Solo Brands Inc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –Significant Accounting Policies

Included below are selected significant accounting policies. Refer to Note 2 - Significant Accounting Policies, within the annual consolidated financial statements in the Company’s 2023 Form 10-K for the full list of significant accounting policies.

Basis of Presentation

The unaudited consolidated financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules of the SEC. The unaudited consolidated financial statements include those of our wholly-owned and majority-owned subsidiaries and the entity consolidated under the variable interest entity model. Intercompany balances and transactions are eliminated in consolidation. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the 2023 Form 10-K. Certain prior period amounts have been conformed to the current period’s presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses during the reporting period and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates and assumptions about future events and their effects cannot be made with certainty. Estimates may change as new events occur when additional information becomes available and if the operating environment changes. Actual results could differ from estimates.

Commitments and Contingencies

From time to time, the Company is involved in various legal proceedings that arise in the normal course of business. While the Company intends to prosecute and defend any lawsuit vigorously, the Company presently believes that the ultimate outcome of any currently pending legal proceeding will not have any material adverse effect on its financial position, cash flows, or results of operations. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages, which could impact the Company’s business and the results of operations for the period in which the ruling occurs or future periods. Based on the information available, the Company evaluates the likelihood of potential outcomes. The Company records the appropriate liability when the amount is deemed probable and reasonably estimable. In addition, the Company does not accrue for estimated legal fees and other directly related costs because they are expensed as incurred. The Company is not currently a party to any pending litigation that it considers material. Therefore, the consolidated balance sheets do not include a liability for any potential obligations as of June 30, 2024 and December 31, 2023.

Recently Adopted Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) in order to align the recognition of a contract liability with the definition of a performance obligation. We adopted ASU 2021-08 in the first quarter of 2024 and for all periods subsequent to adoption, will recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606, for which recognition and measurement would have occurred under Topic 805 prior to adoption.

Recently Issued Accounting Pronouncements - Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU amended the existing segment reporting requirements by requiring disclosure of the significant segment expenses based on how management internally views segment information and by allowing the disclosure of more than one measure of segment profit or loss, as well as by expanding the interim period segment requirements. The ASU also requires single-reportable segment entities to report the disclosures required under Topic 280. The guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements, but will require certain additional disclosures when adopted in the Company’s 2024 Form 10-K.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, that requires presentation of specific categories of reconciling items, as well as reconciling items that meet a quantitative threshold, in the reconciliation between the income tax provision and the income tax provision using statutory tax rates. The ASU also requires disclosure of income taxes paid disaggregated by jurisdiction with separate disclosure of income taxes paid to individual jurisdictions that meet a quantitative threshold. The amendments in this accounting standard are effective for fiscal years beginning after December 15, 2024, on a prospective basis. Early adoption and retrospective application are permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements, but will require certain additional disclosures.

NOTE 2 –Revenue

The Company principally engages in (1) direct-to-consumer (“DTC”) transactions, which are primarily comprised of product sales directly from the Company’s websites, and (2) business-to-business transactions, or retail(1), which are comprised of product sales to retailers, including where possession of the Company's products is taken and sold by the retailer in-store or online.

The following table disaggregates net sales by channel:

(1)Retail sales were previously referred to as wholesale sales. Retail sales and associated business results from such retail sales have been reflected as retail in this Quarterly Report and will be reflected as such in subsequent filings of the Company with the SEC.

NOTE 3 –Inventory

Inventory consisted of the following:

NOTE 4 –Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

NOTE 5 –Accrued Expenses and Other Current Liabilities

Significant accrued expenses and other current liabilities were as follows:

(1)The inventory line item decreased by $10.3 million as a result of invoices received subsequent to December 31, 2023. The timing differences resulting in the late receipt of invoices as of December 31, 2023 has not recurred in subsequent periods.

