COMPASS DIVERSIFIED HOLDINGS
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma condensed combined financial statements give effect to the acquisition of The Honey Pot Company Holdings, LLC ("The Honey Pot" or "THP") with a total purchase price of approximately $380.1 million, as further described on the Form 8-K that we filed on February 1, 2024.
The following pro forma condensed combined statements of operations for the year ended December 31, 2023 give effect to the acquisition of The Honey Pot as if the acquisition had occurred on January 1, 2023. The proforma condensed combined balance sheet as of December 31, 2023 gives effect to the acquisition of The Honey Pot as if the acquisition was completed on December 31, 2023.
The "as reported" financial information of The Honey Pot is derived from the consolidated historical financial statements of The Honey Pot for the comparable period which are included elsewhere in this Form 8-K. The "as reported" financial information for Compass Diversified Holdings (the "Company" or "Holdings") is derived from the consolidated audited financial statements of the Company as of December 31, 2023 and for the year ended December 31, 2023 as filed on Form 10-K with the Securities and Exchange Commission on February 28, 2024.
Assumptions underlying the pro forma adjustments necessary to reasonably present this unaudited pro forma condensed combined financial information are described in the accompanying notes. The pro forma adjustments described in the accompanying notes have been made based on the available information and, in the opinion of management, are reasonable. The preliminary purchase price has been allocated on a provisional basis to assets acquired and liabilities assumed in connection with the acquisition based on the estimated fair value as of the acquisition date. The unaudited pro forma condensed combined statements of operations reflect the adjustments to the historical consolidated results of operations that are expected to have a continuing effect. The unaudited pro forma condensed combined statements of operations do not include certain items such as transaction costs related to the acquisition. The final purchase price allocation is subject to the final determination of the fair value of assets acquired and liabilities assumed and, therefore, that allocation and the resulting effect on income from operations may differ materially from the unaudited pro forma amounts included herein.
The historical consolidated financial information has been adjusted to give effect to estimated pro forma events that are directly attributable to the acquisition, factually supportable and, with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the consolidated results of operations. The unaudited pro forma condensed combined financial information should not be considered indicative of actual results that would have been achieved had the acquisition occurred on the date indicated and do not purport to indicate results of operations for any future period.
You should read these unaudited pro forma condensed combined financial statements in conjunction with the accompanying notes, the financial statements of The Honey Pot included in this Form 8-K and the consolidated financial statements of the Company, including the notes thereto as previously filed.
Compass Diversified Holdings
Pro Forma Condensed Combined Balance Sheet at December 31, 2023
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Compass Diversified Holdings as Reported | | The Honey Pot as Reported | | Pro Forma Adjustments | | Pro Forma Combined Compass Diversified Holdings |
| Assets | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 450,477 | | | $ | 25,188 | | | $ | (379,225) | | A | $ | 96,440 | |
| Accounts receivable, net | | 318,241 | | | 14,187 | | | — | | | 332,428 | |
| Inventories | | 740,387 | | | 16,211 | | | 3,689 | | B | 760,287 | |
| Prepaid expenses and other current assets | | 94,715 | | | 2,467 | | | — | | | 97,182 | |
| Total current assets | | 1,603,820 | | | 58,053 | | | (375,536) | | | 1,286,337 | |
| Property, plant and equipment, net | | 192,562 | | | 1,915 | | | — | | | 194,477 | |
| Goodwill | | 901,428 | | | — | | | 125,499 | | B | 1,026,927 | |
