Right-of-Use Asset Obtained in Exchange for Operating Lease Liability

$ 2,205

$ 6,596

ote N - Commitments and Contingencies

General Matters

The Company and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of business. A liability for a loss contingency is accrued when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For all other material loss contingencies, including those where the loss is reasonably possible or where the amount cannot be reasonably estimated, the Company discloses the nature of the contingency. The Lugano Investigation and the restatement of our previously issued consolidated financial statements for the periods ended at December 31, 2024, 2023 and 2022, may result in additional stockholder litigation, regulatory investigations and additional liabilities in future periods.

State Court Action Naming Lugano and the Company as Defendants

On July 24, 2025, a complaint was filed against Lugano, the Company and others in California State Court, styled Champion Force Industrial Limited v. Lugano Diamonds & Jewelry Inc., et al., asserting claims for breach of contract, goods had and received, conversion, fraud, promissory estoppel, unjust enrichment, and fraudulent conveyance. The plaintiff is a vendor of diamonds and finished jewelry to Lugano and seeking in excess of $56.4 million in damages, principally for unpaid goods. On September 12, 2025, CODI filed a motion to quash due to lack of personal jurisdiction. That motion currently is set to be heard in January 2026. The foregoing matter is in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome.

As noted below under the heading Impact of Lugano Chapter 11 Filing on Lugano Claims and Litigation this matter is subject to an automatic stay that prohibits, among other things, the continuation of this action against Lugano, as debtor, outside of the bankruptcy process. If Lugano is determined to be a necessary party to this litigation, it is possible that the litigation may also be stayed as against the Company. Presently, the Company currently remains a defendant in this case but believes that it can avail itself of certain defenses to these claims and intends to vigorously defend itself.

The Company has recorded an accrual of $52.7 million as of June 30, 2025 related to certain current contractual obligations to Lugano’s vendors, including Champion, in accordance with applicable accounting standards. The Company intends to avail itself of all available defenses in the Champion litigation. The Company is unable to reasonably estimate any additional loss or range of possible loss, if any, that may result from the Champion litigation or whether such loss or range of possible loss would be less than, equal or exceed the amounts accrued in respect of Lugano’s contract with Champion.

Lugano-Specific Claims and Threatened Claims

During the period from approximately April 1, 2025 to November 21, 2025, litigation has been threatened and initiated by counterparties to transactions that appear to have been overseen by Lugano’s former CEO, Moti Ferder, who resigned effective May 7, 2025. The vast majority involve purported investment arrangements whereby the claimant delivered a specified dollar amount to Lugano in exchange for either (a) a profits interest in the future sale of a specified diamond(s), or (b) a guaranteed interest rate (collectively, “Diamond Financing Arrangements”).

Certain Diamond Financing Arrangements are the subject of current litigation, primarily in California State court, and the majority of the plaintiffs in these cases have presented similar fact patterns and are primarily seeking damages for alleged losses of principal amounts invested (“Diamond Financing Litigation”). The total damages being sought by all plaintiffs in Diamond Financing Litigation, is approximately $32.2 million, plus interest and penalties, in most cases. The Diamond Financing Litigation is in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome for any or all of these cases. At this time, management has determined that a loss is reasonably possible; however, management cannot currently reasonably estimate such loss or range of potential loss associated with the Diamond Financing Litigation.

As noted below under the heading Impact of Lugano Chapter 11 Filing on Lugano Claims and Litigation, the Diamond Financing Litigation is subject to an automatic stay that prohibits, among other things, the continuation of these actions against Lugano, as debtor, outside of the bankruptcy process. The Company was named in a co-defendant in one Diamond Financing Litigation matter for which the plaintiff is seeking approximately $1.4 million in damages, plus interest and penalties. If Lugano is determined to be a necessary party to this litigation, it is possible that the litigation may also be stayed as against the Company. Nonetheless, the Company believes that it can avail itself of certain defenses to this claim and intends to vigorously defend itself.

