SBDS US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk Factors” and our audited consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk Factors” and our audited consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

Overview

We own and operate premium authentic lifestyle brands with ingenious products we market and deliver through our Direct-To-Consumer (“DTC”) platform. We aim to help our customers enjoy good moments that create lasting memories. We consistently deliver innovative, high-quality products that are loved by our customers and revolutionize the outdoor experience, build community and help everyday people reconnect with what matters most. In fiscal year 2021, we acquired Oru Kayak and ISLE Paddle Boards, which expanded our served market opportunity into the U.S. paddle sports market, and Chubbies apparel, which expanded our served market opportunity into the clothing and accessories category.

As a result of the change in control transaction that occurred in 2020, we presented two periods of financial information in the consolidated statements of operations in 2020. The periods presented in 2020 are January 1, 2020 through October 8, 2020, defined as the Intermediate Successor, and October 9, 2020 through December 31, 2020, defined as the Successor. These periods are not comparable, as the principal impact of the change of control transaction relates to the application of purchase accounting, and the recognition of assets and liabilities at their fair values as of the time of the transaction (this transaction did not involve the combination of our Company with another operating company).

Supplemental to the presentation described above, we have combined the Intermediate Successor and Successor for fiscal year 2020. The combination of these periods is solely for illustrative purposes, only to assist the discussion below, and does not represent pro forma financial results compiled in accordance with Regulation S-X of the Securities Act. In particular, this combined presentation does not give effect to the recognition of assets and liabilities at fair market value, in accordance with purchase accounting, as if the transactions had occurred at the beginning of the corresponding fiscal year. The primary impact from the application of purchase accounting in both the Intermediate Successor and Successor periods was the step-up in the cost of our inventory and intangible assets to fair market value, which has a corresponding non-cash, negative impact on gross profit and net income.

Our net sales increased from $133.4 million in the combined year ended December 31, 2020, to $403.7 million in the Successor period for the year ended December 31, 2021, representing a growth rate of 202.6%. Our strong results were driven by solid demand despite supply chain challenges that impacted the industry. In addition, to generate long-term organic growth, we take deliberate care to monitor and respond to our customer health as measured for our Solo Stove products by our customer referral rate of 48.2%, our repeat purchase rate 40.0%, and our net promoter score of 77 in 2021. Together, these health checks ensure we continue to keep the customer at the center of what we do and drive solid customer lifetime value.

Our net income increased from a net loss of $24.2 million (comprised of a $15.9 million net loss in the Intermediate Successor period from January 1, 2020, through October 8, 2020, and a net loss of $8.3 million in the Successor period from October 9, 2020, through December 31, 2020) in the combined year ended December 31, 2020 to net income of $56.5 million in the Successor period for the year ended December 31, 2021.

In 2021 we acquired three additional brands, Oru, ISLE, and Chubbies to pair with Solo Stove and further propel our Solo Brands growth story. Solo Stove stand-alone net sales grew 171.3% over the prior year to $362.0 million, while organic sales in our other lifestyle brands Chubbies, Oru, and ISLE, grew 60.4% to $121.3 million over the prior year. Altogether, our brands grew 131.2% to $483.3 million in net sales if we had owned all brands for the full year. We continue to look for new and exciting brands to add to our offering and bring our customers additional opportunities to create lasting memories.

Initial Public Offering and Reorganization Transactions

On October 28, 2021, we completed our initial public offer (the “IPO”), in which we issued and sold 12,903,225 shares of our Class A common stock at a price to the public of $17.00 per share. We raised net proceeds of $198.4 million, after deducting the underwriting discount and commissions and additional offering costs. On November 10, 2021, the underwriters exercised their option to purchase 1,935,483 Class A common stock. We received $30.6 million after deducting the underwriters discount. Solo Brands, Inc. used the proceeds to repay outstanding indebtedness under the Subordinated Debt of $30.0 million and Revolving Credit Facility of $196.1 million.

Prior to the completion of the IPO, we undertook certain reorganization transactions such that Solo Brands, Inc. is now a holding company, and its sole material asset is a controlling equity interest in Solo Stove Holdings, LLC (“Holdings”). As the general partner of Holdings, Solo Brands, Inc. operates and controls the business and affairs of Holdings and its subsidiaries and has the obligation to absorb losses and receive benefits from Holdings. Solo Brands, Inc. will consolidate Holdings in its consolidated financial statements and report a non-controlling interest related to the common units held by the pre-IPO common unitholders and the incentive units held by the continuing incentive unitholders in its consolidated financial statements.

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Solo Brands, Inc. is a corporation for U.S. federal and state income tax purposes. Holdings has been since the Summit Acquisition (as described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K) treated as a flow-through entity for U.S. federal income tax purposes, and as such, has generally not been subject to U.S. federal income tax at the entity level. Accordingly, the historical results of operations and other financial information set forth in this Annual Report do not include any material provisions for U.S. federal income tax for the periods prior to our initial public offering. Following our initial public offering, Solo Brands, Inc. pays U.S. federal and state income taxes as a corporation on its share of Holdings’ taxable income.

In addition, in connection with the reorganization and our IPO, we entered into the tax receivable agreement as described under “Tax Receivable Agreement.”

Tax Receivable Agreement

In connection with the IPO, Solo Brands, Inc. entered into the Tax Receivable Agreement with the Continuing LLC Owners and Holdings. Under the Tax Receivable Agreement, Solo Brands, Inc. generally is required to make cash payments to the Continuing LLC Owners equal to 85% of the tax benefits, if any, that Solo Brands, Inc. actually realizes, or in certain circumstances is deemed to realize, as a result of (1) increases in Solo Brands, Inc.’s proportionate share of the tax basis of the assets of Holdings resulting from (a) any future redemptions or exchanges of LLC Interests by the Continuing LLC Owners for Solo Brands, Inc. Class A common stock or cash pursuant to the Holdings LLC Agreement, or (b) certain distributions (or deemed distributions) by Holdings and (2) certain other tax benefits arising from payments under the Tax Receivable Agreement. Although Solo Brands, Inc. will retain 15% of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A Common Stock. No such payments will be made to any holders of Solo Brands, Inc. Class A common stock unless such holders are also Continuing LLC Owners.

Outlook

We believe we have significant opportunities to continue our upward momentum. Our long-term growth strategy includes each of the following:

•Accelerate organic growth in each brand, including introducing new and enhanced products

•Utilize scale and platform efficiencies

•Expand internationally

•Strategic acquisitions

•Expand our wholesale sales channel

With the successful completion of our IPO, our current debt structure and the ability to access capital markets, we believe we are financially poised to successfully execute on our strategy. Additionally, we continue to recruit and retain top talent, and our people are key to our success.

Into 2021, we continued to experience tailwinds from growth in e-commerce as consumers progress in the shift toward online shopping, including in our wholesale and international channels, and digitally-native brands. However, while we are optimistic about the future growth opportunities for all our brands, we are not immune to the recent macro headwinds, including inflation, that could impact discretionary spending in 2022. In addition, increased freight and raw materials costs as well as supply chain issues persist in the economy and put pressure on our business. As these issues evolve, our margins may be impacted. Our first quarter is typically our lowest quarter for sales following the holiday shopping season as well as colder weather keeping more people indoors.

Key Factors Affecting Our Results of Operations

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed in Item 1A - Risk Factors and included elsewhere in this Annual Report on Form 10-K.

Economic Conditions

Demand for our products is impacted by a number of economic factors impacting our customers, such as consumer confidence, demographic trends, employment levels, and other macroeconomic factors. These factors may influence the extent to which consumers invest in outdoor lifestyle products such as fire pits, stoves, grills, consumables, and associated accessories.

Success of Our Innovation Pipeline

Our future growth depends in part on our ability to introduce new and enhanced products. The success of our new and enhanced products depends on many factors, including anticipating consumer trends, finding innovative solutions to consumer needs, differentiating our products from those of our competitors, obtaining protection for our intellectual property and the ability to expand our brand beyond the categories of products we currently sell.

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Seasonality/Weather

Sales have historically experienced seasonality, with our highest level of sales typically being generated in the second and fourth fiscal quarters, with the first fiscal quarter typically generating the lowest sales. This historical sales trend is supported by the demand for our products at the beginning of the summer and holiday shopping seasons. Unfavorable weather can impact demand, including wet or exceptionally hot or dry weather conditions. Widespread wild fires also have potential to adversely impact our business.

COVID-19 Impacts

In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic. The COVID-19 pandemic has significantly impacted global economies, resulting in travel restrictions, business slowdowns or shutdowns in affected areas, reduced economic activity, and changes in consumer behavior.

