GPGI, Inc. (GPGI) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company's audited consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences 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 creates innovative, highly differentiated and customized financial payment card products for banks and other payment card issuers to support and increase their customer acquisition, customer retention and organic customer spend. The Company’s customers consist primarily of leading international and domestic banks
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and other payment card issuers primarily within the United States (“U.S.”), with additional direct and indirect customers in Europe, Asia, Latin America, Canada, and the Middle East. The Company is a platform for next generation payment technology, security, and authentication solutions. The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers. The Company has established a niche position in the financial payment card market through over 20 years of innovation and experience and is focused primarily on this attractive subsector of the financial technology market. The Company serves a diverse set of direct customers and indirect customers, including some of the largest issuers of credit cards in the U.S.
Recent Developments
On June 11, 2024, the Company paid a special cash dividend to Class A shareholders of CompoSecure, Inc., and made a corresponding distribution to Class B unitholders of Holdings. As a result of the special cash dividend and distribution, the conversion price of the Exchangeable Notes was adjusted to $10.98 per share, which resulted in an adjustment to the exchange rate to 91.0972 shares of the Company’s Class A Common Stock per $1,000 principal amount of notes exchanged.
On August 7, 2024, all of the holders of Class B Common Stock of the Company and Resolute entered into stock purchase agreements, pursuant to which the selling stockholders would exchange their 51,908,422 Class B units (and corresponding shares of Class B Common Stock) for shares of Class A Common Stock, eliminating the Company's existing dual-share class structure. On September 17, 2024, the Resolute Transaction closed and Resolute became the majority owner of the Company by acquiring 49,290,409 shares of Class A Common Stock of the Company for an aggregate purchase price of approximately $372.1 million, or $7.55 per share, representing an approximately 60% voting interest, and, as of February 28, 2025, Resolute owned approximately 51% of the voting interest in the Company's Class A Common Stock. The Company was not party to the stock purchase agreements. Prior to these transactions, holders of Class B Common Stock held Class B units in Holdings. Subsequent to the Resolute Transaction, the Company owned 100% of Holdings. As a result of the Resolute Transaction, the Company no longer has shares of Class B Common Stock outstanding or a non-controlling interest as of December 31, 2024. The Company's tax receivable agreement liability and future payments thereunder increased as the Company realized an increase in tax basis of Holdings’ assets resulting from the exchange of Holdings' equity by unitholders in connection with the Resolute Transaction.
Effective September 19, 2024, Resolute’s acquisition of a majority of the Company’s Class A Common Stock caused a "Fundamental Change" as defined in the Indenture to the Exchangeable Notes (the "Indenture"). Triggering the Fundamental Change provision provided holders of the Exchangeable Notes a choice to: (1) exchange their Exchangeable Notes for shares of Class A Common Stock at a temporarily increased exchange rate of 104.5199 shares per $1,000 principal amount of Exchangeable Notes until November 27, 2024 (with the exchange rate then reverting to the existing 91.0972 shares per $1,000 principal amount of Exchangeable Notes). This temporary increase in the exchange rate resulted in an adjustment of the conversion price to $9.57 per share from September 19, 2024 to November 29, 2024. (2) have the Company repurchase for cash of all of such holder’s Exchangeable Notes on November 29, 2024 at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased plus accrued and unpaid interest; or (3) continue to hold the Exchangeable Notes. A notice was sent to all holders of Exchangeable Notes on October 9, 2024 providing details of these choices. Through December 31, 2024, an aggregate of $130.0 million of the Exchangeable Notes had been surrendered and exchanged for an aggregate of 13,587,565 newly-issued shares of Class A Common Stock. As of December 31, 2024 all of the Exchangeable Notes were exchanged into shares of Class A Common Stock.
On August 7, 2024, the Company entered into a Fourth Amended and Restated Credit Agreement with J.P. Morgan Change ("JPMC") and the lenders party thereto to refinance its senior secured indebtedness, which increased the maximum borrowing capacity of the credit facility to $330.0 million comprising of a term loan of $200.0 million and a revolving credit facility of $130.0 million. The senior credit facility is set to mature on August 7, 2029.
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During the year ended December 31, 2024, the trading price of the Company's Class A Common Stock increased from $5.22 on January 2, 2024 to $15.33 on December 31, 2024. The increase in the stock price was a primary driver of changes in the fair value of the Company's aggregate earnout consideration liability and warrant liability of $171.8 million, which had a material effect on the Company's operating results included in this report.
As a result of the Business Combination discussed in Note 1 to the Company's audited consolidated financial statements, certain of Holdings' equity holders have the right to receive an aggregate of up to7,500,000 additional shares of the Company's Class A Common Stock in earnout consideration (See Note 18 in Notes to Consolidated Financial Statements in this Form 10-K for further discussion) (the "Earnout Shares") based on the achievement of certain stock price thresholds (collectively, the “Earnouts”). The Earnouts are subject to two stock price thresholds, with half of the Earnout Shares awarded upon the achievement of each threshold. As described elsewhere in this report, the first Earnout threshold was achieved, and approximately 3,600,000 Earnout Shares were issued on December 17, 2024 (this represents one-half of the then-issuable7,500,000 shares of Class A Common Stock net of tax withholding for employee recipients). Holdings' equity holders will receive the balance of the Earnout Shares if the applicable volume-weighted average price per share threshold is met prior to December 26, 2025.
