Compass Diversified Holdings (CODI) Risk Analysis

We rely on distributions and other payments from our operating subsidiaries to meet our obligations and to make distributions to our shareholders, and minority owners of our subsidiaries may reduce amounts available to us. The Trust's sole asset is its interest in the LLC, which holds controlling interests in our operating subsidiaries. We are therefore dependent upon the ability of our operating subsidiaries to generate earnings and cash flow through dividends, interest and principal payments on intercompany indebtedness, and other permitted distributions, to enable us to satisfy our obligations (including debt service, taxes and management fees) and to make distributions to our shareholders. Our subsidiaries' ability to make distributions to us may be restricted by applicable law, their organizational documents, and the rights of minority owners. In addition, we do not own 100% of our businesses. To the extent our subsidiaries make dividends or other distributions to equity holders, minority owners may be entitled to receive their pro rata share, which reduces the amounts available to us for debt service, reinvestment, or distributions to our shareholders. Similarly, proceeds from the sale of a subsidiary will be allocated among us and the minority owners of that subsidiary.

As previously disclosed, following concerns reported to the Company's management, the Company commenced the Lugano Investigation. As a result of the Lugano Investigation, the Company determined that the Company's previously issued financial statements for fiscal years 2022, 2023, 2024, and the first three fiscal quarters of 2025 including other interim and full-year financial information should no longer be relied upon. The Company corrected these errors in its 2024 Form 10K/A which was filed on December 8, 2025, and its Quarterly Reports on Form 10-Q for the first, second, and third quarters of 2025, which were filed on December 18, 2025, December 29, 2025 and January 14, 2026 respectively. We have incurred unanticipated costs for accounting, financing and legal fees in connection with the Lugano Investigation and the restatements, including those associated with our entry into forbearance agreements, amendments, and waivers with respect to our Credit Agreement and senior note indentures due to potential defaults or events of default thereunder. The restatements may erode investor confidence in our Company, our financial reporting, accounting practices and processes, and may raise reputational issues for our business. The Lugano Investigation and the restatement of our historical financial statements have negatively impacted, and may continue to negatively impact, the trading price of our securities, have made it more difficult for us to comply with our debt covenants and tightened our liquidity, and may make it more difficult for us to raise capital on acceptable terms, or at all, in the future. In light of the Lugano Investigation and related matters, we have taken certain actions to preserve liquidity, including suspending distributions on our common shares, and our ability to access the equity capital markets, including through at-the-market equity offerings, was limited during 2025 in light of the Lugano Investigation and related events. In addition, the Lugano Investigation, the restatements and related material weaknesses in our internal control over financial reporting have resulted in litigation against Lugano and the Company, and stockholder litigation against the Company, and regulatory investigations and inquiries which may result in adverse regulatory consequences. As previously disclosed, there are ongoing investigations initiated by the SEC and the U.S. Department of Justice ("DOJ"), and FINRA conducted a review of trading activity in our securities and referred the matter to the SEC for whatever actions the SEC deemed appropriate, if any. These and any future regulatory consequences, litigation, claims or disputes, whether successful or not, could subject us to additional costs or liabilities we are currently unaware of, divert the attention of our management, or impair our reputation. Each of these consequences could have a material adverse effect on our business, results of operations and financial condition.

In connection with the Lugano Investigation and the restatements, we identified material weaknesses in our internal control over financial reporting as of December 31, 2024 and 2025, which are described in more detail in Part II, Item 9A. "Controls and Procedures" of the 2024 Form 10-K/A and this Form 10-K. We also determined that our disclosure controls and procedures were not effective as of December 31, 2024 and 2025. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's consolidated interim or annual financial statements will not be prevented or detected on a timely basis. If the material weaknesses are not remediated in a timely manner, or if additional material weaknesses in our internal controls over financial reporting are discovered, they may adversely affect our ability to record, process, summarize and report financial information timely and accurately and, as a result, our consolidated interim or annual financial statements may contain material misstatements or omissions. While the Company has implemented a remediation plan with respect to these material weaknesses, the Company will not be able to conclude whether the steps the Company has taken will remediate the material weaknesses until a sustained period of time has passed to allow management to test the design and operating effectiveness of the new and enhanced controls. We may be unable to timely file, or may be required to amend, future periodic reports if our remediation efforts are not successful or if we identify additional material weaknesses or control deficiencies. At this time, we cannot provide an estimate of costs expected to be incurred in connection with continuing to implement our remediation plan or identify a date on which the remediation efforts will be concluded. However, these remediation measures may be time consuming, may result in us incurring significant costs, and will place significant demands on our financial and operational resources. Our remediation plan also depends in part on the performance of third parties (including advisors, consultants, and service providers) supporting our financial reporting and internal control environment; if these third parties fail to perform as expected, or if we are unable to retain or recruit qualified personnel, remediation could be delayed or unsuccessful. Remediation measures we have taken to date and may take in the future may not be sufficient to remediate the control deficiencies that led to our material weaknesses in internal control over financial reporting or prevent or avoid potential future material weaknesses or other significant deficiencies in the future. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud. Any failure to design, implement and maintain effective internal control over financial reporting and effective disclosure controls and procedures could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods, such as the previous restatements disclosed in the 2024 Form 10-K/A. Any failure to implement and maintain effective internal control over financial reporting in a timely manner or with adequate compliance could also adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our Annual Reports on Form 10-K. Ineffective disclosure controls and procedures and internal control over financial reporting could also have a material adverse effect on our business and cause investors to lose confidence in our reported financial and other information, which would likely adversely affect the market price of our common stock.