| Intangible assets, net | | 923,905 | | | — | | | 247,000 | | B | 1,170,905 | |
| Other non-current assets | | 195,266 | | | 4,288 | | | (3,044) | | C | 196,510 | |
| Total assets | | $ | 3,816,981 | | | $ | 64,256 | | | $ | (6,081) | | | $ | 3,875,156 | |
| Liabilities and stockholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 93,412 | | | $ | 5,345 | | | $ | — | | | $ | 98,757 | |
| Accrued expenses | | 157,456 | | | 4,226 | | | — | | | 161,682 | |
| Due to related party | | 16,025 | | | — | | | — | | | 16,025 | |
| Current portion, long-term debt | | 10,000 | | | — | | | — | | | 10,000 | |
| Other current liabilities | | 35,465 | | | 1,934 | | | — | | | 37,399 | |
| Total current liabilities | | 312,358 | | | 11,505 | | | — | | | 323,863 | |
| Deferred income taxes | | 120,131 | | | — | | | — | | | 120,131 | |
| Long-term debt | | 1,661,879 | | | — | | | — | | | 1,661,879 | |
| Other non-current liabilities | | 203,232 | | | 1,517 | | | — | | | 204,749 | |
| Total liabilities | | 2,297,600 | | | 13,022 | | | — | | | 2,310,622 | |
| | | | | | | | |
| Stockholders’ equity | | | | | | | | |
| Trust preferred shares, no par value | | 303,918 | | | — | | | — | | | 303,918 | |
| Trust common shares, no par value | | 1,281,303 | | | — | | | — | | | 1,281,303 | |
| Treasury shares, at cost | | (9,339) | | | — | | | — | | | (9,339) | |
| Accumulated other comprehensive income (loss) | | 111 | | | — | | | — | | | 111 | |
| Accumulated deficit | | (249,243) | | | 51,234 | | | (47,755) | | D, E | (245,764) | |
| Total stockholders’ equity attributable to Holdings | | 1,326,750 | | | 51,234 | | | (47,755) | | | 1,330,229 | |
| Noncontrolling interest | | 192,631 | | | — | | | 41,674 | | A | 234,305 | |
| Total stockholders’ equity | | 1,519,381 | | | 51,234 | | | (6,081) | | | 1,564,534 | |
| Total liabilities and stockholders’ equity | | $ | 3,816,981 | | | $ | 64,256 | | | $ | (6,081) | | | $ | 3,875,156 | |
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
Compass Diversified Holdings
Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 2023
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| (in thousands, except per share data) | | Compass Diversified Holdings as Reported | | The Honey Pot as Reported | | Pro Forma Adjustments | | Pro Forma Combined Compass Diversified Holdings |
| Net revenues | | $ | 2,058,876 | | | $ | 107,311 | | | $ | — | | | $ | 2,166,187 | |
| Cost of revenues | | 1,165,553 | | | 47,444 | | | 3,689 | | F | 1,216,686 | |
| Gross Profit | | 893,323 | | | 59,867 | | | (3,689) | | | 949,501 | |
| | | | | | | | |
| Operating expenses: | | | | | | | | |
| Selling, general and administrative expense | | 549,589 | | | 38,159 | | | — | | | 587,748 | |
| Management fees | | 68,445 | | | — | | | 6,600 | | G | 75,045 | |
| Amortization expense | | 95,820 | | | — | | | 14,192 | | H | 110,012 | |
| Impairment expense | | 89,400 | | | — | | | — | | | 89,400 | |
| Operating income | | 90,069 | | | 21,708 | | | (24,481) | | | 87,296 | |
| | | | | | | | |
| Other income (expense): | | | | | | | | |
| Interest income (expense), net | | (105,179) | | | (169) | | | — | | | (105,348) | |
| Amortization of debt issuance costs | | (4,038) | | | — | | | — | | | (4,038) | |
| Other income (expense), net | | 1,743 | | | 102 | | | — | | | 1,845 | |
| Income (loss) from continuing operations before income taxes | | (17,405) | | | 21,641 | | | (24,481) | | | (20,245) | |
| Provision for income taxes | | 21,331 | | | — | | | — | | | 21,331 | |
| Income (loss) from continuing operations | | (38,736) | | | 21,641 | | | (24,481) | | | (41,576) | |
| Less: Income from continuing operations attributable to noncontrolling interest | | 15,945 | | | — | | | 3,279 | | I | 19,224 | |
| Net income (loss) attributable to Holdings from continuing operations | | $ | (54,681) | | | $ | 21,641 | | | $ | (27,760) | | | $ | (60,800) | |
| | | | | | | | |
| Basic and fully diluted loss per share attributable to Holdings from continuing operations | | $ | (1.71) | | | | | | | $ | (1.80) | |
| | | | | | | | |
| Weighted average number of shares | | 72,105 | | | | | | | 72,105 | |
| | | | | | | | |
See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information.