On February 28, 2025, the Company completed the Spin-Off of Resolute Holdings. The distribution of all shares of Resolute Holdings Common Stock to holders of the Company’s Class A Common Stock as a pro rata dividend occurred on February 28, 2025 and Resolute Holdings Common Stock began trading on Nasdaq on February 28, 2025 under the ticker “RHLD.” Holders of the Company's Class A Common Stock received one (1) share of Resolute Holdings Common Stock for every twelve (12) shares of Class A Common Stock held on February 20, 2025, the record date for the distribution. The distribution of shares of Resolute Holdings will give rise to a taxable gain to the Company and will be treated as a taxable dividend to all existing stockholders of the Company for U.S. federal and applicable state and local tax purposes. Investors should note that Resolute Holdings Management, Inc. is a distinct entity from Resolute Compo Holdings LLC, which acquired CompoSecure shares in September 2024, as described above.
In connection with the Spin-Off, Resolute Holdings and CompoSecure Holdings L.L.C., a wholly-owned subsidiary of the Company ("Holdings"), entered into a management agreement (the "Management Agreement") on the Distribution Date, pursuant to which Resolute Holdings is responsible for, among other things: establishing and monitoring Holdings’ objectives, financing activities and operating performance; selecting and overseeing Holdings’ management team and their operating performance; devising capital allocation strategies, plans and policies of Holdings; identifying, analyzing and overseeing the consummation of business opportunities and potential acquisitions, dispositions and other business transactions; and reviewing and approving Holdings’ compensation and benefit plans, programs, policies and agreements.
Holdings is required to pay Resolute Holdings a quarterly management fee equal to 2.5% of Holdings' last 12 months' Adjusted EBITDA, as defined in the Management Agreement. Holdings is also required to reimburse Resolute Holdings and its affiliates for their documented costs and expenses incurred on behalf of Holdings other than those expenses related to Resolute Holdings' or their affiliates' personnel who provide services to Holdings under the Management Agreement. The Management Agreement has an initial term of 10 years and shall automatically renew for successive ten-year terms unless terminated in accordance with its terms. Each of Holdings and Resolute Holdings may terminate the Management Agreement upon the occurrence of certain other limited events, and in connection with certain of these limited events, Resolute Holdings has the right to require us to pay a termination fee, which could be significant and may be paid in cash, shares of common stock or a combination of cash and stock. See “Business — Recent Developments.”
Economic Conditions - globally and in the digital asset marketplace
U.S. and international markets, and particularly the rapidly evolving digital assets industry, are experiencing uncertain and volatile economic conditions, including the war in Ukraine, the ongoing conflict in Israel, Gaza and the surrounding areas, sustained inflation, threats or concerns of recession, and supply chain disruptions. These conditions make it extremely difficult for us and our suppliers to accurately forecast and plan
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future business activities. Additionally, a significant downturn in the domestic or global economy may cause our existing customers to pause or delay orders and prospective customers to defer new projects. Together, these circumstances create an environment in which it is challenging for us to predict future operating results. If these uncertain business, macroeconomic or political conditions continue or further decline, our business, financial condition and results of operations could be materially adversely affected.
The Company’s Arculus platform offers a broad range of secure authentication and digital asset storage solutions and enables our consumer Arculus Cold Storage Wallet for digital assets. We believe consumers can achieve enhanced protection by controlling their private keys with a cold storage wallet, such as the Arculus Cold Storage Wallet. At the same time, this market cycle has created uncertainty in timing for our anticipated Arculus ramp up, as some of our partners and targets have been impacted. Therefore, we have been taking a measured approach to better target the timing of our investments to support near-term and long-term opportunities.
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 refers to pre-laminated sub-assemblies consisting of a composite of material layers which are partially laminated to be used as a component in the multiple layers of a final payment card or other card construction). 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 are comprised of selling, general, and administrative expenses, which generally consist of personnel-related expenses for its corporate, executive, finance, information technology, and other administrative functions, expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.
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 Expense, net
Other expense primarily consists of changes in fair value of warrant liability, earnout consideration liability and interest expense, net of any interest income.
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Net (Loss) Income
Net (loss) income consists of the Company’s income from operations, less other expenses and income tax provision or benefit.
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 discussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for additional information.
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Results of Operations
Year Ended December 31, 2024 Compared with Year Ended December 31, 2023
The following table presents the Company’s results of operations for the periods indicated:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Net sales | $ | 420,571 | $ | 390,629 | $ | 29,942 | 8 | % | ||||||
| Cost of sales | 201,344 | 181,547 | 19,797 | 11 | % | |||||||||
| Gross profit | 219,227 | 209,082 | 10,145 | 5 | % | |||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative expenses | 111,605 | 89,995 | 21,610 | 24 | % | |||||||||
| Income from operations | 107,622 | 119,087 | (11,465) | (10 | %) | |||||||||
| Other expense, net | (188,597) | (2,011) | (186,586) | 9278 | % | |||||||||
| (Loss) income before income taxes | (80,975) | 117,076 | (198,051) | (169 | %) | |||||||||
| Income tax expense | (2,187) | (4,556) | 2,369 | (52 | %) | |||||||||
| Net (loss) income | (83,162) | 112,520 | (195,682) | (174 | %) | |||||||||
| Net (loss) income attributable to redeemable non-controlling interests | (29,443) | 93,281 | (122,724) | (132 | %) | |||||||||
| Net (loss) income attributable to CompoSecure, Inc | $ | (53,719) | $ | 19,239 | $ | (72,958) | (379 | %) |
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Gross Margin | 52 | % | 54 | % | |
| Operating margin | 26 | % | 30 | % |
Net Sales
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Net sales by region | ||||||||||||||
| Domestic | $ | 343,465 | $ | 321,470 | $ | 21,995 | 7 | % | ||||||
| International | 77,106 | 69,159 | 7,947 | 11 | % | |||||||||
| Total | $ | 420,571 | $ | 390,629 | $ | 29,942 | 8 | % |
The Company’s net sales for the year ended December 31, 2024 increased by $29.9 million, or 8%, to $420.6 million compared to $390.6 million for the year ended December 31, 2023. The increase was driven by continued domestic growth in the Company’s premium payment card business, which was up 7%, and international sales, which were up 11%.