Disruptions related to the COVID-19 pandemic have affected our business, as well as those of our consumers, retail partners, and suppliers. However, throughout the COVID-19 pandemic and during 2021, customer demand for our products continued and we generated significant growth. Two positive factors contributing to customer demand and our significant growth during the pandemic were: (1) COVID-19 increased consumer interest for outdoor living and outdoor recreation, and (2) it accelerated online shopping that has continued through today, increasing our DTC sales.

The COVID-19 pandemic created challenges with our supply chain. While we have maintained and added new suppliers to support our growth, ocean freightliners experienced unprecedented demand and the availability and cost of shipping containers severely increased. We experienced sharp increases to container costs and had to increase our resources to manage and ensure adequate space on ships to move our product from overseas by onboarding several new shipping carriers to our vendor list.

As we continue to monitor and navigate the COVID-19 pandemic and its effects, we may take additional actions based on the requirements and recommendations of local health guidelines, and intend to focus on investments for future, long-term growth. In certain circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. In addition, see Part I, Item 1A. “Risk Factors” elsewhere in this Annual Report on Form 10-K for more information regarding risks associated with the COVID-19 pandemic.

Ability to Scale Our Operating Model

We depend on third-party manufacturers for the sourcing of our products and generally do not have long-term supply agreements with our manufacturers. Our future performance may be impacted by the inability or unwillingness of our third-party manufacturers to meet our product demand and the availability of land-based and air freight carriers. Our ability to support our growth will also be dependent on attracting, motivating, and retaining personnel.

Business Acquisitions

In fiscal year 2021, we acquired Oru Kayak and ISLE Paddle Boards, which expand our served marked opportunity into the U.S. paddle sports market, and Chubbies apparel, which expands our served market opportunity into the clothing and accessories category. Our ability to find suitable acquisition targets and integrate them on to the Solo Brands platform can impact our future business performance.

Components of Our Results of Operations

Net Sales

Net sales are comprised of DTC channel sales and wholesale channel sales to retail partners. Net sales in both channels reflect the impact of partial shipments, product returns, and discounts for certain sales programs or promotions.

We believe that our net sales include a seasonal component. In the DTC channel, our historical net sales tend to be highest in our second and fourth quarters, while our wholesale channel has generated higher sales in the first and third quarters. Additionally, we expect volatility in the results of operations throughout the year relative to the timing of new product launches.

Gross Profit

Gross profit reflects net sales less cost of goods sold, which primarily includes the purchase cost of our products from our third-party manufacturers, inbound freight and duties, product quality testing and inspection costs, and depreciation on molds and equipment that we own.

Selling, General, & Administrative Expenses

Selling, general, and administrative, or SG&A, expenses consist primarily of marketing costs, employee compensation and benefits costs, costs of our warehousing and logistics operations, costs of operating on third-party DTC marketplaces, professional fees and services, cost of product shipment to our customers, and general corporate infrastructure expenses.

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Other Operating Expenses

Other operating expenses consist primarily of acquisition-related expenses related to the Oru, ISLE, and Chubbies acquisitions in 2021 and the change in control event in 2020. Additionally, other operating expenses include certain costs incurred for the initial public offering and business optimization and expansion expenses.

Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Sales

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined Change

(dollars in thousands) December 31, 2021 December 31, 2020 $ %

Net sales increased $270.3 million, or 202.6%, to $403.7 million for Successor period for the year ended December 31, 2021, compared to $133.4 million for the combined year ended December 31, 2020. $41.7 million of this increase was due to the acquisitions of Oru, ISLE and Chubbies. The remaining increase was primarily driven by a 145.2% increase in total orders period over period. Additionally, the average order size increased by 19.9%, period over period. We believe the increase in the number of orders was primarily due to our increased spending on our digital marketing strategy, growing brand awareness, and increased demand for outdoor recreation and leisure lifestyle products, which we believe was partially attributable to the COVID-19 pandemic solidifying consumer interest in the outdoors and our products.

Net sales for the Successor period, from October 9, 2020, through December 31, 2020, was comprised of $57.0 million, or 93.6%, of DTC sales and $3.9 million, or 6.4%, of wholesale sales.

Net sales for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was comprised of $65.7 million, or 90.5%, of DTC sales and $6.9 million, or 9.5%, of wholesale sales.

Cost of Goods Sold and Gross Profit

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined Change

(dollars in thousands) December 31, 2021 December 31, 2020 $ %

Cost of goods sold increased $98.4 million, or 211.7%, to $144.8 million in the Successor period for the year ended December 31, 2021, compared to $46.5 million in the combined year ended December 31, 2020, primarily due to increased product and freight expenses associated with the increased demand of our products and a $12.3 million fair value write-up of inventory related to the acquisitions of Oru, ISLE and Chubbies. As of December 31, 2021, $7.8 million of the fair value write-up of inventory had not been recognized. Gross profit also increased $171.9 million, or 197.7%, to $258.9 million in the Successor period for the year ended December 31, 2021, compared to $87.0 million in the combined year ended December 31, 2020, due to an increased demand for our products.

Cost of goods sold for the Successor period, from October 9, 2020, through December 31, 2020, was primarily driven by product and freight expenses associated with the demand for our products, and an inventory write-up of $5.8 million as a result of the 2020 change in control event that was recognized in expense in this period. As of December 31, 2020, there was still $0.7 million of inventory write-up that had not yet been expensed through cost of goods sold that was expensed in 2021.

Cost of goods sold for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was primarily driven by product and freight expenses associated with the demand for our products, and an inventory write-up of $1.9 million as a result of the 2019 change in control event that was recognized in this period.

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Gross margin decreased 1.1% to 64.1% in the Successor period for the year ended December 31, 2021, from 65.2% in the combined year ended December 31, 2020. The decrease in gross margin was primarily due to increased product and freight expenses associated with the increased demand of our products.

Gross margin for the Successor period, from October 9, 2020, through December 31, 2020, was primarily driven by increased demand for our products, offset by product and freight expenses associated with this demand, as well as write-up of inventory resulting from the application of purchase accounting from change in control event that occurred in 2020.

Gross margin for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was primarily driven by increased demand for our products offset by product and freight expenses associated with this demand.

Selling, General, and Administrative Expenses

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined Change

(dollars in thousands) December 31, 2021 December 31, 2020 $ %

SG&A increased $119.5 million, or 298.7%, to $159.5 million in the Successor period for the year ended December 31, 2021, compared to $40.0 million in the combined year ended December 31, 2020. The increase in SG&A was primarily driven by the following: an increase in our advertising and marketing spend of $57.0 million, an increase in shipping costs of $24.4 million, an increase in employee costs of $20.6 million due to increased headcount and equity-based compensation expense, and an increase in seller fees of $8.9 million. As a percentage of net sales, SG&A increased to 39.5% in the Successor period for the year ended December 31, 2021, from 30.0% in the combined year ended December 31, 2020 primarily related to the increase in advertising and marketing spend.

SG&A for the Successor period, from October 9, 2020, through December 31, 2020, was primarily driven by advertising and marketing spend of $9.4 million, shipping costs of $4.1 million, seller fees of $2.8 million, and $1.4 million of employee costs.

SG&A for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was primarily driven by advertising and marketing spend of $8.4 million, shipping costs of $5.1 million, employee costs of $3.3 million, and seller fees of $2.6 million.

Depreciation and Amortization Expenses

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined Change

(dollars in thousands) December 31, 2021 December 31, 2020 $ %

Depreciation and amortization expenses increased $12.6 million, or 221.4%, to $18.2 million in the Successor period for the year ended December 31, 2021, compared to $5.7 million in the combined year ended December 31, 2020. The increase in depreciation and amortization expenses was primarily driven by an $11.9 million increase in amortization related to increases in definite-lived intangible assets of $277.9 million as a result of the Oru, ISLE and Chubbies acquisitions as well as the 2020 change in control event.

Depreciation and amortization expenses for the Successor period, from October 9, 2020, through December 31, 2020, was primarily driven by amortization expense of $3.2 million. As of December 31, 2020, we had a definite lived intangible asset balance of $203.8 million due to the 2020 change in control event.

Depreciation and amortization expenses for the Intermediate Successor period, from January 1, 2020, through October 8, 2020 was primarily driven by amortization expense of $2.3 million. As of October 8, 2020, we had a definite lived intangible asset balance of $41.1 million due to the 2019 change in control event.

