our ownership interest in Holdings and such ownership may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Common Stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
We have no direct operations and no significant assets other than our ownership interest in Holdings. We will depend on Holdings for distributions, loans and other payments to generate the funds necessary to meet our financial obligations, including our expenses as a publicly traded company, to pay any dividends with respect to our Common Stock, and to satisfy our obligations under the Tax Receivable Agreement. The financial condition and operating requirements of Holdings may limit our ability to obtain cash from Holdings. The earnings from, or other available assets of, Holdings may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Common Stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
We may be required to pay certain Holders for most of the benefits relating to any additional tax depreciation or amortization deductions that we may claim.
In connection with the Business Combination, we entered into the Tax Receivable Agreement with Holdings and the TRA Parties (as defined therein). The Tax Receivable Agreement will provide for the payment by us to certain Holders of 90% of the benefits, if any, that we are deemed to realize (calculated using certain assumptions) as a result of (i) our allocable share of existing tax basis in the assets of Holdings and its subsidiaries acquired (A) in the Business Combination and (B) upon sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, (ii) certain increases in tax basis that occur as a result of (A) the Business Combination and (B) sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, and (iii) certain other tax benefits, including tax benefits attributable to payments under the Tax Receivable Agreement. These tax attributes may increase (for tax purposes) our depreciation and amortization deductions and, therefore, may reduce the amount of tax that we would otherwise be required to pay in the future, although the IRS may challenge all or part of the validity of such tax attributes, and a court could sustain such a challenge. Such tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets. Actual tax benefits realized by us may differ from tax benefits calculated under the Tax Receivable Agreement as a result of the use of certain assumptions in the Tax Receivable Agreement, including the use of an assumed weighted- average state and local income tax rate to calculate tax benefits. The payment obligations under the Tax Receivable Agreement are an obligation of ours, but not of Holdings. We expect to benefit from the remaining 10% of realized cash tax benefits. While the amount of existing tax basis, the anticipated tax basis adjustments, and the actual amount and utilization of tax attributes, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A Common Stock at the time of exchanges, and the amount and timing of our income, we expect that as a result of the size of the transfers and increases in the tax basis of the tangible and intangible assets of Holdings and our possible utilization of tax attributes, the payments that Holdings, Inc. may make under the Tax Receivable Agreement will be substantial. The payments under the Tax Receivable Agreement are not conditioned upon continued ownership of us by the exchanging holders of Class B Units. See “Certain Relationships and Related Person Transactions of the Company — Tax Receivable Agreement.”
In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
Our payment obligations under the Tax Receivable Agreement may be accelerated in the event of certain changes of control and will be accelerated in the event it elects to terminate the Tax Receivable Agreement early.
The accelerated payments will relate to all relevant tax attributes that would subsequently be available to us. The accelerated payments required in such circumstances will be calculated by reference to the present value (at a discount rate equal to the lesser of (i) 6.5% per annum and (ii) one year LIBOR, or its successor rate, plus 100 basis points) of all future payments that holders of Holdings Class B Units or other recipients would have been entitled to receive under the Tax Receivable Agreement, and such accelerated payments and any other future payments under the Tax Receivable Agreement will utilize certain valuation assumptions, including that we will have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the Tax Receivable Agreement and sufficient taxable income to fully utilize any remaining net operating losses subject to the Tax Receivable Agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses and the five-year period after the early termination or change of control. In addition, recipients of payments under the Tax Receivable Agreement will not reimburse us for any payments previously made under the Tax Receivable Agreement if such tax basis and our utilization of certain tax attributes is successfully challenged by the IRS (although any such detriment would be taken into account in future payments under the Tax Receivable Agreement). Our ability to achieve benefits from any existing tax basis, tax basis adjustments or other tax attributes, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, including the timing and amount of our future income. As a result, even in the absence of a change of control or an election to terminate the Tax Receivable Agreement, payments under the Tax Receivable Agreement could be in excess of 90% of our actual cash tax benefits.
Accordingly, it is possible that the actual cash tax benefits realized by us may be significantly less than the corresponding Tax Receivable Agreement payments or that payments under the Tax Receivable Agreement may be made years in advance of the actual realization, if any, of the anticipated future tax benefits. There may be a material negative effect on our liquidity if the payments under the Tax Receivable Agreement exceed the actual cash tax benefits that we realize in respect of the tax attributes subject to the Tax Receivable Agreement and/or payments to us by Holdings are not sufficient to permit us to make payments under the Tax Receivable Agreement after it has paid taxes and other expenses. We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise, and these obligations could have the effect of delaying, deferring, or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control.
The acceleration of payments under the Tax Receivable Agreement in the case of certain changes of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A Common Stock.
In the case of certain changes of control, payments under the Tax Receivable Agreement may be accelerated and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We expect that the payments that we may make under the Tax Receivable Agreement in the event of a change of control will be substantial. As a result, our accelerated payment obligations and/or the assumptions adopted under the Tax Receivable Agreement in the case of a change of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A Common Stock in a change of control transaction.
In certain circumstances, Holdings will be required to make pro rata distributions to us and the holders of the Class B Units of Holdings with respect to the taxes of its holders, and the distributions that Holdings will be required to make may be substantial and in excess of our tax liabilities and obligations under the Tax Receivable Agreement. To the extent we do not distribute such excess cash to the holders of our Class A Common Stock or contribute such excess cash to Holdings in exchange for the issuance of additional Class A Units and a corresponding stock dividend of Class A Common Stock to the holders of our Class A Common Stock, the holders of Class B Units of Holdings would benefit from any value attributable to such cash balances as a result of their ownership of Class A Common Stock following an exchange of their Class B Units.
Holdings is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any entity-level U.S. federal income tax. Instead, taxable income is allocated to holders of Holdings’ equity interests,
including us. Accordingly, we incur income taxes on our allocable share of any net taxable income of Holdings. Under the Holdings Second Amended and Restated LLC Agreement, Holdings is generally required from time to time to make pro rata distributions in cash to us and the holders of Class B Units of Holdings in amounts that are intended to be sufficient to cover the taxes on our and the other holders of Class B Units of Holdings respective allocable shares of the taxable income of Holdings, based on certain assumptions contained in the Holdings Second Amended and Restated LLC Agreement. As a result of (i) potential differences in the amount of net taxable income allocable to us and the holders of Class B Units of Holdings, (ii) the lower tax rate applicable to corporations as compared to individuals and (iii) the favorable tax benefits that we anticipate receiving from acquisitions of Class B Units in connection with taxable exchanges of Class B Units for shares of our Class A Common Stock, we expect that these tax distributions will be in amounts that exceed our tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our Board will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, any potential dividends, the payment of obligations under the Tax Receivable Agreement and the payment of other expenses. We have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. No adjustments to the exchange ratio of Class B Units for shares of Class A Common Stock will be made as a result of either (i) any cash distribution by Holdings or (ii) any cash that we retain and do not distribute to our stockholders. To the extent that we do not distribute such excess cash as dividends on our Class A Common Stock or contribute such excess cash to Holdings in exchange for the issuance of additional Class A Units and a corresponding stock dividend of Class A Common Stock to the holders of our Class A Common Stock, and instead, for example, hold such cash balances or lend them to Holdings, the holders of Class B Units of Holdings would benefit from any value attributable to such cash balances as a result of their ownership of Class A Common Stock following an exchange of their Class B Units.
Risks Related to Our Indebtedness
We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations.
We had approximately $395 million of indebtedness as of December 31, 2021, consisting of amounts outstanding under our senior secured credit facility and senior notes.
Our indebtedness could have important consequences to our investors, including, but not limited to:
•increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;
•requiring the dedication of a substantial portion of our cash flow from operations to servicing debt, including interest payments and annual excess cash flow prepayment obligations;
•limiting our flexibility in planning for, or reacting to, changes in our business and the competitive environment; and
•limiting our ability to borrow additional funds and increasing the cost of any such borrowing.
The interest rates in our credit facility are set based upon stated margins above lender’s base rate and the London Interbank Offered Rate, an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market, which is subject to fluctuation. In addition, the interest rate margin applicable to our term loans and revolving loans can vary by one hundred (100) basis points depending on our total leverage ratio. An increase in interest rates would adversely affect our profitability.
Upon the occurrence of an event of default relating to our credit facility, the lenders could elect to accelerate payments due and terminate all commitments to extend further credit.
Under our credit facility, upon the occurrence of an event of default, the lenders will be able to elect to declare all amounts outstanding under the credit agreement to be immediately due and payable and terminate all
commitments to lend additional funds. If we are unable to repay those amounts, the lenders under the credit agreement could proceed to foreclose against our collateral that secures that indebtedness. We have granted the lenders a security interest in substantially all of our assets.
The debt outstanding under our existing credit facility has a variable rate of interest that is based on the London Interbank Offered Rate (“LIBOR”) which may have consequences for us that cannot be reasonably predicted and may increase our cost of borrowing in the future.
Our debt outstanding under our existing credit facility bears interest at a variable rate per annum that is calculated based upon the LIBOR rate plus the applicable margin, ranging from 2.0% – 3.0%. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals for reform. In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. However, for U.S. dollar LIBOR, the relevant date was deferred to June 30, 2023 for certain tenors (including overnight and one, three, six and 12 months), at which time the LIBOR administrator will cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. These actions indicate that the continuation of U.S. LIBOR on the current basis cannot be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 30, 2023. While regulators in various jurisdictions have been working to replace LIBOR, it is unclear whether new agreed-upon benchmark rates will be established. Although our credit facility provides for alternative reference rates, such alternative reference rates and the consequences of the phase-out of LIBOR cannot be entirely predicted at this time. An alternative reference rate could be higher or more volatile than LIBOR prior to its discontinuance, which could result in an increase in the cost of our indebtedness, adversely impacting our financial condition and results of operations. Additionally, the U.S. or global financial markets may be disrupted as a result of the phase-out of LIBOR, which could also have a material adverse effect on our business, financial condition and results of operations.
Our credit facility will contain restrictive covenants that may impair our ability to conduct business.
Our credit facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. We must comply with a maximum senior secured leverage ratio and a minimum debt service coverage ratio. Among other things, these covenants restrict our and our subsidiaries’ ability to grant additional liens, consolidate or merge with other entities, purchase or sell assets, declare dividends, incur additional debt, make advances, investments and loans, transact with affiliates, issue equity interests, modify organizational documents and engage in other business. As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. Failure to comply with such restrictive covenants may lead to default and acceleration under our credit facility and may impair our ability to conduct business. We may not be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants, which may result in foreclosure of our assets.
See Note 7 of Notes to Consolidated Financial Statements in the Audited Consolidated Financial Statements of the Company in this Report.report for additional information.
Our guarantees of indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations.
In connection with the Business Combination, Holdings issued the PIPE Senior Notes that are exchangeable into shares of our Class A Common Stock at a conversion price of $11.50 per share. The PIPE Senior Notes are guaranteed by CompoSecure, L.L.C. Our guarantees of indebtedness could have significant negative consequences for our security holders, equity holders and our business, results of operations and financial condition by, among other things:
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing;
•requiring the dedication of a substantial portion of our cash flow from operations to service our guarantees of indebtedness, which reduces the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our business;
•diluting the interests of our stockholders as a result of the issuance shares of our Class A Common Stock upon conversion of the PIPE Senior Notes; and
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts that may become due under our guarantees of indebtedness, including in connection with the PIPE Senior Notes, and our cash needs may increase in the future. In addition, any future indebtedness or guarantees of indebtedness that we may incur may contain financial and other restrictive covenants that limit our ability to operate our business, raise capital or make payments under our other indebtedness. If we fail to comply with these covenants or to make payments under our guarantees of indebtedness if and when due, then we could be in default under those guarantees of indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
General Risks Related to Ownership of our Securities
Our only significant asset will be our ownership of our subsidiaries’ business. If the business of our subsidiaries is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations.
CompoSecure, Inc. has no direct operations and no significant assets other than the ownership of its subsidiaries, which operate the Company’s business. CompoSecure, Inc. will depend on profits generated by its subsidiaries’ business for debt repayment and other payments to generate the funds necessary to meet its financial obligations, including its expenses as a publicly traded company, to pay any dividends with respect to its capital stock and to make distributions. Legal and contractual restrictions in agreements governing the indebtedness of the Company or its subsidiaries, as well as their financial condition and operating requirements, may limit the ability of our subsidiaries to make distributions to the Company.
Provisions in our Charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our Class A Common Stock and could entrench management.
Our Charter contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include the classification of our Board, the ability of our Board to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
In addition, while we have opted out of Section 203 of the DGCL, our charter contains similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless:
•prior to such time, our Board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
•upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or
•at or subsequent to that time, the business combination is approved by our Board and by the affirmative vote of holders of at least two-thirds of our outstanding voting stock that is not owned by the interested stockholder.
These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of the Company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
We may be unable to satisfy the Nasdaq listing requirements in the future, which could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions.
We may be unable to maintain the listing of our securities on Nasdaq in the future. If our securities are delisted from Nasdaq, there could be significant material adverse consequences, including:
•a limited availability of market quotations for our securities;
•a limited amount of news and analyst coverage about the Company; and
•a decreased ability to obtain capital or pursue acquisitions by issuing additional equity or convertible securities.
We will incur significant costs and obligations as a result of being a public company.
As a new public company, we will incur significant legal, accounting, insurance and other expenses. These expenses will increase once we are no longer an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure for public companies, including Dodd Frank, the Sarbanes-Oxley Act, regulations related hereto and the rules and regulations of the SEC and Nasdaq, have increased the costs and the time that must be devoted to compliance matters. We expect these rules and regulations will increase our legal and financial costs and lead to a diversion of management time and attention from revenue-generating activities.
For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may remain an “emerging growth company” for up to five years from the consummation of our initial public offering or until such earlier time that we have $1.07 billion or more in annual revenues, have more than $700.0 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. To the extent we choose not to use exemptions from various reporting requirements under the JOBS Act, or if we no longer can be classified as an “emerging growth company,” we expect that we will incur additional compliance costs, which will reduce our ability to operate profitably.
As an “emerging growth company,” we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors.
As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to obtain an assessment of the effectiveness of our internal controls over financial reporting from our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, which we have elected to do.
We cannot predict if investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result, there may be a less active market for our securities, our share price may be more volatile and the price at which our securities trade could be less than if we did not use these exemptions.
If we do not develop and implement all required accounting practices and policies, we may be unable to provide the financial information required of a United States publicly traded company in a timely and reliable manner.
Previously as a privately held company prior to the Business Combination, Holdings was not required to adopt all of the financial reporting and disclosure procedures and controls required of a United States publicly traded company. We expect that the implementation of all required accounting practices and policies and the hiring of additional financial staff will increase the operating costs of the Company and could require the management of the Company to devote significant time and resources to such implementation. If we fail to develop and maintain effective internal controls and procedures and disclosure procedures and controls, we may be unable to provide financial information and required SEC reports that are timely and reliable. Any such delays or deficiencies could harm us, including by limiting our ability to obtain financing, either in the public capital markets or from private sources and damaging our reputation, which in either cause could impede our ability to implement our growth strategy. In addition, any such delays or deficiencies could result in our failure to meet the requirements for continued listing of our securities on Nasdaq.
If our operating performance does not meet market expectations, the price of our securities may decline.
Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Prior to the Business Combination, there was no public market for Holdings’ equity. Accordingly, the valuation that was ascribed to Holdings’ equity in the Business Combination may not be indicative of the price that will prevail in the trading market following the Business Combination. If an active market for our securities develops and continues, the trading price of our securities following the Business Combination could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them.
Factors affecting the trading price of our securities may include:
•actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
•changes in the market’s expectations about our operating results;
•success of competitors;
•our operating results failing to meet market expectations in a particular period;
•changes in financial estimates and recommendations by securities analysts concerning us or the financial payment card and Digital Asset industries and markets in general;
•operating and stock price performance of other companies that investors deem comparable to us;
•our ability to market new and enhanced products on a timely basis;
•changes in laws and regulations affecting our business;
•commencement of, or involvement in, litigation involving us;
•changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
•the volume of shares of our securities available for public sale;
•any significant change in our board or management;
•sales of substantial amounts of our securities by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
•general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Broad market and industry factors may depress the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the market for financial technology stocks or the stocks of other companies which investors perceive to be similar to us could depress our securities prices regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
Our Public Warrants and the Resale Warrants may never be in the money, and they may expire worthless.
The exercise price for our Public Warrants and Resale Warrants is $11.50 per share, which exceeds the market price of our Class A Common Stock, which was $6.63 per share based on the closing price on March 10, 2022. There can be no assurance that the Public Warrants and Resale Warrants will ever be in the money prior to their expiration and, as such, the Public Warrants and Resale Warrants may expire worthless.
The terms of our Warrants may be amended in a manner that may be adverse to the holders. The warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of a majority of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the Warrants in a manner adverse to a holder if holders of at least a majority of the then outstanding Public Warrants approve of such amendment. Our ability to amend the terms of the Warrants with the consent of at least a majority of the then outstanding Public Warrants is unlimited. Examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, shorten the exercise period or decrease the number of shares of our common stock purchasable upon exercise of a Warrant.
We may redeem your unexpired Warrants prior to their exercise at a time that is disadvantageous to you, thereby making your Warrants worthless.
We have the ability to redeem outstanding Warrants (excluding any Resale Warrants held by Roman Sponsor or their permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific trading day) of the common stock equals or exceeds $18.00 per share on each of 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the Warrants, we have an effective
registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available. If and when the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a Warrant holder: (i) to exercise your Warrants and pay the exercise price therefore at a time when it may be disadvantageous for you to do so, (ii) to sell your Warrants at the then-current market price when you might otherwise wish to hold your Warrants or (iii) to accept the nominal redemption price which, at the time the outstanding Warrants are called for redemption, could be substantially less than the market value of your Warrants.
Warrants to purchase our Class A Common Stock are presently exercisable, which could increase the number of shares of Class A Common Stock eligible for future resale in the public market and result in dilution to our stockholders.
Outstanding Warrants to purchase an aggregate of 22,415,400 shares of our common stock are exercisable on the 30th day following the closing of the Business Combination in accordance with the terms of the warrant agreement governing those securities. These Warrants consist of 11,578,000 Public Warrants and 10,837,400 Resale Warrants originally included in the units issued in our IPO. Each Warrant entitles its holder to purchase one share of our common stock at an exercise price of $11.50 per share and will expire at 5:00 p.m., New York time, on December 27, 2026 or earlier upon redemption of our Class A Common Stock or our liquidation. To the extent Warrants are exercised, additional shares of our Class A Common Stock will be issued, which will result in dilution to our then existing stockholders and increase the number of shares of Class A Common Stock eligible for resale in the public market. Sales of substantial numbers of such shares in the public market could depress the market price of our securities.
We may not be able to timely and effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002, which could have a material adverse effect on our business.
Commencing with this report, we are required to provide management’s attestation on internal controls. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those previously required of Holdings as a privately-held company. Management may not be able to effectively and timely implement controls and procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to us as a public company. If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and lead to a decrease in the market price of our securities.
Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are an “emerging growth company.”
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, belowunder the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until we are no longer an “emerging growth company.” We will be an “emerging growth company” until the earlier of (1) the last day of the fiscal year (a) following November 10, 2025, the fifth anniversary of the consummation of our initial public offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. Accordingly, until we cease being an “emerging growth company” stockholders will not have the benefit of an independent assessment of the effectiveness of our internal control environment.
Our ability to successfully operate our business largely depends upon the efforts of certain key personnel. The loss of such key personnel could adversely affect the operations and profitability of the post-combination business.
Our ability to successfully operate our business depends upon the efforts of certain key personnel. The unexpected loss of key personnel may adversely affect our operations and profitability. In addition, our future success depends in part on our ability to identify and retain key personnel to expand and/or succeed senior management. Furthermore, while we have closely scrutinized the skills, abilities and qualifications of our key personnel, our assessment may not prove to be correct. If such personnel do not possess the skills, qualifications or abilities we expect or those necessary to manage a public company, the operations and profitability of our business may be adversely impacted.
Our ability to meet expectations and projections in any research or reports published by securities or industry analysts, or a lack of coverage by securities or industry analysts, could result in a depressed market price and limited liquidity for our securities.
The trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. If no securities or industry analysts commence coverage of us, prices for our securities would likely be less than that which would obtain if we had such coverage and the liquidity, or trading volume of our securities may be limited, making it more difficult for a holder to sell securities at an acceptable price or amount. If any analysts do cover us, their projections may vary widely and may not accurately predict the results we actually achieve. Prices for our securities may decline if our actual results do not match the projections of research analysts covering us. Similarly, if one or more of the analysts who write reports on us downgrades our securities or publishes inaccurate or unfavorable research about our business, prices for our securities could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, prices for our securities or trading volume could decline.
Future sales of our securities, including resale of securities issued to the certain stockholders, may reduce the market price of our securities that you might otherwise obtain.
Upon expiration of the lockup period applicable to our securities held by certain of our stockholders may sell large amounts of our securities in the open market or in privately negotiated transactions. The registration and availability of such a significant number of securities for trading in the public market may increase the volatility in the price of our securities or put significant downward pressure on the price of our securities. In addition, we may use shares of our common stock as consideration for future acquisitions, which could further dilute our stockholders.
Because certain significant shareholders control a significant percentage of our common stock, such shareholders may influence major corporate decisions of the Company and our interests may conflict with the interests of other holders of our common stock.
LLR Equity Partners IV, L.P. and LLR Equity Partners Parallel IV, L.P. (the “LLR Parties”) and Michele
D. Logan and any trust, entity or other similar vehicle or account affiliated with Michele D. Logan (the “Logan Parties”) beneficially own approximately 45% and 28%, respectively of the voting power of our outstanding common stock. As a result of this control, the LLR Parties and the Logan Parties will be able to influence matters requiring approval by our stockholders and/or our Board, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions. The LLR Parties and the Logan Parties may also have interests that differ from the interests of other holders of our securities and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of the Company and may materially and adversely affect the market price of our securities. In addition, the LLR Parties or the Logan Parties may in the future own businesses that directly compete with the business of the Company.
Our Charter renounces any expectancy in or right to be offered an opportunity to participate in certain transactions or matters that may be investment, corporate or business opportunities and that are presented to the Company or our officers, directors or stockholders.
Our Charter provides that, to the fullest extent permitted by Delaware law, each member of Holdings, their respective affiliates (other than the Company and our subsidiaries) and, to the extent any member is a partial listseries limited liability company, any series thereof and all of material risks, uncertaintiestheir respective partners, principals, directors, officers, members, managers, equity holders and/or employees, including any of the foregoing who serve as officers or directors of the Company (each, an “Excluded Party”), shall not have any fiduciary duty to refrain from (a) directly or indirectly engaging in any opportunity in which we, directly or indirectly, could have an interest or expectancy or (b) otherwise competing with us. Our Charter also renounces, to the fullest extent permitted by Delaware law, any interest or expectancy that we have in any opportunity in which any Excluded Party engages, even if the opportunity is one in which we, directly or indirectly, could have had an interest or expectancy. To the fullest extent permitted by Delaware law, in the event that any Excluded Party acquires knowledge of an opportunity that may be an opportunity for itself, himself or herself and for us, such party shall have no duty to communicate or present such opportunity to us and shall not be liable to us or any of our stockholders for breach of any fiduciary duty as our stockholder, director or officer solely for having pursued or acquired such opportunity or for offering or directing such opportunity to another person. To the fullest extent permitted by Delaware law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted to undertake the opportunity under our Charter, we have sufficient financial resources to undertake the opportunity and the opportunity would be in line with our business.
Our Bylaws designate the courts of the Court of Chancery in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by stockholders, which could limit the ability of stockholders to obtain a favorable judicial forum for disputes.
Our Bylaws provide that, unless we consent in writing to the selection of an alternative forum, (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or employees to us or our stockholders, (c) any action asserting a claim against us, our directors, officers or employees arising pursuant to any provision of the DGCL or our Charter or Bylaws or (d) any action asserting a claim against us, our directors, officers or employees governed by the internal affairs doctrine.
Notwithstanding the foregoing, these provisions of the Bylaws will not apply to any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other factorsthan the Court of Chancery (including suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum), or for which the Court of Chancery does not have subject matter jurisdiction. While this exclusive provision applies to claims under the Securities Act, we note, however, that there is uncertainty as to whether a court would enforce this provision and that stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
This choice-of-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the Company, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, the Company may incur additional costs associated with resolving such matters in other jurisdictions, which could materially and adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and Board.
We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a materialsignificant negative effect on our financial condition, results of operations and securities prices, which could cause you to lose some or all of your investment.
If there are material issues in the business of our subsidiaries, or factors outside of our and our subsidiaries control later arise, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in losses. Additionally, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the Company or our securities. In addition, charges of this nature may cause us to be unable to obtain future financing on favorable terms or at all.
We may be subject to securities litigation, which is expensive and
its operations: | ● | we are a blank check company with no revenue or basis to evaluate our ability to select a suitable business target; |
| ● | we may not be able to select an appropriate target business or businesses and complete our initial business combination in the prescribed time frame; |
| ● | our expectations around the performance of a prospective target business or businesses may not be realized; |
| ● | we may not be successful in retaining or recruiting required officers, key employees or directors following our initial business combination; |
| ● | our officers and directors may have difficulties allocating their time between the Company and other businesses and may potentially have conflicts of interest with our business or in approving our initial business combination; |
could divert management attention. | ● | we may not be able to obtain additional financing to complete our initial business combination or reduce the number of shareholders requesting redemption; |
| ● | we may issue our shares to investorsOur securities prices may be volatile and, in connection with our initial business combination at a price that is less than the prevailing market price of our shares at that time; |
| ● | you may not be given the opportunity to choose the initial business target or to vote on the initial business combination; |
| ● | trust account funds may not be protected against third party claims or bankruptcy; |
| ● | an active market for our public securities’ may not develop and you will have limited liquidity and trading; |
| ● | the availability to us of funds from interest income on the trust account balance may be insufficient to operate our business prior to the business combination; and |
| ● | our financial performance following a business combination with an entity may be negatively affected by their lack an established record of revenue, cash flows and experienced management. |
For the complete listpast, companies that have experienced volatility in the market price of risks relatingtheir securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on business, financial condition, results of operations and prospects. Any adverse determination in litigation could also subject us to significant liabilities.