NOTE 6 –Long-Term Debt, Net

Long-term debt, net consisted of the following:

Long-term debt, net approximates fair value and is valued using Level 2 inputs within the fair value hierarchy, as defined in Note 2 - Significant Accounting Policies, in the 2023 Form 10-K. See Note 9 - Fair Value Measurements of this Quarterly Report for more information regarding the fair value considerations for long-term debt, net.

Interest expense was $3.6 million and $6.7 million for the three and six months ended June 30, 2024, respectively, and $2.5 million and $4.8 million for the corresponding periods in 2023, respectively.

During the six months ended June 30, 2024, the Company made draws of $30.0 million and payments of $15.0 million under the Revolving Credit Facility. Availability for future draws on the Revolving Credit Facility was $274.4 million, net of $0.6 million of letters of credit issued and outstanding, and $289.4 million as of June 30, 2024 and December 31, 2023, respectively.

The Company was in compliance with all covenants under all credit arrangements as of June 30, 2024.

As of June 30, 2024, the future maturities of principal amounts of our total debt obligations, excluding finance lease obligations, through maturity and in total, consists of the following:

NOTE 7 –Equity-Based Compensation

Equity-based compensation expense totaled approximately $1.7 million and $2.9 million for the three and six months ended June 30, 2024, respectively, and $5.0 million and $9.8 million for the corresponding periods in 2023, respectively. Our stock options have contractual terms offour toten years and become exercisable over athree-year period. Expense related to stock options is recognized on a straight-line basis over the vesting period. Expense related to restricted stock units ("RSUs") issued to eligible employees under the Solo Brands, Inc. 2021 Incentive Award Plan (the “Incentive Award Plan”) is recognized over the vesting period, generally between three years andfour years. Expense related to RSUs granted to non-employee directors under the Incentive Award Plan is recognized on a straight-line basis over the vesting period, with newly appointed non-employee directors grants vesting over athree-year period and grants to continuing non-employee directors vesting over aone-year period. Expense related to performance stock units (“PSUs”) is recognized on a straight-line basis from their award date to the end of the performance period, generallytwo years. Expense related to special performance stock units (“SPSUs”) is recognized on a straight-line basis from their award date to the end of the requisite service period ofthree years. Expense related to the Executive Performance Stock Units (“EPSUs”) is recognized over the derived service period.

The following table summarizes equity-based compensation awards granted during the six months ended June 30, 2024:

Executive Performance Stock Units

In January 2024, the Company granted EPSUs to the Chief Executive Officer (“CEO”) under the Incentive Award Plan. The EPSUs are unfunded, unsecured rights to receive, if the Company achieves certain stock price targets (measured as a volume-weighted stock price over 100 consecutive trading days) at any time until the three and half year anniversary of the grant date and the grantee remains an employee of the Company, shares of our Class A common stock or an amount in cash of equal fair market value of a share on the day immediately preceding the settlement date. As the EPSUs contain a market condition, the Company will recognize the full amount of compensation expense regardless of if the stock price targets are achieved, but only as long as the grantee remains an employee of the Company.

In connection with the grant of SPSUs in April 2024, the Company modified the EPSUs previously granted to increase the number of awards granted, lower the stock price targets and change the number of days used for the volume-weighted stock price measure to 30 consecutive trading days.

The EPSUs are divided into four tranches. The fair value of the EPSUs granted in the six months ended June 30, 2024 was derived using a Monte Carlo simulation. It was determined that mid-points between $1.99 to $2.17 for the pre-modification awards and $2.23 to $2.66 post-modification were the most reasonable estimate of grant date fair value for each of thefour tranches. The grant date fair values of the EPSUs are a non-recurring measurement and are considered a level 3 estimate. See Note 2 - Significant Accounting Policies within the annual consolidated financial statements in the Company’s 2023 Form 10-K for additional information about the fair value framework and the levels within. Additionally, due to the full vesting of the awards upon achievement of the stock price target and continued employment, or within 180 days of termination without cause or Good Reason (as defined within the employment agreement filed as Exhibit 10.36 to the 2023 Form 10-K), the period over which compensation expense will be recognized was derived through the same Monte Carlo simulations.