While not the subject of active litigation, claims have been asserted against Lugano and legal action has been threatened by parties to alleged Diamond Financing Arrangements (the “Diamond Financing Arrangement Claims”). At this time, management has determined that a loss resulting from the Diamond Financing Arrangement Claims is reasonably possible; however, management cannot currently reasonably estimate such loss or range of potential loss.

The Company has recorded an accrual of $184.0 million as of June 30, 2025 of estimated principal as short-term debt and interest expense in its condensed consolidated financial statements related to previously undisclosed financing arrangements at Lugano, in accordance with applicable accounting standards, although such financing arrangements are subject to dispute. The Company intends to avail itself of all available defenses in the Diamond Financing Litigation (or any Diamond Financing Arrangement Claim or other Diamond Financing Arrangements for which claims may arise). The Company is unable to reasonably estimate any additional loss or range of possible loss, if any, that may result from the Diamond Financing Litigation (or any Diamond Financing Arrangement Claim or other Diamond Financing Arrangements for which claims may arise) or whether such loss or range of possible loss would be less than, equal to or exceed the amounts accrued in respect of the previously undisclosed financing arrangements at Lugano.

Impact of Lugano Chapter 11 Filing on Lugano Claims and Litigation

On November 16, 2025, Lugano Holding, Inc. and certain of its subsidiaries, filed voluntary Chapter 11 petitions under the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Upon the filing of a bankruptcy petition, Section 362 of the Bankruptcy Code imposes an automatic stay that prohibits, among other things, the commencement or continuation of numerous actions against the debtor entity (in this case, Lugano), which include all lawsuits and collection efforts. The stay goes into effect immediately upon the bankruptcy filing without any further action by the debtor entity or any other party. The automatic stay remains in place until resolution of the bankruptcy case, or until otherwise waived by the debtor. The automatic stay generally protects only the debtor and does not usually extend to non-debtor parties who may be the subject of claims or litigation, including co-defendants named in litigation where Lugano is also defendant. In certain circumstances, a court may extend the stay to non-debtors if the debtor entity is a necessary party to the action. Thus, upon the filing of its bankruptcy petition, the automatic stay will immediately go into effect and prohibit further litigation against Lugano in courts outside of the Bankruptcy Court but will not necessarily prohibit continuation of actions against the Company in Lugano-related matters.

Securities Class Actions and Derivative Actions Involving the Company

Between May 9, 2025, and June 25, 2025, three putative class actions were commenced against the Company and certain of the Company’s officers and directors, asserting claims under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder in the U.S. District Court for the Central District of California (collectively, the “CA Securities Class Actions”). On August 22, 2025, such CA Securities Class Actions were consolidated under the caption In re: Compass Securities Litigation, and the Court appointed the Eastern Atlantic States Carpenters Benefit Funds (“EAS Carpenters”) as lead plaintiff and the law firm of Cohen Milstein Sellers & Toll PLLC (“Cohen Milstein”) as lead counsel. On May 12, 2025, a separate putative class action was commenced against the Company and certain of its officers and directors in the U.S. District Court for the District of Connecticut, captioned Moreno v. Compass Diversified Holdings LLC, et al. (the “Moreno Action”). The plaintiff in the Moreno Action is asserting the same claims as asserted by the plaintiffs in the CA Securities Class Actions. By order dated July 21, 2025, EAS Carpenters was appointed lead plaintiff and Cohen Milstein was appointed lead counsel for the Moreno Action. The foregoing matters are in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome. At this time, management has determined that a loss is reasonably possible but cannot reasonably estimate a range of potential loss. The Company believes it has strong defenses available to it and intends to vigorously defend itself. On December 10, 2025, with the Court’s approval, Lead Plaintiff voluntarily dismissed this consolidated action so that it could pursue its claims in the District of Connecticut.