The future exercise of registration rights may adversely affect the market price of our operations, seesecurities.
Sales of a substantial number of shares of common stock in the
section titled “Risk Factors” containedpublic market could occur at any time. In addition, certain registration rights holders can request underwritten offerings to sell their securities. These sales, or the perception in
the market that the holders of a large number of securities intend to sell securities, could reduce the market price of our
Registration Statement.securities.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Our executive offices
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company maintains three (3) leased facilities, as set forth below. The Company believes its current facilities are
located at 2877 Paradise Rd. #702, Las Vegas, Nevada 89109suitable and
our telephone number is (650) 618-2524. Our executive offices are provided to us by our sponsor. We pay our sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. We consider our current office space adequate for
ourits current
operations.and presently contemplated operations and production capacity needs and recognizes that future operations may require expanded and/or additional production capacity.
| | | | | | | | |
| Location | Operations | Approximate
Square Footage |
| Somerset, New Jersey (Pierce Street) | Executive offices, Sales, Finance, Quality Assurance, Design, Marketing and Production | 116,000 |
| Somerset, New Jersey (Memorial Drive) | Quality Assurance, Production | 46,000 |
| Somerset, New Jersey (Apgar Drive) | Prelams and Subassembly Production | 11,000 |
Item 3. | Legal Proceedings. |
To
Item 3. Legal Proceedings
As of March 2022, the knowledge of our management team, there is no litigation currently pending or contemplated against us,Company was not a party to, nor were any of our officersits properties the subject of, any material pending legal proceedings, other than ordinary routine claims incidental to the business. In May 2021, the Company received from a former independent sales representative a notice of dispute with respect to whether commissions are due and owing on product sales to certain of the Company’s customers which, if successful, could require payments ranging from $4,000,000 to $11,000,000 plus costs and expenses, together with additional commission payments on
future sales, if any, to such customers. The Company does not believe these commissions are owed, and the parties have initiated a binding arbitration proceeding. It is possible that the Company may, in the future, be subject to other legal proceedings, lawsuits and other claims in the ordinary course of operating its business, which could have a material adverse effect on the Company’s business, operations, financial condition or
directors in their capacity as such or against anyresults of
our property.operations. Item 4. | Mine Safety Disclosures. |
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our
Class A Common Stock, units,
public shares and
public warrants
are eachwere historically traded on
the Nasdaq Capital Market under the symbols
DBDRU, DBDR,“DBDR,” “DBDRU” and DBDRW,“DBDRW,” respectively.
OurIn connection with the Merger in December 2021, the units
commenced public tradingceased to trade. Effective December 28, 2021, our Class A Common Stock and Public Warrants are listed on
November 6, 2020,The Nasdaq Global Market, under the symbols “CMPO” and
our public shares and public warrants commenced separate public trading on November 19, 2020.“CMPOW,” respectively. On March 29, 2021,10, 2022, the closing price of a share of Class A Common Stock was $6.63 and the closing price for our Public Warrants was $1.26.
Holders
As of March 10, 2022, there
waswere 16 holders of record of Class A Common Stock, eleven holders of record of Class B Common Stock, two holders of record of our Public Warrants and one holder of record of our
units, one holder of record of our shares of Class A common stock and two holders of record of our warrants.Private Warrants.
Dividend Policy
We have not paid any cash dividends on Class A Common Stock to date. Our Board of Directors (the “Board”) may from time to time consider whether or not to institute a dividend policy. It is our common stockpresent intention to dateretain any earnings for use in our business operations and accordingly, we do not intend to pay cashanticipate the Board declaring any dividends prior toin the completion of our initial business combination.foreseeable future. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of our initial business combination.condition. The payment of any cash dividends subsequent to our initial business combination will be within the discretion of our board of directors at such time. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends in the foreseeable future.Board. Further, if we incur any indebtedness in connection with our initial business combination, our ability to declare dividends maywill also be limited by restrictive covenants we may agreecontained in our debt agreements. Under our Charter, holders of Class B Common Stock are not entitled to share in any declared dividends.
Stock Performance Graph
Not applicable.
Sales of Unregistered Securities
The shares of Class B Common Stock originally issued to the Sponsor, the Private Placement Warrants, the shares of Class B Common Stock issued in connection
therewith. | (d) | Securities Authorized for Issuance Under Equity Compensation Plans. |
None.
| (e) | Recent Sales of Unregistered Securities |
None.
| (f) | Purchases of Equity Securities by the Issuer and Affiliated Purchasers |
None.
| (g) | Use of Proceeds from the Initial Public Offering |
In November 2020,with the Company consummated its initial public offeringBusiness Combination and the shares of 23,156,000 units, including 1,156,000 unitsClass A Common Stock and the Company’s Exchangeable Notes issued pursuant to the partialSubscription Agreements in connection with the PIPE Investments were not registered under the Securities Act, and were issued in reliance on the exemption from registration requirements thereof provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering without any form of general solicitation or general advertising, or the involvement of any underwriters.
The shares of Class B Common Stock originally issued to the Sponsor were issued for an aggregate purchase price of $25,000. The Private Placement Warrants were originally issued for a purchase price of $1.00 per Private Placement Warrant. The Company did not receive any consideration in connection with the issuance of the Class B Common Stock issued in connection with the Business Combination. The Company issued the shares of Class A Common Stock and the Exchangeable Notes in the PIPE Investments for gross proceeds of $45,000,000 and $130,000,000, respectively.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
| | | | | | | | | | | | | | |
| Period | Total Number of Shares | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares Yet to be Purchased under the Plans |
| January 1, 2021 through April 30, 2021 | — | — | — | — |
| May 1, 2021 through June 30, 2021 | — | — | — | — |
| July 1, 2021 through September 30, 2021 | — | — | — | — |
| October 1, 2021 through December 31, 2021 | 18,515,018 (1) | $10.20 | — | — |
(1) In connection with the closing of the Business Combination, on December 27, 2021, the Company redeemed 18,515,018 shares of the Company's Class A Common Stock at a price per share of $10.20 following exercise of the
underwriters’ over-allotment option. Each unit consists of one public share and one-half of one public warrant, with each whole public warrant entitling the holder thereof to purchase one public share for $11.50 per share. The units were sold at a price of $10.00 per unit, generating gross proceeds to the Company of $231,560,000.A total of $236,191,200 of the proceeds from the initial public offering (which amount includes $7,700,000 of the underwriters’ deferred discount) and the sale of the private placement warrants, was placed in a U.S.-based trust account at at J.P. Morgan Chase Bank, N.A., maintained by Continental, acting as trustee. The proceeds heldredemption option in the trust account may be investedBusiness Combination by the trustee only in U.S. government securities with a maturity of 185 days or less or in money market funds investing solely in U.S. government treasury obligations and meeting certain conditions under Rule 2a-7 under the Investment Company Act.
Item 6. Reserved
Item 7. | Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
References to the “Company,” “us,” “our” or “we” refer to Roman DBDR Tech Acquisition Corp. The following discussion and analysisAnalysis of our financial conditionFinancial Condition and resultsResults of operations should be read in conjunction with our audited financial statements and related notes included herein.
Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with ourthe Company's audited consolidated financial statements and therelated notes related thereto which are included elsewhere in “Item 8. Financial Statements and Supplementary Data” of this Annual Reportannual report on Form 10-K. CertainIn addition to historical consolidated financial information, contained in the following discussion contains forward-looking statements that reflect the Company’s plans, estimates and analysis set forth below includes forward-looking statements. Ourbeliefs. The Company’s actual results maycould differ materially from those anticipateddiscussed in the forward-looking statements. Factors that could cause or contribute to these forward-looking statementsdifferences include those discussed below and elsewhere particularly in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this annual report on Form 10-K.
Overview
The Company provides its clients newly innovative and highly differentiated financial payment products in order to support and increase their customer acquisition, customer retention and organic customer spend. The Company’s clients 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 world-class platform for next generation payment technology, security, and Cryptocurrency solutions. For two decades, through its combination of large-scale, advanced manufacturing capabilities and deep technological expertise, the Company has driven key Payments Industry innovations in materials science, Metal Form Factor design, dual interface functionality, and security. The distinct value proposition of the Company’s products have resulted in widespread adoption by major banks, financial institutions and leading FinTech innovators to support their acquisition and retention of consumer and business card customers. The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers. These same fundamental strengths have now enabled the Company to enter the digital asset revolution through the launch of its Arculus platform, which commenced in the third quarter of 2021 with the Arculus Key card and companion Arculus Wallet mobile application.
Impact of COVID-19 Pandemic
In response to the COVID-19 pandemic, during 2020 and continuing in 2021, the Company established policies and protocols to address safety considerations. The Company is in frequent dialogue with key stakeholders to assess health and safety conditions across all of its facilities and to have robust procedures in place to protect the well-being of its employees, such as controls for building access, strict physical distancing measures and enhanced cleaning processes. The Company’s systems and infrastructure have continued to support its business operations. The Company has maintained regular and active communication across senior management, and has ongoing dialogues with its vendors to ensure they continue to meet the Company’s criteria for business continuity.
The resurgence in the spread of COVID-19 toward the end of 2020 and into 2021 has created greater uncertainty regarding the economic outlook for the near term, even as vaccines were distributed on a large scale in an effort to control the pandemic. While governments and central banks continued to be aggressive in providing fiscal and monetary stimulus, the global economic recovery remains fragile. The extent to which the COVID-19 pandemic will continue to affect the Company’s business, financial condition, liquidity and the Company’s operating results will depend on future developments, which are highly uncertain and cannot be predicted.
Key Components of Results of Operations
Net Sales
Net sales reflect the Company’s revenue generated primarily from the sale of its products. Product sales primarily include the design and manufacturing of metal cards, including contact and dual interface cards. The Company also generates revenue from the sale of Prelams (which are used by makers of plastic payment and other cards). Net sales include the effect of discounts and allowances which consist primarily of volume-based rebates.
Cost of Sales
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.
Gross Profit and Gross Margin
The Company’s gross profit represents its net sales less cost of sales, and its gross margin represents gross profit as a percentage of its net sales.
Operating Expenses
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, research and development and other administrative function, and expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.
The Company expects its operating expenses to increase as a result of manyoperating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Income from Operations and Operating Margin
Income from operations consists of the Company’s gross profit less its operating expenses. Operating margin is income from the Company’s operations as a percentage of its net sales.
Other (Income) Expense
Other (income) expense consists primarily of change in fair value of warrant liability, earnout consideration and interest expense net of any interest income.
Net Income
Net income consists of the Company’s income from operations, less other expenses and income tax provisions or benefits.
Factors Affecting the Company’s Operating Results
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 elsewhere in this annual report on Form 10-K, including those set forth under “Specialdiscussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors”Statements” for additional information.
Results of Operations
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
The following table presents the Company’s results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | $ Change | | % Change |
| (in thousands) |
| Net sales | $ | 267,948 | | | $ | 260,586 | | | $ | 7,362 | | | 3 | % |
| Cost of sales | 123,099 | | | 127,959 | | | (4,860) | | | (4 | %) |
| Gross profit | 144,849 | | | 132,627 | | | 12,222 | | | 9 | % |
| Operating expenses | 63,424 | | | 48,669 | | | 14,755 | | | 30 | % |
| Income from operations | 81,425 | | | 83,958 | | | (2,533) | | | (3 | %) |
| Other income (expense), net | 1,132 | | | (6,143) | | | 7,275 | | | (118 | %) |
| Income before income taxes | 82,557 | | | 77,815 | | | 4,742 | | | 6 | % |
| Income tax benefit | 857 | | | — | | | 857 | | | |
| Net income | 83,414 | | | 77,815 | | | 5,599 | | | 7 | % |
| Net income attributable to redeemable non-controlling interests | 69,902 | | | — | | | 69,902 | | | |
| Net income attributable to CompoSecure, Inc | $ | 13,512 | | | $ | 77,815 | | | $ | (64,303) | | | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
| Gross Margin | 54 | % | | 51 | % |
| Operating margin | 30 | % | | 32 | % |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | $ Change | | % Change |
| (in thousands) |
| Net sales by region | | | | | | | |
| Domestic | $ | 218,441 | | | $ | 213,982 | | | $ | 4,459 | | | 2 | % |
| International | 49,507 | | | 46,603 | | | 2,904 | | | 6 | % |
| Total | $ | 267,948 | | | $ | 260,586 | | | $ | 7,363 | | | 3 | % |
The Company’s net sales for the year ended December 31, 2021 increased by $7.4 million, or 3%, to $267.9 million compared to $260.6 million for the year ended December 31, 2020. This was due to higher growing demand for its products throughout the year ended December 31, 2021 as we continue to emerge from the adverse impact from the COVID-19 pandemic compared to the year ended December 31, 2020. The increase in net sales was due to a 2% increase in domestic sales and
elsewherea 6% increase in
this Annual Report on Form 10-K.Overview
We are a blank check company incorporated underinternational sales.
Domestic: The Company’s domestic net sales for the lawsyear ended December 31, 2021 increased $4.5 million, or 2%, to $218.4 million compared to $214.0 million for the year ended December 31, 2020. This was primarily due to higher
demand for the Company's products primarily in the second half of the State of Delaware on August 21, 2020,year ended December 31, 2021 due to higher overall customer acquisition by the Company’s clients as we continue to emerge from the adverse impact from the COVID-19 pandemic compared to the year ended December 31, 2020.
International: The Company’s international net sales for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganizationyear ended December 31, 2021 increased $2.9 million, or other similar business combination with one6%, to $49.5 million compared to $46.6 million for the year ended December 31, 2020. This was primarily driven by our efforts to grow our international distributor channels compared to the year ended December 31, 2020.
In addition, the following table presents the Company’s net sales for the three months ended December 31, 2021 compared to December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2021 | | December 31, 2020 | | $ Change | | % Change |
| (in thousands) |
| Net Sales | $ | 75,300 | | | $ | 53,713 | | | $ | 21,587 | | | 40 | % |
The Company’s net sales for the three months ended December 31, 2021 increased $21.6 million, or more businesses. We intend40%, to effectuate our Business Combination using cash from$75.3 million compared to $53.7 million for the proceeds ofthree months ended December 31, 2020.
The following table presents the Initial Public OfferingCompany’s net sales for the three months ended December 31, 2021 compared to September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2021 | | September 30, 2021 | | $ Change | | % Change |
| (in thousands) |
| Net Sales | $ | 75,300 | | | $ | 66,182 | | | $ | 9,118 | | | 14 | % |
The Company’s net sales for the three months ended December 31, 2021 increased $9.1 million, or 14%, to $75.3 million compared to $66.2 million for the three months ended September 30, 2021.
Gross Profit and Gross Margin
The Company’s gross profit for the
sale ofyear ended December 31, 2021 increased $12.2 million, or 9%, to $144.8 million compared to $132.6 million for the
Private Placement Warrants, our capital stock, debt or a combination of cash, stock and debt.We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to raise capital or to complete our initial Business Combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date. Our only activities throughyear ended December 31, 2020, were organizational activities, those necessarywhile the gross profit margin increased from 51% to prepare54%. The gross margin improvement resulted from a decrease in costs of sales in the period ended December 31, 2021 from improvement in production yields and favorable product mix compared to the period ended December 31, 2020.
Operating Expenses
The Company’s operating expenses for the Initial Public Offering, describedyear ended December 31, 2021 increased $14.8 million compared to the year ended December 31, 2020. This was primarily due to increases in bonuses and commissions of $4.8 million and marketing and professional fee expenses of $19.0 million primarily related to the launch of Arculus in third quarter of 2021, and an overall increase in other costs of $1.1 million, partially offset by a decrease in transaction costs of approximately $10.0 million.
Income from Operations and Operating Margin
During the year ended December 31, 2021, the Company had income from operations of $81.4 million compared to income of $84.0 million for the year ended December 31, 2020. The Company’s operating margin for the year ended December 31, 2021 decreased from 32% to 30% for the year ended December 31, 2020.
Other Expenses
Interest expense for the year ended December 31, 2021 increased $5.8 million, or 94%, to $11.9 million compared to $6.1 million for the year ended December 31, 2020. The additional interest expense resulted from the refinancing of the Company’s existing debt facility in November 2020 resulting in an increase in outstanding debt during the period ended December 31, 2021. This was offset by a favorable change in fair value of $3.5 million in warrant liabilities and $9.6 million in earnout consideration liability. See Liquidity and Capital Resources below for more detail on the existing debt facility.
Net Income
The Company’s net income for the year ended December 31, 2021 was $83.4 million, compared to net income of $77.8 million for the year ended December 31, 2020. The increase was primarily due to favorable change in fair value of $3.5 million in warrant liabilities and after our Initial Public Offering, identifying$9.6 million in earnout consideration liability and a target company for a Business Combination. We do not expect to generate anymore profitable sales mix, partially offset by increases in operating revenues until after the completion of our Business Combination. We will generate non-operating income in the form of interest income on marketable securities held in the Trust Account. We expect to incur expensesas a result of beingthe higher sales volume and costs related to the launch of Arculus.
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
The following table presents the Company’s results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
| (in thousands) |
| Net sales | $ | 260,586 | | | $ | 243,290 | | | $ | 17,296 | | | 7 | % |
| Cost of sales | 127,959 | | | 115,427 | | | 12,532 | | | 11 | % |
| Gross profit | 132,627 | | | 127,863 | | | 4,764 | | | 4 | % |
| Operating expenses | 48,669 | | | 40,937 | | | 7,732 | | | 19 | % |
| Income from operations | 83,958 | | | 86,926 | | | (2,968) | | | (3 | %) |
| Other expenses, net | 6,143 | | | 5,453 | | | 690 | | | 13 | % |
| Net income | $ | 77,815 | | | $ | 81,473 | | | $ | (3,658) | | | (4 | %) |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
| Gross Margin | 51 | % | | 53 | % |
| Operating margin | 32 | % | | 36 | % |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | $ Change | | % Change |
| (in thousands) |
| Net sales by region: | | | | | | | |
| Domestic | $ | 213,982 | | | $ | 191,502 | | | $ | 22,480 | | | 12 | % |
| International | 46,603 | | | 51,788 | | | (5,185) | | | (10 | %) |
| Total | $ | 260,586 | | | $ | 243,290 | | | $ | 17,296 | | | 7 | % |
The Company’s net sales for the year ended December 31, 2020 increased $17.3 million, or 7%, to $260.6 million compared to $243.3 million for the year ended December 31, 2019. The increase in net sales during 2020 was due to a public company (for legal, financial reporting, accounting and auditing compliance)12% increase in domestic sales partially offset by a 10% decrease in international sales.
Domestic: The Company’s domestic net sales for the year ended December 31, 2020 increased $22.5 million, or 12%, to $214.0 million compared to $191.5 million for the year ended December 31, 2019. This was primarily due to increased orders resulting from an expanded client base. This increase in orders was partially offset by lower orders from existing clients as well as product mix.
International: The Company’s international net sales for due diligence expenses.For the period from August 21, 2020 (inception) throughyear ended December 31, 2020 we had a net lossdecreased $5.2 million, or 10%, to $46.6 million compared to $51.8 million for the year ended December 31, 2019. This was primarily due to lower new customer acquisitions for international clients primarily due to the adverse impact of $165,106, which consists of formation costs of $188,995the COVID-19 pandemic. This decrease was partially offset by interest income on marketable securities heldproduct mix.
Gross Profit and Gross Margin
The Company’s gross profit for the year ended December 31, 2020 increased $4.8 million, or 4%, to $132.6 million compared to $127.9 million for the year ended December 31, 2019. The increase in
gross profit was primarily driven by product mix, higher sales volumes, favorable overhead costs partially offset by an increase in depreciation expense resulting from higher capital expenditures. The Company’s gross margin for the
Trust Accountyear ended December 31, 2020 decreased by 2% compared to the year ended December 31, 2019. The decrease in gross margin was driven primarily by an overall higher cost of
$22,970material and
an unrealized gain on marketable securities held inlabor primarily due to the
Trust Account of $919.Liquidity and Capital Resources
On November 10, 2020, we consummated the Initial Public Offering of 22,000,000 Units, at $10.00 per unit, generating gross proceeds of $220,000,000. Simultaneously with the closingimpact of the Initial Public Offering, we consummatedCOVID-19 pandemic on the sale of 10,375,000 Private Placement WarrantsCompany’s operations.
Operating Expenses
The Company’s operating expenses for the year ended December 31, 2020 increased $7.8 million compared to the
Sponsor at a price of $1.00 per Private Placement Warrant, generating gross proceeds of $10,375,000.On November 17, 2020, in connection with the underwriters’ partial exercise of their over-allotment option, the Company consummated the sale ofyear ended December 31, 2019. This was primarily due to an additional 1,156,000 Units, at $10.00 per Unit, and the sale of an additional 462,400 Private Placement Warrants, at $1.00 per Private Placement Warrant, generating total gross proceeds of $12,022,400.
Following the Initial Public Offering, the exercise of the over-allotment option and the sale of the Private Placement Warrants, a total of $236,191,200 was placed in the Trust Account. We incurred $13,206,613increase in transaction costs including $4,631,200 of underwriting$11.4 million, professional fees $8,104,600 of deferred underwriting fees$2.0 million, salaries of $1.0 million and $470,813other costs of other costs.
For$1.1 million, partially offset by a decrease in bonuses and commissions of $7.7 million.
Income from Operations and Operating Margin
During the
period from August 21, 2020 (inception) throughyear ended December 31, 2020,
cash used inThe Company had income from operations of $84.0 million compared to income of $86.9 million for the year ended December 31, 2019. Its operating
activities was $525,572. Net loss of $165,106 was affected by interest earned on marketable securities held inmargins for the
Trust Account of $22,970, an unrealized gain on marketable securities held in the Trust Account of $919 and changes in operating assets and liabilities, which used $336,577 of cash from operating activities.As ofyear ended December 31, 2020 we had cash and marketable securities held indecreased to 32% compared to 36% for the Trust Account of $236,215,089. We intend to use substantially all ofyear ended December 31, 2019.
Other Expenses
Interest expense for the
funds held in the Trust Account, including any amounts representing interest earned on the Trust Account (less deferred underwriting commissions and income taxes payable), to complete our Business Combination. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.As ofyear ended December 31, 2020 we had cash of $603,615 outsideincreased $0.5 million, or 10%, to $5.3 million compared to $4.8 million for the year ended December 31, 2019. The additional interest expense resulted from the refinancing of the Trust Account. We intendexisting debt facility resulting in an increase in outstanding debt during the year ended December 31, 2020.
Net Income
Net income for the year ended December 31, 2020 was $77.8 million, compared to usenet income of $81.5 million for the funds held outside the Trust Accountyear ended December 31, 2019. The decrease was primarily due to identifyan increase in cost of sales and evaluate target businesses, perform business due diligence on prospective target businesses, travel toan increase in operating expenses partially offset by a favorable sales mix and from the offices, plants or similar locationshigher sales volumes.
Use of
prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, and structure, negotiate and complete a Business Combination.In order to fund working capital deficiencies or finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor orNon-GAAP Financial Measures
This Form 10-K includes certain
of our directors and officers may, butnon-GAAP financial measures that are not
obligated to, loan us funds as may be required. If we complete a Business Combination, we would repay such loaned amounts. In the event that a Business Combination does not close, we may use a portion of the working capital held outside the Trust Account to repay such loaned amounts but no proceeds from our Trust Account would be used for such repayment. Upon consummation of a Business Combination, up to $1,500,000 of such loans may be convertible into warrants identical to the Private Placement Warrants, at a price of $1.00 per warrant at the option of the lender.We monitor the adequacy of our working capitalprepared in order to meet the expenditures required for operating our business prior to our initial Business Combination. However, if our estimates of the costs of identifying a target business, undertaking in-depth due diligence and negotiating an initial Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our public shares upon completion of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. If we are unable to complete our initial Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account.
We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business. However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our public shares upon consummation of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination. Subject to compliance with applicable securities laws, we would only complete such financing simultaneously with the completion of our Business Combination. If we are unable to complete our Business Combination because we do not have sufficient funds available to us, we will be forced to cease operations and liquidate the Trust Account. In addition, following our Business Combination, if cash on hand is insufficient, we may need to obtain additional financing in order to meet our obligations.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Contractual Obligations
We do not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than an agreement to pay the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial and administrative support. We began incurring these fees on November 6, 2020 and will continue to incur these fees monthly until the earlier of the completion of the Business Combination and our liquidation.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or $8,104,600 in the aggregate. The deferred fee will be waived by the underwriters in the event that the Company does not complete a Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformityaccordance with accounting principles generally accepted in the United States (“GAAP”) and that may be different from non-GAAP financial measures used by other companies. The Company believes EBITDA and Adjusted EBITDA are useful to investors in evaluating the Company’s financial performance. The Company uses these measures internally to establish forecasts, budgets and operational goals to manage and monitor its business, as well as evaluate its underlying historical performance and to measure incentive compensation, as we believe that these non-GAAP financial measures depict the true performance of Americathe business by encompassing only relevant and controllable events, enabling the Company to evaluate and plan more effectively for the future. In addition, the Company’s debt agreements contain covenants that use a variation of these measures for purposes of determining debt covenant compliance. The Company believes that investors should have access to the same set of tools that its management uses in analyzing operating results. EBITDA and Adjusted EBITDA should not be considered as measures of financial performance under U.S. GAAP, and the items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing the Company’s financial performance. Accordingly, these key business metrics have limitations as an analytical tool. They should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flows from operating activities as a measure of the Company’s liquidity, and may be different from similarly titled non-GAAP measures used by other companies. The following unaudited table presents the reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2021, 2020 and 2019.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
| Net income | $ | 83,414 | | | $ | 77,815 | | | $ | 81,473 | |
| Add: | | | | | |
| Depreciation | 10,428 | | | 9,916 | | | 8,606 | |
| Taxes | (857) | | | — | | | — | |
| Interest expense, net | 11,928 | | | 6,143 | | | 5,454 | |
| EBITDA | $ | 104,913 | | | $ | 93,874 | | | $ | 95,533 | |
| Special management bonus expense | 4,384 | | | 15,708 | | | 7,631 | |
| Equity compensation expense | 6,113 | | | 1,848 | | | 1,681 | |
| Mark to market adjustments (1) | (13,060) | | | — | | | — | |
| Other (2) | — | | | 4,071 | | | 2,000 | |
| Adjusted EBITDA | $ | 102,350 | | | $ | 115,501 | | | $ | 106,845 | |
(1)Primarily includes the changes in fair value of warrant liability and earnout consideration liability for the year ended December 31, 2021.