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Other Operating Expenses

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined Change

(dollars in thousands) December 31, 2021 December 31, 2020 $ %

Other operating expenses as a % of net sales 3.0 % 37.0 % 54.0 % 46.3 % (43.3)%

Other operating expenses decreased $49.4 million, or 80.1%, to $12.3 million in the Successor period for the year ended December 31, 2021, compared to $61.7 million in the combined year ended December 31, 2020. The decrease in other operating expenses was primarily related to the 2020 change in control event, including the settlement of incentive awards and transaction bonuses of $37.9 million, $2.9 million of seller and transaction expenses, $1.9 million of buyer expenses paid by the seller, as well as a $19.1 million loss on contingent consideration in the combined year ended December 31, 2020 that did not recur in the Successor period for the year ended December 31, 2021. Partially offsetting these decreases in other operating expenses were $8.1 million of acquisition-related expenses and $2.6 million of business optimization expenses in the Successor period for the year ended December 31, 2021 related to the Company's significant growth, compared to no such expenses in the combined year ended December 31, 2020.

Other operating expenses for the Successor period, from October 9, 2020, through December 31, 2020, was driven by an increase of $19.1 million to the fair value of the contingent consideration from the 2020 change in control transaction and $3.5 million of transaction expenses in connection with the 2020 change in control transaction.

Other operating expenses for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was driven by $39.2 million of transaction expenses in connection with the 2020 change in control transaction.

Non-Operating Expenses

Interest expense was $10.1 million in the Successor period for year ended December 31, 2021 compared to $3.2 million in the combined year ended December 31, 2020. The increase in interest expense was primarily due to $131.9 million of gross debt outstanding as of December 31, 2021, as compared to $75.0 million of gross debt outstanding as of December 31, 2020.

Interest expense for the Successor period, from October 9, 2020, through December 31, 2020, was primarily driven by $1.5 million of interest expense associated with the senior debt and subordinated debt.

Interest expense for the Intermediate Successor period, from January 1, 2020, through October 8, 2020, was primarily driven by $1.7 million of interest expense associated with the term loan.

Income Taxes

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 not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings is passed through to and included in the taxable income or loss of its members, including us, 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.

Income taxes was $2.0 million in the Successor period for year ended December 31, 2021, compared to $0.1 million in the combined year ended December 31, 2020. Income taxes represents federal, state, and local income taxes on the Company's allocable share of taxable income of Holdings, as well as Oru's and Chubbies' federal and state tax expense.

Income taxes for the Successor period, from October 9, 2020 through December 31, 2020, was driven by a nominal amount of Texas franchise tax expense.

Income taxes for the Intermediate Successor period, from January 1, 2020 through October 8, 2020, was driven by $0.1 million of Texas franchise tax expense.

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Liquidity and Capital Resources

General

Historically, our cash requirements have principally been for working capital purposes. We expect these needs to continue as we develop and grow our business. We fund our working capital, primarily inventory, and accounts receivable, from cash flows from operating activities, cash on hand, and borrowings under our Revolving Credit Facility.

Current Liquidity

As of December 31, 2021, we had a cash balance of $25.1 million, working capital (excluding cash) of $87.2 million, and $317.5 million of borrowings available under the Revolving Credit Facility.

Revolving Credit Facility and Term Loan

On May 12, 2021, we entered into that certain credit agreement with JPMorgan Chase Bank, N.A., the Lenders and L/C Issuers party thereto (each as defined therein) and the other parties thereto (as subsequently amended on June 2, 2021, and September 1, 2021, the “Revolving Credit Facility”). As so amended, the Revolving Credit Facility allows us to borrow up to $350.0 million of revolving loans, including the ability to issue up to $20.0 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under the Revolving Credit Facility, it does reduce the amounts available under the Revolving Credit Facility. The Revolving Credit Facility matures on May 12, 2026 and bears interest at a rate equal to the base rate as defined in the agreement plus an applicable margin, which as of December 31, 2021, was based on LIBOR. Interest is due on the last business day of each March, June, September and December. On December 31, 2021, we had $32.5 million in outstanding borrowings and $317.5 million available for future borrowings on the Revolving Credit Facility. All outstanding principal and interest due under the Revolving Credit Facility are due at maturity.

In addition to the above, the amendment on September 1, 2021 included a provision to borrow up to $100.0 million under a term loan (the “Term Loan”). The proceeds from the Term Loan were used to fund the Chubbies acquisition. The Term Loan matures on September 1, 2026 and bears interest at 1.25% plus an applicable margin, which as of December 31, 2021 was based on LIBOR. We were required to make quarterly principal payments on the Term Loan beginning on December 31, 2021. On December 31, 2021, we had $99.4 million outstanding on the Term Loan. All outstanding principal and interest due on the Term Loan are due at maturity.

The recent changes in our working capital requirements generally reflect the growth in our business. Although we cannot predict with certainty all of our particular short-term cash uses or the timing or amount of cash requirements, we believe that our available cash on hand, along with amounts available under our Revolving Credit Facility will be sufficient to satisfy our liquidity requirements for at least the next twelve months. However, the continued growth of our business, including our expansion into international markets, may significantly increase our expenses (including our capital expenditures) and cash requirements. Furthermore, we will continue to seek possible brand and mission consistent acquisition opportunities that would require additional capital. In addition, the amount of our future product sales is difficult to predict, and actual sales may not be in line with our forecasts. As a result, we may be required to seek additional funds in the future from issuances of equity or debt, obtaining additional credit facilities, or loans from other sources.

Other Terms of the Revolving Credit Facility

We may request incremental term loans, incremental equivalent debt, or revolving commitment increases (we refer to each as an Incremental Increase) in amounts such that, after giving pro forma effect to such Incremental Increase, our total secured net leverage ratio (as defined in the Revolving Credit Facility) would not exceed the then-applicable cap under the Revolving Credit Facility. In the event that any lenders fund any of the Incremental Increases, the terms and provisions of each Incremental Increase, including the interest rate, shall be determined by us and the lenders, but in no event shall the terms and provisions, when taken as a whole and subject to certain exceptions, of the applicable Incremental Increase, be more favorable to any lender providing any portion of such Incremental Increase than the terms and provisions of the loans provided under the Revolving Credit Facility unless such terms and conditions reflect market terms and conditions at the time of incurrence or issuance thereof as determined by us in good faith.

The Revolving Credit Facility is (a) jointly and severally guaranteed by the Guarantors and any future subsidiaries that execute a joinder to the guaranty and related collateral agreements and (b) secured by a first priority lien on substantially all of our and the Guarantors’ assets, subject to certain customary exceptions.

The Revolving Credit Facility requires us to comply with certain financial ratios, including:

•at the end of each fiscal quarter, a total net leverage ratio (as defined in the Revolving Credit Facility) for the four quarters then ended of not more than: 4.00 to 1.00, for each quarter ending in 2021, 2022, and on June 30, 2023; 3.75 to 1.00, for each quarter ending June 30, 2023 through March 31, 2024; and 3.50 to 1.00, for each quarter ending June 30, 2024 or thereafter;

•at the end of each fiscal quarter commencing with the quarter ending September 30, 2021, an interest coverage ratio (as defined in the Revolving Credit Facility) for the four quarters then ended of not less than 3.00 to 1.00.

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In addition, the Revolving Credit Facility contains customary financial and non-financial covenants limiting, among other things, mergers and acquisitions; investments, loans, and advances; affiliate transactions; changes to capital structure and the business; additional indebtedness; additional liens; the payment of dividends; and the sale of assets, in each case, subject to certain customary exceptions. The Revolving Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, defaults under other material debt, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the Revolving Credit Facility to be in full force and effect, and a change of control of our business. We were in compliance with all covenants under the Revolving Credit Facility as of December 31, 2021.

Subordinated Debt – Related Party

On October 9, 2020, Solo Brands, LLC entered into a Note Purchase Agreement, or the Summit Note Agreement, by and among itself, the guarantors party thereto from time to time, the purchasers party thereto, and Summit Partners Subordinated Debt Fund V-A, L.P., as the Purchaser Representative. Pursuant to the terms of the Summit Note Agreement, certain affiliates of Summit Partners, L.P. purchased from Solo Brands, LLC $30.0 million of senior subordinated notes, or the Summit Notes. On November 5, 2021, the Company repaid in full the Subordinated Debt - related party. The Summit Notes bore interest at a rate of 12% per annum, with an original maturity date of October 9, 2026. The Summit Notes were also subject to mandatory prepayment, plus accrued interest and related mandatory prepayment premium, upon the occurrence of certain liquidity events described in the Summit Note Agreement, including the initial public offering.

