Description

Many investment ideas have been pitched to us recently that start like this... "here is a BUSTED SPAC... they have cash.  they will be EBITDA profitable soon."  "here is a SPAC that floundered after its merger... they are on the cusp of profitability.  if this wasn't a SPAC it would be worth 2-3x more..."

To these pitches I say show me a SPAC that is NOT busted.  Well I guess there are a few that have done just fine... But the vast majority probably fall into the busted category.  Is this a fertile hunting ground for value?  Absolutely.  Who am I to say that bottom fishing for out of favor equities is not a formidable investment strategy?

With all of this in mind, I present to you a BUSTED SPAC that is unique.  It is not on the cusp of anything... it is actually really profitable, with a market leading position, solid management, and a return on invested capital mindset.

Composecure is a 2021 vintage SPAC MERGER name (they merged with something called Roman DBDR Tech) in December of 2021.

The Company is a premium metal card maker and emergent crypto cold storage provider (FORGET THE CRYPTO PIECE FOR NOW....)

A 10-K paste is lazy, but it's one of the better overviews I have read:

Composecure 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 and other payment card issuers primarily within the United States 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.

Their metal card business growth has been stellar with an ~19% CAGR since seating Jon Wilk as CEO in 2026.

Their core metal card business is well established with premier partnerships including American Express and JP Morgan and is highly profitable with Gross Margins over 50% and EBITDA margins that rival some of the finest companies this side of Omaha. Recognizable cards include American Express’ Platinum and branded cards such as Amazon Prime and Delta Airlines. 

What is truly amazing is that most of the Company's products are made in its Somerset NJ facility, where $100m of PP&E (Depreciated down to a mere $24m) is able to generate products of this margin profile.  Raw materials include various metals, EMV chips, holograms, adhesives, magnetic stripes, and NFC assemblies. The Company runs with ~$50m of this stuff. 

The Company has grown its metal card business from ~$90M in 2015 to an expected $400m ++++ for 2024.

5.5B cards are expected to be issued worldwide in 2025, a steady 5-7% CAGR as electric payments continue to replace cash. Competitors to CMPO include 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., though most focus on lower-end cards and in some cases have contracts with CompoSecure to producemetal cards.

There is a surprising amount of technology contained within a metal card, thus the manufacturing of these cards is no small feat. This gives Composecure high barriers to entry. Card issuers have repeatedly observed that consumers holding metal cards spend more money. When a customer loses a card they are eager to get a new card into that customers' hands quickly, and are not price sensitive.

In the last quarter, US sales continued to grow ~25% year over year yet non-US sales, which are usually more lumpy, continued to be down, now several quarters ina  row. However they are still coming off a big 2022 surge of over 60% in 2022 and management thinks this stabilizes into next year.

What about Crypto?

As promised let's get back to Crypto.  What does this Company have to do with Crypto?

Since this was a 2020/2021 vintage SPAC, of course there was some buzzword crypto angle to the deal.

Composecure has a cold storage crypto product called Arculus.

https://www.getarculus.com/

It's cool, it's sexy, it costs only $99.00

What does it do?

Without going into a whole screed on cold storage and crypto, Composecure leveraged its metal card technology to design a one-tap secure cold storage wallet.

Basically you can tap your Arculus Card to a mobile device with the Arculus App to view your crypto and even NTFs. No cords, no Bluetooth - you can access your digital assets safely and securely.

When the Company IPO'd they were touting something like 230m cold storage wallets would be in use by 2025. SPAC hustlers latched on to the crypto element of the story, and the Company invested heavily in marketing the platform.

In 2021 they invested $21m in Arculus which moved to $14m in 2022.  It is worth noting that these numbers are included in adjusted EBITDA.

The 2023 investment was lower than in 2022 and again lower in 2024.  The Company has stated that Arculus will be cash flow positive in 2025.  Honestly I don't really care.  If this business is worth anything it is all 'extra'.. Mgmt says they will sell 17m of these cards in 2025.  I hope they do... There is a whole narrative around Arculus and taking a percentage of transaction fees and so on and so forth.  Ignore it.  Hang out hhere for the metal card business... 

Shareholder Structure at closing was problematic - it is getting better

The Roman SPAC raised $220m in its November 2020 IPO. When CMPO reported its first quarter after closing, in March 2022, they showed $15m in cash on the balance sheet, which is all you need to know about SPACS.

When the Dec 2021 SPAC deal closed, insiders owned approximately 75% of the shares outstanding. Of the ~16.4M Class A shares, 4.7M were rolled over from DBDR, while 4.5M shares were distributed through the common PIPE, with PIPE shares having no lockup period. Earn-out shares to existing CMPO shareholders included 3.75M shares to be issued if the stock exceeded $15.00 and 3.75M shares issued if the stock exceeded $20.00.

Here is what the holders list looked like on April 18, 2024 (below).

Note that in May 2024, the Chairman's firm, LLR Capital, completed a no-proceeds Secondary, selling ~$52m of stock (7m shares at $6.50/share).

While any no-proceeds secondary is usually viewed as bearish, in a "busted SPAC" (that term again), I don't give Companies that big of a penalty mark for this.  Owners of a business merged with an entity that they "thought" had $220m. Everyone had great aspirations of diversified shareholder base and ample cash to run their business plan.  Well that did not happen. As a decent 'door prize' on the heels of the secondary, CMPO distributed a special 30c dividend to holders of Record (5/20), payable on 6/11.

I think the seconday is bullish in that it increases the float and liquidity for a company that has north of $750m in EV and should be able to attract institutional investors.

Earnings power and guidance

2022:

Sales: $378m

Adj EBITDA: $136m

2023:

Sales: $391m

Adj EBITDA: $145m

Here is their guidance for 2024:

Sales: $408m - $428m

Adj EBITDA: $147m - $157m

There is $192m of Term Loan and $128m of Exchangeable Notes (another BUSTED SPAC vestige) for a total of $320m of total debt.  There is a Revolver with a zero balance and $60m of capacity. The rate on the Term Loan is between 7.8-8.0%. The Notes bear interest at 7% per year and mature in December of 2026. They are exchangeable at $11.50 per share.  If the stock were to go to $14.95 or higher (now that the three year anniversary of the Notes has happened) the Company could begin calling the Notes.

Earlier in 2024, the Company received authorization to buyback $40m of stock of Exchangeable Notes. Leverage ratios continue to shrink each quarter.

There are 22.4m warrants that strike at $11.50.  These expire in Dec 2026.

As Arculus investment rolls off, the Company should be capable of doing $180m in EBITDA in 12-18 months time.  $780m in EV today for this kind of number (4.3x) is simply too low.  It is hard to say what multiple this deserves, but 7-8x seems reasonable. Is there dilution from the Notes and Warrants?  Yes.  Bake it in and use the Treasury method to get to a fully diluted share count if you must.  CapEx is minimal.  $180m in EBITDA less $10m in D&A less $23m in interest expense fully taxes is close to $100m.  Even at 100m shares out, the stock trades for 6x earnings.  This is a busted SPAC that may not actually be busted.  The shares should be a double in a year or so.

Catalyst

cold storage product investment dollars rolling off, actually becoming cash flow neutral on that product

continued special dividend, potential buybacks

market waking up to the strong margins here