(2)Primarily includes the non-recurring transaction expenses relating to the then proposed Business Combination for the year ended December 31, 2020 and non-recurring litigation costs for the year ended December 31, 2019.
Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon audited financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities disclosureand disclosures with respect to contingent liabilities and assets at the date of contingentthe financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. On an ongoing basis, the Company evaluates its estimates including those related to revenue recognition and equity-based compensation. These judgments are based on the Company’s historical experience, terms of its existing contracts, evaluation of trends in the industry, information provided by its customers, and information available from outside sources, as appropriate. The Company’s actual results may differ from those estimates under different assumptions or conditions. See Note 2 to the Notes to Consolidated Financial Statements for additional description of the significant accounting policies that have been followed in preparing the Company’s audited consolidated financial statements.
The accounting policies described below are those that the Company considers to be the most critical for an understanding of its financial condition and results of operations and that require the most complex and subjective management judgment.
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 incomethe reported amounts of revenues and expenses during the periods reported.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 could materiallymay differ from those estimates. 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 due December 2026, which will be marked to market each quarter based on a Lattice model approach, 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. See Note 7, 9 and 11 for further discussion of the nature of these assumptions and conditions.
Revenue Recognition
The Company recognizes revenue in accordance with the accounting standard 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 refer 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 primary judgments relating to the Company’s revenue recognition include determining whether (i) the contract with a customer exists; (ii) performance obligations are identified; (iii) the transaction price is determined; (iv) the transaction price is allocated to performance obligations; and (v) the distinct performance obligations are satisfied by transferring control of the product or service to the client. Transfer of control is typically evaluated from the customer's perspective.
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 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. The Company accounts for shipping and handling as activities fulfill its promise to transfer the associated products to its customers. Accordingly, the Company records amounts billed for sales. Revenue is recognized net of variable consideration such as discounts, penalties, 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 rebates based on achieving a certain level of shipped sales during the calendar year. These rebates are estimated and updated throughout the year and recorded against revenues and the related accounts receivable.
Equity-Based Compensation
The Company adopted equity incentive plans in 2021 and 2015. See Note 9 for a detailed discussion of both the plans. The Company estimates the fair value of option awards using a Black-Scholes option valuation model. Option valuation model requires the Company to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term, and risk-free interest rate. The expected term assumption reflects the period for which the Company believes the option will remain outstanding. This assumption is based upon the historical and expected behavior of the option holders and may vary based upon the behavior of different groups of option holders. The most subjective estimate is the expected volatility of the underlying unit when determining the fair market value of an option granted. As there was no trading history for the Company’s equity, the Company had utilized an appropriate index to estimate the volatility assumption when calculating the fair value of options granted during 2020 and 2019. A nonpublic entity that is unable to estimate the expected volatility of the price of its underlying share may measure awards based on a “calculated value,” which substitutes the volatility of an appropriate index for the volatility of the entity’s own share price. The Company had used the historical closing values of comparable publicly held entities to estimate volatility. The risk-free rate reflects the U.S. Treasury yield curve for a similar expected life instrument in effect at the time of the grant. There were no grants made during 2021 under both the plans.
In connection with the consummation of the Business Combination, the then existing equity holders had 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 earn-out consideration based on the achievement of certain stock price thresholds (collectively, the “Earnouts”). There were a total of 657,160 shares subject to ASC 718, or 328,580 shares for each portion of the Earnouts.
Upon the transaction date, a valuation was performed which took into consideration all the key terms and conditions of the award, including the fact that, under Topic 718, there is no requisite service period due to the fact that there is no service condition prospectively, and as of the grant date there is no service inception date preceding the grant date on which to base historical valuation or expense amortization. As such, the award is considered to be immediately vested from a service perspective, and is solely contingent on meeting the hurdles required for the award to be settled. Since there is no future substantive risk of forfeiture, all expense associated with the awards were accelerated and recognized on December 27, 2021.The valuation of the Earnouts was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the
probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. The following assumptions were used to determine the grant date fair value for the Earnouts that were fully expensed at the closing date, December 27, 2021:
| | | | | |
| Year Ended |
| 12/27/2021 |
| Valuation date share price | $ | 9.95 | |
| Risk-free interest rate | 0.98% - 1.12% |
| Expected volatility | 57.92% - 58.88% |
| Expected dividends | 0 | % |
| Expected forfeiture rate | 0 | % |
| Expected term | 3 - 4 years |
A 10% change in the Company’s equity-based compensation expense for the year ended December 31, 2021 would have affected net income by approximately $0.1 million. The Company includes equity-based compensation expense in selling, general and administrative expenses in its consolidated statement of operations.
Earnout Consideration
As a result of the Business Combination, certain of 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 (collectively, the “Earnouts”). As such, Earnouts were considered to be derivative liability and the valuation of the Earnouts liability was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. The Company classifies the Earnouts as liabilities at their fair value on the consolidated balance sheet and adjusts the fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in revaluation of earnout consideration liability in the Company's consolidated statements of operations. See Note 9 for a detailed discussion.
Warrant Liabilities
The Company accounts for the warrants in accordance with the guidance contained in ASC 815 under which the warrants do not meet the criteria for equity treatment and must be recorded as liabilities. Accordingly, the Company classifies the warrants as liabilities at their fair value within warrant liability on the consolidated balance sheet and adjusts the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in revaluation of warrant liability in the Company's consolidated statements of operations. The Private Placement Warrants were valued using a Black-Scholes option pricing model. The Public Warrants were valued using the quoted market price as the fair value at the end of each balance sheet date. See Note 11 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
Derivative Liability – Redemption Make-Whole Provision Feature
A derivative liability was initially recorded as a result of the issuance of the 7.00% Exchangeable notes due December, 2026 (see note 7 to our Consolidated Financial Statements included in this report). The fair value measurement of the derivative liability is classified as Level 3 under the fair value hierarchy as it has been valued using certain unobservable inputs using Lattice model. These inputs primarily include: (1) share price as of the valuation date, (2) assumed timing of redemption of the notes based on redemption threshold using Monte Carlo simulation (3) historical volatility of share price and (4) the risk-free rate. Significant increases or decreases in any
of those inputs in isolation could result in a significantly lower or higher fair value measurement. The fair value of the derivative liability was determined using a Lattice model by calculating the fair value of the notes with the redemption make-whole feature as compared to the fair value of the notes without the redemption make-whole feature, with the difference representing the value of the redemption make-whole feature, or the derivative liability. The conversion feature will be measured at fair value on a quarterly basis and the change in the fair value of the conversion feature for the period will be recorded in the consolidated statements of operations.
Income Taxes
Income taxes are applied to the income attributable to the controlling interest (see Note 8 ) as the income attributable to the non-controlling interest is pass-through income. The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
We will continue to evaluate the realizability of our deferred tax assets and liabilities on a quarterly basis, and will adjust such amounts in light of changing facts and circumstances, including but not limited to future projections of taxable income, tax legislation, rulings by relevant tax authorities and the progress of ongoing tax audits, if any. we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized in future periods.
The Company was not subject to income taxes due to the then equity structure of the Company prior to Business Combination and was subject to pass through income taxes. Federal, state and local income tax returns for years prior to 2019 are no longer subject to examination by tax authorities.
Market and Credit Risk
Financial instruments that potentially subject the Company to credit risk consist principally of investments in cash, cash equivalents, short-term investments and accounts receivable. The Company’s primary exposure is credit risk on receivables as the Company does not require any collateral for its accounts receivable. Credit risk is the loss that may result from a trade customer’s or counterparty’s nonperformance. The Company uses credit policies to control credit risk, including utilizing an established credit approval process, monitoring customer and counterparty limits, employing credit mitigation measures such as analyzing customers’ financial statements, and accepting personal guarantees and various forms of collateral. The Company believes that its customers and counterparties will be able to satisfy their obligations under their contracts.
The Company maintains cash, cash equivalents with approved federally insured financial institutions. Such deposit accounts at times may exceed federally insured limits. The Company is exposed to credit risks and liquidity in the event of default by the financial institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution if required. The Company has not experienced any losses on such accounts.
Recently Adopted Accounting Policies
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial
conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have
identifiedan impact on the
following critical accounting policies:Class A Common Stock SubjectCompany’s financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to
Possible RedemptionWe accountmeet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in statements of operations. The Company adopted the new lease guidance effective January 1, 2021 using the modified retrospective transition approach, applying the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for ourdates and periods before January 1, 2021. The Company elected the package of practical expedients which permits to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change the Company’s previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. The adoption of the new guidance resulted in the recognition of ROU assets of $6.3 million and lease liabilities of $6.9 million. The difference between the ROU assets and the lease liabilities is primarily due to unamortized lease incentive and deferred rent related to the Company’s operating leases at December 31, 2020. See Note 2 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
Liquidity and Capital Resources
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).
As of December 31, 2021, the Company had cash and cash equivalents of $21.9 million and total debt principal outstanding of $395.0 million. 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. 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, it may incur additional debt to finance such acquisitions.
At December 31, 2021, there was $265.0 million of total debt outstanding under the Company’s existing credit facility (the “2021 Credit Facility”). The credit facility comprised a term loan of $250.0 million as well as a $60.0 million revolving loan facility, of which $45.0 million was available for borrowing as of December 31, 2021.
Additional amounts may be available for borrowing during the term of the revolving loan, up to the remaining full $45.0 million, as long as the Company’s maintains a net leverage ratio as stipulated in the credit facility agreement. As of December 31, 2021, 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.
Interest rates for the 2021 Credit Facility are calculated as the fluctuating bank prime rate plus the applicable margin of 2.0% or, for portions of the debt converted to Euro Loans, the quoted LIBOR rate plus the applicable margin of 3.0%. The Company must also pay an annual commitment fee of 0.40% on the unused portion of the $60.0 million revolving loan commitment. As of December 31, 2021, the effective interest rate on the Company’s 2020 Credit Facility was 3.65%. Total cash interest paid during the year ended December 31, 2020 was $10.2 million, an increase of $5.0 million compared to the prior year.
The 2021 Credit Facility contains customary covenants, including among other things, certain restrictions or limitations on indebtedness, issuance of liens, investments, asset sales, certain mergers or consolidations, sales, transfers, leases or dispositions of substantially all of the Company’s assets, and affiliate transactions. The Company may also be required to make repayments on the 2021 Credit Facility in advance of the maturity date based on a calculation of excess cash flows, as defined in the agreement, with any required payments to be made after the issuance of the Company’s annual financial statements. The Company did not have a required excess cash flow payment related to 2021, and the Company was in compliance with all covenants under the 2021 Credit Facility as of December 31, 2021. See Note 7 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its wholly owned 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 wholly owned subsidiary, Holdings in an aggregate principal amount of up to $130,000,000 that are exchangeable into shares of Class A common stock
at a conversion price of $11.50 per share, subject to
possible redemption in accordance with the
guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Sharesterms and conditions of
Class A common stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. Our common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events. Accordingly, the Class A common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ equity section of our balance sheet.Net Loss per Common Share
We apply the two-class method in calculating earnings per share. Net loss per common share, basic and diluted for Class A common stock subject to possible redemption is calculated by dividing the interest income earned on the Trust Account, net of applicable taxes, if any,an Indenture entered by the weighted average numberCompany and its wholly owned subsidiary, Holdings and the trustee under the Indenture. The Exchangeable Notes will bear interest at a rate of 7% per annum, payable semiannually in arrears. The Exchangeable Notes will mature in five years on December 27, 2026, and be convertible into shares of Class A common stock subject to possible redemption outstanding forat a conversion price of $11.50 per share. The Company will settle any exchange of the period. Net loss per common share, basic and diluted for and non-redeemable common stock is calculated by dividing net loss less income attributable toExchangeable Notes in shares of Class A common stock, subjectwith cash payable in lieu of any fractional shares.
Exchangeable Notes bear interest at the rate of 7.00% per year from December 27, 2021, or from the most recent date to possible redemption,which interest has been paid or provided for to, but excluding, the next scheduled interest payment date until December 15, 2026, unless earlier repurchased or converted pursuant to and in accordance with the provisions of the Indenture. Interest is payable semi-annually 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. Additional interest may be payable as set forth in the Indenture. See Note 7 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
Net Cash Provided by Operations
Cash provided by the weighted average number of shares of non-redeemable common stock outstandingCompany’s operating activities for the year ended December 31, 2021 was $77.8 million compared to cash provided by its operating activities of $87.1 million during the year ended December 31, 2020. The decrease in cash provided by operating activities of $9.3 million was primarily attributable to a change in fair value of $3.5 million of warrant liability, a change in fair value of $9.6 million of earnout consideration liability, deferred tax benefits of $0.9 million and changes in working capital of $10.5 million. This was partially offset by depreciation expense of $10.4 million, equity compensation expense of $6.1 million, amortization of deferred financing cost of $1.7 million, an increase in net income of $5.6 million and inventory reserve of $0.6 million.
Net Cash Used in Investing
Cash used in the Company’s investing activities for the year ended December 31, 2021 was $4.7 million, primarily relating to capital expenditures of $4.7 million during the year ended December 31, 2021.
Net Cash Used in Financing
Cash used in the Company’s financing activities for the year ended December 31, 2021 was $64.5 million, primarily relating to distributions to equity holders pursuant to the consummation of the business combination on December 27, 2021 and repayments of debt related to The Company’s prior Credit Facility, partially offset by cash drawn under the 2021 Credit Facility, Exchangeable Notes and capital raised through PIPE pursuant to the business combination.
Contractual Obligations
The following table summarizes, as of December 31, 2021, the Company’s material contractual cash obligations by future period
presented.Recent Accounting Standards
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have(see Notes 2 and 7 of Notes to Consolidated Financial Statements):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments due by Period |
| Contractual Obligations | 1 year or less | | Years 2-3 | | Years 4-5 | | After Year 5 | | Total |
| ($ amounts in thousands) |
| Long-term Debt (1) | $ | 12,500 | | | $ | 37,500 | | | $ | 330,000 | | | $ | — | | | $ | 380,000 | |
| Line of Credit (1) | — | | | — | | | 15,000 | | | — | | | 15,000 | |
| Operating Leases (2) | 1,294 | | | 1,298 | | | 1,263 | | | 2,495 | | | 6,350 | |
| Total | $ | 13,794 | | | $ | 38,798 | | | $ | 346,263 | | | $ | 2,495 | | | $ | 401,350 | |
(1)Includes principal only. See Note 7 to the Consolidated Financial Statements.
(2)See Note 2 to the Consolidated Financial Statements.
As of December 31, 2021, the Company had inventory-related purchase commitments totaling approximately $52.1 million.
Financing
The Company is party to the 2021 Credit Facility with various banks and an issuer of Exchangeable Notes to certain holders. For a
material effect on our financial statements.more complete description of the Company's debt obligations, see Note 7 of Notes to Consolidated Financial Statements in the Audited Consolidated Financial Statements of the Company in this report Form 10-K.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
Through December 31, 2020, our efforts have been limited
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
In addition to
organizationalexisting cash balances and cash provided by operating activities,
activities relatingthe Company uses variable rate debt to
our initial public offering and since the initial public offering, the search for a target business with which to consummate an initial business combination. We have engaged in limited operations and have not generated any revenues. We have not engaged in any hedging activities since our inception on August 21, 2020. We do not expect to engage in any hedging activities with respect to the market risk to which we are exposed.finance its operations. The net proceeds of the initial public offering and the sale of the private placement warrants held in the trust account at at J.P. Morgan Chase Bank, N.A., maintained by Continental, acting as trustee, have been invested in U.S. government treasury bills with a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act which invest only in direct U.S. government treasury obligations. Due to the short-term nature of these investments, we believe there will be no associated material exposureis exposed to interest rate risk.
risk on these debt obligations and a related interest rate swap agreement. As of December 31, 2021, the Company had $265.0 million in long-term debt principal outstanding from the 2021 Credit Facility, all of which is variable rate debt and $130.0 million in long-term debt principal outstanding from the issuance of Exchangeable Notes.
The Company performed a sensitivity analysis based on the principal amount of its debts as of December 31, 2021, as well as the effect of its interest rate swap agreement. In this sensitivity analysis, the change in interest rates is assumed to be applicable for an entire year. An increase or decrease of 100 basis points in the applicable interest rate would cause an increase or decrease in interest expense of $4.0 million on an annual basis.
On November 5, 2020, the Company entered into an interest rate swap agreement to hedge forecasted interest rate payments on its variable rate debt. As of December 31, 2021, the Company had the following interest rate swap agreement (in thousands):
| | | | | | | | | | | | | | |
| Effective Dates | | Notional Amount | | Fixed Rate |
| November 5, 2020 through November 5, 2023 | | $ | 100,000 | | | 1.06 | % |
Under the terms of the interest rate swap agreement, the Company receives payments based on the greater of 1-month LIBOR rate or a minimum of 1.00%.
The Company has designated the interest rate swap agreement as a cash flow hedge for accounting purposes utilizing the hypothetical derivative method. The Company has determined the fair value of the interest rate swap agreement to be zero at the inception of the agreement. The Company reflects only the realized gains and losses of the actual monthly settlement activity of the interest rate swap in its income statement. The income statement does not reflect the unrealized changes in fair value of the interest rate swap at each reporting period, and similarly a derivative asset or liability is not recognized at each reporting period in the Company’s financial statements as the amounts are not significant.
In January 2022, the Company cancelled the November 2020 swap agreement and entered into a new interest rate swap agreement with a notional amount of $125.0 million maturing in December 2025. The terms and conditions of the new contracts were similar to the November 2020 swap agreement. The Company realized $0.3 million upon the settlement of the November 2020 swap agreement.
Item 8. | Financial Statements and Supplementary Data. |
Reference is made
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPOSECURE, INC.
Table of Contents to
pages F-1 through F-17 comprising a portion of this Report.the Consolidated Financial Statements
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Co-Chief Executive Officers and our Chief Financial Officer (together, the “Certifying Officers”), we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the foregoing, our Certifying Officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Certifying Officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Controls over Financial Reporting
This Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information. |
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Directors and Executive Officers
As of the date of this Report, our directors and officers are as follows:
Name | | Age | | Position | |
Dr. Donald G. Basile | | 55 | | Chairman and Co-Chief Executive Officer | Page |
Dixon Doll, Jr. | | 52 | | Co-Chief Executive Officer | |
John C. Small | | 53 | | Chief Financial Officer | |
Dixon Doll | | 78 | | Senior Director | |
Alan Clingman | | 61 | | Director | |
Paul Misir | | 48 | | Director | |
Arun Abraham | | 39 | | Director | |
James L. Nelson | | 72 | | Director | |
Dr. Donald G. Basile has served as our Chairman and Co-Chief Executive Officer since inception. Dr. Basile has also served as an executive officer and director at Monsoon Blockchain Corporation since November 2019 and as a director of GIBF, GP Inc. since September 2018. Dr. Basile previously served as a director of Violin Memory, Inc. from April 2009 to January 2014 and as its Chief Executive Officer from April 2009 to December 2013. He also served as Chief Executive Officer of FusionIO from January 2008 to March 2009 and as its Chairman from July 2006 to March 2009. Dr. Basile previously worked at AT&T Bell Labs, IBM, United Health Group and Lenfest Group (acquired by Comcast) and served as Managing Director of Raza Foundries and Vice President of Raza Microelectonics (RMI). Dr. Basile received a Ph.D. degree in Electrical Engineering with a focus on distributed computing from Stanford University, a MS in Electrical Engineering focused on advanced computer architecture from Stanford University and a BS in Electrical Engineering with a minor in economics from Rensselaer Polytechnic Institute. We believe Dr. Basile is well qualified to serve as a member of our board of directors due to his depth of investment experience and vast network of relationships.
Dixon Doll, Jr. has served as our Co-Chief Executive Officer since inception. Mr. Doll is currently also the Chief Executive Officer and Chairman of DBM Cloud Systems, Inc. since January 2016 and the Managing Director of Longstreet Ventures, Inc. since January 2003. From July 2009 to January 2014, Mr. Doll served as the Chief Operating Officer and as a director of Violin Memory, Inc. He has also previously worked as the Senior Vice President of Sales and Corporate Development at FusionIO from February 2008 to February 2009, as the Vice President of Corporate Development of NEON from May 1998 to July 2001 and as Vice President of Corporate Development of Recourse Technologies from July 2001 to August 2002. In addition, he was a Business Development Manager at Oracle Alliances Division from September 1994 to May 1998. Mr. Doll has previously served as a consultant to Oak Investment Partners, GTGR, Carlyle Group and DCM. He also is a partner at Birchwood Partners, an angel fund that helps early stage companies launch. Mr. Doll is the son of Dixon Doll, one of our director nominees. Mr. Doll holds a bachelors of arts from Georgetown University and has been a member of the board of advisors to the dean of the College of Liberal Arts since 2012. He holds an MBA from The University of Michigan.
John C. Small has served as our Chief Financial Officer since inception. Mr. Small is currently the Chief Operating Officer of Diamond Standard, and served as Chief Financial Officer and Chief Financial Officer of Quanterra Capital Management LP from May 2019 to December 2020. He served as the Chief Operating Officer of Mode Media from April 2016 to September 2016, and the Chief Financial Officer of Viggle, Inc. (Nasdaq: VGGL) from September 2012 to October 2015. He served as Senior Vice President of Finance for Tsunami XR from October 2016 to May 2019. Mr. Small joined GLG Partners in 2000 as a Senior Asset Manager responsible for Telecom, Media, Technology and Renewable Energy investments for the GLG North American Opportunity Fund and served as the President of the GLG North America office from April 2000 to August 2011. He worked as a Telecom and Media analyst at Ulysses Management from January 1997 to March 2000 and as a Telecom analyst at Odyssey Partners from March 1996 to January 1997. He also worked as an equity research analyst at Dillon Read (from January 1992 to September 1993) and Morgan Stanley (from October 1993 to February 1996). Mr. Small has previously served as a director of Loyalty Alliance, Inc., PayEase Ltd., INFINIA Corporation, ViSole Energy, Inc., New Millennium Solar Equipment Co, ShortList Media Ltd, DraftDay Inc., and Spinvox Ltd. Mr. Small received a BA in Economics concentrating in International Relations from Cornell University.
Dixon Doll has served as our Senior Director since November 2020. Mr. Doll currently serves as Vice Chairman on the Advisory Board for the Stanford Institute for Economic Policy Research Institute (SIEPR). Previously, Mr. Doll served as the Chairman of Network Equipment Technologies (NWK) and as a director of DIRECTV (DTV). Mr. Doll was elected to the Board of the National Venture Capital Association in 2005 and served on the Executive Committee and as Chairman from 2008 to 2009. Mr. Doll led DCM Ventures’ investments in About.com (acquired by The New York Times Co.), @Motion (acquired by Openwave), Clearwire (Nasdaq: CLWR), Coradiant (acquired by BMC), Force10 Networks (acquired by Dell), Foundry Networks (Nasdaq: FDRY), Internap (Nasdaq: INAP), Ipivot (acquired by Intel), and Neutral Tandem (Nasdaq: TNDM). He is a Board Member of Catholic Information Services (CIS), the Papal Foundation Rome and the University of San Francisco, where he serves as Chairman of the investment committee. He received his B.S. degree (cum laude) from Kansas State University and M.S. and Ph.D. degrees in Electrical Engineering from the University of Michigan, where he was a National Science Foundation scholar. Mr. Doll is the father of Dixon Doll, Jr., our Co-Chief Executive Officer. We believe that Mr. Doll is well qualified to serve as a member of our board because of his extensive investment, his service as a current and former director of public companies, and his vast network of relationships.
Alan Clingman has served as our one of our directors since November 2020. Since January 2008, Mr. Clingman has served as the founder and Chief Executive Officer of Yellow River Asset Management. He has also served as the co-founder of LRG Energy since February 2018. Mr. Clingman started his first business, Coal & Carbon Industries, in 1981 and purchased AIOC, a small commodities trading company in New York, in 1988. He also served as the CEO and Chairman of Marquis Jet from March 2001 to April 2003 and founded Cortiva Education from November 2003 to January 2007, which was acquired by Steiner Leisure (NASDAQ: STNR). We believe Mr. Clingman is well qualified to serve as a member of our board due to his strategic expertise, deep business knowledge and vast network of relationships.
Paul Misir has served as our one of our directors since November 2020. Since May 2013, Mr. Misir has served as the founder and Managing Partner of Notos LLC, where he consults boards of late stage private and public telecom, data, and technology companies on corporate strategy and the development of capital markets offerings. From July 2001 to December 2011, Mr. Misir served as the Founder and Managing Partner of Morning Street Capital and its related funds (including as Founder and CEO of its predecessor merchant bank and market research advisor, Columbia Strategy LLC). Mr. Misir holds an M.B.A. from Columbia University and a B.A. from the University of Chicago. We believe Mr. Misir is well qualified to serve as a member of our board of directors due to his depth of investment experience and vast network of relationships.