Senior Debt Facility

On November 6, 2020, we entered into a credit agreement with a bank (the “Senior Debt Facility”). Under the terms of this agreement, we borrowed $45 million under a term loan. The proceeds from the term loan were used to repay certain outstanding bridge indebtedness entered as part of the 2019 Agreement described in Note 1. We voluntarily repaid in full the principal amount and $1.0 million of accrued interest outstanding under the Senior Debt Facility on May 31, 2021, using proceeds from the Revolving Credit Facility described above. The Senior Debt Facility bore interest at a rate equal to a base rate defined in the agreement plus an applicable margin. At the time of the repayment, we wrote off $1.5 million of debt issuance costs associated with the Senior Debt Facility.

Cash Flows

SUCCESSOR SUCCESSOR INTERMEDIATESUCCESSOR Combined

Cash flows provided by (used in):

Operating activities

Net cash used in operating activities was $10.2 million in the Successor period for the year ended December 31, 2021, compared to net cash provided by operating activities of $32.7 million in the combined year ended December 31, 2020. The $42.9 million decrease in cash provided by operating activities was primarily due to the following:

•changes in inventory decreased operating cash flow by $47.3 million, primarily driven by purchases of additional inventory to meet the increased demand of our products;

•changes in deferred revenue decreased operating cash flow by $38.1 million, primarily driven by shipments of previously backordered products;

•changes in accrued expenses and other current liabilities decreased operating cash flow by $21.3 million, primarily driven by a reduction in accruals for transaction related expenses related to the change in control transaction in 2020 as well as the payout of member distributions related to 2020;

•changes in accounts receivable decreased operating cash flow by $12.6 million, primarily driven by an increase in credit sales; and

•changes in prepaid expenses and other current assets decreased operating cash flow by $7.9 million, primarily driven by increases in prepaid insurance, marketing and software and deposits to vendors for materials and accessories.

Partially offsetting these decreases in cash provided by operating activities was net income, which increased operating cash flow by $80.7 million. Adjustments to net income for non-cash items, included decreases in operating cash flow of $19.1 million related to the change in fair value of contingent consideration and $3.1 million related to deferred income taxes, offset by amortization of intangible assets, which increased operating cash flow by $11.9 million, and equity-based compensation, which increased operating cash flow by $7.3 million.

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Investing activities

Cash used in investing activities was $143.9 million in the Successor period for the year ended December 31, 2021, primarily related to the assets and liabilities acquired in the Oru, ISLE, and Chubbies acquisitions. Cash used in investing activities was $274.1 million in the combined period for the year ended December 31, 2020, primarily related to the assets and liabilities acquired as a result of the change in control event. Additionally, capital expenditures decreased investing cash flow by $9.7 million in the Successor period for the year ended December 31, 2021 compared to the combined period for the year ended December 31, 2020, primarily related to the construction of our new global headquarters.

Financing activities

Cash provided by financing activities was $146.5 million in the Successor period for the year ended December 31, 2021, compared to $281.1 million in the combined period for the year ended December 31, 2020. The $134.6 million decrease in cash provided by financing activities was primarily due to the following:

•A $97.9 million increase in payment of contingent consideration

•A $16.6 million increase in distributions to members and non-controlling interests

•Proceeds from the issuance of Class A units, net of underwriters’ discounts of $250.0 million in the combined period for the year ended December 31, 2020, compared to $229.0 million of proceeds from our initial public offering, net of underwriters’ discounts, commissions and offering costs in the Successor period for the year ended December 31, 2021

Partially offsetting these decreases in cash provided by financing activities were $52.7 million of proceeds from long-term debt, net of repayments and issuance costs, in the Successor period for the year ended December 31, 2021, compared to net proceeds from long-term debt of $49.0 million in the combined period for the year ended December 31, 2020.

Contractual Obligations

The following table summarizes our material contractual obligations as of December 31, 2021 (in thousands):

Payments Due by Fiscal Year

(1) Long-term debt consists of required principal payments on long-term debt.

(2) Interest payment obligations represent required interest payments on long-term debt. Amounts exclude amortization of debt issuance costs, debt discounts, and acquisition costs that would be included in interest expense in the consolidated financial statements.

(3) Operating leases represent required lease payments during the noncancelable lease term. Variable payments for occupancy-related costs, common area maintenance charges, real estate taxes, insurance and contingent rent are not included above.

(4) Inventory obligations represent binding commitments to purchase finished goods, raw materials and contract production that are payable upon shipment from the manufacturer.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, we make estimates and judgments that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an on-going basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Because of the uncertainty inherent in these matters, actual results may differ from these estimates and could differ based upon other assumptions or conditions.

See Note 2, Significant Accounting Policies, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about our significant accounting policies, including our critical accounting policies. The critical accounting estimates that reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements include those noted below. Within the context of these critical accounting estimates, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Revenue Recognition

The Company primarily engages in direct-to-consumer transactions, which is comprised of product sales directly from the brands’ websites, and business-to-business transactions, which is 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.

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There are no significant extended payment terms with our customers. Payment is due at the time of sale on our website for our direct-to-consumer transactions. Our business-to-business customers’ payment terms vary depending on the contract with each retailer, but the most common is net 30 or net 60 days.

Revenue is recognized for the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer includes fixed and variable amounts. The fixed amount of consideration is the standalone selling price of the goods sold. Variable considerations, including cash discounts and rebates, are deducted from gross sales in determining net sales. Variable considerations also include the portion of goods that are expected to be returned and refunded. Any consideration received (or receivable) that the Company expects to refund to the customer will be recognized as a refund liability. Our refund liability is based on historical experience and trends. The actual amount of customer returns and refunds may differ from our estimates. Net sales include shipping costs charged to the customer and is recorded net of taxes collected from customers, which are remitted to government authorities.

Income Taxes

In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected revenue growth, and operating margins, among others. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods.

We have recorded a valuation allowance against the capital loss resulting from the portion of the basis difference in our investments in Holdings, Oru, and Chubbies, that will only reverse upon the eventual sale of our interest in Holdings, Oru, and Chubbies, as well as certain state tax losses and foreign losses that are not expected to be utilized prior to expiration. As of December 31, 2021, we had $2.5 million of deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. However, since future financial results may differ from previous estimates, periodic adjustments to our valuation allowance may be necessary. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods.

Goodwill and Intangible Assets

Goodwill is determined based upon the excess enterprise value of the Company over the estimated fair value of assets and liabilities assumed at acquisition date. Intangible assets are comprised of brand, patents, customer relationships, developed technology and trademark. Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition. Acquired definite-lived intangible assets subject to amortization are amortized using the straight-line method over the estimated useful lives of the assets. See Note 2, Significant Accounting Policies, for more information about our accounting policies related to goodwill and intangible assets and Note 7, Intangible Assets, net, for further details regarding intangible asset balances and related amortization.

We review goodwill at the reporting unit level, which is one level below the operating segment, for impairment annually in the fourth quarter of each fiscal year and on an interim basis whenever events or changes in circumstances indicate the fair value of such assets may be below their carrying value. In conducting our annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying value. If factors indicate that the fair value of the asset is less than its carrying value, we perform a quantitative assessment of the asset, analyzing the expected present value of future cash flows to quantify the amount of impairment, if any.

The Company has goodwill of $410.6 million, of which $289.1 million relates to one reporting unit. For our annual goodwill impairment tests in the fourth quarters of 2021 and 2020, we performed a qualitative assessment to determine whether the fair value of goodwill was more likely than not less than the carrying value for each reporting unit. Based on timing of change in control events, timing of acquisitions, economic conditions and industry and market considerations, we determined that it was more likely than not that the fair value of goodwill was greater than its carrying value; therefore, the quantitative impairment test was not performed. As a result, there was no impairment charge recognized for the years 2021 and 2020.

Related to the Oru, ISLE and Chubbies acquisitions and the 2020 change in control, we engaged a third-party valuation specialist to determine the fair values of the intangible assets as of the acquisition date. The fair values were based on certain significant estimates and assumptions, including forecasted models projecting the operations of the business subsequent to the acquisition. Lower than expected results of operations could result in the need to review goodwill recorded as a result of these acquisitions for impairment, which could result in an impairment of goodwill when also considering economic conditions and industry and market conditions. See Note 4, Acquisitions, for further details of the acquisitions, including the fair values of the assets and liabilities acquired.

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Inventory

Inventories are comprised primarily of finished goods and are recorded at the lower of cost or net realizable value. Cost is determined using average costing that approximates actual cost on a first-in, first-out (FIFO) method. Net realizable value is estimated based on our assumptions about market conditions and historically has remained above cost. As a result, we have not recorded any write-downs to inventory below cost, except as it relates to obsolete or slow-moving inventory. Based on our review of inventories, obsolete or slow-moving inventories were not material as of December 31, 2021. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of sales and higher income from operations than expected in that period. Related to the 2020 change in control and the Oru, ISLE and Chubbies acquisitions, inventory was revalued to its fair value based on the market approach as of the acquisition dates.