In November 2025, Lugano and certain of its subsidiaries filed a voluntary Chapter 11 petition under the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. While our intercompany loan to Lugano is secured, the anticipated value of the collateral securing the loan is less than the value of the loan. Our ability to access the collateral may also be limited by bankruptcy and other applicable laws as well as claims by Lugano or its stakeholders attempting to invalidate or subordinate the intercompany loan. There is no assurance that the liquidation of the collateral securing our intercompany loan to Lugano will occur in a timely fashion or that the collateral can be readily liquidated. The amount and timing of any recoveries on our secured position are inherently uncertain and may differ from the amounts reflected in our estimates as of December 31, 2025. Our secured position may be challenged in the bankruptcy proceedings (including through claims seeking to subordinate or recharacterize our claim), and adverse outcomes could materially reduce or eliminate recoveries. In addition, parties in interest in the bankruptcy proceedings or other third parties could assert claims or causes of action against the Company and/or its directors and officers arising out of or relating to Lugano and the bankruptcy proceedings, which could result in substantial defense costs, potential liability or settlement payments, and could further reduce the net amount and timing of any recoveries. In addition, as previously disclosed, at Lugano's request and subject to Bankruptcy Court approval, we agreed to provide Lugano with debtor-in-possession financing under Section 364 of the Bankruptcy Code in an amount not to exceed $12.0 million (inclusive of any "roll up" of prepetition indebtedness) (the "Lugano DIP Loan"). The Bankruptcy Court approved the Lugano DIP Loan on an interim basis, but never on a final basis as Lugano determined that it no longer needed the financing. Bankruptcy proceedings are inherently uncertain and may result in delays, additional claims, litigation, administrative expenses, and outcomes that are adverse to us.

As of December 31, 2025, we had approximately $1.89 billion of consolidated debt outstanding. Our level of indebtedness, and the debt service obligations associated with it, could have significant adverse consequences, including, among other things: (i) requiring a substantial portion of our cash flows to be used for interest and principal payments, thereby reducing cash available for working capital, capital expenditures, acquisitions, and distributions; (ii) limiting our ability to obtain additional financing (including to refinance existing indebtedness) on acceptable terms, or at all; (iii) increasing our vulnerability to adverse economic, industry, and business conditions, including periods of reduced demand or compressed margins at our subsidiaries; (iv) limiting our flexibility in planning for, or reacting to, changes in our business and the businesses of our subsidiaries; and (v) increasing the cost of future borrowings and/or increasing the likelihood that we would need to sell assets, raise equity (potentially on dilutive terms), or pursue other strategic alternatives to generate liquidity. Our indebtedness also subjects us and certain of our subsidiaries to restrictive covenants and other contractual requirements, including financial maintenance covenants and limitations on, among other things, additional indebtedness, liens, asset sales, investments, and distributions. These restrictions may limit our operating flexibility and may constrain our ability to respond to changing market conditions or pursue our strategic objectives. If we fail to comply with the covenants or other terms of our indebtedness, we could be required to seek waivers or amendments, which may not be available on acceptable terms, or at all. A covenant breach or other event of default could result in increased borrowing costs, the acceleration of some or all of our indebtedness, the imposition of additional lender controls (including cash management measures), and cross-defaults under other debt instruments, any of which could materially and adversely affect our liquidity and financial condition. In addition, a portion of our indebtedness-most significantly borrowings under our credit facility-bears interest at floating rates. As a result, increases in benchmark interest rates and/or applicable margins would increase our interest expense and debt service requirements. Higher interest expense could reduce our earnings and cash flows, make it more difficult to comply with financial covenants, reduce cash available for distributions, and adversely affect our ability to refinance indebtedness or incur additional debt. While we may from time to time enter into hedging arrangements to mitigate exposure to interest rate volatility, any such arrangements may not be available on acceptable terms, may not be effective, and may expose us to additional risks, including counterparty risk and potential cash payment obligations. Any of the foregoing risks could materially and adversely affect our business, results of operations, financial condition, liquidity, and the trading price of our securities.

Sostratus LLC, as Holder of our Allocation Interests, will receive a profit allocation based on ongoing cash flows and capital gains in excess of a hurdle rate. Certain persons who are employees and partners of our Manager are owners of Sostratus LLC. In this respect, a calculation and payment of profit allocation may be triggered upon the sale of one of our businesses. As a result, our Manager may be incentivized to recommend the sale of one or more of our businesses to the Company's Board at a time that may not be optimal for our shareholders.

Neither our management team nor our Manager is expressly prohibited from investing in or managing other entities, including those that are in the same or similar line of business as our businesses. In this regard, the Management Services Agreement and the obligation to provide management services will not create a mutually exclusive relationship between our Manager and its affiliates, on the one hand, and the Company, on the other.

Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it satisfies the Company's acquisition or disposition criteria, as established by the Company's Board from time to time. If our Manager determines, in its sole discretion, that an opportunity fits our criteria, our Manager will refer the opportunity to the Company's Board for its authorization and approval prior to the consummation thereof; opportunities that our Manager determines do not fit our criteria do not need to be presented to the Company's Board for consideration. If such an opportunity is ultimately profitable, we will have not participated in such opportunity. Upon a determination by the Company's Board not to promptly pursue an opportunity presented to it by our Manager in whole or in part, our Manager will be unrestricted in its ability to pursue such opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other entities, including its affiliates.

We may decide to acquire one or more businesses with which our officers, our directors, or our Manager have a relationship. Potential conflicts of interest may exist with respect to a particular acquisition, and, as a result, the terms of the acquisition of a target business may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.