Arun Abraham has served as our one of our directors since November 2020. Mr. Abraham is an executive director at M. Klein and Company, a global strategic advisory firm, where he advises technology, FinTech, media, sports and other companies and select financial sponsors, sovereign wealth funds and other large private investors. Since joining M. Klein and Company in July 2017, Mr. Abraham has also helped execute various special purpose acquisition company (SPAC) processes and transactions for both SPACs sponsored by M. Klein and for third-party advisory clients. Previously, Mr. Abraham was an investment banker at Lazard Frères & Co. from August 2016 to June 2017 and at Evercore Partners from May 2013 to August 2016, where he advised technology, media, FinTech, healthcare and other leading global companies and investors. From 2007 to 2011, he served as an attorney at Cadwalader, Wickersham & Taft and is a member of the New York State Bar. Mr. Abraham holds an MBA from the University of Chicago Booth School of Business, a J.D. from USC Law School and a B.A. from Yale University. We believe Mr. Abraham is well qualified to serve as a member of our board of directors due to his depth of experience with strategic investment, M&A and SPAC transactions including with companies in the technology sector, capital markets experience, and his broad network of relevant investor, financial and technology industry relationships.
James L. Nelson has served as our one of our directors since December 2020. Mr. Nelson has served as the Chief Executive Officer and Chairman of Global Net Lease, Inc., a publicly traded real estate investment trust, since July 2017 and has been a director of the company since March 2017. Mr. Nelson’s former leadership positions are many. He was director of Herbalife Nutrition Ltd from 2014 to 2020 and lead director from July 2019; former director and member of the audit committee of Caesars Entertainment Corporation, a casino-entertainment company, from March 2019 until October 2020; former director and member of the audit committee of Icahn Enterprises GP from June 2001 to March 2019; former CEO of Orbitex Management, a financial services company; and former CEO of Eaglescliff Corporation, a specialty investment banking, consulting, and wealth management firm. His previous director positions include membership on the boards of American Entertainment Properties, Tropicana Entertainment, and Take Two Interactive Software. We believe Mr. Nelson is well qualified to serve as a member of our board of directors due to his significant public company experience.
Number and Terms of Office of Officers and Directors
Our board of directors consists of six directors, divided into three classes with only one class of directors being elected in each year and each class (except for those directors appointed prior to our first annual meeting of stockholders) serving a three-year term. In accordance with Nasdaq corporate governance requirements, we are not required to hold an annual meeting until one year after our first fiscal year end following our listing on Nasdaq. The term of office of the first class of directors, consisting of Alan Clingman and James L. Nelson, will expire at our first annual meeting of stockholders. The term of office of the second class of directors, consisting of Dixon Doll and Paul Misir, will expire at the second annual meeting of stockholders. The term of office of the third class of directors, consisting of Dr. Donald G. Basile and Arun Abraham, will expire at the third annual meeting of stockholders.
Our officers are appointed by the board of directors and serve at the discretion of the board of directors, rather than for specific terms of office, other than the Chairman of the Board which is appointed to a three year term and can only be removed for cause. Our board of directors is authorized to appoint persons to the offices set forth in our amended and restated amended and restated bylaws as it deems appropriate. Our amended and restated bylaws provide that our officers may consist of a Chairman of the Board, one or more Chief Executive Officers, Chief Financial Officer, Vice Presidents, Secretary, Treasurer, Assistant Secretaries and such other offices as may be determined by the board of directors.
Pursuant to an agreement with our sponsor, our sponsor, upon and following consummation of an initial business combination, will be entitled to nominate three individuals for election to our board of directors, as long as the sponsor holds any securities covered by the registration and shareholder rights agreement.
Committees of the Board of Directors
Our board of directors has two standing committees: an audit committee and a compensation committee. Subject to phase-in rules and a limited exception, Nasdaq rules and Rule 10A-3 of the Exchange Act require that the audit committee of a listed company be comprised solely of independent directors, and Nasdaq rules require that the compensation committee of a listed company be comprised solely of independent directors. Each committee operates under a charter that complies with Nasdaq rules, has been approved by our board of directors and has the composition and responsibilities described below. The charter of each committee has been filed as an exhibit to this Report.
Audit Committee
James L. Nelson, Arun Abraham, Paul Misir and Alan Clingman serve as the members of our audit committee, and Mr. Nelson chairs the audit committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least three members of the audit committee, all of whom must be independent. Each of James L. Nelson, Arun Abraham, Paul Misir and Alan Clingman meets the independent director standard under Nasdaq listing standards and under Rule 10-A-3(b)(1) of the Exchange Act.
Each member of the audit committee is financially literate and our board of directors has determined that Mr. Nelson qualifies as an “audit committee financial expert” as defined in applicable SEC rules.
We have adopted an audit committee charter, which details the principal functions of the audit committee, including:
• the appointment, compensation, retention, replacement, and oversight of the work of the independent registered public accounting firm engaged by us;
• pre-approving all audit and permitted non-audit services to be provided by the independent registered public accounting firm engaged by us, and establishing pre-approval policies and procedures;
• setting clear hiring policies for employees or former employees of the independent registered public accounting firm, including but not limited to, as required by applicable laws and regulations;
• setting clear policies for audit partner rotation in compliance with applicable laws and regulations;
• obtaining and reviewing a report, at least annually, from the independent registered public accounting firm describing (i) the independent registered public accounting firm’s internal quality-control procedures, (ii) any material issues raised by the most recent internal quality-control review, or peer review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues and (iii) all relationships between the independent registered public accounting firm and us to assess the independent registered public accounting firm’s independence;
• reviewing and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC prior to us entering into such transaction; and
• reviewing with management, the independent registered public accounting firm, and our legal advisors, as appropriate, any legal, regulatory or compliance matters, including any correspondence with regulators or government agencies and any employee complaints or published reports that raise material issues regarding our financial statements or accounting policies and any significant changes in accounting standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
Compensation Committee
Arun Abraham, Paul Misir and Alan Clingman serve as the members of our compensation committee. Under the Nasdaq listing standards and applicable SEC rules, we are required to have at least two members of the compensation committee, all of whom must be independent. Each of Arun Abraham, Paul Misir and Alan Clingman is independent and Mr. Misir chairs the compensation committee.
We adopted a compensation committee charter, which details the principal functions of the compensation committee, including:
• reviewing and approving on an annual basis the corporate goals and objectives relevant to our Chief Executive Officer’s compensation, if any is paid by us, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration (if any) of our Chief Executive Officer based on such evaluation;
• reviewing and approving on an annual basis the compensation, if any is paid by us, of all of our other officers;
• reviewing on an annual basis our executive compensation policies and plans;
• implementing and administering our incentive compensation equity-based remuneration plans;
• assisting management in complying with our proxy statement and annual report disclosure requirements;
• approving all special perquisites, special cash payments and other special compensation and benefit arrangements for our officers and employees;
• if required, producing a report on executive compensation to be included in our annual proxy statement; and
• reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Notwithstanding the foregoing, as indicated above, other than the payment to our sponsor of $10,000 per month, for up to 18 months, for office space, utilities and secretarial and administrative support and reimbursement of expenses, no compensation of any kind, including finders, consulting or other similar fees, will be paid to any of our existing stockholders, officers, directors or any of their respective affiliates, prior to, or for any services they render in order to effectuate the consummation of an initial business combination. Accordingly, it is likely that prior to the consummation of an initial business combination, the compensation committee will only be responsible for the review and recommendation of any compensation arrangements to be entered into in connection with such initial business combination.
The charter provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required by Nasdaq and the SEC.
Director Nominations
We do not have a standing nominating committee though we intend to form a corporate governance and nominating committee as and when required to do so by law or Nasdaq rules. In accordance with Rule 5605 of the Nasdaq rules, a majority of the independent directors may recommend a director nominee for selection by the board of directors. The board of directors believes that the independent directors can satisfactorily carry out the responsibility of properly selecting or approving director nominees without the formation of a standing nominating committee. The directors who will participate in the consideration and recommendation of director nominees are James L. Nelson, Arun Abraham, Paul Misir and Alan Clingman. In accordance with Rule 5605 of the Nasdaq rules, all such directors are independent. As there is no standing nominating committee, we do not have a nominating committee charter in place.
The board of directors will also consider director candidates recommended for nomination by our stockholders during such times as they are seeking proposed nominees to stand for election at the next annual meeting of stockholders (or, if applicable, a special meeting of stockholders). Our stockholders that wish to nominate a director for election to our board of directors should follow the procedures set forth in our bylaws.
We have not formally established any specific, minimum qualifications that must be met or skills that are necessary for directors to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our stockholders.
Code of Ethics
We have adopted a Code of Ethics applicable to our directors, officers and employees. We have filed our Code of Ethics and our audit and compensation committee charters as exhibits to this Report. You are able to review these documents by accessing our public filings at the SEC’s web site at www.sec.gov. We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.
Item 11. | Executive Compensation |
Compensation Discussion and Analysis
None of our officers has received any cash compensation for services rendered to us. We pay our sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly fees. No compensation of any kind, including any finder’s fee, reimbursement or consulting fee, will be paid by us to our sponsor, officers and directors, or any affiliate of our sponsor or officers, prior to, or in connection with any services rendered in order to effectuate, the consummation of our initial business combination (regardless of the type of transaction that it is). However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. We do not have a policy that prohibits our sponsor, executive officers or directors, or any of their respective affiliates, from negotiating for the reimbursement of out-of-pocket expenses by a target business. Our audit committee will review on a quarterly basis all payments that were made to our sponsor, officers or directors, or our or their affiliates. Any such payments prior to an initial business combination will be made using funds held outside the trust account. Other than quarterly audit committee review of such payments, we do not expect to have any additional controls in place governing our reimbursement payments to our directors and executive officers for their out-of-pocket expenses incurred in connection with identifying and consummating an initial business combination.
After the completion of our initial business combination, directors or members of our management team who remain with us may be paid consulting or management fees from the combined company. All of these fees will be fully disclosed to stockholders, to the extent then known, in the tender offer materials or proxy solicitation materials furnished to our stockholders in connection with a proposed initial business combination. We have not established any limit on the amount of such fees that may be paid by the combined company to our directors or members of management. It is unlikely the amount of such compensation will be known at the time of the proposed initial business combination, because the directors of the post-combination business will be responsible for determining officer and director compensation. Any compensation to be paid to our officers will be determined, or recommended to the board of directors for determination, either by a compensation committee constituted solely by independent directors or by a majority of the independent directors on our board of directors.
We do not intend to take any action to ensure that members of our management team maintain their positions with us after the consummation of our initial business combination, although it is possible that some or all of our officers and directors may negotiate employment or consulting arrangements to remain with us after our initial business combination. The existence or terms of any such employment or consulting arrangements to retain their positions with us may influence our management’s motivation in identifying or selecting a target business but we do not believe that the ability of our management to remain with us after the consummation of our initial business combination will be a determining factor in our decision to proceed with any potential business combination. We are not party to any agreements with our officers and directors that provide for benefits upon termination of employment.
The compensation committee has reviewed and discussed this Compensation Discussion and Analysis with management and, based upon its review and discussions, the compensation committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Report.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth information regarding the beneficial ownership of our common stock as of December 31, 2020 based on information obtained from the persons named below, with respect to the beneficial ownership of common stock, by:
| ● | each person known by us to be the beneficial owner of more than 5% of our outstanding common stock; |
| ● | each of our executive officers and directors that beneficially owns our common stock; and |
| ● | all our executive officers and directors as a group. |
In the table below, percentage ownership is based on 28,945,000 shares of our common stock, consisting of (i) 23,156,000 shares of our Class A common stock and (ii) 5,789,000 shares of our Class B common stock, issued and outstanding as of December 31, 2020. On all matters to be voted upon, except for the election of directors of the board, holders of the shares of Class A common stock and shares of Class B common stock vote together as a single class. Currently, all of the shares of Class B common stock are convertible into Class A common stock on a one-for-one basis.
Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. The following table does not reflect record or beneficial ownership of the private placement warrants as these warrants are not exercisable within 60 days of the date of this Report.
| | | Class A Common Stock | | | Class B Common Stock | | | | |
| Name and Address of Beneficial Owner (1) | | Number of Shares Beneficially Owned | | | Approximate
Percentage
of Class | | | Number of Shares Beneficially Owned(2) | | | Approximate
Percentage
of Class | | | Approximate
Percentage
of Outstanding
Common Stock | |
| Roman DBDR Tech Sponsor LLC (3) | | | -- | | | | -- | | | | 5,789,000 | | | | 100.00 | % | | | 20.00 | % |
| Dr. Donald G. Basile (3) | | | -- | | | | -- | | | | 5,789,000 | | | | 100.00 | % | | | 20.00 | % |
| Dixon Doll, Jr. (3) | | | -- | | | | -- | | | | 5,789,000 | | | | 100.00 | % | | | 20.00 | % |
| John C. Small (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Dixon Doll (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Alan Clingman (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Paul Misir (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Arun Abraham (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| James L. Nelson (4) | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| All directors and executive officers as a group (8 individuals) | | | -- | | | | -- | | | | 5,789,000 | | | | 100.00 | % | | | 20.00 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Other 5% owners | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Karpus Investment Management (5) | | | 4,272,590 | | | | 18.45 | % | | | -- | | | | -- | | | | 14.76 | % |
(1) | Unless otherwise noted, the business address of each of the following entities or individuals is 2877 Paradise Rd. #702 Las Vegas, NV 89109. |
(2) | Interests shown consist solely of founder shares, classified as shares of Class B common stock. Such shares are convertible into shares of Class A common stock on a one-for-one basis, subject to adjustment. |
(3) | Our sponsor is the record holder of such shares. Dr. Donald G. Basile, our Chairman and Co-Chief Executive Officer, and Dixon Doll, Jr., our Co-Chief Executive Officer, are the managing members of our sponsor. As such, they have voting and investment discretion with respect to the common stock held of record by our sponsor and may be deemed to have shared beneficial ownership of the common stock held directly by our sponsor. |
(4) | Each of these individuals holds a direct or indirect interest in our sponsor. Each such person disclaims any beneficial ownership of the reported shares other than to the extent of any pecuniary interest they may have therein, directly or indirectly. |
(5) | According to the Schedule 13G filed on December 10, 2020 with the SEC by Karpus Management, Inc., d/b/a Karpus Investment Management ("KIM"), KIM is an investment adviser who has sole voting power with respect to 3,940,090 Class A shares and sole dispositive authority with respect to 4,272,590 Class A shares. The principal business address of KIM is 183 Sully's Trail, Pittsford, New York 14534. |
Securities Authorized for Issuance under Equity Compensation Table
None.
Changes in Control
None.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
In August 2020, our sponsor purchased 7,906,250 founder shares for an aggregate purchase price of $25,000, or approximately $0.003 per share. In October 2020, our sponsor returned to us, at no cost, an aggregate of 1,581,250 founder shares which we cancelled, resulting in an aggregate of 6,325,000 founder shares outstanding and held by our sponsor. At the time of closing our initial public offering, another 536,000 founder shares were forfeited, resulting in 5,789,000 founder shares outstanding, all held by our sponsor. The founder shares (including the Class A common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holder.
Our sponsor purchased an aggregate of 10,837,400 private placement warrants at a price of $1.00 per warrant ($10,837,400 in the aggregate) in a private placement that occurred simultaneously with the closing of our initial public offering. Each private placement warrant entitles the holder thereof to purchase one share of our Class A common stock at a price of $11.50 per share. The private placement warrants (including the Class A common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holder until 30 days after the completion of our initial business combination.
If any of our officers or directors becomes aware of an initial business combination opportunity that falls within the line of business of any entity to which he or she has then-current fiduciary or contractual obligations, he or she will honor his or her fiduciary or contractual obligations to present such business combination opportunity to such other entity. Our officers and directors currently have certain relevant fiduciary duties or contractual obligations that may take priority over their duties to us.
We pay our sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of our initial business combination or our liquidation, we will cease paying these monthly fees.
Other than the foregoing, no compensation of any kind, including any finder’s fee, reimbursement, consulting fee or monies in respect of any payment of a loan, will be paid by us to our sponsor, officers and directors, or any affiliate of our sponsor or officers, prior to, or in connection with any services rendered in order to effectuate, the consummation of an initial business combination (regardless of the type of transaction that it is). However, these individuals will be reimbursed for any out-of-pocket expenses incurred in connection with activities on our behalf such as identifying potential target businesses and performing due diligence on suitable business combinations. We do not have a policy that prohibits our sponsor, executive officers or directors, or any of their respective affiliates, from negotiating for the reimbursement of out-of-pocket expenses by a target business. Our audit committee reviews on a quarterly basis all payments that were made to our sponsor, officers, directors or our or their affiliates and will determine which expenses and the amount of expenses that will be reimbursed. There is no cap or ceiling on the reimbursement of out-of-pocket expenses incurred by such persons in connection with activities on our behalf.
Prior to the closing of our initial public offering, our sponsor agreed to loan us up to $300,000 to be used for a portion of the expenses of the offering. As of November 10, 2020, we had borrowed $95,657 under the promissory note with our sponsor. These loans were non-interest bearing, unsecured and were due at the earlier of March 31, 2021 or the closing of our initial public offering. The loan was repaid upon the closing of our initial public offering.
In addition, in order to finance transaction costs in connection with an intended initial business combination, our sponsor or an affiliate of our sponsor or certain of our officers and directors may, but are not obligated to, loan us funds on a non-interest bearing basis as may be required. If we complete an initial business combination, we would repay such loaned amounts. In the event that the initial business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into warrants at a price of $1.00 per warrant at the option of the lender. The warrants would be identical to the private placement warrants, including as to exercise price, exercisability and exercise period.
After our initial business combination, members of our management team who remain with us may be paid consulting, management or other fees from the combined company with any and all amounts being fully disclosed to our stockholders, to the extent then known, in the tender offer or proxy solicitation materials, as applicable, furnished to our stockholders. It is unlikely the amount of such compensation will be known at the time of distribution of such tender offer materials or at the time of a stockholder meeting held to consider our initial business combination, as applicable, as it will be up to the directors of the post-combination business to determine executive and director compensation.
We entered into a registration and shareholder rights agreement with respect to the private placement warrants, the warrants issuable upon conversion of working capital loans (if any) and the shares of Class A common stock issuable upon exercise of the foregoing and upon conversion of the founder shares, which was filed with the Registration Statement.
Director Independence
Nasdaq listing standards require that a majority of our board of directors be independent. An “independent director” is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship which in the opinion of the company’s board of directors, would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that Messrs. Clingman, Misir and Abraham are “independent directors” as defined in the Nasdaq listing standards and applicable SEC rules. Our independent directors have regularly scheduled meetings at which only independent directors are present.
Item 14. | Principal Accountant Fees and Services. |
The following is a summary of fees paid or to be paid to Marcum, for services rendered.
Audit Fees. Audit fees consist of fees for professional services rendered for the audit of our year-end financial statements and services that are normally provided by Marcum in connection with regulatory filings. The aggregate fees of Marcum for professional services rendered for the audit of our annual financial statements, review of the financial information included in our Form 10-Q and other required filings with the SEC for the year ended December 31, 2020 totaled $30,240. The aggregate fees of Marcum related to audit services in connection with our initial public offering totaled $41,200. The above amounts include interim procedures and audit fees, as well as attendance at audit committee meetings.
Audit-Related Fees. Audit-related fees consist of fees billed for assurance and related services that are reasonably related to performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include attest services that are not required by statute or regulation and consultations concerning financial accounting and reporting standards. During the year ended December 31, 2020, we did not pay Marcum any audit-related fees.
Tax Fees. We did not pay Marcum for tax services, planning or advice for the year ended December 31, 2020.
All Other Fees. We did not pay Marcum for any other services for the year ended December 31, 2020.
Pre-Approval Policy
Our audit committee was formed upon the consummation of our initial public offering. As a result, the audit committee did not pre-approve all of the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors. Since the formation of our audit committee, and on a going-forward basis, the audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit).
PART IV
Item 15. | Exhibits, Financial Statements and Financial Statement Schedules |
(a) | The following documents are filed as part of this Report: |
(2) | Financial Statements Schedule |
All financial statement schedules are omitted because they are not applicable or the amounts are immaterial and not required, or the required information is presented in the financial statements and notes beginning on F-1 on this Report.
We hereby file as part of this Report the exhibits listed in the attached Exhibit Index.
Item 16. | Form 10-K Summary |
Not applicable.
ROMAN DBDR TECH ACQUISITION CORP.
INDEX TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and
Board of Directors
ofRoman DBDR Tech Acquisition Corp.and Stockholders'
CompoSecure, Inc.
Opinion on the
Financial Statementsfinancial statements
We have audited the accompanying consolidated balance sheet Roman DBDR Tech Acquisition Corp.sheets of CompoSecure, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period from August 21, 2020 (inception) throughended December 31, 2020,2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Companyas of December 31, 2021 and 2020, and the results of itsoperations and itscash flows for each of the three years in the period from August 21, 2020 (inception) throughended December 31, 2020,2021, in conformity with accounting principles generally accepted in the United States of America.America
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(the “PCAOB”(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit,audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.opinion
.
Our
auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our
auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audit providesaudits provide a reasonable basis for our opinion.
/s/
Marcum GRANT THORNTON LLP
Marcum LLP
We have served as the Company’s auditor since
2020.Melville, NY
2015.
Iselin, New Jersey
| F-2 | |
| COMPOSECURE, INC. |
| Consolidated Balance Sheets |
| ($ in thousands, except par value and share amounts) |
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 21,944 | | | $ | 13,422 | |
| Accounts receivable, net | 27,925 | | | 8,792 | |
| Inventories | 25,806 | | | 30,197 | |
| Prepaid expenses and other current assets | 2,596 | | | 1,077 | |
| Total current assets | 78,271 | | | 53,488 | |
| | | |
| Property and equipment, net | 22,177 | | | 27,859 | |
| Right of use asset, net | 5,246 | | | — | |
| Deferred tax asset | 25,650 | | | — | |
| Deposits and other assets | 10 | | | 10 | |
| Total assets | $ | 131,354 | | | $ | 81,357 | |
| | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | |
| CURRENT LIABILITIES | | | |
| Current portion of long-term debt | 12,500 | | | 24,000 | |
| Current portion of lease liabilities | 1,119 | | | — | |
| Accounts payable | 7,058 | | | 2,421 | |
| Accrued expenses | 13,220 | | | 11,556 | |
| Issuance costs payable | 23,107 | | | — | |
| Bonus payable | 3,512 | | | 3,638 | |
| Total current liabilities | 60,516 | | | 41,615 | |
| | | |
| Long-term debt, net of deferred finance costs | 233,132 | | | 211,887 | |
| Convertible notes | 126,897 | | | — | |
| Derivative liability - convertible notes redemption make-whole provision | 552 | | | — | |
| Warrant liability | 35,271 | | | — | |
| Line of credit | 15,000 | | | 20,000 | |
| Lease liabilities | 4,709 | | | — | |
| | | |
| Tax receivable agreement liability | 24,500 | | | — | |
| Earnouts liability | 38,427 | | | — | |
| Other liabilities | — | | | 409 | |
| Total liabilities | 539,004 | | | 273,911 | |
| | | |
| Commitments and contingencies (Note 15) | 0 | | 0 |
| | | |
| Redeemable non-controlling interest | 608,311 | | | — | |
| | | |
| Preferred stock, $0.0001 par value; 10,000,000 shares authorized | — | | | — | |
| Class A common stock, $0.0001 par value; 250,000,000 shares authorized, 14,929,982 and 0 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 1 | | | — | |
| Class B common stock, $0.0001 par value; 75,000,000 shares authorized 61,136,800 and 61,136,800 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 6 | | | 6 | |
| Additional paid in capital | 12,261 | | | 6,148 | |
| Accumulated deficit | (1,028,229) | | | (198,708) | |
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 131,354 | | | $ | 81,357 | |
ROMAN DBDR TECH ACQUISITION CORP.
BALANCE SHEET
DECEMBER 31, 2020
| ASSETS | | | |
| Current Assets | | | | |
| Cash | | $ | 603,615 | |
| Prepaid expenses | | | 434,689 | |
| Total Current Assets | | | 1,038,304 | |
| | | | | |
| Cash and marketable securities held in Trust Account | | | 236,215,089 | |
| TOTAL ASSETS | | $ | 237,253,393 | |
| | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current Liabilities | | | | |
| Accrued expenses | | $ | 98,112 | |
| Total Current Liabilities | | | 98,112 | |
| | | | | |
| Deferred underwriting payable | | | 8,104,600 | |
| Total Liabilities | | | 8,202,712 | |
| | | | | |
| Commitments | | | | |
| | | | | |
| Class A common stock subject to possible redemption, 21,965,753 shares at redemption value | | | 224,050,680 | |
| | | | | |
| Stockholders’ Equity | | | | |
| Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding | | | — | |
| Class A common stock, $0.0001 par value; 200,000,000 shares authorized; 1,190,247 issued and outstanding (excluding 21,965,753 shares subject to possible redemption) | | | 119 | |
| Class B common stock, $0.0001 par value; 20,000,000 shares authorized; 5,789,000 shares issued and outstanding | | | 579 | |
| Additional paid-in capital | | | 5,164,409 | |
| Accumulated deficit | | | (165,106 | ) |
| Total Stockholders’ Equity | | | 5,000,001 | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 237,253,393 | |
The accompanying notes are an integral part of
thethese financial statements.