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, see “Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Standards—Not Yet Adopted” in Note 2 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

JOBS Act

We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates.

Interest Rate Risk

In order to maintain liquidity and fund business operations, we have a long-term credit facility and separate term loan that bear variable interest rates based on prime, federal funds, or LIBOR plus an applicable margin based on our total net leverage ratio. As of December 31, 2021, we had indebtedness of $32.5 million and $99.4 million under our Revolving Credit Facility and Term Loan, respectively. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions, and other factors. We may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations, but as of December 31, 2021, we have not entered into any such contracts. A 100 bps increase in LIBOR would increase our interest expense by approximately $1.3 million in any given year.

Inflation Risk

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and SG&A expenses as a percentage of net sales, if the selling prices of our products do not increase with these increased costs.

Commodity Price Risk

The primary raw materials and components used by our contract manufacturing partners include stainless steel and aluminum. We believe these materials are readily available from multiple vendors. We have, and may continue to, negotiate prices with suppliers of these products on behalf of our third-party contract manufacturers in order to leverage the cumulative impact of our volume. We do not, however, source significant amounts of these products directly. Certain of these products use petroleum or natural gas as inputs. However, we do not believe there is a significant direct correlation between petroleum or natural gas prices and the costs of our products.

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Foreign Currency Risk

Our international sales are primarily denominated in U.S. dollars. As of December 31, 2021, net sales in international markets accounted for 5.5% of our consolidated revenues. During 2020, net sales in international markets accounted for 3.2% of our consolidated revenues. Therefore, we do not believe exposure to foreign currency fluctuations would have a material impact on our net sales. A portion of our operating expenses are incurred outside the Unites States and are denominated in foreign currencies, which are also subject to fluctuations due to changes in foreign currency exchange rates. In addition, our suppliers may incur many costs, including labor costs, in other currencies. To the extent that exchange rates move unfavorably for our suppliers, they may seek to pass these additional costs on to us, which could have a material impact on our gross margin. In addition, a strengthening of the U.S. dollar may increase the cost of our products to our customers outside of the United States. Our operating results and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates. However, we believe that the exposure to foreign currency fluctuations from operating expenses is not material at this time.

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Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm - PCAOB Firm ID: 42 46

Consolidated Balance Sheets 47

Consolidated Statements of Operations 48

Consolidated Statements of Cash Flows 49

Consolidated Statements of Equity 50

Notes to Consolidated Financial Statements

Note 1 - Organization and Description of Business 52

Note 2 - Significant Accounting Policies 53

Note 3 - Revenue 58

Note 4 - Acquisition 59

Note 5 - Inventory 61

Note 6 - Property and Equipment, net 62

Note 7 - Intangible Assets, net 62

Note 8 - Goodwill 63

Note 9 - Accrued Expenses and Other Current Liabilities 63

Note 10 - Long-Term Debt 63

Note 12 - Employee Compensation 65

Note 13 - Income Taxes 69

Note 14 - Commitment and Contingencies 72

Note 15 - Fair Value Measurements 73

Note 16 - Members' Equity 73

Note 17 - Net Income (Loss) Per Unit 74

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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Solo Brands, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Solo Brands, Inc. (the Company) as of December 31, 2021 and 2020 (Successor) and the related consolidated statements of operations, cash flows and statements of shareholders’ and members’ equity for the year ended December 31, 2021 and for the period from October 9, 2020 to December 31, 2020 (Successor), January 1, 2020 to October 8, 2020 of Solo Brands, LLC, formerly Frontline Advance, LLC (Intermediate Successor), and the related notes. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020 (Successor) and the results of its operations and its cash flows for the year ended December 31, 2021, and the results of its operations and its cash flows for the periods from October 9, 2020 to December 31, 2020 (Successor) and January 1, 2020 to October 8, 2020 (Intermediate Successor) in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2021.

Dallas, Texas

March 30, 2022

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SOLO BRANDS, INC.

Consolidated Balance Sheets

ASSETS

Current assets

Prepaid expenses and other current assets 9,889 328

Non-current assets

Other non-current assets 506 149

LIABILITIES AND STOCKHOLDERS’ AND MEMBERS’ EQUITY

Current liabilities

Accrued expenses and other current liabilities 28,150 15,203

Contingent consideration — 100,000

Current portion of long-term debt 3,125 450

Non-current liabilities

Deferred tax liability 91,244 —

Other non-current liabilities 729 133

Commitments and contingencies (Note 14)

Shareholders’ and members’ equity

Additional paid-in capital 350,088 —

Accumulated other comprehensive income 6 —

Retained earnings (accumulated deficit) 10,691 (8,318)

Shareholders’ equity attributable to non-controlling interests 213,292 —

Total liabilities and shareholders’ and members’ equity $ 837,740 $ 542,407

See Notes to Consolidated Financial Statements

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SOLO BRANDS, INC.

Consolidated Statements of Operations

SUCCESSOR SUCCESSOR INTERMEDIATE SUCCESSOR

Operating expenses

Non-operating expenses

Net income (loss) attributable to Solo Brands, Inc. $ 10,691 $ — $ —

Earnings per Class A common stock

Basic $ 0.17 * *

Diluted $ 0.17 * *

Weighted-average Class A common stock outstanding

* Refer to Note 17 - Net Income (Loss) Per Share for why the earnings per share information has not been presented for the Successor period from October 9, 2020, through December 31, 2020, and the Intermediate Successor period from January 1, 2020, through October 8, 2020.

See Notes to Consolidated Financial Statements

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SOLO BRANDS, INC.

Consolidated Statements of Cash Flows

SUCCESSOR SUCCESSOR INTERMEDIATE SUCCESSOR

CASH FLOWS FROM OPERATING ACTIVITIES:

Amortization of debt issuance costs 507 55 719

Non-cash interest expense 1,652 — —

Equity-based compensation 7,329 — —

Deferred income taxes (3,139) — —

Change in fair value of contingent consideration — 19,073 —

Loss on the sale of property and equipment 187 — —

Changes in assets and liabilities

Prepaid expenses and other current assets (8,134) (118) (68)

Other non-current assets and liabilities 653 13 (16)

Net cash provided by (used in) operating activities (10,246) 5,592 27,087

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from the sale of property and equipment 64 — —

Net cash provided by (used in) investing activities (143,889) (273,441) (661)

CASH FLOWS FROM FINANCING ACTIVITIES:

Debt issuance costs paid (4,234) — —

Payment of contingent consideration (100,000) — (2,080)

Contributions from members before Reorganization Transactions 250 — 700

Payments of initial public offering costs (5,594) — —

Distributions to non-controlling interests (2,256) — —

Effect of exchange rate changes on cash 6 — —

Cash and cash equivalents balance, beginning of period 32,753 — 5,025

SUPPLEMENTAL DISCLOSURES:

SUPPLEMENTAL NONCASH INVESTING AND FINANCING DISCLOSURES:

Non-cash issuance of Class B units - ISLE $ 16,494 $ — $ —

Non-cash issuance of Class B units - Chubbies $ 29,075 $ — $ —

Non-cash acquisition of Class B units $ — $ 4,749 $ —

See Notes to Consolidated Financial Statements

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SOLO BRANDS, INC.

Consolidated Statements of Shareholders’ and Members’ Equity

Member tax distributions — — — — — (31,503) — (1,660) — — — — — (33,163)

Contributions — — — — — — 60 250 — — — — — 250

Noncontrolling interest in Oru — — — — — — — — — — — — 15,320 15,320

See Notes to Consolidated Financial Statements

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SOLO BRANDS, INC.

Consolidated Statements of Members’ Equity

(In thousands) Class A-1 Class A-2

(In thousands) Class A Class B

Balance at October 9, 2020 — $ — — $ — $ — $ —

See Notes to Consolidated Financial Statements

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SOLO BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Organization and Description of Business

Description of Business

Solo Brands, Inc. (“Company”, “We”, “Our” or “Solo Brands”), through a wholly-owned subsidiary, Solo Stove Holdings, LLC (“Holdings”), is a large, rapidly growing DTC platform that operates four premium outdoor lifestyle brands—Solo Stove, Oru Kayak (“Oru”), ISLE Paddle Boards (“ISLE”), and Chubbies apparel. Solo Stove offers portable, low-smoke fire pits, grills, and camping stoves for backyard and outdoor use in different sizes, fire pit bundles, gear kits, stoves, cookware, dinnerware, and a variety of clothing and accessories. Oru offers a flagship line of lightweight, foldable kayaks. ISLE produces high-quality stand-up paddle boards with colorful designs that are engineered to accommodate every skill level, style, and interest. Chubbies is a fun-loving, premium apparel brand that offers well-fitted comfortable clothing with unique style. Solo Brands distributes its products through individual brand websites and other partners across North America and Europe.