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Domestic: The Company’s domestic net sales for the year ended December 31, 2024 increased $22.0 million, or 7%, to $343.5 million compared to $321.5 million for the year ended December 31, 2023. The increase was primarily due to higher customer acquisition by the Company’s clients as they continued to experience higher demand.
International: The Company’s international net sales for the year ended December 31, 2024 increased $7.9 million, or 11%, to $77.1 million compared to $69.2 million for the year ended December 31, 2023. The international customer base is comprised of a larger population of smaller customers relative to the domestic customer base. There were increased sales across the customer base driving growth in net sales during 2024.
In addition, the following table presents the Company’s net sales for the three months ended December 31, 2024 compared to December 31, 2023:
| Three Months Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Net Sales | $ | 100,859 | $ | 99,900 | $ | 959 | 1 | % |
The Company’s net sales for the three months ended December 31, 2024 increased $1.0 million, or 1%, to $100.9 million compared to $99.9 million for the three months ended December 31, 2023.
Gross Profit and Gross Margin
The Company’s gross profit for the year ended December 31, 2024 increased $10.1 million, or 5%, to $219.2 million compared to $209.1 million for the year ended December 31, 2023, while the gross profit margin decreased from 54% to 52%. The decrease in gross margin was partially driven by initial production of new and innovative card constructions, which resulted in lower production efficiencies, and the impact of inflationary pressure on wages and materials for the year ended December 31, 2024.
Operating Expenses
The Company’s operating expenses for the year ended December 31, 2024 increased $21.6 million, or 24%, to $111.6 million compared to $90.0 million for the year ended December 31, 2023. The increase was driven primarily by an increase in professional fees of $10.4 million associated with the Resolute Transaction and Spin-Off, stock-based compensation of $3.7 million, salaries and employee benefits of $3.2 million, bonus expenses of $3.3 million, computer software supplies of $0.8 million and various other costs of $1.4 million. These increases were partially offset by decreases in commission expenses of $0.6 million and reductions in marketing expenses of $0.6 million.
Income from Operations and Operating Margin
During the year ended December 31, 2024, the Company had income from operations of $107.6 million compared to income from operations of $119.1 million for the year ended December 31, 2023. The Company’s operating margin for the year ended December 31, 2024 decreased to 26% compared to 30% for the year ended December 31, 2023. The decrease in operating margin was primarily due to the decrease in gross margin as a percentage of revenue and increase in operating expenses offset by revenue growth.
Other (Expenses), Net
Other expenses for the year ended December 31, 2024 increased $186.6 million, or 9,278%, to $188.6 million compared to $2.0 million for the year ended December 31, 2023. The increase in other expenses was primarily due to changes in the fair value of earnout consideration liability, warrant liability and make-whole liability resulting in non-cash expenses of $171.8 million for the year ended December 31, 2024, compared to income of $22.1 million in the year ended December 31, 2023, resulting in an increase in operating expense of $194.0 million. The increase in expense related to the changes in fair value was offset by lower interest expense resulting from principal payments made on the outstanding term
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loan and the conversion of all outstanding Exchangeable Notes into shares of Class A Common Stock resulting in reduced interest expense on the Exchangeable Notes.
Income Tax Expense
The Company's income tax expense for the year ended December 31, 2024 was $2.2 million, compared to $4.6 million for the year ended December 31, 2023. The decrease in income tax expense was attributable to the valuation of non-cash items and the elimination of the Company's Up-C structure in connection with the Resolute Transaction during the third quarter of 2024.