77
| F-3 | |
| COMPOSECURE, INC. |
| Consolidated Statements of Operations |
| ($ in thousands except per share amounts) |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Net sales | $ | 267,948 | | | $ | 260,586 | | | $ | 243,290 | |
| Cost of sales | 123,099 | | | 127,959 | | | 115,427 | |
| Gross profit | 144,849 | | | 132,627 | | | 127,863 | |
| Operating expenses: | | | | | |
| General and administrative expenses | 45,990 | | | 48,488 | | | 40,624 | |
| Selling expenses | 17,434 | | | 181 | | | 313 | |
| Income from operations | 81,425 | | | 83,958 | | | 86,926 | |
| | | | | |
| Other income (expense): | | | | | |
| Revaluation of warrant liability | 3,485 | | | — | | | — | |
| Revaluation of earnout consideration liability | 9,575 | | | — | | | — | |
| Interest expense, net of interest income of $0, $52 and $110 in 2021, 2020 and 2019, respectively | (10,235) | | | (5,266) | | | (4,753) | |
| Amortization of deferred financing costs | (1,693) | | | (877) | | | (700) | |
| Total other expenses, net | 1,132 | | | (6,143) | | | (5,453) | |
| Income before income taxes | 82,557 | | | 77,815 | | | 81,473 | |
| Income tax benefit | 857 | | | — | | | — | |
| Net income | 83,414 | | | 77,815 | | | 81,473 | |
| | | | | |
| Net income attributable to redeemable non-controlling interests | 69,902 | | | — | | | — | |
| Net income attributable to CompoSecure, Inc (1) | $ | 13,512 | | | $ | 77,815 | | | $ | 81,473 | |
| | | | | |
| Net income per share attributable to Class A common stockholders - basic (2) | $ | 0.91 | | | n/a | | n/a |
| Net income per share attributable to Class A common stockholders - diluted (2) | $ | 0.14 | | | n/a | | n/a |
| | | | | |
| Weighted average shares used to compute net income per share attributable to Class A common stockholders - basic | 14,930 | | | n/a | | n/a |
| Weighted average shares used to compute net income per share attributable to Class A common stockholders - diluted | 94,926 | | | n/a | | n/a |
| | | | | |
ROMAN DBDR TECH ACQUISITION CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 21, 2020 (INCEPTION) THROUGH DECEMBER
(1) Net income attributable to CompoSecure, Inc. for the year ended December 31,
2020| | | For the Period
from
August 21,
2020
(Inception)
Through December 31,
2020 | |
| Operating and formation costs | | $ | 188,995 | |
| Loss from operations | | | (188,995 | ) |
| | | | | |
| Other income: | | | | |
| Interest earned on marketable securities held in Trust Account | | | 22,970 | |
| Unrealized gain on marketable securities held in Trust Account | | | 919 | |
| Other income | | | 23,889 | |
| | | | | |
| Loss before provision for income taxes | | | (165,106 | ) |
| Provision for income taxes | | | — | |
| Net loss | | $ | (165,106 | ) |
| | | | | |
| Basic and diluted weighted average shares outstanding, Class A Common stock subject to possible redemption | | | 21,828,647 | |
| Basic and diluted net income per share, Class A Common stock subject to possible redemption | | $ | 0.00 | |
| Basic and diluted weighted average shares outstanding, Common stock | | | 6,078,552 | |
| Basic and diluted net loss per share, Common stock | | | (0.03 | ) |
2021 is equal to net income for the period subsequent to business combination for the prorated period from December 27, 2021 through December 31, 2021. Net income attributable to non-controlling for the year ended December 31, 2021 is equal to net income for the period from January 1, 2021 through December 31, 2021. See Note 1.
(2) The amounts for the year ended December 31, 2021 represent basic and diluted net income per share of Class A common stock and weighted average shares of Class A common stock outstanding for the prorated period from December 27, 2021 through December 31, 2021, the period following the Business Combination described in Note 1. See Note 14.
The accompanying notes are an integral part of
thethese financial statements.
78
| F-4 | |
| COMPOSECURE, INC. |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
| (in thousands, except share data) |
ROMAN DBDR TECH ACQUISITION CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD FROM AUGUST 21, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
| | | Class A Common Stock | | | Class B Common Stock | | | Additional
Paid-in | | | Accumulated | | | Total
Stockholders’ | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Equity | |
| Balance – August 21, 2020 (Inception) | | | — | | | $ | — | | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Issuance of Class B common stock to Sponsor | | | — | | | | — | | | | 6,325,000 | | | | 633 | | | | 24,367 | | | | — | | | | 25,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of 23,156,000 Units, net of underwriting discounts | | | 23,156,000 | | | | 2,315 | | | | — | | | | — | | | | 218,351,072 | | | | — | | | | 218,353,387 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sale of 10,837,400 Private Placement Warrants | | | — | | | | — | | | | — | | | | — | | | | 10,837,400 | | | | — | | | | 10,837,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Forfeiture of Founder Shares | | | — | | | | — | | | | (536,000 | ) | | | (54 | ) | | | 54 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A common stock subject to possible redemption | | | (21,965,753 | ) | | | (2,196 | ) | | | — | | | | — | | | | (224,048,484 | ) | | | — | | | | (224,050,680 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | (165,106 | ) | | | (165,106 | ) |
| Balance – December 31, 2020 | | | 1,190,247 | | | $ | 119 | | | | 5,789,000 | | | $ | 579 | | | $ | 5,164,409 | | | $ | (165,106 | ) | | $ | 5,000,001 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | Class B Common Stock | | Additional Paid-in | | Accumulated | | Total Stockholders' | | Redeemable Non-Controlling | |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Deficit | | Equity | | Interest | |
| Balance as of December 31, 2018 | | — | | | $ | — | | | — | | | $ | — | | | $ | 2,625 | | | $ | (37,520) | | | $ | (34,895) | | | $ | — | | |
| Retroactive application of recapitalization | | — | | | — | | | 61,136,800 | | 6 | | | (6) | | | — | | | — | | | — | | |
| Adjusted balance, beginning of period | | — | | | — | | | 61,136,800 | | 6 | | 2,619 | | (37,520) | | | (34,895) | | | — | | |
| Distributions | | — | | | — | | | — | | | — | | | — | | | (103,808) | | | (103,808) | | | — | | |
| Stock-based compensation | | — | | | — | | | — | | | — | | | 1,681 | | — | | | 1,681 | | | — | | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 81,473 | | | 81,473 | | | — | | |
| Balance as of December 31, 2019 | | — | | | — | | | 61,136,800 | | 6 | | 4,300 | | (59,855) | | | (55,549) | | | — | | |
| Distributions | | — | | | — | | | — | | | — | | | — | | | (216,668) | | | (216,668) | | | — | | |
| Stock-based compensation | | — | | | — | | | — | | | — | | | 1,848 | | — | | | 1,848 | | | — | | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 77,815 | | | 77,815 | | | — | | |
| Balance as of December 31, 2020 | | — | | | — | | | 61,136,800 | | 6 | | 6,148 | | (198,708) | | | (192,554) | | | — | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Distributions | | — | | | — | | | — | | | — | | | — | | | (226,643) | | | (226,643) | | | — | | |
| Business combination, PIPE financing and others | | 14,929,982 | | | 1 | | | — | | | — | | | — | | | (77,981) | | | (77,980) | | | — | | |
| Stock-based compensation | | — | | | — | | | — | | | — | | | 6,113 | | — | | | 6,113 | | | — | | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 13,512 | | | 13,512 | | | 69,902 | | |
| Adjustment of redeemable non-controlling interests to redemption value | | — | | | — | | | — | | | — | | | — | | | (538,409) | | | (538,409) | | | 538,409 | |
| Balance as of 12/31/2021 | | 14,929,982 | | $ | 1 | | | 61,136,800 | | $ | 6 | | | $ | 12,261 | | | $ | (1,028,229) | | | $ | (1,015,961) | | | $ | 608,311 | | |
The accompanying notes are an integral part of
thethese financial statements.
79
| F-5 | |
| COMPOSECURE, INC. |
| Consolidated Statements of Cash Flows |
| ($ in thousands) |
ROMAN DBDR TECH ACQUISITION CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 21, 2020 (INCEPTION) THROUGH DECEMBER 31, 2020
| Cash Flows from Operating Activities: | | | |
| Net loss | | $ | (165,106 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | |
| Interest earned on marketable securities held in Trust Account | | | (22,970 | ) |
| Unrealized gain on marketable securities held in Trust Account | | | (919 | ) |
| Changes in operating assets and liabilities: | | | | |
| Prepaid expenses | | | (434,689 | ) |
| Accrued expenses | | | 98,112 | |
| Net cash used in operating activities | | | (525,572 | ) |
| | | | | |
| Cash Flows from Investing Activities: | | | | |
| Investment of cash in Trust Account | | | (236,191,200 | ) |
| Net cash used in investing activities | | | (236,191,200 | ) |
| | | | | |
| Cash Flows from Financing Activities: | | | | |
| Proceeds from sale of Units, net of underwriting discounts paid | | | 226,928,800 | |
| Proceeds from sale of Private Placement Warrants | | | 10,837,400 | |
| Proceeds from promissory note – related party | | | 95,657 | |
| Repayment of promissory note – related party | | | (95,657 | ) |
| Payment of offering costs | | | (445,813 | ) |
| Net cash provided by financing activities | | | 237,320,387 | |
| | | | | |
| Net Change in Cash | | | 603,615 | |
| Cash – Beginning of period | | | — | |
| Cash – End of period | | $ | 603,615 | |
| | | | | |
| Non-Cash Investing and Financing Activities: | | | | |
| Initial classification of Class A common stock subject to possible redemption | | $ | 224,215,068 | |
| Change in value of Class A common stock subject to possible redemption | | $ | (164,388 | ) |
| Deferred underwriting fee payable | | $ | 8,104,600 | |
| Payment of offering costs by the Sponsor in exchange for the issuance of Class B common stock | | $ | 25,000 | |
| Forfeiture of Founder Shares | | $ | (54 | ) |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
| Cash flows from operating activities | | | | | |
| Net income | $ | 83,414 | | | $ | 77,815 | | | $ | 81,473 | |
| Adjustments to reconcile net income to net cash provided | | | | | |
| by operating activities | | | | | |
| Depreciation | 10,428 | | | 9,916 | | | 8,606 | |
| Equity-based compensation expense | 6,113 | | | 1,848 | | | 1,681 | |
| Inventory reserve | 600 | | | 1,157 | | | (473) | |
| Amortization of deferred finance costs | 1,654 | | | 842 | | | 669 | |
| Change in fair value of earnout consideration liability | (9,575) | | | — | | | — | |
| Revaluation of warrant liability | (3,485) | | | — | | | — | |
| Deferred tax benefit | (857) | | | — | | | — | |
| Changes in assets and liabilities | | | | | |
| Accounts receivable | (19,133) | | | 10,249 | | | 5,827 | |
| Inventories | 3,792 | | | (12,866) | | | (5,678) | |
| Prepaid expenses and other assets | (1,519) | | | (94) | | | 1,343 | |
| Accounts payable | 4,637 | | | (456) | | | (29) | |
| Accrued expenses | 1,665 | | | 332 | | | (12,725) | |
| Other liabilities | 46 | | | (1,681) | | | 492 | |
| Net cash provided by operating activities | 77,780 | | | 87,062 | | | 81,186 | |
| | | | | |
| Cash flows from investing activities | | | | | |
| Acquisition of property and equipment | (4,746) | | | (7,501) | | | (9,642) | |
| Net cash used in investing activities | (4,746) | | | (7,501) | | | (9,642) | |
| | | | | |
| Cash flows from financing activities | | | | | |
| | | | | |
| Business combination and PIPE financing | 60,826 | | | — | | | — | |
| Proceeds from convertible notes | 127,400 | | | — | | | — | |
| Proceeds from line of credit | — | | | 20,000 | | | — | |
| Payment of line of credit | (5,000) | | | — | | | (18,000) | |
| Proceeds from term loan | 250,000 | | | 117,500 | | | 76,000 | |
| Payment of term loan | (240,000) | | | (10,500) | | | (11,000) | |
| Deferred finance costs related to debt origination | (1,860) | | | (3,199) | | | (1,032) | |
| Distributions pursuant to the business combination | (218,300) | | | — | | | — | |
| Distributions to Holdings' members | (22,334) | | | (216,668) | | | (103,808) | |
| Issuance cost related to business combination | (15,244) | | | — | | | — | |
| Net cash used in financing activities | (64,512) | | | (92,867) | | | (57,840) | |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | 8,522 | | | (13,306) | | | 13,704 | |
| | | | | |
| Cash and cash equivalents, beginning of period | 13,422 | | | 26,728 | | | 13,024 | |
| | | | | |
| Cash and cash equivalents, end of period | $ | 21,944 | | | $ | 13,422 | | | $ | 26,728 | |
| | | | | |
| Supplementary disclosure of cash flow information: | | | | | |
| Cash paid for interest expense | $ | 10,101 | | | $ | 5,317 | | | $ | 4,889 | |
| Supplemental disclosure of non-cash financing activities: | | | | | |
| Issuance costs payable | $ | 23,107 | | | $ | — | | | $ | — | |
The accompanying notes are an integral part of
thethese financial statements.
80
| F-6 | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
NOTE
1.DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS CompoSecure, Inc. (“CompoSecure” or the “Company”) is a manufacturer and designer of complex metal, plastic, composite ID and proprietary financial transaction cards. The Company started operations in 2000 and provides products and services primarily to global financial institutions, plastic card manufacturers, government agencies, system integrators, and security specialists. The Company is located in Somerset, New Jersey.
The Company creates newly innovated, highly differentiated and customized quality financial payment products to support and increase its 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 Cryptocurrency solutions. The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers. The Company entered the digital asset revolution through the launch of its Arculus platform, which commenced in the third quarter of 2021 with the Arculus Key card and companion Arculus Wallet mobile application. 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 over 20 direct customers and over 80 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.Corp ("Roman DBDR") consummated the merger pursuant to the Merger Agreement, dated April 19, 2021 (the
“Company”"Merger Agreement")
is, by and among Roman DBDR, Roman Parent Merger Sub, LLC, a
blank check companywholly-owned subsidiary of Roman DBDR incorporated in
the State of Delaware
on August 21, 2020. The Company was formed for("Merger Sub"), and CompoSecure Holdings, L.L.C., a Delaware limited liability company ("Holdings"). Pursuant to the
purposeterms of
effectuatingthe Merger Agreement, a
merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination
between the Company and Holdings was effected through the merger of Merger Sub with
one or more businesses (the “Business Combination”). The Company is an early stage and
emerging growthinto Holdings, with Holdings surviving as the surviving company and as
such, the Company is subject to alla wholly-owned subsidiary of
the risks associated with early stage and emerging growth companies.As of December 31, 2020, the Company had not yet commenced any operations. All activity for the period from August 21, 2020 (inception) through December 31, 2020 relatesRoman DBDR (the "Business Combination"). Pursuant to the Company’s formationBusiness Combination, the merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP.
On the Closing Date, and
the initial public offering (the “Initial Public Offering”).The registration statement for the Company’s Initial Public Offering was declared effective on November 5, 2020. On November 10, 2020, the Company consummated the Initial Public Offering of 22,000,000 units (the “Units” and, with respect to the shares of Class A common stock included in the Units sold, the “Public Shares”), at $10.00 per Unit, generating gross proceeds of $220,000,000, which is described in Note 3.
Simultaneouslyconnection with the closing of the Initial Public Offering,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 and was accounted for using the acquisition method of accounting. This determination was primarily based on Holdings' members prior to the Business Combination having a majority of the voting interests in the combined company, Holdings' operations comprising the ongoing operations of the combined company, Holdings' members and officers comprising a majority of the board of directors of the combined company, and Holdings' senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Holdings issuing stock for the net assets of Roman DBDR, accompanied by a recapitalization. The net assets of Roman DBDR are stated at historical cost, with no goodwill or other intangible assets recorded. While Roman DBDR was the legal acquirer in the Business Combination, because Holdings was deemed the accounting acquirer, the historical financial statements of Holdings became the historical financial statements of the combined company, upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect (i) the historical operating results of Holdings prior to the Business Combination; (ii) the combined results of the Company consummated the sale of 10,375,000 warrants (the “Private Placement Warrants”) at a price of $1.00 per Private Placement Warrant in a private placement to Roman DBDR Tech Sponsor, LLC (the “Sponsor”), generating gross proceeds of $10,375,000, which is described in Note 4.
Followingand Holdings following the closing of the Initial Public Offering on November 10, 2020, an amountBusiness Combination; (iii) the assets and liabilities of $224,400,000 ($10.20 per Unit) fromHoldings at their historical cost; and (iv) the proceedsCompany’s equity structure for all periods presented. In accordance with guidance applicable to these circumstances, the equity structure has been restated in all comparative periods up to the Closing Date, to reflect the number of shares of the sale ofCompany's common stock, $0.0001 par value per share issued to Holdings' equity holders in connection with the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”), to be invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund meeting the conditions of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of: (i) the consummation of a Business Combination or (ii) the distribution of the funds in the Trust Account to the Company’s stockholders, as described below.
On November 12, 2020, the underwriters notified the Company of their intention to partially exercise their over-allotment option.recapitalization transaction. As such, on November 17, 2020, the Company consummated the sale of an additional 1,156,000 Units, at $10.00shares and corresponding capital amounts and earnings per Unit, and the sale of an additional 462,400 Private Placement Warrants, at $1.00 per Private Placement Warrant, generating total gross proceeds of $12,022,400. A total of $11,791,200 of the net proceeds was deposited into the Trust Account, bringing the aggregate proceeds held in the Trust Accountshare related to $236,191,200.
Transaction costs amountedHoldings' common stock prior to $13,206,613, consisting of $4,631,200 of underwriting fees, $8,104,600 of deferred underwriting fees and $470,813 of other offering costs.
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Initial Public Offering and the sale of the Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward consummating a Business Combination. NASDAQ rules provide that the Business Combination must be with one or more target businesses that together have a fair market value equal to at least 80% ofbeen retroactively restated as shares reflecting the balanceexchange ratio established in the Trust Account (less any deferred underwriting commissions and taxes payable on interest earned on the Trust Account) at the time of the signing a definitive agreement to enter a Business Combination. The Company will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or more of the outstanding voting securities of the target or otherwise acquires a controlling interest in the target sufficient for it not to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.
The Company will provide its holders of the outstanding Public Shares (the “public stockholders”) with the opportunity to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a stockholder meeting called to approve the Business Combination or (ii) by means of a tender offer. In connection with a proposed Business Combination, the Company may seek stockholder approval of a Business Combination at a meeting called for such purpose at which stockholders may seek to redeem their shares, regardless of whether they vote for or against a Business Combination. The Company will proceed with a Business Combination only if the Company has net tangible assets of at least $5,000,001 either immediately prior to or upon such consummation of a Business Combination and, if the Company seeks stockholder approval, a majority of the outstanding shares voted are voted in favor of the Business Combination.
Agreement.
| F-7 | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
If the Company seeks stockholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules, the Company’s Amended and Restated Certificate of Incorporation provides that, a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from seeking redemption rights with respect to more than 15% of the Public Shares without the Company’s prior written consent.
The public stockholders will be entitled to redeem their shares for a pro rata portion of the amount then in the Trust Account (initially $10.20 per share, plus any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations). The per-share amount to be distributed to stockholders who redeem their shares will not be reduced by the deferred underwriting commissions the Company will pay to the underwriter (as discussed in Note 6). There will be no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.
If a stockholder vote is not required and the Company does not decide to hold a stockholder vote for business or other legal reasons, the Company will, pursuant to its Amended and Restated Certificate of Incorporation, offer such redemption pursuant to the tender offer rules of the Securities and Exchange Commission (the “SEC”), and file tender offer documents containing substantially the same information as would be included in a proxy statement with the SEC prior to completing a Business Combination.
The Company’s Sponsor has agreed (a) to vote its Founder Shares (as defined in Note 5) and any Public Shares purchased during or after the Initial Public Offering in favor of a Business Combination, (b) not to propose an amendment to the Company’s Amended and Restated Certificate of Incorporation with respect to the Company’s pre-Business Combination activities prior to the consummation of a Business Combination unless the Company provides dissenting public stockholders with the opportunity to redeem their Public Shares in conjunction with any such amendment; (c) not to redeem any shares (including the Founder Shares) into the right to receive cash from the Trust Account in connection with a stockholder vote to approve a Business Combination (or to sell any shares in a tender offer in connection with a Business Combination if the Company does not seek stockholder approval in connection therewith) or a vote to amend the provisions of the Amended and Restated Certificate of Incorporation relating to stockholders’ rights of pre-Business Combination activity and (d) that the Founder Shares shall not participate in any liquidating distributions upon winding up if a Business Combination is not consummated. However, the Sponsor will be entitled to liquidating distributions from the Trust Account with respect to any Public Shares purchased during or after the Initial Public Offering if the Company fails to complete its Business Combination.
If the Company is unable to complete a Business Combination by May 10, 2022 (the “Combination Period”), the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than ten business days thereafter, redeem the public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned on the funds held in the Trust Account and not previously released to us to pay taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders’ rights as stockholders (including the right to receive further liquidation distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining stockholders and the Company’s board of directors, proceed to commence a voluntary liquidation and thereby a formal dissolution of the Company, subject in each case to its obligations under Delaware law to provide for claims of creditors and the requirements of applicable law. The underwriter has agreed to waive its rights to the deferred underwriting commission held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the amount initially deposited into the Trust Account ($10.20).
The Sponsor has agreed that it will be liable to the Company if and to the extent any claims by a third party for services rendered or products sold to the Company, or a prospective target business with which the Company has entered into a written letter of intent, confidentiality or similar agreement or Business Combination agreement, reduce the amount of funds in the Trust Account to below the lesser of (i) $10.20 per Public Share and (ii) the actual amount per Public Share held in the Trust Account as of the day of liquidation of the Trust Account, if less than $10.20 per share due to reductions in the value of the trust assets, less taxes payable, provided that such liability will not apply to any claims by a third party or prospective target business who executed a waiver of any and all rights to monies held in the Trust Account (whether or not such waiver is enforceable) nor will it apply to any claims under the Company’s indemnity of the underwriter of Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). However, the Company has not asked the Sponsor to reserve for such indemnification obligations, nor has the Company independently verified whether the Sponsor has sufficient funds to satisfy its indemnity obligations and believe that the Sponsor’s only assets are securities of the Company. Therefore, the Company cannot assure its stockholders that the Sponsor would be able to satisfy those obligations. None of the Company’s officers or directors will indemnify the Company for claims by third parties including, without limitation, claims by vendors and prospective target businesses. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers, prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
Risks and Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying
consolidated financial statements are presented in conformity with accounting principles generally accepted in the
United States of AmericaU.S. (“
U.S. GAAP”) and pursuant to the rules and regulations of the
SEC.Emerging Growth Company
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 Company is an “emerging growth company,” as defined in Section 2(a)accompanying consolidated financial statements include the results of operations of the Securities Act, as modified byCompany and its majority owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),current year presentation. All dollar amounts are in thousands, unless otherwise noted. Share and it may take advantage of certain exemptions from various reporting requirements thatper share amounts are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404presented on a post-conversion basis for all periods presented, unless otherwise noted.
The global outbreak of the
Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being requiredCOVID-19 pandemic continue to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.rapidly evolve. The Company has electedtaken a number of measures to monitor and mitigate the effects of COVID-19, such as safety and health measures for the employees and securing the supply of materials that are essential to the Company’s production process. At this stage, the impact on the Company’s business and results has not to opt outbeen significant. However, the ultimate impact of such extended transition periodthe pandemic on our operations is unknown and will depend on future developments, which meansare highly uncertain and cannot be predicated with confidence, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, required social distancing and any additional preventative and protective actions that when a standard is issuedgovernments, or revised and it has different application dates for public or private companies, the Company, asmay direct, which could result in an emerging growth company, can adopt the newextended period of continued business disruption, reduced customer, collaborator, or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
supplier traffic and reduced operations.
The preparation of the
consolidated financial statements
in conformity with GAAP requires management to make
a number of estimates and assumptions
that affectrelating to the reported
amountsamount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the
reporting period.
Making The Company bases its estimates requireson 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 exercise significant judgment. It is at least reasonably possible thatmake estimates include the estimatevaluation of equity instruments, measurement of changes in the fair value of earnout consideration liability, estimates of derivative liability associated with the exchangeable notes due December 2026, which will be marked to market each quarter based on a Lattice model approach, changes in the fair value of warrant liabilities, valuation allowances on deferred tax assets which are based on an assessment of recoverability of the effect of a condition, situation or set of circumstances that existed at the datedeferred tax assets against future taxable income and estimates of the financial statements, which management considered in formulating its estimate, could change ininputs used to calculate the near term due to one or more future confirming events. Accordingly,tax receivable agreement liability. See Note 7, 9 and 11 for further discussion of the actual results could differ significantly from those estimates.
nature of these assumptions and conditions. Cash and Cash Equivalents
The Company considers all
Cash and cash equivalents consist of cash and short-term investments with an original maturitymaturities from the purchase date of three months or less when purchasedthat can be readily convertible into known amounts of cash. Cash and cash equivalents are held at recognized U.S. financial institutions. Interest earned on the short-term investments is reported in the consolidated statements of operations. The carrying amount of cash and cash equivalents approximates its fair value due to its short and liquid nature.
Accounts Receivable
Accounts receivable are recognized net of allowances for doubtful accounts. In the normal course of business, the Company extends credit to customers that satisfy predefined credit criteria. The Company is required to estimate the
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
collectability of its receivables. Reserves for estimated bad debts are established at the time of sale and are based on an evaluation of accounts receivable aging, and, where applicable, specific reserves on a customer-by-customer basis, creditworthiness of the Company’s customers and prior collection experience to estimate the ultimate collectability of these receivables. At the time the Company determines that a receivable balance, or any portion thereof, is deemed to be cash equivalents.permanently uncollectible, the balance is then written off. The Company did not recognize any accounts receivable allowance for doubtful accounts at December 31, 2021 and 2020.
Inventories
Inventories are stated at the lower of cost or net realizable value, using the first-in, first-out method. Inventories consist of raw material, work in process and finished goods. The Company establishes reserves as necessary for obsolescence and excess inventory. The Company records a reserve for excess and obsolete inventory based upon a calculation using the historical experience, expected future sales volumes, the projected expiration of inventory and specifically identified obsolete inventory.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which ranges from one to ten years. Leasehold improvements are recorded at cost, less accumulated amortization, which is computed on straight-line basis over the shorter of the useful lives of the assets or the remaining lease term. Expenditures for maintenance and repairs are charged to expense as incurred. The Company evaluates the depreciation periods of property and equipment to determine whether events or circumstances indicate that the asset’s carrying value is not recoverable or warrant revised estimates of useful lives.
Revenue Recognition
The Company recognizes revenue in accordance with accounting standard 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
cash equivalentscontract assets or liabilities as of December 31,
2021 and 2020.