Compass Diversified Holdings
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The pro forma financial information has been prepared in accordance with Article 11 of Regulation S-X and has been compiled from historical consolidated financial statements prepared in accordance with U.S. GAAP and should be read in conjunction with the Form 10-K for the year ended December 31, 2023 for CODI. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the combined company’s results of operations actually would have been had the acquisition of The Honey Pot been completed as of January 1, 2023. In addition, this pro forma financial information does not purport to project the future operating results of the combined company.
The accompanying unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting in accordance with Accounting Standards Codification 805, ‘‘Business Combinations’’ (‘‘ASC 805’’) and are based on the annual audited historical financial information of CODI, and annual audited historical financial information of The Honey Pot. For purposes of the unaudited pro forma condensed combined balance sheet, the purchase price consideration has been allocated to the assets acquired and liabilities assumed of the Honey Pot based upon preliminary estimate of their fair values as of the acquisition date. Accordingly, the purchase price allocation and related adjustments reflected in the unaudited pro forma condensed combined financial information are preliminary and subject to revision as further analyses are completed and additional information becomes available. The purchase price consideration as well as the estimated fair values of the assets acquired and liabilities assumed will be finalized as soon as practicable.
Management believes that the assumptions used provide a reasonable basis for presenting the significant effects of the Acquisition, and that the pro forma adjustments in the unaudited pro forma condensed combined financial information give appropriate effect to those assumptions.
Pro forma information is intended to reflect the impact of the acquisition of The Honey Pot on CODI’s historical financial position and results of operations through adjustments that are directly attributable to the transaction, that are factually supportable and, with respect to the pro forma condensed combined statements of operations that are expected to have a continuing impact. This information in the accompanying footnotes provide a description of each of the pro forma adjustments from each line item in the pro forma condensed combined financial statements together with information explaining how the adjustments were derived or calculated.
Note 2. Purchase Price Allocation
The following table summarizes the preliminary purchase price for The Honey Pot acquisition (in thousands):
| | | | | | | | |
| Acquisition Consideration | | |
| | |
| Gross purchase price | | $ | 380,000 | |
| Working capital adjustment - preliminary | | (3,126) | |
| Other adjustments | | (1,128) | |
| Cash acquired - preliminary estimate | | 4,375 | |
| Purchase consideration | | $ | 380,121 | |
| | |
| | |
The purchase price is preliminary and is subject to adjustment based upon the difference between the estimated net working capital to be transferred and the actual amount of working capital transferred on the date of closing. The initial purchase price has been allocated to the acquired assets and assumed liabilities based on estimated fair values. The table below provides the provisional recording of assets acquired and liabilities assumed as of the acquisition date. The amounts recorded for inventory, intangible assets, and goodwill are preliminary pending finalization of valuation efforts.