Year Ended December 31, 2023 Compared with Year Ended December 31, 2022
The following table presents the Company’s results of operations for the periods indicated:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Net sales | $ | 390,629 | $ | 378,476 | $ | 12,153 | 3 | % | ||||||
| Cost of sales | 181,547 | 158,832 | 22,715 | 14 | % | |||||||||
| Gross profit | 209,082 | 219,644 | (10,562) | (5 | %) | |||||||||
| Operating expenses: | ||||||||||||||
| Selling, general and administrative expenses | 89,995 | 104,749 | (14,754) | (14 | %) | |||||||||
| Income from operations | 119,087 | 114,895 | 4,192 | 4 | % | |||||||||
| Other (expense) income, net | (2,011) | 21,280 | (23,291) | (109 | %) | |||||||||
| Income before income taxes | 117,076 | 136,175 | (19,099) | (14 | %) | |||||||||
| Income tax expense | (4,556) | (4,360) | (196) | 4 | % | |||||||||
| Net income | 112,520 | 131,815 | (19,295) | (15 | %) | |||||||||
| Net income attributable to redeemable non-controlling interests | 93,281 | 113,158 | (19,877) | (18 | %) | |||||||||
| Net income attributable to CompoSecure, Inc | $ | 19,239 | $ | 18,657 | $ | 582 | 3 | % |
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2023 | 2022 | ||||
| Gross Margin | 54 | % | 58 | % | |
| Operating margin | 30 | % | 30 | % |
Net Sales
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | $ Change | % Change | |||||||||||
| (in thousands) | ||||||||||||||
| Net sales by region: | ||||||||||||||
| Domestic | $ | 321,470 | $ | 295,423 | $ | 26,047 | 9 | % | ||||||
| International | 69,159 | 83,053 | (13,894) | (17 | %) | |||||||||
| Total | $ | 390,629 | $ | 378,476 | $ | 12,153 | 3 | % |
The Company’s net sales for the year ended December 31, 2023 increased by $12.2 million, or 3%, to $390.6 million compared to $378.5 million for the year ended December 31, 2022. The increase was primarily driven by continued domestic growth in the Company’s premium payment card business, which was up 9%. This was offset by lower
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international sales, which is a more variable market due to current global economic uncertainty, customer mix and a smaller sales base.
Domestic: The Company’s domestic net sales for the year ended December 31, 2023 increased $26.1 million, or 9%, to $321.5million compared to $295.4 million for the year ended December 31, 2022. The increase was primarily due to higher customer acquisition by the Company’s clients as they continued to experience higher demand.
International: The Company’s international net sales for the year ended December 31, 2023 decreased $13.9 million, or 17%,to $69.2 million compared to $83.1 million for the year ended December 31, 2022. This decrease was primarily due to current global economic uncertainty and international markets being a more variable market due to customer mix and a smaller sales base.
Gross Profit and Gross Margin
The Company’s gross profit for the year ended December 31, 2023 decreased $10.6 million, or 5%, to $209.1 million compared to $219.7 million for the year ended December 31, 2022, while the gross profit margin decreased from 58% to 54%. The decrease in gross margin percentage was due to lower production efficiencies from new and innovative card constructions, as well as the impact of inflationary pressure on wages and materials for the year ended December 31, 2023.
Operating Expenses
The Company’s prudent control on operating expenses led to a $14.7 million, or 14%, expense decrease for the year ended December 31, 2023 compared to the year ended December 31, 2022. Total operating expenses for the year ended December 31, 2023 were $90.0 million compared to $104.7 million for the year ended December 31, 2022. The decrease was driven primarily by a decrease in bonus expenses of $2.7 million, commission expenses of $8.1 million, reductions in marketing expenses of $7.2 million, insurance expenses of $4.2 million and professional fees of $0.5 million, as well as a decrease in various other costs aggregating $1.6 million. This was partially offset by increases in stock-based compensation of $6.1 million and increases in salaries and employee benefits of $3.5 million.
Income from Operations and Operating Margin
During the year ended December 31, 2023, the Company had income from operations of $119.1 million compared to income from operations of $114.9 million for the year ended December 31, 2022. The Company’s operating margin for the year ended December 31, 2023 remained consistent, at 30%, with the year ended December 31, 2022.
Other (Expenses) Income, Net
Interest expense for the year ended December 31, 2023 increased $1.6 million, or 7%, to $24.2 million compared to $22.5 million for the year ended December 31, 2022. An interest rate swap which the Company entered in January 2022 provided a benefit of $4.9 million for the year ended December 31, 2023. See Liquidity and Capital Resources below for more detail on the existing credit facility. There was an overall increase in other expenses due to the reduction in favorable changes to the fair value of mark-to-market instruments compared to December 31, 2022. The decrease in favorable changes in the fair value of mark-to-market instruments were primarily due to the increase in the price of the Company's Class A common stock compared to December 31, 2022.
Net Income
The Company’s net income for the year ended December 31, 2023 was $112.5 million, compared to net income of $131.8 million for the year ended December 31, 2022. The decrease was driven by the decrease in gross profit, changes to the fair value of warrant liabilities, earnout consideration liability and derivative liability, offset by the decrease in operating expenses.
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Use of Non-GAAP Financial Measures
This Form 10-K includes certain non-GAAP financial measures that are not prepared in accordance 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, Adjusted EBITDA and non-GAAP earnings per share 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 the 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, Adjusted EBITDA and non-GAAP earnings per share should not be considered as measures of financial performance under U.S. GAAP, and the items excluded from EBITDA, Adjusted EBITDA and non-GAAP earnings per share 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, 2024, 2023 and 2022.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (in thousands) | ||||||||||
| Net (loss) income | $ | (83,162) | $ | 112,520 | $ | 131,815 | ||||
| Add: | ||||||||||
| Depreciation and amortization | 9,174 | 8,387 | 8,575 | |||||||
| Income tax expense | 2,187 | 4,556 | 4,360 | |||||||
| Interest expense, net (1) | 16,780 | 24,156 | 22,544 | |||||||
| EBITDA | $ | (55,021) | $ | 149,619 | $ | 167,294 | ||||
| Stock-based compensation expense | 21,235 | 17,562 | 11,465 | |||||||
| Mark to market adjustments, net (2) | 171,817 | (22,145) | (42,533) | |||||||
| September Resolute deal expenses | 2,726 | — | — | |||||||
| Secondary offering transaction costs | 586 | — | — | |||||||
| Debt refinance costs | 225 | — | — | |||||||
| Additional earnout costs | 3,680 | — | — | |||||||
| Spin-off costs | 6,119 | — | — | |||||||
| Adjusted EBITDA | $ | 151,367 | $ | 145,036 | $ | 136,226 |
(1)Includes amortization of deferred financing costs and loss on extinguishment of debt for the years ended December 31, 2024, 2023 and 2022.