On May 12, 2025, a separate putative class action was commenced against the Company and certain of its officers and directors in the U.S. District Court for the District of Connecticut, captioned Moreno v. Compass Diversified Holdings LLC, et al. (the “Moreno Action”). The plaintiff in the Moreno Action is asserting the same claims as asserted by the plaintiffs in the CA Securities Class Actions. By order dated July 21, 2025, EAS Carpenters was appointed lead plaintiff and Cohen Milstein was appointed lead counsel for the Moreno Action. The foregoing matters are in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome. At this time, management has determined that a loss is reasonably possible but cannot reasonably estimate a range of potential loss. The Company believes it has strong defenses available to it and intends to vigorously defend itself.

On June 5, 2025, a Company shareholder commenced a shareholder derivative action in the U.S. District Court for the Central District of California, captioned Jones v. Sabo, et al. (the “Jones Action”), purporting to assert claims on behalf of the Company against current and former Company officers and directors who were named as defendants. The plaintiff is asserting causes of action for breach of fiduciary duty and violations of Section 14(a) of the Exchange Act. On July 17, 2025, a Company shareholder commenced a second shareholder derivative action in the U.S. District Court for the Central District of California, captioned Kelly v. Sabo, et al., (the “Kelly Action”). The plaintiff in the Kelly Action is asserting the same causes of action, against the same defendants, as the Jones Action. On August 6, 2025, the parties to the Jones Action and the Kelly Action filed a stipulation and proposed order to consolidate the two actions and to stay the actions, pending certain future events. The foregoing matters are in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome. At this time, management has determined that a loss is reasonably possible but cannot reasonably estimate a range of potential loss. The Company believes it has strong defenses available to it and intends to vigorously defend itself.

On September 12, 2025, a shareholder of the Company filed a shareholder derivative action in the District Court for the District of Connecticut, captioned Kamp v. Sabo, et al. (the “Kamp Action”). The plaintiff in the Kamp Action asserts the same causes of action as in the above derivative cases, plus a cause of action for securities fraud in violation of Section 10(b) and 20 (a) of the Exchange Act and Rule 10b-5 promulgated thereunder. On October 7, 2025, a shareholder of the Company filed a shareholder derivative action in the District Court for the District of Connecticut, captioned Sulger v. Sabo, et al. (the “Sulger Action”). The plaintiff in the Sulger Action asserts the same causes of action as in the Kamp Action. On October 9, 2025, a shareholder of CODI commenced a shareholder derivative action in the United State District Court for the District of Connecticut captioned Moore v. Sabo, et al., Case No. 3:25-cv-01707 (the “Moore Action”). The shareholder asserts similar claims against the same defendants as in the Kamp and Sulger actions. On December 8, 2025, the Court consolidated these three cases, which now will be referred to as In re Compass Diversified Holdings Derivative Litigation, Case No. 3:25-cv-01505-AWT. This case is pending before District Court Judge Alvin Thompson, who is also presiding over the federal securities class action. The parties are discussing staying the proceedings in this consolidated derivative case pending further developments in the federal securities class action.

The foregoing matters are in the early stages and the Company is currently unable to determine the likelihood of an unfavorable outcome. At this time, management has determined that a loss is reasonably possible but cannot reasonably estimate a range of potential loss. The Company believes it has strong defenses available to it and intends to vigorously defend itself.

External Investigations Involving the Company and Lugano

As a result of the Company’s withdrawal of reliance on its 2024, 2023, and 2022 financial statements, its failure to timely file its financial statements for the quarters ended at March 31, 2025 and June 30, 2025, and the underlying conduct at the Company’s Lugano subsidiary, there are ongoing investigations initiated by the United States Securities Exchange Commission (“SEC”) and Department of Justice (“DOJ”). The regulatory investigative process is inherently uncertain the foregoing investigations are in the early stages. Additionally, the Financial Industry Regulatory Authority (“FINRA”) initiated a routine review of trading activity in the Company’s securities following the public announcement of the restatement. On November 17, 2025, the Company received notification from FINRA that its review had been completed and had referred the matter to the SEC for whatever actions the SEC deems appropriate, if any. The Company and Lugano have cooperated and continue to cooperate fully with each investigation and review.