Organization

Solo Brands, Inc. was incorporated in Delaware on June 23, 2021 for the purpose of facilitating an initial public offering and other related transactions in order to carry on the Company’s business. On October 28, 2021, Solo Brands, Inc. completed its initial public offering of 14,838,708 shares of Class A common stock at an offering price of $17.00 per share, including 1,935,483 shares of Class A common stock the underwriters exercised their option to purchase subsequent to the initial public offering. Solo Brands, Inc. received gross proceeds of approximately $234.6 million, including underwriting discounts and commissions and before offering related transaction costs of $5.6 million, for net proceeds of $229.0 million.

Solo Stove Holdings, LLC (“Holdings”) was formed as a single-member limited liability company in the state of Delaware on October 6, 2020. Through a wholly-owned subsidiary, pursuant to the securities purchase agreement (the “2020 Agreement”) dated October 9, 2020, Holdings acquired 100% percent of the outstanding units of Solo Brands, LLC (previously Frontline Advance, LLC dba Solo Stove).

While operating as a limited liability company from 2011 to 2019, Solo Brands, LLC had two owners, or the Founders, which together owned 100% of the outstanding membership interest. Pursuant to the membership interest purchase agreement (“the 2019 Agreement”) dated September 24, 2019, SS Acquisitions, Inc. (which was majority-owned by Bertram Capital) acquired 66.74% of the total Class A-1 and Class A-2 units of Solo Brands, LLC from the Founders. The remaining interests were retained by the Founders and other employees who acquired interest as part of the 2019 Agreement.

For all periods, the operations of the Company are conducted through Solo Brands, LLC. As a result of the 2020 Agreement, Solo Brands, LLC became a wholly-owned subsidiary of Holdings. In exchange, Holdings issued Class A and B units, through which Summit Partners Growth Equity Funds, Summit Partners Subordinated Debt Funds, and Summit Investors X Funds (collectively, the “Summit Partners”) acquired an effective 58.82% percent of Holdings. The remaining units were retained by the Founders, SS Acquisitions, Inc., and other employees (collectively, the “Continuing LLC Owners”).

In connection with the IPO, the organizational structure was converted to an umbrella partnership-C-Corporation with Solo Brands, Inc. having a controlling equity interest in Solo Stove Holdings, LLC. The Reorganization Transactions were accounted for as a transaction between entities under common control. As the sole managing member, Solo Brands, Inc. operates and controls all of the business and affairs and, through Solo Stove Holdings, LLC and its subsidiaries, conducts the business. Solo Brands, Inc. consolidates Solo Stove Holdings, LLC in its consolidated financial statements and reports a non-controlling interest related to the common units held by the Continuing LLC Owners on its audited consolidated financial statements.

Basis of Presentation

The period January 1, 2020 through October 8, 2020 is referred to as “Intermediate Successor.” The Intermediate Successor period reflects the costs and activities as well as the recognition of assets and liabilities at their fair values pursuant to the election of push-down accounting as of the consummation of the 2019 Agreement. Prior to the formation of Holdings, the members’ equity represents interest in Solo Brands, LLC.

The period October 9, 2020 through December 31, 2021 is referred to as “Successor.” The Successor period reflects the costs and activities as well as the recognition of assets and liabilities of the Company at their fair values pursuant to the election of push-down accounting as of the consummation of the 2020 Agreement. Due to the application of acquisition accounting, the election of push-down accounting, and the conforming of significant accounting policies, the results of the consolidated financial statements for Intermediate Successor and Successor periods are not comparable. Subsequent to the formation of the Successor and through the date of the Reorganization Transactions, the members’ equity represents interest in Holdings. Subsequent to the Reorganization Transactions, shareholders’ equity represents interest in Solo Brands, Inc. and the Continuing LLC Owners’ interest in Holdings. However, the operations of the Company during this period were conducted through Solo Brands, LLC.

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The 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 U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted pursuant to applicable rules and regulations of the SEC. The consolidated financial statements include those of our wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation.

NOTE 2 – Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

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 our operating environment changes. Actual results could differ from our estimates.

Concentrations of Credit Risk

The Company extends trade credit to its business-to-business customers on terms that generally are practiced in the industry. The Company periodically performs credit analyses and monitors the financial condition of its customers to reduce credit risk. The Company performs ongoing credit evaluations of its customers but generally does not require collateral to support accounts receivable. Accounts receivable mostly consist of amounts due from our business-to-business customers.

As of December 31, 2021, Bed Bath and Beyond, Ace Hardware, and Dick’s Sporting Goods accounts for 21.0%, 19.0%, and 13%, respectively, of the Company’s total outstanding accounts receivable. As of December 31, 2020, Dick’s Sporting Goods accounted for 17.0% of the Company’s total outstanding accounts receivable. There are no other significant concentrations of receivables that represent a significant credit risk. In the Successor period for the year ended December 31, 2021, no single customer accounted for more than 10% of total net sales. In the Successor period for the period October 9, 2020 through December 31, 2020, and in the Intermediate Successor period for the period January 1, 2020 through October 8, 2020, no single customer accounted for more than 10% of total net sales.

We are exposed to risk due to our concentration of business activity with certain third-party manufacturers of our products. The majority of our camp stoves and fire pits are currently made in China between three of our manufacturers, with additional limited production in India and Vietnam. The majority of our kayaks and kayak accessories are currently made by two manufacturers in Mexico. The majority of our stand up paddle boards and paddle board accessories are currently made in China between a number of manufacturers, with an additional manufacturer in Vietnam. The majority of our casual wear, sportwear, swimwear, outerwear, loungewear, and other accessories are currently made in China between a variety of manufacturers, with additional manufacturers in India, Vietnam, and the United States.

Segment Information

The Company’s Chief Executive Officer, as the chief operating decision-maker, organizes the Company, manages resource allocations, and measures performance on the basis of one operating segment. We report our operations as a single reportable segment and manage our business as a single-brand outdoor consumer products business. This is supported by our operational structure, which includes sales, research, product design, operations, marketing, and administrative functions focused on the entire product suite rather than individual product categories. Our chief operating decision maker does not regularly review financial information for individual product categories, sales channels, or geographic regions that would allow decisions to be made about the allocation of resources or performance.

Fair Value Measurements

Accounting standards require certain assets and liabilities to be reported at fair value in the consolidated financial statements and provide a framework for establishing that fair value. The framework for determining fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.

Fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets or liabilities in active markets and other inputs, such as interest rates and yield curves, that are observable at commonly quoted intervals.

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Fair values determined by Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related liability. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset or liability.

In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.

Our financial instruments consist primarily of cash, accounts receivable, accounts payable, 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.

Risks and Uncertainties

On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus as a “pandemic”. First identified in late 2019 and known now as COVID-19, the outbreak has impacted millions of individuals worldwide and continues to do so with new variants as well. In response, many countries have implemented measures to combat the outbreak, which have impacted global business operations. While the Company’s results of financial position, cash flows, and results of operations were not significantly impacted, the extent of any future impact cannot be reasonably estimated at this time.

Cash and Cash Equivalents

The Company considers all investments with an original maturity of three months or less when purchased to be cash equivalents. The Company continually monitors its position with, and the credit quality of, the financial institutions with which it invests. The Company has maintained bank balances in excess of federally insured limits. We have not historically experienced any losses in such accounts.

Accounts Receivable, net

Accounts receivables consists of amounts due to the Company from retailers and direct to corporate customers. Accounts receivable are recorded at invoiced amounts, less contractual allowances for trade terms, sales incentive programs, and discounts. The Company maintains an allowance for doubtful accounts for estimated losses that will result from the inability of customers to make required payments. The allowance is determined based on a review of specific customer accounts where the collection is doubtful, as well as an assessment of the collectability of total receivables considering the aging of balances, historical and anticipated trends, and current economic conditions. All accounts are subject to an ongoing review of ultimate collectability. Receivables are written off against the allowance when it is probable the amounts will not be recovered. The allowance for doubtful accounts on accounts receivable balances was $0.3 million as of December 31, 2021. This balance was $0.1 million as of December 31, 2020.

Inventory

Inventories are comprised primarily of finished goods and are recorded at the lower of cost or net realizable value. Cost is determined using average costing that approximates actual cost on a first-in, first-out (FIFO) method. Obsolete or slow-moving inventory is written down to estimated net realizable value.