(2)Includes the changes in fair value of warrant liability, derivative liabilities and earnout consideration liability for the years ended December 31, 2024, 2023 and 2022.
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The following unaudited table presents the non-GAAP earnings per share and reconciliation of GAAP net (loss) income to non-GAAP adjusted net income for the periods indicated below to reflect current and deferred income tax expenses. The below presentation does not include a full tax provision. The Company applies a blended tax rate to its income before taxes and to all adjustments. Additionally, the below table includes Class B shares to eliminate the impact of the Company's historical Up-C structure.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (in thousands) except per share amounts | ||||||||||
| Basic: | ||||||||||
| Net (loss) income | $ | (83,162) | $ | 112,520 | $ | 131,815 | ||||
| Add: provision for income taxes | 2,187 | 4,556 | 4,360 | |||||||
| (Loss) income before income taxes | (80,975) | 117,076 | 136,175 | |||||||
| Add (less): mark-to-market adjustments (1) | 171,817 | (22,145) | (42,533) | |||||||
| Add: stock-based compensation | 21,235 | 17,562 | 11,465 | |||||||
| Add: secondary offering transaction costs | 586 | — | — | |||||||
| Add: September Resolute deal expenses | 2,726 | — | — | |||||||
| Add: debt refinance costs | 225 | — | — | |||||||
| Add: additional earnout costs | 3,680 | — | — | |||||||
| Add: spin-off costs | 6,119 | — | — | |||||||
| Adjusted net income before tax | 125,413 | 112,493 | 105,107 | |||||||
| Income tax expense (2) | 27,240 | 24,433 | 22,367 | |||||||
| Adjusted net income | $ | 98,173 | $ | 88,060 | $ | 82,740 | ||||
| Common shares outstanding used in computing net income per share, basic: | ||||||||||
| Class A and Class B common shares (3) | 83,834 | 78,619 | 75,697 | |||||||
| Adjusted net income per share - basic | $ | 1.17 | $ | 1.12 | $ | 1.09 | ||||
| Diluted: | ||||||||||
| Adjusted net income | $ | 98,173 | $ | 88,060 | $ | 82,740 | ||||
| Add: Interest on convertible notes net of tax | 3,238 | 7,123 | 7,164 | |||||||
| Adjusted net income used in computing net income per share, diluted (5) | $ | 101,411 | $ | 95,183 | $ | 89,904 | ||||
| Common shares outstanding used in computing net income per share, diluted: | ||||||||||
| Warrants (4) | 8,094 | 8,094 | 8,094 | |||||||
| Exchangeable Notes (5) | 11,629 | 13,000 | 13,000 | |||||||
| Equity awards | 3,411 | 3,651 | 4,183 | |||||||
| Total shares outstanding used in computing net income per share - diluted (5) | 106,968 | 103,364 | 100,974 | |||||||
| Adjusted net income per share - diluted | $ | 0.95 | $ | 0.92 | $ | 0.89 |
1) Includes the changes in fair value of warrant liability, make-whole provision of Exchangeable Notes and earnout consideration liability.
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2) Reflects current and deferred income tax expenses. Calculated using the Company's blended tax rate as if the Company did not have any non-controlling interest associated with its historical Up-C structure.
3) Assumes both Class A and Class B shares participate in earnings and are outstanding at the end of the period. There were no Class B shares outstanding as of December 31, 2024.
4) Assumes treasury stock method, valuation at assumed fair market value of $18.00.
5) The Exchangeable Notes were included through the application of the "if-converted" method. Interest related to the Exchangeable Notes, net of tax was excluded from net income.
Critical Accounting Policies and Estimates
General:
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 involve the management making estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosures with respect to contingent liabilities and assets at the date of the 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. 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. The Company evaluates the adequacy of its expected reserves and the estimates used in calculations on an on-going basis. Significant areas requiring management to make estimates include the valuation of equity instruments, measurement of changes in the fair value of earnout consideration liability, estimates of derivative liability associated with the Exchangeable Notes which were marked to market each quarter based on a Lattice model approach, changes in the fair value of warrant liabilities, derivative asset for the interest rate swap, 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 Notes 6, 9 and 11 in Notes to Consolidated Financial Statements in this Form 10-K for further discussion of the nature of these assumptions and conditions. See Note 2 in the Notes to Consolidated Financial Statements for a complete 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.
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 a customer 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.
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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 60 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. Revenue is recognized net of variable consideration such as discounts, rebates and returns.
The Company’s products do not include an unmitigated right of return unless the product is non-conforming or defective. If the goods are non-conforming or defective, the defective goods are replaced or reworked or, in certain instances, a credit is issued for the portion of the order that was non-conforming or defective. A provision for sales returns and allowances is recorded based on experience with goods being returned. Most returned goods are re-worked and subsequently re-shipped to the customer and recognized as revenue. Historically, returns have not been material to the Company.
Additionally, the Company has a rebate program with certain customers allowing for 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.