Marketable Securities Held in Trust Account
At December 31, 2020, substantially all
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 assets heldinvoice, 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 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
Trust Account were heldconsideration the Company expects to receive in
money market funds which are primarily invested in U.S. Treasury securities.Class A Common Stock Subject to Possible Redemption
exchange for those products or services. The Company accounts for shipping and handling as activities to fulfill its Classpromise to transfer the associated products to its customers. Accordingly, the Company records amounts billed to customers for shipping and handling as revenue. Revenue is recognized net of variable consideration such as discounts , rebates, and returns.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
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 common stock subjectprovision 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 possible redemption in accordancethe 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 guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Class A common stock subjectcalendar year. This rebate is estimated and updated throughout the year and recorded against revenues and the related accounts receivable. The Company did not have any contract assets or liabilities as of December 31, 2021 and 2020.
Shipping and Handling Costs
Amounts billed to mandatory redemption iscustomers for shipping and handling are classified as a liability instrumentrevenue. Costs incurred in shipping and is measured at fair value. Conditionally redeemable common stock (including common stock that features redemption rights that is either withinhandling are recognized in Cost of goods sold in the controlconsolidated statements of operations. Total Shipping and handling costs were approximately $2,308, $1,596, and $1,752, for the holder or subject to redemption uponyears ended December 31, 2021, 2020, and 2019, respectively.
Advertising
The Company expenses the occurrencecost of uncertain events not solely withinadvertising as incurred. Advertising expense of approximately $17,434, $181, and $313 for the Company’s control) is classified as temporary equity. At all other times, common stock is classified as stockholders’ equity. The Company’s Class A common stock features certain redemption rights thatyears ended December 31, 2021, 2020, and 2019, respectively, were included in Selling, general and administrative expenses in the consolidated statements of operations.
Income Taxes
Income taxes are
considered to be outside of the Company’s control and subject to occurrence of uncertain future events. Accordingly, Class A common stock subject to possible redemption is presented at redemption value as temporary equity, outside of the stockholders’ equity section of the Company’s balance sheet.Offering Costs
Offering costs consist of legal, accounting, underwriting fees and other costs incurred through the balance sheet date that are directly relatedapplied to the Initial Public Offering. Offering costs amountingincome attributable to $13,206,613 were chargedthe controlling interest (see Note 8 ) as the income attributable to stockholders’ equity upon the completion of the Initial Public Offering.
Income Taxes
non-controlling interest is pass-through income. The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes
The Company will continue to evaluate the realizability of our deferred tax assets and liabilities on a recognition thresholdquarterly basis, and will adjust such amounts in light of changing facts and circumstances, including but not limited to future projections of taxable income, tax legislation, rulings by relevant tax authorities and the progress of ongoing tax audits, if any. we consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized in future periods.
The Company was not subject to income taxes due to the then equity structure of the Company prior to Business Combination and was subject to pass through income taxes. Federal, state and local income tax returns for years prior to 2019 are no longer subject to examination by tax authorities.
Equity-Based Compensation
The Company has equity-based compensation plans and a measurement attributeprofits interest which are described in more detail in Note 9. Compensation cost relating to equity-based awards as provided by the arrangements are recognized in the consolidated statements of operations over the requisite service period based on the grant date fair value of such awards. The Company determines the fair value of each option on the date of grant using the Black‑Scholes option pricing model, which is impacted by the fair value of common stock, expected price volatility of common stock, expected term, risk-free interest rates, forfeiture rate and expected dividend yield. Forfeitures are estimated at the time of grant and revised, if necessary, in
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
subsequent periods if actual forfeitures differ from those estimates, in order to derive the Company’s best estimate of awards ultimately expected to vest.
Earnout Consideration
As a result of the Business Combination, certain of 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 (collectively, the “Earnouts”). The valuation of the Earnouts was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. The Company classifies the Earnouts as liabilities at their fair value on the consolidated balance sheet and adjusts the fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in revaluation of Earnout consideration liability in the Company's consolidated statements of operations. A portion of the liability was considered compensation and expensed. See Note 9.
Warrant Liability
The Company accounts for the financial statement recognitionwarrants in accordance with the guidance contained in ASC 815 under which the warrants do not meet the criteria for equity treatment and measurementmust be recorded as liabilities. Accordingly, the Company classifies the warrants as liabilities at their fair value within warrant liability on the consolidated balance sheet and adjusts the warrants to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in revaluation of tax positions taken or expected to be takenwarrant liability in the Company's consolidated statements of operations. The Private Placement Warrants were valued using a Black-Scholes option pricing model. The Public Warrants were valued using the quoted market price as the fair value at the end of each balance sheet date. See Note 11 for more details.
Tax Receivable Liability
As a result of the Business Combination, the Company entered into a tax return. For those benefitsreceivable agreement (the “Tax Receivable Agreement”) with Holdings and holders of interests in Holdings. Pursuant to be recognized,the Tax Receivable Agreement, the Company is required to pay to participating holders of membership units in Holdings 90% of the amount of savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of the utilization of certain tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.attributes. The Company recognizes accrued interest and penalties related to unrecognizedrecorded $24,500 in tax benefits, if any, as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penaltiesreceivable liability which is recognized in the Company's balance sheet as of December 31, 2020. 2021.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses primarily include expenses related to salaries and commissions, transaction costs, and professional fees. Included in SG&A during the years ended December 31, 2021, 2020, and 2019 were salaries and commissions of $16,103, $12,650, and $14,824, transaction costs of $2,784, $264, and $1,065 and professional fees of $8,350, $6,536, and $4,546, respectively.
Net Income (Loss) Per Share
The Company
is currently not awarecomplies with accounting and disclosure requirements of
any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject toFASB ASC Topic 260, “Earnings Per Share”. Net income
tax examinations by major taxing authorities since inception.On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increasing the limitation under Section 163(j) of the Internal Revenue Code of 1986, as amended (the “IRC”) for 2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimum tax credits. Given the Company’s full valuation allowance position and capitalization of all costs, the CARES Act did not have an impact on the financial statements.
Net Loss Per Common Share
Net loss(loss) per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. The Company has not considered the effect of the warrants sold in the Initial Public Offering and private placement warrants to purchase an aggregate of 22,415,400 shares in the calculation of diluted loss per share, since the exercise of the warrants are contingent upon the occurrence of future events and the inclusion of such warrants would be anti-dilutive.
The Company’s statement of operations includes a presentation of loss per share for common shares subject to possible redemption in a manner similar to the two-class method of loss per share. Net loss per common share, basic and diluted, for common stock subject to possible redemption is calculated by dividing the proportionate share of income or loss on marketable securities held by the Trust Account by the weighted average number of common stock subject to possible redemption outstanding since original issuance.
Net loss per share, basic and diluted, for non-redeemable common stock is calculated by dividing the net loss, adjusted for income or loss on marketable securities attributable to common stock subject to possible redemption, by the weighted average number of non-redeemable shares of common stock outstanding for the period.
Non-redeemable The weighted-average number of common shares outstanding during the period includes Class A common stock includes Founder Shares and non-redeemable sharesbut is exclusive of Class B common stock as these shares do not have any redemption features. Non-redeemable commonno economic or participating rights. The Company applies the lower of the treasury stock participatesmethod or the two-class method in thecalculating net income or loss on marketable securities based on non-redeemable shares’ proportionate interest.
The following table reflects the calculation of basic and diluted net loss(loss) per common share (in dollars, exceptshare. Diluted net income per share amounts):
| | | For the Period
from
August 21, 2020
(inception)
Through
December 31,
2020 | |
| Class A Common stock subject to possible redemption | | | | |
| Numerator: Earnings allocable to common stock subject to possible redemption | | | | |
| Interest earned on marketable securities held in Trust Account | | $ | 22,970 | |
| Unrealized gain on marketable securities held in Trust Account | | | 919 | |
| Less: interest available to be withdrawn for payment of taxes | | | (23,889 | ) |
| Net Income | | $ | — | |
| Denominator: Weighted Average Class A common stock subject to possible redemption | | | | |
| Basic and diluted weighted average shares outstanding | | | 21,828,647 | |
| Basic and diluted net income per share | | $ | 0.00 | |
| | | | | |
| Non-Redeemable Common Stock | | | | |
| Numerator: Net Loss minus Net Earnings | | | | |
| Net Loss | | $ | (165,106 | ) |
| Net income allocable to Class A common stock subject to possible redemption | | | — | |
| Non-Redeemable Net Loss | | $ | (165,106 | ) |
| Denominator: Weighted Average Non-Redeemable Common Stock | | | | |
| Basic and diluted weighted average shares outstanding, Non-Redeemable common stock, | | | 6,078,552 | |
| Basic and diluted net loss per share, Non-Redeemable | | $ | (0.03 | ) |
Concentrationis computed by dividing the net income by the basic weighted-average number of common shares outstanding during the period, adjusted for the potentially dilutive shares of common stock
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
equivalents resulting from the assumed exercise of the warrants, Earnouts, equity awards, Class B units and exchangeable notes only if the effect is not anti-dilutive.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash, cash equivalents, short-term investments and accounts receivable. The Company’s primary exposure is credit risk on receivables as the Company does not require any collateral for its accounts receivable. Credit risk is the loss that may result from a cash accounttrade customer’s or counterparty’s nonperformance. The Company uses credit policies to control credit risk, including utilizing an established credit approval process, monitoring customer and counterparty limits, monitoring changes in a customer’s credit rating, employing credit mitigation measures such as analyzing customers’ financial institution, which,statements, and accepting personal guarantees and various forms of collateral. The Company believes that its customers and counterparties will be able to satisfy their obligations under their contracts.
The Company maintains cash, cash equivalents with approved federally insured financial institutions. Such deposit accounts at times may exceed
federally insured limits. The Company is exposed to credit risks and liquidity in the
Federal Deposit Insurance Corporation maximumevent of
$250,000.default by the financial institutions or issuers of investments in excess of FDIC insured limits. The Company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any institution if required. The Company has not experienced
any losses on
this account.
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 Instrumentsfinancial 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 consisted of cash and cash equivalents, accounts receivable and accounts payable, debt, warrants and earnout consideration. Cash and cash equivalents consisted of bank deposits and short-term investments, such as money market funds, the fair value of which is based on quoted market prices, a Level 1 fair value measure. As of December 31, 2021 and December 31, 2020, the carrying values of cash, accounts receivable and accounts payable approximate fair value because of the short-term maturity of these instruments. The fair value of the
Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,”Company's debt approximates the carrying
amounts represented in the balance sheet, primarily due to their short-term nature.Recent Accounting Standards
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
NOTE 3. INITIAL PUBLIC OFFERING
Pursuant to the Initial Public Offering, the Company sold 22,000,000 Units at a purchase price of $10.00 per Unit. In connection with the underwriters’ partial exercise of the over-allotment option on November 17, 2020, the Company sold an additional 1,156,000 Units, at a purchase price of $10.00 per Unit. Each Unit consists of one share of the Company’s Class A common stock, $0.0001 par value and one-half of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (see Note 7).
NOTE 4. PRIVATE PLACEMENT
Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 10,375,000 Private Placement Warrants at a price of $1.00 per Private Placement Warrant, or $10,375,000 in the aggregate, each exercisable to purchase one share of Class A common stock at a price of $11.50 per share. In connection with the underwriters’ partial exercise of the over-allotment option on November 17, 2020, the Company sold an additional 462,400 Private Placement Warrants, at a purchase price of $1.00 per Private Placement Warrant, for an aggregate purchase price of $462,400. The proceeds from the sale of the Private Placement Warrants were added to the proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Private Placement Warrants will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Private Placement Warrants will expire worthless.
NOTE 5. RELATED PARTY TRANSACTIONS
Founder Shares
On August 26, 2020, the Sponsor paid $25,000 to cover certain offering costs of the Company in consideration for 7,906,250 shares of Class B common stock (the “Founder Shares”). On October 26, 2020, the Sponsor returned to the Company, at no cost, an aggregate of 1,581,250 Founder Shares which the Company cancelled, resulting in an aggregate of 6,325,000 Founder Shares outstanding. The Founder Shares included an aggregate of up to 825,000 shares subject to forfeiture by the Sponsor to the extent that the underwriter’s over-allotment option was not exercised in full or in part, so that the Sponsor would collectively own, on an as-converted basis, 20% of the Company’s issued and outstanding shares after the Initial Public Offering (assuming the Sponsor did not purchase any Public Shares in the Initial Public Offering). In connection with the underwriters’ partial exercise of the over-allotment option and the forfeiture of the remaining over-allotment option, 536,000 Founder Shares were forfeited and 289,000 Founder Shares are no longer subject to forfeiture resulting in an aggregate of 5,789,000 Founder Shares outstanding at December 31, 2020.
The Sponsor has agreed not to transfer, assign or sell any of its Founder Shares until the earlier to occur of: (A) one year after the completion of a Business Combination or (B) the date on which the Company completes a liquidation, merger, capital stock exchange or similar transaction that results in the Company’s stockholders having the right to exchange their shares of common stock for cash, securities or other property. Notwithstanding the foregoing, if the last sale price of the Company’s Class A common stock equals or exceeds $12.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after the Business Combination, the Founder Shares will be released from the lock-up.
Administrative Support Agreement
The Company entered into an agreement, commencing on November 6, 2020, to pay the Sponsor a total of $10,000 per month for office space, utilities and secretarial and administrative support. Upon completion of the Business Combination or the Company’s liquidation, the Company will cease paying these monthly fees. For the period from August 21, 2020 (inception) through December 31, 2020, the Company incurred and paid $14,450 in fees for these services.
Promissory Note — Related Party
On August 26, 2020, the Sponsor agreed to loan the Company an aggregate of up to $300,000 to cover expenses related to the Initial Public Offering pursuant to a promissory note (the “Note”). The Note was non-interest bearing and was payable on the earlier of March 31, 2021 or the completion of the Initial Public Offering. The outstanding balance under the Note of $95,657 was repaid at the closing of the Initial Public Offering on November 10, 2020.
Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Company’s Sponsor, an affiliate of the Sponsor, or the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (the “Working Capital Loans”). Such Working Capital Loans would be evidenced by promissory notes. The notes would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $1,500,000 of notes may be converted upon consummation of a Business Combination into warrants at a price of $1.00 per warrant. The warrants will be identical to the Private Placement Warrants. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans but no proceeds held in the Trust Account would be used to repay the Working Capital Loans.
NOTE 6. COMMITMENTS
Registration Rights
Pursuant to a registration and shareholder rights agreement entered into on November 5, 2020, the holders of the Founder Shares, Private Placement Warrants and any warrants that may be issued upon conversion of the Working Capital Loans (and any shares of Class A common stock issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and upon conversion of the Founder Shares) are entitled to registration rights requiring the Company to register such securities for resale (in the case of the Founder Shares, only after conversion to our Class A common stock). The holders of the majority of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of a Business Combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act. The registration and shareholder rights agreement does not contain liquidating damages or other cash settlement provisions resulting from delays in registering the Company’s securities. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
Underwriting Agreement
The underwriters will be entitled to a deferred fee of $0.35 per Unit, or $8,104,600 in the aggregate. The deferred fee will become payable to the underwriter from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement.
NOTE 7. STOCKHOLDERS’ EQUITY
Preferred Stock — The Company is authorized to issue 1,000,000 shares of $0.0001 par value preferred stock. At December 31, 2020, there were no shares of preferred stock issued or outstanding.
Class A Common Stock— The Company is authorized to issue up to 200,000,000 shares of Class A, $0.0001 par value common stock. Holders of the Company’s common stock are entitled to one vote for each share. At December 31, 2020, there were 1,190,247 shares of Class A common stock issued and outstanding, excluding 21,965,753 shares of Class A common stock subject to possible redemption.
Class B Common Stock — The Company is authorized to issue up to 20,000,000 shares of Class B, $0.0001 par value common stock. Holders of the Company’s common stock are entitled to one vote for each share. As of December 31, 2020, there were 5,789,000 shares of Class B common stock outstanding.
The shares of Class B common stock will automatically convert into shares of Class A common stock at the time of the Business Combination on a one-for-one basis, subject to adjustment. In the case that additional shares of Class A common stock, or equity linked securities, are issued or deemed issued in excess of the amounts offered in the Initial Public Offering and related to the closing of a Business Combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as converted basis, 20% of the sum of the total number of all shares of common stock outstanding upon the completion of the Initial Public Offering plus all shares of Class A common stock and equity linked securities issued or deemed issued in connection with a Business Combination (excluding any shares or equity linked securities issued, or to be issued, to any seller in a Business Combination, and any private placement-equivalent warrants issued to the Sponsor or its affiliates upon conversion of loans made to the Company).
Warrants — Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants will become exercisable on the later of (a) 30 days after the consummation of a Business Combination or (b) 12 months from the closing of the Initial Public Offering. The Public Warrants will expire five years from the consummation of a Business Combination or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any Class A common stock pursuant to the exercise of a Public Warrant and will have no obligation to settle such Public Warrant exercise unless a registration statement under the Securities Act covering the issuance of the Class A common stock issuable upon exercise of the Public Warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. No warrant will be exercisable and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered, qualified or deemed to be exempt under the securities laws of the state of residence of the registered holder of the warrants. The Company has agreed that as soon as practicable, but in no event later than 15 business days after the closing of a Business Combination, it will use its best efforts to file with the SEC a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants, to cause such registration statement to become effective and to maintain a current prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed, as specified in the warrant agreement. If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the 60th business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption. Notwithstanding the foregoing, if a registration statement covering the Class A common stock issuable upon exercise of the warrants is not effective within a specified period following the consummation of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act of 1933, as amended, or the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis.
Once the Public Warrants become exercisable, the Company may redeem the Public Warrants for redemption:
in whole and not in part;
at a price of $0.01 per Public Warrant;
upon not less than 30 days’ prior written notice of redemption to each warrant holder; and
if, and only if, the reported last reported sale price of the Class A common stock for any 20 trading days within a 30-trading day period ending three business days before the Company sends the notice of redemption to the warrant holders equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like).
If and when the Public Warrants become redeemable by the Company, the Company may not exercise its redemption right if the issuance of shares of common stock upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws or the Company is unable to effect such registration or qualification.
The exercise price and number of shares of Class A common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, or recapitalization, reorganization, merger or consolidation. Additionally, in no event will the Company be required to net cash settle the Public Warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants. Accordingly, the warrants may expire worthless. If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of common shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with respect to such warrants. Accordingly, the warrants may expire worthless.
In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of its initial Business Combination at an issue price or effective issue price of less than $9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of the Company’s initial Business Combination on the date of the consummation of such initial Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s common stock during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the greater of the Market Value and the Newly Issued Price and the $18.00 per share redemption trigger price described above will be adjusted (to the nearest cent) to be equal to 180% of the greater of the Market Value and the Newly Issued Price.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants will and the shares of Class A common stock issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions. Additionally, the Private Placement Warrants will be exercisable on a cashless basis and will be non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
NOTE 8. INCOME TAX
The Company’s net deferred tax liability at December 31, 2020 is as follows:
| | | December 31, | |
| | | 2020 | |
| Deferred tax asset (liability) | | | | |
| Organizational/Start-up costs | | $ | 24,416 | |
| Net operating loss carryforward | | | 10,449 | |
| Unrealized gain on marketable securities | | | (193 | ) |
| Total deferred tax assets, net | | | 34,672 | |
| Valuation Allowance | | | (34,672 | ) |
| Deferred tax liability, net of valuation allowance | | $ | — | |
The income tax provision for the period from August 21, 2020 (inception) through December 31, 2020 consists of the following:
| | December 31, | |
| | 2020 | |
Federal | | | | |
Current | | $ | — | |
Deferred | | | (34,672 | ) |
| | | | |
State and Local | | | | |
Current | | | — | |
Deferred | | | — | |
| | | | |
Change in valuation allowance | | | 34,672 | |
| | | | |
Income tax provision | | $ | — | |
As of December 31, 2020, the Company had $49,757 U.S. federal net operating loss carryover available to offset future taxable income.
In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance. For the period from August 21, 2020 (inception) through December 31, 2020, the change in the valuation allowance was $34,672.
A reconciliation of the federal income tax rate to the Company’s effective tax rate at December 31, 2020 is as follows:
| | December 31,
2020 | |
Statutory federal income tax rate | | | 21.0 | % |
State taxes, net of federal tax benefit | | | 0.0 | % |
Change in valuation allowance | | | (21.0 | )% |
Income tax provision | | | (0.0 | )% |
The Company files income tax returns in the U.S. federal jurisdiction and is subject to examination by the various taxing authorities. The Company's tax returns since inception remain open to examination by the taxing authorities.
NOTE 9. FAIR VALUE MEASUREMENTS
presented. The Company follows the guidance in ASC Topic 820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period,period. See Note 11.
Segments
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
The Company is managed and non-financialoperated as 1 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 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 prepare discrete financial information to allocate resources to separate products or by location. Accordingly, the Company views its business as 1 reportable operating segment.
Recent Accounting Pronouncements – Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have an impact on the Company’s financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” Topic 842, which amends the guidance in former ASC Topic 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases longer than 12 months. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For lessees, leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The Company adopted the new lease guidance effective January 1, 2021 using the modified retrospective transition approach , applying the new standard to all of its leases existing at the date of initial application which is the effective date of adoption. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2021. The Company elected the package of practical expedients which permits to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment. The adoption of the lease standard did not change the Company’s previously reported consolidated statements of operations and did not result in a cumulative catch-up adjustment to opening equity. The adoption of the new guidance resulted in the recognition of ROU assets of $6,298 and lease liabilities of $6,875. The difference between the ROU assets and the lease liabilities is primarily due to unamortized lease incentive and deferred rent related to the Company’s operating leases at December 31, 2020.
The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilized its incremental borrowing rate (“IBR”), which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. In calculating the present value of the lease payments, the Company elected to utilize its incremental borrowing rate based on the remaining lease terms as of the January 1, 2021 adoption date. The Company utilized a synthetic credit rating model including fundamental analysis per S&P Global Market Intelligence. The Company then utilized the Bloomberg BVAL Pricing Source to determine the option-adjusted spread and added the United States Treasury Constant Maturity for the applicable terms to determine the term structure of the IBR. Based on these calculations, the Company determined applicable discount rates for various points along the yield curve as of January 1, 2021. As a reasonableness check for the yield curve, the Company considered its then revolving credit agreement amendment on November 5, 2020, which extended the term of the agreement through November 5, 2023. The base interest rate on the loan was calculated as LIBOR plus 300 bps which approximates 3.41%. This rate was generally
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
consistent with the yield curve derived, thus the Company determined that the yield curve was appropriate for determining the discount rates for its leases. The Company then interpolated the discount rates in the yield curve to determine the discount rate for each of its existing leases at January 1, 2021.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives incurred, if any. The Company’s lease terms may include options to extend the lease when it is reasonably certain that we will exercise that option. Our leases have remaining lease terms of 1 year to 5 years, some of which include options to extend the lease term for up to 3 years.
The Company has elected the practical expedient to combine lease and non-lease components as a single component. The lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.
The new standard also provides practical expedients and certain exemptions for an entity’s ongoing accounting. The Company has elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases where the initial lease term is one year or less or for which the ROU asset at inception is deemed immaterial, the Company will not recognize ROU assets or lease liabilities. Those leases are expensed on a straight line basis over the term of the lease.
Operating Leases
The Company through its wholly-owned subsidiary Holdings leases certain office space and manufacturing space under arrangements currently classified as leases under ASC 842. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal options ranging from 1 to 5 years. The exercise of lease renewal options is at the Company’s sole discretion.
Effective April 1, 2012, the Company entered into a 10-year lease for its office and manufacturing facilities in Somerset, New Jersey terminating in 2022. The lease contains escalating rental payments, exclusive of required payments for increases in real estate taxes and operating costs over base period amounts. The agreement provides for a five year renewal option. The lease provides for monthly payments of rent during the lease term. These payments consist of base rent, and additional rent covering customary items such as charges for utilities, taxes, operating expenses, and other facility fees and charges. The base rent is currently approximately $324 per year, which reflects an annual 3% escalation factor. The Company exercised its renewal option in December 2020.
Effective August 1, 2014, the Company entered into a 4-year lease for additional office and manufacturing space in Somerset, New Jersey terminating in July 31, 2018. The lease contains escalating rental payments. The Company has the option to extend the term for 2 periods of two years each. The Company has exercised both renewal options with last one exercised in 2020. The base rent is currently approximately $106 per year, which reflects an annual 3% escalation factor.
Effective June 16, 2016, the Company entered into a 10-year lease for a new facility. The lease contains escalating rental payments and terminates on September 30, 2026. The agreement also provides for a renewal option at a fixed rate. The base rent is currently approximately $825 per year, which reflects an annual 3% escalation factor.
The Company’s leases have remaining lease terms of 1 to 5 years. The Company does not include any renewal options in lease terms when calculating lease liabilities as the Company is not reasonably certain that it will exercise these options. Two of our leases include the early termination option in the lease term, however, it was not included in the lease terms when calculating the lease liability since the Company determined that it is reasonably certain it will not terminate the leases prior to the termination date.
The weighted-average remaining lease term for our operating leases was 4.8 years at December 31, 2021. The weighted-average discount rate was 3.73% at December 31, 2021.