Leases

The Company and its subsidiaries lease office and manufacturing facilities, computer equipment and software under various arrangements. Certain of the leases are subject to escalation clauses and renewal periods. The Company and its subsidiaries recognize lease expense, including predetermined fixed escalations, on a straight-line basis over the initial term of the lease including reasonably assured renewal periods from the time that the Company and its subsidiaries control the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Certain of our subsidiaries have leases that contain both fixed rent costs and variable rent costs based on achievement of certain operating metrics. The variable lease expense was not a material component of our total lease expense for the three and six months ended June 30, 2025 and 2024. The Company recognized $13.9 million and $27.4 million in the three and six months ended June 30, 2025, respectively and $14.9 million and $26.3 million in the three and six months ended June 30, 2024, respectively, in expense related to operating leases in the condensed consolidated statements of operations. The Company entered into one finance lease in the fourth quarter of 2024. In the three and six months ended June 30, 2025, the Company recognized $0.2 million and $0.3 million, respectively, in interest expense related to its finance lease.

The maturities of lease liabilities at June 30, 2025 are as follows (in thousands):


	Operating		Finance		Total
2025 (excluding the six months ended June 30, 2025)	$	27,685	$	359	$	28,044
2026	54,506		719		55,225
2027	46,767		7,040		53,807
2028	36,366		—		36,366
2029	26,948		—		26,948
Thereafter	77,143		—		77,143
Total undiscounted lease payments	$	269,415	$	8,118	$	277,533
Less: Interest	62,225		1,232		63,457
Present value of lease liabilities	$	207,190	$	6,886	$	214,076

The calculated amount of the right-of-use assets and lease liabilities are impacted by the length of the lease term and discount rate used to present value the minimum lease payments. The Company's lease agreements often include one or more options to renew at the Company's discretion. In general, it is not reasonably certain that lease renewals will be exercised at lease commencement and therefore lease renewals are not included in the lease term. As the discount rate is rarely determinable, the Company utilizes the incremental borrowing rate of the subsidiary entering into the lease arrangement, on a collateralized basis, over a similar term as adjusted for any country specific risk.

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows:


Lease Term and Discount Rate	June 30, 2025		June 30, 2024
Weighted-average remaining lease term (years)
Operating Leases	5.96		6.37
Finance Leases	1.83		N/a
Weighted-average discount rate
Operating Leases	8.88	%	8.67	%
Finance Leases	9.90	%	N/a

Supplemental balance sheet information related to leases was as follows (in thousands):


	Line Item in the Company’s Consolidated Balance Sheet	June 30, 2025		December 31, 2024

Assets:
Operating lease right-of-use assets (1)	Other non-current assets	$	180,151	$	191,639
Finance lease right-of-use assets	Other non-current assets	6,881		$	6,882
		$	187,032	$	198,521
Liabilities
Operating lease liabilities - current	Other current liabilities	$	40,062	$	38,180
Operating lease liabilities - non-current	Other non-current liabilities	167,129		178,577
Finance lease liabilities - current	Other current liabilities	44		42
Finance lease liabilities - non-current	Other non-current liabilities	6,841		6,866
		$	214,076	$	223,665

(1) During the second quarter of 2025, the Company recorded impairment of an operating lease right-of-use asset at Lugano. Refer to "Note F - Goodwill and Other Intangible Assets" for a description of the impairment.

Supplemental cash flow information related to leases was as follows (in thousands):


	Six months ended June 30, 2025		Six months ended June 30, 2024
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,400	$	22,051
Operating cash flows from finance leases	336		—
Financing cash flows from finance leases	23		—
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	2,205	$	6,596
Finance leases	—		—