On occasion, the Company receives requests from customers to hold purchased products. We evaluate these requests as bill and hold arrangements. The Company recognizes revenue from such bill and hold arrangements in accordance with the guidance provided in ASC 606, which indicates that, for a customer to have obtained control of a product in a bill and hold arrangement all of the following criteria must be met: (a) the reason for the bill and hold is substantive, (b) the product has separately been identified as belonging to the customer, (c) the product is currently ready for physical transfer to the customer, and (d) we do not have the ability to use the product or direct it to another customer. During the years ended December 31, 2024, 2023, and 2022 the Company recognized $8.1 million, $0 and $2.3 million of revenue under bill and hold arrangements.
Net Income (Loss) Per Share
The Company complies with accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share”. Net income per common share is computed by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding for the period. The weighted-average number of common shares outstanding during the period includes Class A common stock but is exclusive of Class B common stock as these shares have no economic or participating rights. As a result of the Resolute Transaction, all shares of Class B Common Stock were exchanged for shares of Class A Common Stock on September 17, 2024. No shares of Class B Common Stock were outstanding at December 31, 2024.
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Equity-Based Compensation
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 prior to 2021, the Company utilized a blend of an appropriate index and the Company's volatility to estimate the volatility assumption when calculating the fair value of options granted during 2024. An 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 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. During the year ended December 31, 2024, the Company granted 1,915,532 non-qualified stock options. The Company also granted restricted stock units and performance-based stock units under its 2021 incentive plan during the years ended December 31, 2024, 2023 and 2022. See Note 9 in Notes to Consolidated Financial Statements in this Form 10-K.
Certain equity awards associated with the achievement of certain market conditions discussed below were achieved during the year ended December 31, 2024
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 shares of the Company's Class A Common Stock in earnout consideration based on the achievement of certain stock price thresholds (See Note 18 in Notes to Consolidated Financial Statements in this Form 10-K for further discussion) (collectively, the “Earnouts”). 657,160 of the Earnout shares were subject to ASC 718. The remaining shares 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 share price, volatility, risk-free rate of return, expected term, anticipated dividends and forfeitures, 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.
The earnouts achievement were subject to two price thresholds with half to be awarded upon the achievement of each threshold. The earnouts expire in two phases if the achievement thresholds are not met. The first phase was to expire upon the three year anniversary upon the initial closing date and the second phase is set to expire upon the four year anniversary. The earnouts under the first phase were achieved on December 13, 2024. The second phase has not yet been achieved. See Notes 9 and 11 in Notes to Consolidated Financial Statements in this Form 10-K 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 warrants are publicly traded and are 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.
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Tax Receivable Agreement Liability
In connection with the Business Combination, the Company entered into a tax receivable agreement (the "TRA" or "Tax Receivable Agreement") with Holdings and holders of interests in Holdings (the "TRA Parties"). Pursuant to the TRA, the Company is required to pay to certain TRA Parties, 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. The TRA will continue until all such tax benefits have been utilized or expired unless the Company exercises its right to terminate the agreement for an amount representing the present value of anticipated future tax benefits under the TRA. The Company will retain the benefit of the remaining 10% of these cash tax savings. The Company recorded $253.7 million and $25.4 million in TRA liability as of December 31, 2024 and 2023, respectively, in the Company's consolidated balance sheets. The Company paid $1.3 million and $2.4 million in the years ended December 31, 2024 and 2023, respectively, to the TRA Parties pursuant to the savings in U.S. federal, state and local income taxes that the Company realized as a result of the utilization of certain tax attributes for the fiscal year 2023 and 2022.
In connection with the Resolute Transaction, the Company and certain of the TRA Parties entered into Amendment No. 1 to the TRA, dated as of August 7, 2024 (the "TRA Amendment"). The TRA Amendment provides for certain amendments to the TRA for the benefit of the Company. In particular, the TRA Amendment amends the definition of “Change of Control” (as defined in the TRA) to forego the acceleration of certain payments that may have otherwise been payable to the TRA Parties by the Company or Holdings as a result of the Resolute Transaction, provided that such TRA Parties shall retain their right to acceleration of payments upon any future change of control. The TRA Amendment also amends the “Early Termination Rate” (as defined in the TRA) by providing for an increase in the discount rate applicable to any future early termination payments pursuant to the TRA, resulting in a decrease in the amount of any such potential payments that the TRA Parties would otherwise be entitled to receive.
Income Taxes
Income taxes are applied to the income attributable to the controlling interest (see Note 8 in Notes to Consolidated Financial Statements in this Form 10-K) 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.
The Company 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 prior to December 27, 2021, the date of the consummation of the Business Combination, 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. During the year ended December 31, 2024, federal tax authorities completed their audit of fiscal 2020. There were no proposed adjustments resulting from the examination.