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
ROU assets and lease liabilities related to our operating leases are as follows:
| | | | | | | | | | | |
| Balance Sheet Classification | | December 31, 2021 |
| Right-of-use assets | Right of use assets | | $ | 5,246 | |
| Current lease liabilities | Current portion of lease liabilities | | 1,119 | |
| Non-current lease liabilities | Non-current portion of lease liabilities | | 4,709 | |
The Company has lease agreements that contain both lease and non-lease components. The Company accounts for lease components together with non-lease components (e.g., common-area maintenance). Variable lease costs are based on day to day common-area maintenance costs related to the lease agreements and are recognized as incurred. The components of lease costs were as follows:
| | | | | |
| Twelve-month period ended December 31, 2021 |
| Operating lease cost | $ | 1,305 | |
| Variable lease cost | 444 | |
| Total lease cost | $ | 1,749 | |
Future minimum commitments under all non-cancelable operating leases are as follows:
| | | | | |
| 2022 | $ | 1,294 | |
| 2023 | 1,298 | |
| 2024 | 1,263 | |
| 2025 | 1,302 | |
| 2026 | 1,096 | |
| Later years | 97 | |
| Total lease payments | 6,350 | |
| Less: Imputed interest | 522 | |
| Present value of lease liabilities | $ | 5,828 | |
Supplemental cash flow information and non-cash activity related to our operating leases are as follows:
| | | | | |
| Twelve-month period ended December 31, 2021 |
| Operating cash flow information: | |
| Cash paid for amounts included in the measurement of lease liabilities | $ | 1,272 | |
| Non-cash activity: | |
| Right-of-use assets obtained in exchange for lease obligations | $ | — | |
Recent Accounting Pronouncements – Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform ("ASU 2020-04"). ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are re-measuredexpected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. However, it cannot be applied to contract modifications that occur after December 31, 2022. LIBOR was expected to be phased out at the end 2021. We do not currently have any
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
contracts that have been changed to a new reference rate, but we will continue to evaluate our contracts and the effects of this standard on our consolidated financial statements prior to adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This ASU provides guidance for recognizing credit losses on financial instruments based on an estimate of current expected credit losses model. This new standard amends the current guidance on the impairment of financial instruments and adds an impairment model known as current expected credit loss (CECL) model that is based on expected losses rather than incurred losses. Under the new guidance, an entity will recognize as an allowance its estimate of expected credit losses. The FASB subsequently issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses to clarify and address certain items related to the amendments in ASU 2016-13. ASC 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim reporting periods within those fiscal years with early adoption permitted. The Company does not anticipate a significant impact on its consolidated financial statements based on its historical trend of bad debt expense relating to trade accounts receivable.
3. BUSINESS COMBINATION
On December 27, 2021 (the “Closing Date”), Roman DBDR consummated its Business Combination, pursuant to that Merger Agreement dated April 19, 2021, by and among Roman DBDR, Merger Sub, Holdings and LLR Equity Partners IV, L.P. as subsequently amended by that certain Amendment No. 1 to the Merger Agreement dated as of May 25, 2021 (the “First Amendment” and the Original Merger Agreement as amended by the First Amendment, the “Merger Agreement”). Holdings is considered the Company’s accounting predecessor. On the Closing Date, the Merger Sub of Roman DBDR merged with and into Holdings, with Holdings surviving as a wholly owned subsidiary of Roman DBDR. Upon consummation of the Business Combination, Holdings amended and restated its limited liability company agreement (the “Second Amended and Restated LLC Agreement”) and the holders of issued and outstanding equity of Holdings received a combination of cash consideration, certain newly-issued membership units of Holdings (each, a “Holdings Unit”) and shares of newly-issued Class B Common Stock of the Company, which have no economic value, but entitle the holder to 1 vote per issued share and were issued on a 1-for-one basis for each Holdings Unit retained by the holder following the Merger; the holders of outstanding options to purchase Holdings equity received a combination of cash consideration and options to purchase shares of Class A Common Stock of the Company and the Company received all of the voting units in Holdings. The Holdings' Second Amended and Restated LLC Agreement, together with an Exchange Agreement entered into at the closing of the transactions contemplated by the Merger Agreement, provides the holders of Holdings Units the right to exchange the Holdings Units, together with the cancellation of an equal number of shares of Class B Common Stock, for Class A Common Stock, subject to certain restrictions set forth therein.
Following the Closing, the Company is organized in an “Up-C” structure with a Board of Managers appointed by the Board of Directors of the Company controlling Holdings in accordance with the terms of the Holdings' Second Amended and Restated LLC Agreement. In addition to the consideration paid at Closing as described above, Holdings' equity holders have the right to receive an aggregate of up to 7,500,000 additional (i) shares of Class A Common Stock or (ii) Holdings Units (and a corresponding number of shares of Class B Common Stock), as applicable, in earn-out consideration based on the achievement of certain stock price thresholds (collectively, the “Earnouts”).
Concurrent with Closing, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with Holdings and holders of interests in Holdings. Pursuant to the Tax Receivable Agreement, the Company is required to pay to participating holders of membership units in Holdings 90% of the amount of savings, if any, in U.S. federal, state and local income tax that the Company actually realizes as a result of the utilization of certain tax attributes. In addition, concurrent with the Closing, the Company entered into a stockholders agreement (the “Stockholders Agreement”) with certain equity holders of the Company relating to the voting for directors of the Company and containing certain lock-up
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
restrictions, as well as a registration rights agreement that provides customary registration rights to certain equity holders of the Company.
In connection with the execution of the Business Combination, the Company entered into separate subscription agreements (each, a "Subscription Agreement") with a number of investors ("Note Holders"), pursuant to which the Note Holders agreed to purchase, and the Company agreed to sell to the Note Holders, an aggregate of 4,500,000 shares of the Company's class A common stock (the "PIPE Shares"), for a purchase price of $10.00 per share and an aggregate purchase price of $45,000, in a private placement pursuant to the subscription agreements (the "PIPE"). The PIPE investment closed simultaneously with the consummation of the Business Combination.
The Business Combination is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, Roman DBDR was treated as the "acquired" company for financial reporting purposes. See Note 1, Description of Organization and Business Operations, for further details. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Holdings issuing stock for the net assets of Roman DBDR, accompanied by a recapitalization. The net assets of Roman DBDR are stated at historical cost, with no goodwill or other intangible assets recorded.
The following summarizes the net contributions received from the Business Combination and PIPE financing:
| | | | | |
| Recapitalization |
| Cash - Roman DBDR's trust and cash (net of redemptions) | $ | 47,359 | |
| Cash - PIPE (Common) | 45,000 | |
| Cash - PIPE (Exchangeable Notes) | 130,000 | |
| Less: transaction costs and advisory fees paid | (34,132) | |
| Net Business Combination and PIPE financing | $ | 188,226 | |
| |
| |
| |
The following table describes the number of shares of common stock issued immediately following the consummation of the Business Combination:
| | | | | |
| Number of Shares |
| Common stock, outstanding prior to Business Combination | 23,156,000 | |
| Less: redemption of Roman DBDR shares | (18,515,018) | |
| Common stock of Roman DBDR | 4,640,982 | |
| Roman DBDR Founder Shares | 5,789,000 | |
| Shares issued in PIPE | 4,500,000 | |
| Business Combination and PIPE financing shares - Class A common stock | 14,929,982 | |
| Class B common stock held by Holdings | 61,136,800 | |
| Total shares of common stock - Class A and Class B immediately after Business Combination | 76,066,782 | |
| |
4. REVENUE RECOGNITION
The Company recognizes revenue 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 as specified by each
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
purchase order are transferred to customers. Specific goods refers to the products offered by the Company, including metal cards, high-security documents, and pre-lam materials. Transfer of control passes to customers upon shipment or upon receipt, depending on the agreement with the individual customers. 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 order constitutes as 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. The Company accounts for shipping and handling as activities fulfill its promise to transfer the associated products to its customers. Accordingly, the Company records amounts billed for shipping and handling costs as a component of net sales, and classifies such costs as a component of costs of sales. Revenue is recognized net of variable consideration such as discounts, penalties, rebates, and returns. The Company’s products do not include an unmitigated right of return unless the product is damaged 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. Historically, returns have not been material to the Company.
Disaggregation of Revenue
The percentages present the Company’s revenue disaggregated by customer. The majority of the Company’s revenue is earned within these major contracts, with aggregate revenue from the three top customers comprising approximately 79.1%, 74.9% and 82.5% of total revenue in 2021, 2020 and 2019, respectively.
Significant Judgments in Application of the Guidance
The Company uses the following methods, inputs, and assumptions in determining amounts of revenue to recognize:
Determination of Transaction Price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring products to the customer. The Company includes any fixed charges within its contracts as part of the total transaction price. In addition, several contracts include variable consideration such as specific sales prices based on certain volume thresholds, discounts, penalties, rebates, refunds, and the customer’s right to return. The Company has concluded that its estimation of variable consideration results in an adjustment to the transaction price such that it is probable that a significant reversal of cumulative revenue would not occur in the future. The accrual for variable consideration is netted against the sale price in determining the transaction price.
Assessment of Estimates of Variable Consideration
Many of the Company’s contracts with customers contain some component of variable consideration. The Company estimates variable consideration, such as discounts, rebates such as volume based rebate, penalties, and credits, using the expected value method, and adjusts transaction price for its estimate of variable consideration. Throughout the year, we record an accrual that nets down our revenue based on our best estimate of the impact of variable consideration based on cards shipped in each month of the year. We regularly revisit this accrual throughout the year to ensure we are tracking to the correct offset. This effectively factors the volume based rebate into the transaction price. Therefore, management applies the constraint in its estimation of variable consideration for inclusion in the transaction price such that it is probable that a significant reversal of cumulative revenue would not occur in the future.
Allocation of Transaction Price
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
The transaction price (including any discounts) is allocated between goods in a multi-element arrangement based on their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells each good. For items that are not sold separately, the Company estimates the standalone selling prices using available information such as market conditions and internally approved pricing guidelines. Significant judgment may be required to determine standalone selling prices for each performance obligation and whether it depicts the amount the Company expects to receive in exchange for the related goods.
Practical Expedients and Exemptions
As permitted by ASC 606, the Company elected to use certain practical expedients in connection with the implementation of ASC 606. The Company treats shipping and handling activities as fulfillment activities. The Company treats costs associated with obtaining new contracts as expenses when incurred if the amortization period of the asset we would recognize is one year or less. The Company does not adjust the transaction price for significant financing components, as the Company’s contracts typically do not contain provisions for significant advance or deferred payments, nor do they span more than a one year period. The Company applies the optional exemption to not disclose information regarding the allocation of transaction price to remaining performance obligations with an original expected duration of less than one year. The Company applies the practical expedient to not separately evaluate the effects of each contract modification before January 1, 2019. The election of these practical expedients results in accounting treatments that the Company believes are consistent with historical accounting policies and, therefore, these elections of practical expedients do not have a material impact on the comparability of the consolidated financial statements.
5. INVENTORIES
The major classes of inventories were as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Raw materials | $ | 27,474 | | | $ | 27,157 | |
| Work in process | 582 | | | 1,055 | |
| Finished goods | 363 | | | 3,998 | |
| Inventory reserve | (2,613) | | | (2,013) | |
| $ | 25,806 | | | $ | 30,197 | |
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.
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Useful Life | | 2021 | | 2020 |
| Machinery and equipment | 5 - 10 years | | $ | 59,437 | | | $ | 57,360 | |
| Furniture and fixtures | 3 - 5 years | | 955 | | | 955 | |
| Computer equipment | 3 - 5 years | | 925 | | | 908 | |
| Leasehold improvements | Shorter of lease term
or estimated useful
life | | 11,358 | | | 10,875 | |
| Vehicles | 5 years | | 264 | | | 264 | |
| Software | 1 - 3 years | | 2,889 | | | 1,186 | |
| Construction in progress | | | 985 | | | 519 | |
| Total | | | 76,813 | | | 72,067 | |
| Less: Accumulated depreciation and amortization | | | (54,636) | | | (44,208) | |
| Property and equipment, net | | | $ | 22,177 | | | $ | 27,859 | |
Depreciation and amortization expense for the years ended December 31, 2021, 2020, and 2019, was $10,428, $9,916, and $8,606, respectively.
7. DEBT
Exchangeable Senior Notes
On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its wholly owned 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 wholly owned subsidiary, Holdings in an aggregate principal amount of up to $130,000,000 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 wholly owned subsidiary, Holdings and the trustee under the Indenture. The Exchangeable Notes will bear interest at a rate of 7% per annum, payable semiannually in arrears. The Exchangeable Notes will 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.
Exchangeable Note shall bear interest at the rate of 7.00% per year from December 27, 2021, or from the most recent date to which interest has been paid or provided for to, but excluding, the next scheduled interest payment date until December 15, 2026, unless earlier repurchased or converted pursuant to and in accordance with the provisions of the Indenture. Interest is payable semi-annually 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. Additional interest may be payable as set forth in the Indenture.
After the three-year anniversary of the Closing Date, the Exchangeable Senior 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
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
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.
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 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.
Exchangeable Notes contains customary anti-dilution adjustments, taking into account the agreed terms in Indenture. To avoid doubt, among other customary adjustments, this will include anti-dilution protections for dividends and distributions of the Company's capital stock, assets and indebtedness. Per 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
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
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% 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 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 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. The fair value of the optional redemption with a make-whole provision feature derivative was determined based on the difference between the fair value of the notes with the redemption with a make-whole provision feature and the fair value of the notes without the redemption with a make-whole provision feature. The Company employed a Lattice model and determined that the fair value of the derivative upon issuance of the notes was $552 and recorded this amount as derivative liability with an offsetting amount as a debt discount as a reduction to the carrying value of the notes on the closing date, or December 27, 2021. The optional redemption with a make-whole provision feature will be measured at fair value on a quarterly basis and the change in the fair value for the period will be recorded on the consolidated statements of operations. The Company determined that the change in fair value from December 27, 2021 to December 31, 2021 was not material.
The Company determined that the expected life of the Exchangeable Notes was equal to the period through December 27, 2026 as this represents the point at
least annually.which the Exchangeable Notes will mature unless earlier converted in accordance with their terms prior to such date. For the year ended December 31, 2021, the Company recognized $0.2 million of interest expense related to the Exchangeable Notes at the effective interest rate of 7.4%. The fair value of the Company’s financial assets and liabilities reflects management’s estimateExchangeable Notes approximate the carrying value of amounts thatthe debt.
In connection with the issuance of the Exchangeable Notes, the Company would have receivedincurred 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 life of the Exchangeable Notes using the effective interest method.
Term Loan
On July 26, 2016, the Company obtained a $120 million credit facility with JP Morgan Chase (“JPMC”) acting as the lending agent (“2016 Credit Facility”). The 2016 Credit Facility provided a revolving loan (“Revolver”) with a maximum aggregate amount of $40 million, and a $80 million term loan (“Term Loan”).
In July of 2019, the Company amended its 2016 Credit Facility with JPMC, increasing the maximum aggregate amount available under the revolver to $60,000 and the amount of the term loan to $140,000. In addition, the maturity date of both the revolver and term loan was amended to July 2, 2022. This amendment was accounted for as a modification and
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
approximately $1,065 of additional costs incurred in connection with the salemodification were capitalized as debt issuance costs. In connection with the amendment, the prior outstanding balance of $64,000 along with $100 of interest was paid-off. Further, two of the assets or paidlenders in the original agreement did not participate in the amended debt agreement. As such, the balances related to these two lenders were written off by the Company.
In November of 2020, the Company entered into a new agreement with JPMC to refinance its 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 transfer of the liabilities in an orderly transaction between market participants at the measurement date.modification capitalized as debt issuance costs. In connection with measuringthe amendment, the prior outstanding balance were paid-off. Further, one of the lenders in the original agreement did not participate in the amended debt agreement. As such, the balance related to that lender was written off by the Company.
In December of 2021, the Company entered into a new agreement with JPMC to refinance its then existing November 2020 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 date of both the revolver and term loan was 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 capitalized as debt issuance costs.
Interest on the Revolver and Term Loan are based the outstanding principal amount during the interest period multiplied by the fluctuating bank prime rate plus the applicable margin of 2.00% or for portions of the debt converted to Euro Loans the quoted LIBOR rate plus the applicable margin of 3.00%. At December 31, 2021 and 2020, the effective interest rate on the Revolver and Term Loan was 3.65% and 4.36% per annum, 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 0.40% on the unused portion of the $60 million Revolver commitment.
The credit facility is secured by substantially all of the assets of the Company. The terms of the credit facilities impose financial covenants including a minimum interest coverage ratio, a maximum total debt to EBITDA ratio and a minimum fixed charge coverage ratio. At December 31, 2021, the Company was in compliance with all financial covenants.
The Company recognized $11,928, $6,142 and $5,453, of interest expense related to the Exchangeable Notes, Revolver and Term Loan for the years ended December 31, 2021, 2020, and 2019, respectively.
The balances payable under all borrowing facilities are as follows:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Total debt | $ | 380,000 | | | $ | 240,000 | |
| Less: current portion of term loan (scheduled payments) | 12,500 | | | 24,000 | |
| Less: debt discount and debt issuance costs, net | 7,471 | | | 4,113 | |
| Total long-term debt | $ | 360,029 | | | $ | 211,887 | |
| Derivative liability - redemption with make-whole provision | $ | 552 | | | $ | — | |
The maturity of the all the borrowings facilities is as follows:
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
| | | | | |
| Years | |
| 2022 | $ | 12,500 | |
| 2023 | 18,750 | |
| 2024 | 18,750 | |
| 2025 | 200,000 | |
| 2026 | 130,000 | |
| Total debt | $ | 380,000 | |
The Company is exposed to interest rate risk on variable interest rate debt obligations. On November 5, 2020, to manage interest rate risk, the Company entered into an interest rate swap agreement ("November 2020 swap agreement") to hedge forecasted interest rate payments on its variable rate debt. At December 31, 2021, the Company’s interest rate swap contract outstanding had a notional amount of $100,000 maturing in November 2023. The Company has designated the interest rate swap as a cash flow hedge for accounting purposes utilizing the hypothetical derivative method. The Company has determined the fair value of its assetsthe interest rate swap to be zero at the inception of the agreement. The Company has determined the fair value of the interest rate swap to be immaterial at each reporting period and liabilities,therefore, in the consolidated statements of operations, the Company seeksreflects only the realized gains and losses of the actual monthly settlement activity of the interest rate swap. The Company does not reflect the unrealized changes in fair value of the interest rate swap at each reporting period, and similarly a derivative asset or liability is not recognized at each reporting period in the Company’s financial statements.
In January 2022, the Company cancelled the November 2020 swap agreement and entered into a new interest rate swap agreement with a notional amount of $125,000 maturing in December 2025. The terms and conditions of the new contracts were similar to maximize the useNovember 2020 swap agreement.
8. EQUITY STRUCTURE
Shares Authorized
As of observable inputs (market data obtained from independent sources)December 31, 2021, 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 December 31, 2021, there were 14,929,982 shares of Class A Common Stock issued and outstanding, 61,136,800 shares of Class B Common Stock issued and outstanding and no shares of Preferred Stock issued and outstanding.
Warrants
As of December 31, 2021, the Company had 10,837,400 shares private warrants outstanding. Each private warrant entitles the registered holder to minimizepurchase share of Class A common stock at a price of $11.50 per share, subject to adjustment, at any time commencing 30 days after the usecompletion of unobservable inputs (internal assumptions about how market participants wouldthe Business Combination. The exercise price assets and liabilities)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 December 31, 2021, the Company had 11,578,000 shares 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 $11.50 per share, subject to adjustment, at any time commencing 30 days after the completion of the Business Combination. Pursuant to the warrant agreement, a warrant holder may exercise its warrants only for a whole number of shares.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
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 non-controlling interests are redeemable for cash at the option of the Company subject to the terms and conditions, they have been classified as temporary equity on the consolidated balance sheet in accordance with ASC 480. Income tax benefit or provision is applied to the income attributable to the controlling interest as the income attributable to the non-controlling interest is pass-through income. The Company may only issue Class A Units to the parent CompoSecure Inc.The non-controlling interest has been adjusted to redemption value as of December 31, 2021 in accordance with ASC 480-10-S99-3A. 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 $608,311 on December 31, 2021. The redemption value is calculated by multiplying the 61,136,800 Class B Units by the $9.95 trading price of our Class A common stock on December 27, 2021.
9. EQUITY COMPENSATION
Equity Incentive Plan
In connection with the business combination consummated on December 27, 2021, the Company established CompoSecure, Inc. 2021 Incentive Equity Plan (the “2021 Plan”) effective as of December 27, 2021. The purpose of the 2021 Plan is to provide eligible employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the Board of directors of the Company, with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, and other stock-based awards. The aggregate authorized number of shares of Class A common stock that may be issued or transferred as of December 31, 2021 under the Plan is 8,987,609 shares of Class A common stock plus the number of shares of Class A stock underlying grants issued under the Company’s existing amended and restated equity compensation Plan that expire, terminate or are otherwise forfeited without being exercised. Commencing with the first business day of each calendar year beginning in 2022, the aggregate number of shares of Class A Stock that may be issued or transferred under the Plan shall be increased by an amount of shares of Class A Stock equal to 4% of the aggregate number of shares of Class A stock and Class B stock outstanding as of the last day of the immediately preceding calendar year, or such lesser number of shares of Class A Stock as may be determined by the Board. There were no awards granted or outstanding under the 2021 Plan as of December 31, 2021.
Employee Stock Purchase Plan
Effective December 27, 2021, the Board approved the Employee Stock Purchase Plan (the “ESPP”). The Company authorized 1,650,785 aggregate number of shares of Class A Common Stock reserved for sale pursuant to the ESPP Plan as of December 31, 2021. The number of shares of Class A Common Stock reserved for sale under the ESPP will automatically increase on the first trading day in January each calendar year during the term of the ESPP, beginning with the 2022 calendar year, by 1% of the total number of shares of class A common stock and class B common stock outstanding on the last trading day in the immediately preceding calendar month, but in no event shall any such annual increase exceed 1,686,531 shares or a lesser number of shares as determined by the administrator of the ESPP. The ESPP permits participating eligible employees to purchase class A common stock, with after-tax payroll deductions, on a quarterly basis at a 15% discount at the closing price of the Common Stock on the Nasdaq on the first day of the offering period. The Board may suspend or terminate the ESPP at any time to become effective immediately following the close of any offering period. As of December 31, 2021, there were 1,650,785 shares of common stock remaining authorized for issuance under the ESPP. The Company will recognize the discount on the Common Stock issued under the ESPP as stock-based compensation expense in the period in which the employees will begin participating in the ESPP.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
Holdings' 2015 Incentive Plan
Holdings' May 2015 equity incentive Plan (the “2015 Plan”) provided for the grant of options, Class C unit appreciation rights, restricted Class C units, unrestricted Class C unit awards and other equity awards to certain employees and officers. The exercise price of unit options granted under the 2015 Plan was equal to the fair market value hierarchyof the Holdings’ members’ equity at the date of grant. Options vest and become exercisable incrementally over a 5-year and 4-year period, depending on the grant. The options also provided for accelerating vesting if there is useda change in control as described in the Plan agreement. The options expire on the 10th anniversary of the grant date Outstanding awards under the 2017 Plan continue to classify assetsbe subject to the terms and liabilitiesconditions of the 2017 Plan.
Upon consummation of the Business Combination on December 27, 2021 (see Note 3), Holdings amended and restated its 2015 Plan and the holders of issued and outstanding equity of 2015 Plan received a combination of cash consideration, certain newly-issued membership units of Holdings and shares of newly-issued class B common stock of the Company, which have no economic value, but entitle the holder to 1 vote per issued share and were issued on a 1-for-one basis for each Holdings Unit retained by the holder following the Merger. All incentive units available for grants under the 2015 Plan at the time of the consummation will be made available for new award grants under the 2021 Plan and no further awards will be granted under the 2015 Plan. As a result, all of the options, 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 an option to purchase shares of class A common stock. Each converted options continue to have and be subject to substantially the same material terms and conditions as were applicable to such options under the 2015 Plan except that each converted option shall be exercisable for, and represent the right to acquire, that number of shares of Class A common stock equal to the product (rounded down to the nearest whole number) of (A) the number of Units subject to the converted option immediately before the merger effective time multiplied by (B) the equity award exchange Ratio at an exercise price per share equal to the quotient of (i) the exercise price per unit of such converted option immediately before the consummation of the Business Combination divided by (ii) the Equity Award Exchange Ratio (rounding the resulting exercise price up to the nearest whole cent). Except as specifically provided in the Business Combination Agreement, following the Business Combination, each exchanged option will continue to be governed by the same terms and conditions (including vesting and exercisability terms) as were applicable to the corresponding former Holdings 2015 Plan immediately prior to the consummation of the Business Combination. As a result of the modification, all of 9,778 options outstanding right before the Business Combination were recapitalized into 6,823,006 options of which 1,413,235 were settled and 5,409,771 remain outstanding at December 31, 2021. There was no incremental expense recognized since the options were recapitalized with terms consistent with prior awards and there were no incremental changes to fair value. There were a total of 12 grantees affected by the recapitalization.
Earnout Consideration
As a result of the Business Combination, certain of 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 observable inputsachievement of certain stock price thresholds (collectively, the “Earnouts”). There were a total of 657,160 shares subject to ASC 718, or 328,580 shares for each Phase since they were issued to the Company's employees.
Upon the transaction date, a valuation was performed which took into consideration all the key terms and
unobservable inputs used in orderconditions of the award, including the fact that, under Topic 718, there is no requisite service period due to
the fact that there is no service condition prospectively, and as of the grant date there is no service inception date preceding the grant date on which to base historical valuation or expense amortization. As such, the award is considered to be immediately vested from a service perspective, and is solely contingent on meeting the hurdles required for the award to be settled. Since there is no future substantive risk of forfeiture, all expenses associated with the awards were accelerated and recognized on December 27, 2021. There were a total of 657,160 shares subject to Topic 718 or 328,580 shares per Phase with an intrinsic value
the assets and liabilities:of
| Level 1: | Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| | COMPOSECURE, INC. |
| Level 2: | Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
$5,395 as of December 31, 2021. The Company recognized a total expense of $4,610 related to Earnouts in its consolidated statements of operations for the year ended December 31, 2021.
The valuation of the Earnouts was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award. The following assumptions were used to determine the grant date fair value for these Earnouts:
| | | | | |
| Level 3:Year Ended |
| Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.12/27/2021 |
| Valuation date share price | $ | 9.95 | |
| Risk-free interest rate | 0.98% - 1.12% |
| Expected volatility | 57.92% - 58.88% |
| Expected dividends | 0 | % |
| Expected forfeiture rate | 0 | % |
| Expected term | 3 - 4 years |
At December 31, 2020, assets
Holdings' Options Valuation
In the year ended 2021, Holdings granted no stock options, restricted stock units, or profits interests, and no awards were forfeited. Prior to the completion of the Business Combination the fair value of Holdings options was determined by using the Black-Scholes option valuation model based upon information available at the time of grant. The calculated value of each option award was estimated at the date of grant using the Black-Scholes option valuation model. The expected term assumption reflected the period for which the Holdings believed the option will remain outstanding. This assumption was based upon the historical and expected behavior of the Holdings’ employees. Holdings had elected to use the calculated value method to account for the options it had issued. A nonpublic entity that is unable to estimate the expected volatility of the price of its underlying share may measure awards based on a “calculated value,” which substitutes the volatility of an appropriate index for the volatility of the entity’s own share price. To determine volatility, the Holdings had used the historical closing values of comparable publicly held inentities to estimate volatility. The risk-free rate reflected the Trust Account were comprised of $939 of cash and $236,214,150 of money market funds, which are primarily invested in U.S. Treasury securities. Duringyield curve for a similar expected life instrument in effect at the time of the grant.