| | | | | | | | |
| | Amounts recognized as of the acquisition date |
| (in thousands) | | Preliminary |
| Purchase Consideration | | $ | 380,121 | |
| | |
| Fair value of identified assets acquired: | | |
| Cash | | $ | 4,375 | |
| Accounts receivable, net | | 16,361 | |
| Inventory | | 18,986 | |
| Property, plant and equipment | | 1,888 | |
| Intangible assets | | 247,000 | |
| Other current and non-current assets | | 3,959 | |
| Total identifiable assets | | 292,569 | |
| | |
| Fair value of liabilities assumed: | | |
| Current liabilities | | 10,957 | |
| Other liabilities | | 1,480 | |
| | |
| Total liabilities assumed | | 12,437 | |
| | |
| Net identifiable assets acquired | | $ | 280,132 | |
| | |
| Goodwill | | $ | 99,989 | |
| | |
| Transaction costs incurred | | $ | 3,479 | |
The preliminary allocation presented above is based upon management's estimate of the fair values using valuation techniques including income, cost and market approaches. In estimating the fair value of the identifiable acquired assets and assumed liabilities, the fair value estimates are based on, but not limited to, expected future revenue and cash flows, expected future growth rates and estimated discount rates. Current and noncurrent assets, property, plant and equipment and current and other liabilities are estimated at their historical carrying values, which approximates fair value. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce and non-contractual relationships, as well as expected future synergies. The Company expects the goodwill balance to be deductible for tax purposes.
The identified intangible assets are definite lived intangibles and will be amortized over the estimated useful life assigned to the underlying intangible asset. The intangible assets preliminarily recorded in connection with The Honey Pot acquisition are as follows (in thousands):
| | | | | | | | | | | | | | |
| Intangible Assets | | Amount | | Estimated Useful Life |
| | | | |
| Tradename | | $ | 225,000 | | | 18 years |
| Customer Relationships | | 22,000 | | | 13 years |
| | $ | 247,000 | | | |
| | | | |
Note 3. Pro Forma Adjustments
Balance Sheet
The following adjustments correspond to those included in the pro forma unaudited condensed combined balance sheet as of December 31, 2023:
A. On January 31, 2024 the Company completed its acquisition of the Honey Pot The Company paid a purchase price of approximately $383.6 million, including transaction costs, at the Closing (total purchase consideration) in connection with the Transaction. The Company funded the total purchase consideration with cash on hand.
The following reflects the use of cash on hand to fund the acquisition of The Honey Pot and transaction costs incurred by the Company:
| | | | | | | | |
| (in thousands) | | The Honey Pot Acquisition |
| Purchase consideration | | $ | 380,121 | |
| Buyer transaction costs | | 3,479 | |
| Total Purchase Consideration | | 383,600 | |
| Less: Cash Acquired | | (4,375) | |
| Total Cash Paid | | $ | 379,225 | |
| | |
B. The following reflects the adjustments necessary to reflect: (i) the allocation of the purchase price to inventory, intangible assets, and goodwill, and; (ii) the assignment of noncontrolling shareholder interest derived from the equity value contributed by noncontrolling shareholders. The adjustment to inventory represents the estimated adjustment to step up The Honey Pot's finished goods inventory to fair value. The fair value was determined based on the estimated selling price less the selling costs and a normal profit margin on those selling efforts. After the acquisition, the step-up in inventory value will increase cost of revenues over approximately three months as the inventory is sold. This increase is reflected in the pro forma condensed combined statements of operations for the year ending December 31, 2023.
| | | | | | | | |
| (in thousands) | | December 31, 2023 |
| Inventory | | $ | 3,689 | |
| Intangible assets | | 247,000 | |
| Goodwill | | 125,499 | |
| Noncontrolling interest | | (41,674) | |
| | $ | 334,514 | |
C. Represents the elimination of loan receivables from a related party which were paid off at close.
D. Represents the elimination of historical stockholders' equity of The Honey Pot. The elimination of historical Members' Equity has been combined with accumulated deficit in the accompanying condensed combined pro forma balance sheet as of December 31, 2023 to conform with the presentation of the Company's stockholders' equity.
| | | | | | | | |
| (in thousands) | | The Honey Pot |
| Members' Equity | | $ | — | |
| | |
| Accumulated deficit | | (51,234) | |
| Total Stockholders' equity | | $ | (51,234) | |
E. Represents transaction costs incurred by the buyer subsequent to December 31, 2023. The transaction costs incurred by the buyer were expensed on January 31, 2024 and are reflected as an expense of the combined entities in the Pro Forma Condensed Combined Financial Statements.