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Prior to the Resolute Transaction, Holdings was a partnership for tax purposes. Pursuant to Holdings’ limited liability company agreement, during a portion of fiscal 2024 (and prior years), Holdings made pro rata tax distributions to its members. These distributions were based on the Company’s estimate of taxable income for each year, updated throughout the year. Tax distributions from Holdings were intended to provide each member of Holdings sufficient funds to meet tax obligations with respect to the taxable income of Holdings allocated to each member. The Holdings limited liability company agreement required distributions to be calculated based on a tax rate equal to the highest combined marginal federal and applicable state or local statutory income tax rate applicable to an individual resident in New York City, New York, including the Medicare contribution tax on unearned income, taking into account all jurisdictions in which the Company was required to file income tax returns together with the relevant apportionment information subject to various adjustments. For the year ended December 31, 2024, Holdings distributed a total of $50.1 million of tax distributions to its members, of which $15.2 million was paid to CompoSecure, Inc. (the parent company), resulting in a net tax distribution to all other members of $34.9 million. For the year ended December 31, 2023, Holdings distributed a total of $50.0 million of tax distributions to its members, of which $11.6 million was paid to CompoSecure, Inc., resulting in a net tax distribution to all other members of $38.4 million. As a result of the Resolute Transaction, the Company became the sole member of Holdings, eliminating the requirement for further tax distributions to members other than the Company.
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, and 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
On November 27, 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures, which applies to all public entities that are required to report segment information in accordance with Topic 280, Segment Reporting, The guidance will be applied retrospectively and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance improves financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analysis. The Company adopted this standard and has reflected updates to its segment reporting in the Company's consolidated financial statements.
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 and revolving credit facility. The Company’s primary cash requirements include operating expenses, debt service payments (principal and interest) and capital expenditures (including property and equipment).
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As of December 31, 2024, the Company had cash and cash equivalents of $77.5 million and total debt principal outstanding of $197.5 million. As of December 31, 2023, the Company had cash and cash equivalents of $41.2 million and total debt principal outstanding of $340.3 million.
The Company believes that cash flows from its operations and available cash and cash equivalents as well as the availability of a revolving credit facility of $130.0 million (as described below), are sufficient to meet its liquidity needs, including the repayment of its outstanding debt, 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.
On August 7, 2024, the Company entered into a Fourth Amended and Restated Credit Agreement with JPMC (the“2024 Credit Facility” and collectively with the 2021 Credit Facility, the “Credit Facilities”) to refinance the 2021 Credit Facility. In conjunction with the 2024 Credit Facility, the maximum borrowing capacity of the overall credit facility was increased to $330.0 million comprised of a term loan of $200.0 million (the “2024 Term Loan”) and a revolving credit facility of $130.0 million (the “2024 Revolver”). At December 31, 2024, there was $197.5 million of total debt outstanding under the Company’s existing credit facilities (the “2024 Credit Facility”). No amounts were drawn on the revolving credit facility as of December 31, 2024. Additional amounts may be available for borrowing during the term of the revolving loan, up to the full $130 million, as long as the Company maintains a net leverage ratio as stipulated in the credit facility agreement. As of December 31, 2024, the Company’s net leverage ratio met the requirement for the available borrowing as defined in the terms of the credit facility agreement. The 2024 Credit Facility will mature on August 7, 2029.
Two lenders who participated in the 2021 Credit Facility did not participate in the 2024 Credit Facility and transferred their debt to other lenders. The 2024 Credit Facility is set to mature on August 7, 2029. The 2024 Credit Facility was accounted for as an extinguishment for the two lenders who transferred their debt and as a modification for all other remaining lenders. As a result, the Company wrote-off approximately $0.1 million in unamortized debt issuance costs related to the lenders who did not participate in the 2024 Credit Facility which is included in Loss on Extinguishment of Debt in Other Expense in the accompanying consolidated statements of operations. In conjunction with the 2024 Credit Facility, the Company incurred approximately $0.7 million in lender fees and $0.1 million in other third-party fees related to the 2024 Revolver and approximately $1.1 million in lender fees and $0.2 million in other third-party fees related to the 2024 Term Loan. The $1.1 million of lender fees related to the 2024 Term Loan have been capitalized and these fees, along with $0.8 million of unamortized debt issuance costs related to the 2021 Credit Facility, will be amortized into interest expense through the maturity date of the 2024 Term Loan using the effective interest method. Similarly, $0.7 million of lender fees and $0.1 million of other third-party fees related to the 2024 Revolver have been capitalized as an other long-term asset and will be amortized into interest expense through the maturity date of the 2024 Revolver using the straight-line method. The $0.2 million other third-party fees related to the 2024 Term Loan were expensed as incurred.
On December 30, 2024, the Company executed Amendment No. 1 to the 2024 Credit Facility (the "December 2024 Amendment") to allow the Company to facilitate the Spin-Off. See Note 1 in Notes to Consolidated Financial Statements for additional discussion of the spin-off. There were no changes to the lenders as a result of the amendment, which is accounted for as a modification. The Company incurred $0.2 million of lender fees in connection with the December 2024 Amendment, which will be amortized through the maturity of the 2024 Credit Facility.
The Company’s Credit Facilities, including the 2024 Credit Facility, require the Company to make quarterly principal payments until maturity, at which point a balloon principal payment is due for the outstanding
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principal. The Credit Facilities also require the Company to make monthly interest payments as well as pay a quarterly unused commitment fee of 0.35% for any unused portion of the revolving credit facilities. The 2024 Credit Facility provides for the Company to prepay the term loans without penalty or premium. The Credit Facilities are secured by substantially all of the assets of the Company.
Interest on the revolving credit facilities and the term loans are based on the outstanding principal amount during the interest period multiplied by the quoted SOFR rate plus the Applicable Rate (as defined in the 2024 Credit Facility), which can range from 1.75% to 2.75% based on the Company's leverage ratio.
