Compass Diversified Holdings (CODI) Risk Analysis

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.

Our management fee consists of a base management fee and, if specified performance measure is met under certain circumstances, an incentive management fee. Both the base management fee and the incentive management fee are calculated by reference to the Company's adjusted net assets, which will be impacted by the acquisition or disposition of businesses, which can be significantly influenced by our Manager, as well as the performance of our businesses and other businesses we may acquire in the future. Changes in adjusted net assets and in the resulting management fees could be significant, resulting in a material adverse effect on the Company's results of operations. In addition, if the performance of the Company declines, assuming adjusted net assets remains the same, management fees will increase as a percentage of the Company's net income. While the MSA provides for a reduction of future payments due to an overpayment to the Manager, for example as a result of the Lugano Investigation, the timeline of such reductions is subject to negotiation between the Company and the Manager and may delay the return of any overpayments.

A significant portion of our long-term assets are comprised of intangible assets, including goodwill and indefinite lived intangible assets recorded as a result of past acquisitions. We assess the potential impairment of goodwill and indefinite lived intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If our analysis indicates that an individual asset's carrying value exceeds its fair market value, we will record a loss equal to the excess of the individual asset's carrying value over its fair value. The impairment testing steps require significant amounts of judgment and subjectivity. Factors that could trigger impairment include the following: - significant underperformance relative to historical or projected future operating results;- significant changes in the manner of or use of the acquired assets or the strategy for our overall business;- significant negative industry or economic trends;- significant decline in our stock price for a sustained period;- changes in our organization or management reporting structure could result in additional reporting units, which may require alternative methods of estimating fair values or greater desegregation or aggregation in our analysis by reporting unit; and - a decline in our market capitalization below net book value. As of December 31, 2025, we had identified indefinite lived intangible assets with a carrying value in our financial statements of $30.8 million, and goodwill of $895.4 million.

In order to make future acquisitions, we intend to raise capital primarily through debt financing at the Company level, additional equity offerings, the sale of stock or assets of our businesses, and by offering equity in the Trust or our businesses to the sellers of target businesses or by undertaking a combination of any of the above. Since the timing and size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit fully from attractive acquisition opportunities. Such funding may not be available on acceptable terms, especially in light of the Lugano Investigation. Our prior filing delays and any future delays could also limit our ability to access the public capital markets efficiently, including by limiting our ability to use certain registration statement forms or offering methods that are available to timely filers. In addition, the level of our indebtedness may impact our ability to borrow at the Company level. These risks may materially adversely affect our ability to pursue our acquisition strategy successfully and our financial condition, business and results of operations.

As a result of the Lugano Investigation, the Company was in breach of certain financial and other covenants under its 2022 Credit Facility. As a result of the Fifth Amendment, the Company is no longer in default under its obligations under the 2022 Credit Facility; however, there is no certainty that the Company will be able to comply with the amended covenants under the 2022 Credit Facility when they are next tested. If the Company fails to comply with its amended covenants and is determined to be in default under the 2022 Credit Facility, our Credit Agreement Lenders may elect to exercise the remedies available to them, including but not limited to declaring our borrowings under the Credit Agreement due and payable, discontinuing further lending commitments, imposing cash dominion or other cash-management controls, and instructing our debtors and customers (and those of our subsidiaries) to remit payments directly to the Credit Agreement Administrative Agent. In the event of a future default under the 2022 Credit Facility, if our borrowings under the Credit Agreement are accelerated and the acceleration is not rescinded, annulled, or otherwise cured within thirty (30) days after the notice of acceleration, the holders of our Notes would have the right to declare the Notes due and payable. Any such outcome in the event of a breach would materially and adversely affect our liquidity, results of operations, financial condition, ability to execute on our business strategies, stock price, and our ability to continue as a going concern, and may require us to seek additional capital, refinance or restructure our indebtedness, sell assets, or pursue other strategic alternatives, none of which may be available on acceptable terms, if at all. Any new financing, if available, may impose significantly higher costs, require additional restrictive covenants, or result in substantial dilution to our stockholders. Additionally, the exercise of other remedies available to the Lenders under the Credit Agreement could disrupt our operations by interrupting our supply chain, limiting our ability to pay vendors, delaying customer deliveries, and increase the risk of losing key employees, any of which would materially harm our financial performance and business prospects. These circumstances may also negatively affect our relationships with customers, suppliers, employees, and other stakeholders. They have also required, and will continue to require, substantial management time and increased professional advisory costs.

A component of our strategy is to continue to acquire additional subsidiaries, as well as add-on acquisitions for our existing subsidiaries. If our reputation suffers due to the Lugano Investigation or otherwise, we may experience challenges in causing acquisition targets to work with us. Generally, because such acquisition targets are held privately, we may experience difficulty in evaluating potential target businesses as the information concerning these businesses is not publicly available. In addition, we and our subsidiary companies may have difficulty effectively managing or integrating acquisitions or they may fail to perform as anticipated. In such events, we may experience greater than expected costs or difficulties relating to such acquisition, in which case, we might not achieve our anticipated returns and our financial condition, business, and results of operations may be adversely affected. In addition, constraints on our liquidity and access to the debt and equity capital markets (including limitations on our ability to utilize at-the-market equity programs and other equity issuance alternatives) could limit our ability to pursue acquisitions or could require us to pursue acquisitions on terms that are less favorable to us.

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.

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.

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.