The table below contains the derived service periods over which compensation expense will be recognized is as follows for each of thefour tranches of EPSUs:

In the event the Company incurs a Change in Control (as defined in the Incentive Award Plan), any previously unvested EPSUs will vest based on the price per share received by or payable with respect to the common stockholders in connection with the transaction, pro-rated to reflect a price per share that falls between two stock price goals. EPSUs that remain unvested as of the expiration date or upon the employee’s termination will be automatically forfeited and terminated without consideration.

Special Performance Stock Units

In April 2024, the Company granted SPSUs under the Incentive Award Plan. The SPSUs are unfunded, unsecured rights to receive, if the Company achieves certain stock price targets (measured as a volume-weighted stock price over 30 consecutive trading days) at any time until the three year anniversary of the grant date and the grantee remains an employee of the Company, shares of our Class A common stock or an amount in cash of equal fair market value of a share on the day immediately preceding the settlement date. As the SPSUs contain a market condition, the Company will recognize the full amount of compensation expense regardless of if the stock price targets are achieved, but only as long as the grantee remains an employee of the Company.

The SPSUs are divided into three tranches. The fair value of the SPSUs granted in the six months ended June 30, 2024 were derived using a Monte Carlo simulation. It was determined that mid-points between $1.07 to $1.43 were the most reasonable estimate of grant date fair value for each of the three tranches. The grant date fair values of the SPSUs are a non-recurring measurement and are considered a level 3 estimate. The SPSUs have a requisite service period ofthree years over which compensation expense will be recognized.

NOTE 8 –Income Taxes

Provision for Income Taxes

The Company is subject to U.S. federal, federal, state, and local income taxes on the Company's allocable share of taxable income of Holdings. The subsidiaries of Holdings are also subject to income taxes in the foreign jurisdictions in which they operate. We are the sole managing member of Holdings, and as a result, consolidate the financial results of Holdings. Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Holdings is generally not subject to U.S. federal and certain state and local income taxes. Instead, taxable income or loss is allocated to its members on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of Holdings, as well as any stand-alone income or loss generated by Solo Brands, Inc. Correspondingly, our forecasted annual effective tax rate (“AETR”) was 9.1% as of June 30, 2024.

The effective income tax rate was (200.6)% and 4.5% for the three and six months ended June 30, 2024, compared to 18.9% and 19.4% for the corresponding periods in 2023. The decrease for the three and six months ended June 30, 2024 was primarily driven by a decrease to the forecasted AETR and the shift of income to certain corporate subsidiaries within our partnership, a reduction of income attributable to noncontrolling interests, nondeductible compensation and the impacts of other discrete items recorded in the current period.

The weighted-average ownership interest in Holdings was 63.8% and 63.8% for the three and six months ended June 30, 2024, respectively, and 65.1% and 65.7% for the three and six months ended June 30, 2023.

Deferred Tax Assets and Liabilities

As of June 30, 2024, the total deferred tax liability related to the basis difference in the Company's investment in Holdings was $10.5 million. The total net basis difference currently recorded would reverse upon the eventual sale of its interest in Holdings as a capital gain.

During the three and six months ended June 30, 2024, the Company did not recognize any deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement, as defined in Note 15 - Income Taxes, to the audited consolidated financial statements included in our 2023 Form 10-K.

The Company evaluates the realizability of its deferred tax assets on a quarterly basis and establishes valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of June 30, 2024, the Company concluded, based on the weight of all available positive and negative evidence, that all of the partnership deferred tax assets related to Holdings are more likely than not to be realized. During the year ended December 31, 2023, the Company evaluated and concluded that there was significant negative evidence related to the realizability of Oru's deferred tax assets, resulting in the Company recording a full valuation allowance against the deferred tax assets of Oru. As of June 30, 2024, there has been no change in the valuation allowance assessment related to Oru deferred tax assets.