Property and Equipment, net

Property and equipment acquired through acquisitions (as described in Note 4) are recorded at estimated fair value as of that date. Property and equipment acquired subsequent to acquisitions are recorded at cost, net of accumulated depreciation. Costs of maintenance and repairs are charged to expense when incurred. When property and equipment are sold or disposed of, the cost and related accumulated depreciation is written off, and a gain or loss, if applicable, is recorded. We review property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Property and equipment are depreciated on a straight-line method over their estimated useful lives. The useful lives for property and equipment are as follows:

Useful Life

Computers, software, and other equipment 3 Years

Machinery 5 Years

Leasehold improvements Shorter of lease term or 5 Years

Furniture and fixtures 5 Years

Goodwill and Intangible Assets

Goodwill is determined based upon the excess enterprise value of the Company over the estimated fair value of assets and liabilities assumed at the acquisition date. Intangible assets are comprised of brand, patents, trademark, developed technology, and customer relationships. Goodwill and intangible assets are recorded at their estimated fair values at the date of acquisition. We review goodwill and indefinite-lived intangible assets for impairment annually on October 1st of each fiscal year and on an interim basis whenever events or changes in circumstances indicate the fair value of such assets may be below their carrying value. In conducting our annual impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying value. If factors indicate that the fair value of the asset is less than its carrying value, we perform a quantitative assessment of the asset, analyzing the expected present value of future cash flows to quantify the amount of impairment, if any.

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For our annual goodwill and indefinite-lived intangibles impairment tests on October 1, 2021, and 2020, we performed a qualitative assessment to determine whether the fair value of goodwill and indefinite-lived intangibles was more likely than not less than the carrying value. Based on timing of change in control events, timing of acquisitions, economic conditions and industry and market considerations, we determined that it was more likely than not that the fair value of goodwill and indefinite lived intangibles was greater than their carrying value; therefore, the quantitative impairment test was not performed. As a result, there was no impairment charge recognized for the years 2021 and 2020.

Acquired definite-lived intangible assets subject to amortization are amortized using the straight-line method over the estimated useful lives of the assets. The useful lives for intangible assets subject to amortization are as follows:

Useful Life

Brand 15 Years

Patents 8 Years

Customer relationships 10 Years

Developed technology 6 Years

Trademark 9-15 Years

Proprietary software 5 Years

Debt Issuance Costs

Debt issuance costs were incurred by the Company in connection with obtaining debt in the change of control transactions and funding acquisitions and inventory purchases. These are recorded on the balance sheet as a direct deduction from the carrying value of the associated debt liability. The costs are amortized on a straight-line basis over the term of the related debt and reported as a component of interest expense.

Leases

The Company accounts for leases in accordance with Accounting Standards Codification (“ASC”) No. 840, Leases. The Company deals primarily with operating leases for office space and distribution facilities and does not have any assets or liabilities under capital leases.

Rent expense on operating leases is recorded on a straight-line basis over the lease term. Deferred rent represents the difference between rent amounts paid and amounts recognized as straight-line rent expense. The excess of straight-line rent expense over lease payments due is recorded as a deferred rent liability in accrued expenses for the current portion and other long-term liabilities for the noncurrent portion in the consolidated balance sheets.

Revenue Recognition

The Company primarily engages in direct-to-consumer transactions, which is comprised of product sales directly from the Company’s website, and business-to-business transactions, or wholesale, which is 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.

For the Company’s direct-to-consumer and wholesale transactions, performance obligations are satisfied at the point of shipment. To determine the point in time at which a customer obtains control of a promised asset and the Company satisfies a performance obligation, the Company considered the following:

a.The Company has a present right to payment for the asset

b.The customer has legal title to the asset

c.The Company has transferred physical possession of the asset

d.The customer has the significant risks and rewards of ownership of the asset

e.The customer has accepted the asset.

There are no significant extended payment terms with our customers. Payment is due at the time of sale on our website for our direct-to-consumer transactions. Our business-to-business customers’ payment terms vary depending on the contract with each retailer, but the most common is net 30 or net 60 days.

Revenue is recognized for the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods to a customer. The consideration promised in a contract with a customer includes fixed and variable amounts. The fixed amount of consideration is the stand-alone selling price of the goods sold. Variable considerations, including cash discounts and rebates, are deducted from gross sales in determining net sales. Variable considerations also include the portion of goods that are expected to be returned and refunded. Any consideration received (or receivable) that the Company expects to refund to the customer is recognized as a refund liability. Our refund liability is based on historical experience and trends. Net sales include shipping costs charged to the customer and are recorded net of taxes collected from customers, which are remitted to government authorities.

Sales Returns and Allowances

Sales returns and allowances are recorded when the customer makes a return of a purchased product or when the customer agrees to keep a purchased product in return for a reduction in the selling price. Total sales returns and allowances were $11.6 million in the Successor period for the year ended December 31, 2021. This amount was $4.7 million in the Successor period from October 9, 2020 through December 31, 2020 and

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$3.0 million in the Intermediate Successor period from January 1, 2020 through October 8, 2020. These amounts are included in net sales on the consolidated statement of operations.

Contract Balances

Contract liabilities are recorded when the customer pays consideration, or the Company has a right to an amount of consideration that is unconditional before the transfer of a good to the customer and thus represents the Company’s obligation to transfer the good to the customer at a future date. The Company’s primary contract liabilities are from its direct-to-consumer channel and represent payments received in advance from the Company’s customers for its products. The Company also has $1.0 million of contract liabilities from unredeemed gift cards as of December 31, 2021. The Company recognizes contract liabilities as revenue once all performance obligations have been satisfied.

Contract liabilities were $3.5 million and $20.2 million as of December 31, 2021, and December 31, 2020, respectively. None of the $20.2 million of contract liabilities outstanding as of December 31, 2020 were still remaining as of December 31, 2021. The change in the contract liability balance primarily results from timing differences between the customer’s payment and our satisfaction of performance obligations.

Cost of Goods Sold

Cost of goods sold includes the purchase price of merchandise sold to customers and inbound shipping and handling costs. Cost of goods sold also includes depreciation and amortization, allocated overhead, and direct and indirect labor for warehouse personnel.

Shipping and Handling Costs

Costs associated with the shipping and handling of customer sales are expensed when the product ships to the customer. Total outbound shipping and handling costs were $33.2 million in the Successor period for the year ended December 31, 2021. This cost was $4.1 million in the Successor period from October 9, 2020 through December 31, 2020 and $5.1 million in the Intermediate Successor period from January 1, 2020 through October 8, 2020. These costs are included in selling, general, & administrative expenses on the consolidated statements of operations.

Advertising Expense

Advertising expense is expensed as incurred. Advertising expense was $74.5 million in the Successor period for the year ended December 31, 2021. This expense was $9.4 million in the Successor period from October 9, 2020 through December 31, 2020, and $8.4 million in the Intermediate Successor period from January 1, 2020 through October 8, 2020. These costs are included in selling, general, & administrative expenses on the consolidated statements of operations.

Other Operating Expenses

Other operating expenses consist primarily of acquisition-related expenses related to the Oru, ISLE, and Chubbies acquisitions in 2021, the change in control event in 2020, and other acquisition activities. Additionally, other operating expenses include costs incurred for the initial public offering related expenses and business optimization and business expansion expenses.

Income Taxes

We account for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying values and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in Income tax expense in the period of enactment. A valuation allowance is recognized if we determine it is more likely than not that all or a portion of a deferred tax asset will not be recognized. In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operations.

As a result of the Reorganization Transactions, Solo Brands, Inc. became the sole managing member of Solo Stove Holdings, LLC ("Holdings"), which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Holdings is passed through to and included in the taxable income or loss of its members, including Solo Brands, Inc. following the Reorganization Transactions, on a pro rata basis. Solo Brands, Inc. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income of Holdings following the Reorganization Transactions. The Company is also subject to taxes in foreign jurisdictions.

Oru Kayak, Inc. and Chubbies, Inc., wholly owned subsidiaries of Holdings, are subject to federal and state income taxes on corporate earnings and accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

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In accordance with authoritative guidance on accounting for and disclosure of uncertainty in tax positions, the Company follows a more likely than not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. For tax positions meeting the more-likely-than-not threshold, the tax liability recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. If tax authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the members rather than the Company.

No amounts have been accrued for uncertain tax positions as of December 31, 2021 and December 31, 2020. However, management’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based on ongoing analyses of tax laws, regulations, and interpretations thereof, and other factors. The Company does not have any unrecognized tax benefits as of December 31, 2021, and December 31, 2020, and does not expect that the total amount of unrecognized tax benefits will materially change over the next six months. Additionally, no interest or penalty related to uncertain taxes has been recognized in the accompanying consolidated financial statements.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local jurisdictions, where applicable. If such examinations result in changes to income or loss, the tax liability of the Company could be changed accordingly.