| | | | | | | | |
| (in thousands) | | December 31, 2023 |
| Buyer transaction costs | | 3,479 | |
| Transaction costs - net | | $ | 3,479 | |
Statement of Operations
The following adjustments correspond to those included in the unaudited pro forma condensed combined statements of operations for all periods presented:
F. Inventory valuation adjustment - to record the amortization of the inventory step-up recorded in connection with the purchase price allocation. The pro forma condensed combined statements of operations for the year ended December 31, 2023 is adjusted to increase cost of sales to reflect the amount of inventory expected to be sold within one year of the acquisition date. After the acquisition, the step-up in inventory value will increase cost of revenues over approximately one month as the inventory is sold.
| | | | | | | | |
| (in thousands) | | For the year ended December 31, 2023 |
| Amortization of inventory step-up | | $ | 3,689 | |
G. Management fee - to record the annual management fee payable to Compass Group Management (our Manager) calculated as 2% of the aggregate purchase price of The Honey Pot, less the offsetting management fee that will be incurred by The Honey Pot.
| | | | | | | | |
| (in thousands) | | For the year ended December 31, 2023 |
| Management fee | | $ | 7,600 | |
| Less: THP management fee | | (1,000) | |
| | $ | 6,600 | |
H. Amortization expense - to record the adjustment to amortization expense for the revised intangible assets associated with the preliminary allocation of the purchase price. See Note 2 for the detail on intangible assets acquired.
| | | | | | | | |
| (in thousands) | | For the year ended December 31, 2023 |
| Revised amortization expense | | $ | 14,192 | |
I. To record the noncontrolling interest associated with The Honey Pot's net income for the periods presented.
| | | | | | | | |
| (in thousands) | | For the year ended December 31, 2023 |
| The Honey Pot net income | | $ | 21,641 | |
| Noncontrolling interest ownership percentage | | 15.2 | % |
| | $ | 3,279 | |
Note 3. Earnings Per Share
Basic and fully diluted earnings per Trust common share is computed using the two-class method which requires companies to allocate participating securities that have rights to earnings that otherwise would have been available to common shareholders as a separate class of securities in calculating earnings per share. The Company has granted Allocation Interests that contain participating rights to receive profit allocations upon the occurrence of certain events, and has issued preferred shares that have rights to distributions when, and if, declared by the Company's Board of Directors. The calculation of basic and fully diluted earnings per Trust common share is computed by dividing income available to common shareholders by the weighted average number of Trust common shares outstanding during the period. Earnings per common share reflects the effect of distributions that were declared and paid to holders of the Allocation Interests, and distributions that were paid or cumulative on preferred shares during the period.
Reconciliation of pro forma net loss from continuing operations available to common shares of Holdings
The following table reconciles net loss attributable to the common shares of Holdings:
| | | | | | | | |
| (in thousands) | | Year ended |
| | December 31, 2023 |
| Pro forma net loss from continuing operations attributable to Holdings | | $ | (60,800) | |
| Less: Distributions paid - Allocation Interests | | 26,475 |
| Less: Distributions paid - Preferred Shares | | 24,181 |
| Less: Accrued distributions - Preferred Shares | | 2,869 |
| Pro forma net loss from continuing operations attributable to Holdings | | $ | (114,325) | |
| | |
Pro forma earnings per share - continuing operations
| | | | | | | | |
| | Year ended |
| (in thousands, except per share data) | | December 31, 2023 |
| | |
| Pro forma net loss from continuing operations attributable to Holdings | | $ | (114,325) | |
| Less: Effect of Contribution based profit - Holding Event | | 15,424 |
| Pro forma loss from Holdings attributable to common shares | | $ | (129,749) | |
| | |
| | |
| | |
| | |
| | |
| Basic and diluted weighted average common shares of Holdings | | 72,105 |
| | |
| Basic and fully diluted pro forma income (loss) per share attributable to Holdings | | |
| Continuing operations | | $ | (1.80) | |
| | |
| | |