The assumptions utilized to calculate the value of the options granted for the year ended December 31, 2020 and 2019, respectively, were as below:
| | | | | | | | | | | | | | | |
| | | 2020 | | 2019 |
| Expected term | | | 1 year | | 1.25 years |
| Volatility | | | 44.00% | | 30.00% |
| Risk-free rate | | | 1.07% | | 2.36% |
| Expected dividends | | | 0% | | 0% |
| Expected forfeiture rate | | | 0% | | 0% |
Stock Options activity
Upon consummation of the
company did not withdraw anyBusiness Combination, Holdings options were assumed by the Company and recapitalized. Because of the nature of the recapitalization in a Business Combination, the Company recalculated new fair values for the affected stock options and profits interest
income fromto preserve the
Trust Account.total grant date fair value originally issued. All stock option activity was retroactively restated to reflect the exchanged options.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
The following table presents information aboutsets forth the options activity under the Holdings' equity plan which was assumed by the Company and recapitalized for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted
Average
Exercise Price
Per Shares | | Weighted
Average
Remaining Contractual
Term (years) | | Aggregate
Intrinsic Value
(in thousands) |
| Outstanding at January 1, 2021 | 6,823,006 | | | $ | 1.15 | | | 5.4 | | $ | 72,489 | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | 1,413,235 | | | $ | 0.71 | | | | | 13,133 | |
| Outstanding at December 31, 2021 | 5,409,771 | | | $ | 1.27 | | | 4.1 | | 37,542 | |
| Vested and expected to vest at December 31, 2021 | 5,409,771 | | | $ | 1.27 | | | 4.1 | | 37,542 | |
| Exercisable at December 31, 2021 | 4,947,921 | | | $ | 0.91 | | | 3.9 | | 36,104 | |
The weighted average calculated grant date fair value per time-vested option granted during the years ended December 31, 2020 and 2019 were $6.36 and $4.31, respectively. The Company recognized approximately $1,310, $1,143, and $1,211 of compensation expense for the options in Selling, general and administrative expenses in the accompanying consolidated statements of operations in 2021, 2020, and 2019, respectively.
The number of options exercisable and vested as of December 31, 2021, 2020, and 2019 were 4,947,921, 5,894,922 and 5,128,908 respectively. The weighted average exercise price of options exercisable and vested is $1.26, $406.63, and $265.62 for years ended December 31, 2021, 2020, and 2019, respectively. The weighted average remaining contractual years term (years) per options exercisable as of December 31, 2021, 2020, and 2019 is 3.9, 4.9, and 5.7, respectively. Unrecognized compensation expense for the options of approximately $1,425 is expected to be recognized during the next three years.
Profits Interest
On May 11, 2017, the members of the Holdings executed a Limited Liability Company Agreement for an entity formed in 2016 titled CompoSecure Employee LLC. The purpose of the entity was to hold Operating Incentive units. In May 2017, the Company granted 1,320,765 incentive units with a profits interest hurdle of $232,232. No interests were granted during the period ended December 31, 2021. 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. The total class B common stock outstanding were 1,236,027 as of December 31, 2021 with an aggregate intrinsic value of $10,843 .
The Company recognized approximately $193, $433, and $470 of compensation expense for the incentive units in Selling, general and administrative expenses in the accompanying consolidated statements of operations in 2021, 2020, and 2019, respectively. Unrecognized compensation expense for the incentive units of approximately $39 is expected to be recognized during the next one year.
10. RETIREMENT PLAN
Defined Contribution Plan
The Company has a 401(k) profit sharing plan for all full-time employees who have attained the age of 21 and completed 90 days of service. The Company matches 100% of the first 1% and then 50% of the next 5% of
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
employee contributions. Retirement plan expense for the years ended December 31, 2021, 2020, and 2019 was approximately $1,102, $1,030, and $943 respectively.
Deferred Compensation Plan
The Company has a self-administered deferred compensation plan that accrues a liability for the benefit of certain employees equal to 0.25% year-over-year change in Earnings Before Interest Depreciation “EBITDA” that began in 2014. The Company made an initial contribution of $150 with an additional contribution of $0, $0, and $501 for years ended December 31, 2021, 2020, and 2019, respectively. The total liability was $242 and $1,534 at December 31, 2021 and 2020, respectively, and is recorded in other liabilities on the balance sheet. The Plan vests over a seven year period according to the following vesting schedule: Year 1 – 0.0%, Year 2 – 5.0%, Year 3 – 15.0%, Year 4 – 20.0%, Year 5 – 30.0%, Year 6 – 50.0%, Year 7 – 100%. Since plan inception $1,223 has vested of the recorded liability.
11. FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, the Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.
The Company’s financial assets that areand liabilities measured at fair value on a recurring basis, consisted of the following types of instruments as of the following dates:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2021 | | | | | | | | |
| Liabilities Carried at Fair Value: | | | | | | | | |
| Public warrants | | $ | — | | | $ | 17,714 | | | $ | — | | | $ | 17,714 | |
| Private warrants | | — | | | — | | | 17,557 | | | 17,557 | |
| Earnout consideration | | — | | | — | | | 38,427 | | | 38,427 | |
| Derivative liability - redemption with make-whole provision | | — | | | — | | | 552 | | | 552 | |
Warrant Liability
As a result of the Business Combination, the Company assumed warrant liability related to previously issued warrants in connection with Roman'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 balance sheet. The warrant liabilities were remeasured at fair value upon business combination and subsequently at December 31, 2021, with changes in fair value presented within revaluation of warrant liabilities in the statement of operations.
Initial Measurement
The Company established the initial fair value of the warrants upon the business combination date using the Black Scholes Option Pricing Model. The following table provides a reconciliation of the ending balances for the warrant liabilities remeasured at fair value:
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
| | | | | | | | |
| | Warrant Liabilities |
| | |
| | |
| Assumed warrant liability upon business combination at December 27, 2021 | | 38,756 | |
| Change in estimated fair value | | (3,485) | |
| Estimated fair value at December 31, 2021 | | 35,271 | |
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 following assumptions were used to determine the fair value of the private warrants as of December 31, 2021:
| | | | | | | | |
| | 12/31/2021 |
| Exercise Price | | $ | 11.50 | |
| Risk-free interest rate | | 1.26 | % |
| Expected volatility | | 33 | % |
| Expected dividends | | 0 | % |
| Expected term (years) | | 4.9 years |
| Common Stock market value | | $ | 8.21 | |
The fair value of 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 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. See also Note 9. 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. Subsequently, the liability for Earnouts will be remeasured at each reporting period at fair value, with changes in fair value recorded in earnings in accordance with ASC 815-40-35-4. The Company established the initial fair value for the earnouts at the closing date on December 27, 2021 using a Monte Carlo simulation model. Subsequently, the Company remeasured the fair value of the earnouts at December 31, 2021. The following table provides a reconciliation of the ending balances for the earnout consideration liabilities remeasured at fair value:
| | | | | | | | |
| | Earnout Consideration Liability |
| | |
| Fair value recognized upon business combination | | (48,002) | |
| Change in estimated fair value | | 9,575 | |
| Estimated fair value at December 31, 2021 | | $ | (38,427) | |
The following assumptions were used to determine the fair value of the Earnout considerations as of December 31, 2021:
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
| | | | | | | | |
| | 12/31/2021 |
| Valuation date share price | | $ | 8.21 | |
| Risk-free interest rate | | 0.97% - 1.12% |
| Expected volatility | | 67.5 | % |
| Expected dividends | | 0 | % |
| Expected term (years) | | 3 - 4 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.
12. 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 revenue information based on the location of the customer follows:
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| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net sales by country | | | | | |
| Domestic | $ | 218,441 | | | $ | 213,982 | | | $ | 191,502 | |
| International | 49,507 | | | 46,604 | | | 51,788 | |
| Total | $ | 267,948 | | | $ | 260,586 | | | $ | 243,290 | |
The Company’s principal direct customers as of December 31, 2021 consist primarily of leading international and domestic banks and other credit card issuers primarily within the U.S., Europe, Asia, Latin America, Canada, and the Middle East. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses, if necessary.
Two customers individually accounted for more than 10% of the Company’s revenue or 71.9% of total revenue for the year ended December 31, 2021. Two customers individually accounted for more than 10% of the Company’s revenue or 72.1% of total revenue for the year ended December 31, 2020. Three customers individually accounted for more than 10% of the Company’s revenue or 74.9% of total revenue for the year ended December 31, 2019. Two customers individually accounted for more than 10% of the Company’s accounts receivable or approximately 66% as of December 31, 2021 and two customers individually accounted for 10% of total accounts receivable or 61% as of December 31, 2020, respectively.
The Company primarily relied on two vendors that individually accounted for more than 10% of purchases of supplies for the year ended December 31, 2021. The Company primarily relied on four vendors that individually accounted for more than 9% of purchases of supplies for the year ended December 31, 2020.
13. INCOME TAXES
The Company recorded $857 for the tax benefit for the period from December 27, 2021 to December 31, 2021. No provisions/benefits were made for federal or state income taxes for the years ended December 31, 2020, and indicates2019 as prior to the Business Combination, the Company was not subject to income taxes due to the then equity structure of the Company and was subject to pass through income taxes. Federal, state and local income tax returns for years prior to 2019 are no longer subject to examination by tax authorities.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
Income before the benefit for income taxes as shown in the accompanying consolidated statements of operations is as follows:
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| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Income before income taxes | | $ | 82,557 | | | $ | 77,815 | | | $ | 81,473 | |
| Income before income taxes attributable to period subsequent to business combination for the year ended December 31, 2021 | | $ | 12,206 | | | — | | | — | |
The Company calculated income taxes on prorated income only for the days remaining subsequent to the Business Combination for the year ended December 31, 2021. The components of the benefit for income taxes for the year ended December 31, 2021 consisted of the following:
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| | Year Ended December 31, |
| | 2021 | | | | |
| Current: | | | | | | |
| Federal | | $ | — | | | | | |
| State | | — | | | | | |
| | — | | | | | |
| Deferred: | | | | | | |
| Federal | | (856) | | | | | |
| State | | (1) | | | | | |
| | (857) | | | | | |
| Total benefit from income taxes | | $ | (857) | | | | | |
The reconciliation of taxes at the federal statutory rate to our provision for income taxes for the year ended December 31, 2021 was as follows:
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| | Year Ended December 31, |
| | 2021 | | | | |
| U.S. federal statutory tax rate | | 21.00 | % | | | | |
| State taxes | | 0.03 | % | | | | |
| Valuation allowances | | — | | | | | |
| NCI adjustment | | (18.53) | % | | | | |
| Permanent differences | | (3.35) | % | | | | |
| Effective income tax rate | | (0.85) | % | | | | |
The Company’s overall effective tax rate is affected primarily by the non-controlling interest adjustment as the income attributable to the non-controlling interest is pass-through income.
Provisions have been made for deferred taxes based on the differences between the basis of the assets and liabilities for financial statement purposes and the basis of the assets and liabilities for tax purposes using currently enacted tax rates and regulations that will be in effect when the differences are expected to be recovered or settled.
| | |
| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
The components of the deferred tax assets were as follows: | | | | | | | | | | |
| | December 31, |
| | 2021 | | |
| Deferred Tax Assets: | | | | |
| Investment in Holdings | | $ | 29,102 | | | |
| Imputed Interest | | 623 | | | |
| | | | |
| Earnout consideration liability | | 970 | | | |
| Federal R&D Credit | | — | | | |
| Net operating loss carryforward | | 819 | | | |
| Total deferred tax assets | | $ | 31,514 | | | |
| valuation allowance | | (5,864) | | | |
| Total deferred tax assets net of valuation allowance | | $ | 25,650 | | | |
The deferred taxes primarily result from the Business Combination where the Company recorded a carryover basis on all assets for financial accounting purposes and a fair value
hierarchystep-up on a portion of the
assets for income tax purposes. The Company’s deferred tax asset was reviewed for expected utilization using a “more likely than not” approach by assessing the available positive and negative evidence surrounding its recoverability. Accordingly, a valuation
inputsallowance has been recorded against the Company’s deferred tax asset, as it was determined that it was “more likely than not” that the Company’s deferred tax assets would not be fully realized. As of December 31, 2021, the Company
utilized to determine such fair value:| Description | | Level | | | December 31,
2020 | |
| Assets: | | | | | | | | |
| Marketable securities held in Trust Account | | | 1 | | | $ | 236,214,150 | |
NOTE 10. SUBSEQUENT EVENTS
determined that considering all of these factors, a $5,864 valuation allowance would be established. The Company evaluatedwill continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately at such time when it is determined that the “more likely than not” criteria is satisfied.
The Company has net operating losses (“NOL”) of approximately $3,892 for federal purposes which do not expire; however, they are limited to 80% of taxable income. State NOL’s of approximately $8 which expire beginning in 2042. Realization of the NOL carryforwards and other deferred tax temporary differences is contingent on future taxable earnings.
There were no significant uncertain tax positions taken, or expected to be taken, in a tax return that would be determined to be an unrecognized tax benefit taken or expected to be taken in a tax return that should have been recorded on the Company’s financial statements for the year ended December 31, 2021. Additionally, there were no interest or penalties outstanding as of the fiscal year ended December 31, 2021.
14. EARNINGS PER SHARE
Basic net income per share has been computed by dividing net income attributable to class A common shareholders for the period subsequent events and transactions that occurred after the balance sheet date up to the datebusiness combination by the weighted average number of shares of common stock outstanding for the same period. Diluted earnings per share of Class A common stock were computed by dividing net income available to CompoSecure, Inc. by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. No earnings per share are presented for periods preceding the business combination as only the Class B common stock would have been outstanding in historical periods pursuant to the reverse recapitalization and the Class B common stock do not participate in the Company's income or loss and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been presented.
The following table sets forth the computation of net income used to compute basic net income per share of Class A common stock for the year ended December 31, 2021. The basic and diluted earnings per share period for the year ended December 31, 2021, represents only the period from December 27, 2021 to December 31, 2021, which represents the period wherein we had outstanding Class A common stock.
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | | | |
| Basic and diluted: | | | | | | |
| Net income | | $ | 83,414 | | | | | |
| Less: Net income attributable to Holdings L.L.C. prior to business combination | | (70,352) | | | | | |
| Less: Net income attributable to non-controlling interest subsequent to business combination | | 450 | | | | | |
| Net income attributable to CompoSecure, Inc for period subsequent to business combination | | $ | 13,512 | | | | | |
| Plus: adjustment due to net effect of dilutive class B units, stock options and exchangeable notes to net income | | (331) | | | | | |
| Net income attributable to CompoSecure, Inc for period subsequent to business combination after adjustment | | $ | 13,181 | | | | | |
| Weighted average common shares outstanding used in computing net income per share—basic | | 14,930 | | | | | |
| | | | | | |
| Weighted average common shares outstanding used in computing net income per share—diluted | | 94,926 | | | | | |
| Net income per share—basic | | $ | 0.91 | | | | | |
| Net income per share—diluted | | $ | 0.14 | | | | | |
The difference between basic and diluted shares is that diluted shares include the dilutive effect of the assumed exercise of outstanding securities. The Company’s stock options, warrants, earnouts and exchangeable notes could have the most significant impact on diluted shares. Securities that could potentially be dilutive are excluded from the computation of diluted earnings per share when a loss from continuing operations exists or when the exercise price exceeds the average closing price of the Company’s common stock during the period, because their inclusion would result in an antidilutive effect on per share amounts. The Company applied if-converted method for the convertible debt to calculate diluted earnings per share in accordance of ASU 2020-06.
The following amounts were not included in the calculation of net income per diluted share because their effects were anti-dilutive:
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| | Year Ended December 31, |
| | 2021 | | | | |
| Denominator: | | | | | | |
| Warrants | | 22,415 | | | | | |
| Earnout Shares | | 7,500 | | | | | |
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15. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office space and manufacturing space under arrangements currently classified as leases under ASC 842. See Note 2 for future minimum commitments under all non-cancelable operating leases.
Litigation
The Company may be, from time to time, party to various disputes and claims arising from normal business activities. The Company accrues for amounts related to legal matters if it is probable that a liability has been incurred and the amount is reasonably estimable. while the outcome of existing disputes and claims is uncertain, the Company does not expect that the resolution of existing disputes and claims would have a material adverse effect on its consolidated financial position or liquidity or the Company’s consolidated results of operations. Litigation expenses are expensed as incurred. During first
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| COMPOSECURE, INC. |
| Notes to Consolidated Financial Statements |
| ("$ in thousands" - except share data) |
quarter of 2021, the Company received from a third party a notice of dispute with respect to whether commissions are due and owing on product sales to certain of the Company’s customers which, if successful, could require payments ranging from $4,000 to $$11,000, plus costs and expenses, together with additional commission payments on future sales, if any, to such customers. The Company does not believe these commissions are owed, and intends to vigorously oppose this claim, which may include legal proceedings. The Company has not accrued any amount as a component of accrued expense related to the notice of dispute as of December 31, 2021.
16. RELATED PARTY TRANSACTIONS
In November 2015, the Company entered into a sales representation agreement with a third party, partially owned by an individual who is a Class B member of Holdings and who was then a member of Holdings' Board of Managers. In 2016, the Company commenced litigation against such third party seeking a judicial determination that the sales representation agreement was void and unenforceable, among other claims. In February 2018, the trial court ruled against Holdings in the litigation, concluding that the sales representation agreement was valid and enforceable. Holdings appealed the ruling, however, the ruling was upheld. As a result of the ruling, Holdings was instructed to pay the commissions in accordance with the terms of the sales representation agreement, interest related to the commissions, and legal fees on behalf of the third party. Expenses relating to this agreement for the years ended December 31, 2021, 2020, and 2019 amounted to $9,508, $6,724, and $9,232, respectively and were recorded as a component of selling, general and administrative expenses. In October 2019, Holdings terminated the sales representation agreement. Customers in place prior to the termination of the agreement are subject to the arrangement and are eligible for future commissions, which are payable and are being accrued and paid in accordance with the terms of the sales representation agreement. Amounts accrued as a component of accrued expenses as of December 31, 2021, and December 31, 2020 related to this agreement amounted to $3,402 and $2,786.
In March 2021, the Company received from such third party a notice of dispute with respect to whether commissions are due and owing on product sales to certain of the Company’s customers which, if successful, could require payments ranging from $4,000 to $11,000, plus costs and expenses, together with additional commission payments on future sales, if any, to such customers. The Company does not believe these commissions are owed, and intends to vigorously oppose this claim, which may include legal proceedings. The Company has not accrued any amount as a component of accrued expense related to the notice of dispute as of December 31, 2021.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of CompoSecure, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
were issued. Based upon this review,for external purposes in accordance with accounting principles generally accepted in the
Company did not identify any subsequent eventsUnited States of America (“U.S. GAAP”) and includes those policies and procedures that: (i) pertain to the maintenance of records that,
wouldin reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have
required adjustment or disclosure ina material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of its internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021 based on those criteria.
As a smaller reporting company, the Company is not required to include in this Annual Report on Form 10-K a report on the effectiveness of its internal control over financial reporting by the Company’s independent registered public accounting firm.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Present Inspections
Not applicable.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in June 2022. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2021.
Item 11. Executive Compensation
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in June 2022. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2021.
Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in June 2022. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2021.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in June 2022. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2021.
Item 14. Principal Accounting Fees and Services
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference to portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held in June 2022. The Proxy Statement will be filed by the Registrant with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year ended December 31, 2021.
Part IV
Item 15. Exhibits, Financial Statement Schedules
Financial Statements and Financial Statement Schedules
See “Table of Contents to the Consolidated Financial Statement” in Part II, Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are not required or are not applicable or because the information required in those schedules either is not material or is included in the consolidated financial statements or the accompanying notes.
Exhibits
The exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10‑K.
EXHIBIT INDEX
Exhibit No. | | Description | | | | | | | |
1.1Exhibit No. | | Description | |
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| | Agreement and Plan of Merger, dated November 5, 2020,April 19, 2021, by and among the CompanyRoman DBDR Tech Acquisition Corp., Roman Parent Merger Sub, LLC, CompoSecure Holdings, L.L.C., and B. Riley Securities, Inc. (3)LLR Equity Partners IV, L.P. as Member Representative (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 001-39687), filed with the SEC on April 19, 2021). | |
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| | Amended and Restated Bylaws. (2)Registration Rights Agreement, dated as of December 27, 2021, by and among CompoSecure, Inc., the LLR Investors (as defined therein), the CompoSecure Investors (as defined therein), the Founder Investors (as defined therein), and the Additional Investors (as defined therein) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 001-39687), filed with the SEC on December 29, 2021). | |
4.1 | | Specimen Unit Certificate. (2) | |
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4.3 | | Specimen Warrant Certificate. (2) | |
| | WarrantExchange Agreement, dated November 5,as of December 27, 2021, by and among CompoSecure, Inc., CompoSecure Holdings, L.L.C. and the holders of Class B Units of CompoSecure Holdings, L.L.C. party thereto (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K (File No. 001-39687), filed with the SEC on December 29, 2021). | |
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| | Third Amended and Restated Credit Agreement, dated as of December 21, 2021, by and among CompoSecure, L.L.C., Arculus Holdings, L.L.C., CompoSecure Holdings, L.L.C., the Lenders (as defined therein) party thereto and JPMorgan Chase Bank, N.A (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K (File No. 001-39687), filed with the SEC on December 29, 2021). | |
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4.5 | | Description of Registered Securities.* | |
| | LetterMaster Services Agreement, dated November 5, 2020,August 1, 2004, by and amongbetween American Express Travel Related Services Company, Inc. and CompoSecure, L.L.C. (incorporated by reference to Exhibit 10.22 to the Company, its officers, its directors and certain security holders. (3)Current Report on Form 8-K (File No. 001-39687), filed with the SEC on December 29, 2021). | |
10.2 | | | |
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* | Filed herewith. |
** | Furnished herewith |
(1) | IncorporatedRoman DBDR Tech Acquisition Corp.to Roman DBDR Tech Sponsor LLC (incorporated by reference to Exhibit 10.2 to the Company’sRegistration Statement on Form S-1,S-1/A (File No. 333-249330), filed with the SEC on October 5, 2020.2021). | |
(2) | Incorporated | | |
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(3) | Incorporated by reference | | |
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| 101 | | Pursuant to Rules 405 and 406 of Regulation S-T, the following information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 is formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statement of Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows and (v) Notes to the Company’s Form 8-K, filed withConsolidated Financial Statements. | |
| | | |
| 104 | | Cover Page Interactive Data File (embedded within the inline XBRL document) | |
| | | | | |
| + | Indicates management contract or compensatory plan or arrangement. |
| | | | | |
| † | Schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC on November 10, 2020.upon request. |
| |
| †† | The Company has redacted provisions or terms of this Exhibit pursuant to Regulation S-K Item 601(b)(10)(iv). The Company agrees to furnish an unredacted copy of the Exhibit to the SEC upon its request. |
Item 16. Form 10-K Summary
None.
Pursuant to the requirements of
Section13Section 13 or 15(d) of the Securities
Exchange Act of
1934,1933, the
Registrantregistrant has duly caused this
Reportreport to be signed on its behalf by the undersigned, thereunto duly authorized.
March 29, 2021 | ROMAN DBDR TECH ACQUISITION CORP. |
| | |
| By: | /s/ Dr. Donald G. Basile
|
| Name: | Dr. Donald G. Basile |
| Title: | Co-Chief Executive Officer
(Co-Principal Executive Officer) |
CompoSecure, Inc.
By: /s/ Jonathan Wilk
Jonathan Wilk
President and Chief Executive Officer
Date: March 14, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Reportreport on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | | Position | | Date | | | | |
| Name | Title | Date |
/s/ Dr. Donald G. BasileJonathan Wilk Jonathan Wilk | | Co-ChiefPresident, Chief Executive Officer and Director (Principal Executive Officer) | | March 29, 202114, 2022 |
Dr. Donald G. Basile | | (Co-Principal Executive Officer) | | |
| | |
/s/ Dixon Doll, Jr.Timothy Fitzsimmons Timothy Fitzsimmons | | Co-Chief Executive Officer | | March 29, 2021 |
Dixon Doll, Jr. | | (Co-Principal Executive Officer) | | |
| | |
/s/ John C. Small
| | Chief Financial and Accounting Officer | | March 29, 2021 |
John C. Small | | (Principal Financial and Accounting Officer) | | March 14, 2022 |
| | |
/s/ Dixon DollMitchell Hollin Mitchell Hollin | Chairman of the Board of Directors | Director | | March 29, 202114, 2022 |
Dixon Doll | | | | |
/s/ Michele Logan Michele Logan | Director | March 14, 2022 |
/s/ Alan Clingman
| | Director | | March 29, 2021 |
Alan Clingman/s/ Donald G. Basile Donald G. Basile | Director | | | March 14, 2022 |
| | |
/s/ Paul MisirNiloofar Razi Howe Niloofar Razi Howe | Director | Director | | March 29, 202114, 2022 |
Paul Misir | | | | |
/s/ Brian F. Hughes Brian F. Hughes | Director | March 14, 2022 |
/s/ Arun Abraham
| | Director | | March 29, 2021 |
Arun Abraham | | | | |
| | |
/s/ James L. NelsonJane J. Thompson Jane J. Thompson | Director | Director | | March 29, 2021 |
James L. Nelson | | | | 14, 2022 |