The 2024 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 was in compliance with all covenants as of December 31, 2024. See Note 6 in Notes to Consolidated Financial Statements in this Annual Report on 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, 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 $130.0 million. The Exchangeable Notes were 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 accrued interest at a rate of 7% per annum. Interest was payable semi-annually in arrears on each June 15 and December 15, which commenced on June 15, 2022, to holders of record at the close of business on the preceding June 1 and December 1 (whether or not such day is a Business Day), respectively. The Exchangeable Notes were scheduled to mature on December 15, 2026, and were convertible into shares of Class A Common Stock at a conversion price of $11.50 per share, subject to adjustment. See Note 6 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
Effective September 19, 2024, Resolute’s acquisition of a majority of the Company’s Class A Common Stock caused a Fundamental Change, as defined in the Indenture pursuant to which $130 million of 7% Exchangeable Senior Notes, due 2026 were issued by a subsidiary of the Company. This Fundamental Change provided holders of the Exchangeable Notes a choice to: (1) exchange the Exchangeable Notes for shares of Class A Common Stock at a temporarily increased exchange rate of 104.5199 shares per $1,000 principal amount of Exchangeable Notes until November 27, 2024 (with the exchange rate then reverting to the existing 91.0972 shares per $1,000 principal amount of Exchangeable Notes); (2) have the Company repurchase for cash of all of such holder’s Exchangeable Notes on November 29, 2024 at a repurchase price equal to 100% of the principal amount of the Exchangeable Notes to be repurchased plus accrued and unpaid interest; or (3) continue to hold the Exchangeable Notes. Through December 31, 2024, all $130 million of the Exchangeable Notes were surrendered and exchanged for an aggregate of 13,587,565 newly-issued shares of Class A Common Stock. As of December 31, 2024, all of the Exchangeable Notes were converted into Class A shares.
Net Cash Provided by Operations
Cash provided by the Company’s operating activities for the year ended December 31, 2024 was $129.6 million compared to cash provided by its operating activities of $104.3 million during the year ended December 31, 2023. The increase in cash provided by operating activities of $25.2 million was primarily attributable to an increase in changes in mark to market fair value with a net change of $171.8 million, equity compensation expense of $21.2 million, depreciation and amortization expense of $9.2 million, changes in working capital of $11.9 million, amortization of deferred financing costs of $1.2 million and deferred tax income of $2.5 million. This was partially offset by a decrease in net income of $83.2 million, and inventory reserve of $0.3 million.
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Net Cash Used in Investing
Cash used in the Company’s investing activities for the year ended December 31, 2024 was $9.9 million, primarily relating to capital expenditures of $7.4 million, investment in SAFE of $1.5 million and capitalized software expenditures of $1.0 million, compared to cash used in investing activities of $10.9 million for capital expenditures during the year ended December 31, 2023.
Net Cash Used in Financing
Cash used in the Company’s financing activities for the year ended December 31, 2024 was $83.4 million, compared to cash used in the Company's financing activities for the year ended December 31, 2023 of $65.8 million. Cash used in financing activities for the year ended December 31, 2024 primarily related to distributions to non-controlling interest holders of $34.9 million, special distribution to non-controlling interest holders of $15.6 million repayment of scheduled principal payments of term loan of $12.8 million, dividends to holders of Class A Common Stock of $8.9 million, payments for taxes related to net share settlement of equity awards and Earnouts of $9.0 million and $3.8 million, respectively. The Company also made payments of $2.1 million for costs related to the 2024 Term Loan modification and $1.3 million related to payment for tax receivable agreement liability. Cash outflows were partially offset by proceeds of $5.0 million pursuant to the exercise of equity awards and issuance of shares for employee stock purchase plan transactions. Cash used for the year ended December 31, 2023 primarily related to payment of distributions to non-controlling interests, repayment of scheduled term loan principal payments, payments for taxes related to net share settlement of equity awards, payments of tax receivable agreement liability and proceeds from employee stock purchase plan and exercise of equity awards.
Contractual Obligations
The following table summarizes, as of December 31, 2024, the Company’s material expected contractual cash obligations by future period (see Notes 6, 7 and 15 of Notes to Consolidated Financial Statements):
| Payments due by Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 year or less | Years 2-3 | Years 4-5 | After Year 5 | Total | ||||||||||||||
| ($ amounts in thousands) | ||||||||||||||||||
| Long-term Debt (1) | $ | 11,250 | $ | 31,250 | $ | 155,000 | $ | — | $ | 197,500 | ||||||||
| Operating Leases (2) | 2,502 | 3,152 | 1,205 | — | 6,859 | |||||||||||||
| Tax Receivable Agreement Liability (3) | 5,171 | 28,405 | 29,278 | 190,851 | 253,705 | |||||||||||||
| Total | $ | 18,923 | $ | 62,807 | $ | 185,483 | $ | 190,851 | $ | 458,064 |
(1)Includes principal only. See Note 6 to the Consolidated Financial Statements.
(2)See Note 7 to the Consolidated Financial Statements.
(3)The Company is obligated to make payments under the tax receivable agreement to holders of interests in Holdings. See Note 2 and 15 to the Consolidated Financial Statements.
As of December 31, 2024, the Company has purchase commitments with a supplier of approximately $10.7 million
for 2025 and $2.0 million for 2026.
Financing
The Company is party to the 2024 Credit Facility with various banks. For a more complete description of the Company's debt obligations, see Note 6 in the Notes to Consolidated Financial Statements in the Audited Consolidated Financial Statements of the Company in this report.
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