NOTE 9 –Fair Value Measurements

The Company has established a fair value hierarchy which prioritizes the inputs to the valuation techniques used to measure fair value into three levels. These levels are determined based on the lowest level input that is significant to the fair value measurement. Levels within the hierarchy are defined within Note 2 - Significant Accounting Policies, in the 2023 Form 10-K.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis:

There were no transfers between the valuation hierarchy Levels 1, 2 and 3 for three and six months ended June 30, 2024 and year ended December 31, 2023.

Liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

The contingent consideration as of June 30, 2024 consists of a post-closing payment, resulting from acquisition activity in 2023 and relies on forecasted results through the expected post-closing payment period. The fair value of the post-closing payment is valued using a threshold and cap (capped call) structure. This contingent considerations represents a stand-alone liability that is measured at fair value on a recurring basis each reporting date using inputs that are unobservable and significant to the overall fair value measurement and are considered a level 3 estimate. The contingent consideration liability is recorded in other non-current liabilities on the consolidated balance sheets. Changes in fair value of contingent consideration are recorded in selling, general and administrative expenses.

The Company’s financial instruments consist primarily of cash, accounts receivable, accounts payable, contingent consideration and bank indebtedness. The carrying amount of cash, accounts receivable, and accounts payable, approximates fair value due to the short-term maturity of these instruments.

There were no other material nonrecurring fair value measurements during the periods ended June 30, 2024 and December 31, 2023.

NOTE 10 -Variable Interest Entities

As of June 30, 2024 and December 31, 2023, we consolidated one entity that is a VIE, that relates to a manufacturing entity for Oru, for which we are the primary beneficiary. Through a management agreement governing the entity, we manage the entities and handle all day-to-day operating decisions. Accordingly, we have the decision-making power over the activities that most significantly impact the economic performance of our VIE and an obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. These decisions and significant activities include, but are not limited to, manufacturing schedules, production processes, units of production and types of products. The Company is contractually obligated to provide financial support to the VIE.

Total assets of the VIE included on the consolidated balance sheet as of June 30, 2024 and December 31, 2023 were $2.6 million and $3.7 million, respectively. Total liabilities of the VIE included on the consolidated balance sheets as of June 30, 2024 and December 31, 2023 were $2.8 million and $3.9 million, respectively.

The VIE’s assets may only be used to settle the VIE’s obligations and may not be used for other consolidated entities. The VIE’s liabilities are non-recourse to the general credit of the Company’s other consolidated entities.

NOTE 11 –Net Income (Loss) Per Share

Basic net income (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Solo Brands, Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted net income (loss) per share of Class A common stock is computed by dividing net income (loss) attributable to Solo Brands, Inc. by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.

The following table sets forth the calculation of the basic and diluted net income (loss) per share for the Company’s Class A common stock:

During the three months ended June 30, 2024 and 2023,0.1 million and 0.3 million options and 2.5 million and 0.3 million restricted stock units, respectively, were not included in the computation of diluted net income per share because their effect would have been anti-dilutive. During the six months ended June 30, 2024 and 2023,0.1 million and 0.4 million options and 1.7 million and 0.5 million restricted stock units, respectively, were not included in the computation of diluted net income per share because their effect would have been anti-dilutive.

The shares of Class B common stock and the granted PSUs are subject to a contingency that is not based on the Company’s share price or the price of the convertible instrument, as disclosed in Note 14 - Equity-Based Compensation, in the 2023 Form 10-K. As such, contingently convertible shares where conversion is not tied to a market price trigger or price of the convertible instrument are excluded from the calculation of diluted EPS until such time as the contingency has been resolved under the if-converted method. Additionally, the Company has issued EPSUs that contain a market condition and vest immediately upon satisfaction of said market condition. As a result of the immediate vesting feature, the EPSUs will in all cases be neither dilutive nor anti-dilutive.