Warranty

The Company warrants its products against manufacturing defects and will replace all products sold by an authorized retailer that are deemed defective. The Company does not warranty its products against normal wear or misuse. Historically, warranty claims have been nominal, and the Company does not expect large warranty claims in the future. As of December 31, 2021, the amount of warranty claims was $0.3 million. This amount was nominal as of December 31, 2020.

Earnings Per Share

In the Successor period, after the IPO, basic earnings per share is computed by dividing net income (loss) by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings per share assumes conversion of potentially dilutive securities such as stock options, restricted stock units, and Class B common stock.

Equity-Based Compensation

The Company recognizes equity-based compensation expense for employees and non-employees based on the grant-date fair value of the award. Certain awards contain service and performance vesting conditions. For awards that vest based on continued service, compensation cost is recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the awards. For awards with performance vesting conditions, compensation cost is recognized on a graded vesting basis over the requisite service period when it is probable the performance condition will be achieved. Equity-based compensation expense is recorded in the selling, general and administrative expense line item on the consolidated statements of operations.

The grant-date fair value of awards that contain service or performance conditions is estimated using a Monte Carlo simulation model. The grant date fair value of restricted stock awards that contain service vesting conditions are estimated based on the fair value of the underlying shares on the grant date. For awards with market vesting conditions, the fair value is estimated using a Monte Carlo simulation model, which incorporates the likelihood of achieving the market condition. The Company uses a Black-Scholes option-pricing model to calculate the fair value of stock options. This model requires various judgmental assumptions including volatility, the risk free rate, and expected option life.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", an update that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.The Company early adopted this standard on January 1, 2021. It did not materially impact our consolidated financial statements or disclosures.

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes,” an update that simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 by clarifying and amending existing guidance. The guidance became effective for the Company on January 1, 2021, but did not materially impact our financial statements.

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Recently Issued Accounting Pronouncements - Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and has modified the standard thereafter, which supersedes the lease requirements in ASC 840. The ASU requires lessees to recognize a right-to-use asset and related lease liability for all leases, with a limited exception for short-term leases. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the statement of operations. Prior to this new standard, leases were classified as either capital or operating, with only capital leases recognized on the consolidated balance sheets. In June 2020, the FASB issued ASU 2020-05, deferring the effective date of ASU 2016-02 to annual periods beginning after December 15, 2021. Upon adoption, the Company plans to apply the ASU using a modified retrospective transition method to the beginning of the year of adoption. Although the Company is finalizing its procedures to implement this new standard and the impact could still change materially, the Company currently expects to recognize additional operating liabilities in the range of $20 to $25 million with corresponding right-of-use assets of the same amount based on the present value of the remaining minimum rental payments. The effects on the results of operations are not expected to be significant as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes changes to the accounting and measurement of financial assets, including the Company’s accounts receivable and held-to-maturity debt securities, by requiring the Company to recognize an allowance for all expected losses over the life of the financial asset at origination. This is different from the current practice, where an allowance is not recognized until the losses are considered probable. The ASU also changes the way credit losses are recognized for available-for-sale debt securities. Credit losses are recognized through the recording of an allowance rather than as a write-down of the carrying value. In November 2019, the FASB issued ASU 2019-10, deferring the effective date of ASU 2016-13 to annual periods beginning after December 15, 2022. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the earliest period presented. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Although early adoption is permitted, the Company does not plan to early adopt. The Company is still evaluating the impact of this standard on our consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions effected by reference rate reform if certain criteria are met. The optional guidance is provided to ease the potential burden of accounting for reference rate reform. The guidance is effective as of March 12, 2020, and is available for contract modifications through December 31, 2022. The Company is still evaluating the impact of this standard on our consolidated financial statements.

In October 2021, the FASB issued ASU No. 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). The guidance is effective for annual periods beginning after December 15, 2023, including interim periods therein, with early adoption permitted. The guidance will be applied prospectively to acquisitions occurring on or after the effective date. The Company will continue to evaluate the impact of this guidance, which will depend on the contract assets and liabilities acquired in future business combinations.

NOTE 3 – Revenue

The Company primarily engages in direct-to-consumer transactions, which is comprised of product sales directly from our website, and business-to-business transactions, or wholesale, which is 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 our net sales by channel:

SUCCESSOR SUCCESSOR INTERMEDIATE SUCCESSOR

Net sales by channel

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NOTE 4 – Acquisitions

The following transactions were accounted for under the acquisition method of accounting for business combinations.

Oru Kayak, Inc.

On May 3, 2021, Solo Brands, LLC acquired 60% of the voting equity interests in Oru Kayak, Inc. (“Oru”) for total cash consideration of $25.4 million. Additionally, the Company had the option to purchase the remaining 40% upon a liquidity event, which it did on September 8, 2021 in exchange for 9.3 million Class B Units of Solo Stove Holdings, LLC. The exercise price of the option was equal to Oru’s last twelve months adjusted EBITDA times a predetermined multiple. The Company acquired Oru to increase its brand and market share in the overall outdoor activities industry, as Oru manufactures, markets, and sells kayak boats and kayak accessories.

The excess enterprise value of Oru over the estimated fair value of assets and liabilities assumed was recorded as goodwill. Goodwill was recorded to reflect the excess purchase consideration over net assets acquired, which represents the value that is expected from expanding the Company’s product offerings and other synergies. Factors that contributed to the recognition of goodwill included the expected future revenue growth of Oru. None of the goodwill recognized was expected to be deductible for tax purposes. Purchase accounting has been finalized, with the exception of the finalization of settlements in accordance with the purchase agreement.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed by the Company at the acquisition date:

Accounts receivable 357

Property and equipment 436

Prepaid expenses and other assets 902

Accounts payable and accrued liabilities (4,314)

Deferred revenue (746)

Deferred tax liability (6,247)

Total identifiable net assets 21,981

Noncontrolling interest (15,320)

Less: cash acquired (6,307)

Total, net of cash acquired $ 19,135

Acquisition-related costs, which include legal, accounting, and valuation fees, totaled $0.7 million in the Successor period for the year ended December 31, 2021, and were paid by the Company subsequent to the transaction date. These costs are included in other operating expenses on the consolidated statements of operations.

The amounts of net sales and net income of Oru included in the Company’s consolidated income statement since the acquisition date for the year ended December 31, 2021 were $19.9 million and $2.8 million, respectively.

International Surf Ventures, LLC

On August 2, 2021, Solo Brands, LLC acquired 100% of the voting equity interests in International Surf Ventures, LLC (“ISLE”) for total consideration of cash paid of $24.8 million and Class B units of $16.5 million. The Company acquired ISLE to increase its brand and market share in the overall outdoor activities industry, as ISLE manufactures, markets, and sells stand up paddle boards and paddle board accessories.

The excess enterprise value of ISLE over the estimated fair value of assets and liabilities assumed was recorded as goodwill. Goodwill was recorded to reflect the excess purchase consideration over net assets acquired, which represents the value that is expected from expanding the Company’s product offerings and other synergies. Factors that contributed to the recognition of goodwill included the expected future revenue growth of ISLE. None of the goodwill recognized was expected to be deductible for tax purposes. Purchase accounting has been finalized, with the exception of the finalization of settlements in accordance with the purchase agreement.

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The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed by the Company at the acquisition date:

Accounts receivable 107

Property and equipment 110

Prepaid expenses and other assets 60

Intangible assets 4,121

Accounts payable and accrued liabilities (4,697)

Total identifiable net assets 11,772

Less: fair value of class B units (16,494)

Less: cash acquired (3,085)

Total, net of cash acquired $ 21,757

Acquisition-related costs, which include legal, accounting, and valuation fees, totaled $0.6 million in the Successor period for the year ended December 31, 2021, and were paid by the Company subsequent to the transaction date. These costs are included in other operating expenses on the consolidated statements of operations.

The amounts of net sales and net loss of ISLE included in the Company’s consolidated income statement since the acquisition date for the year ended December 31, 2021 were $5.4 million and $7.1 million, respectively.

Chubbies, Inc.

On September 1, 2021, Solo Brands, LLC acquired 100% of the voting equity interests in Chubbies, Inc. (“Chubbies”) for total consideration of cash paid of $100.4 million and Class B units of $29.1 million. The Company acquired Chubbies to increase its brand and market share in the overall outdoor activities industry, as Chubbies sells casual wear, sportwear, swimwear, outerwear, loungewear, and other accessories.

The excess enterprise value of Chubbies over the estimated fair value of assets and liabilities assumed was recorded as goodwill. Goodwill was recorded to reflect the excess purchase consideration over net assets acquired, which represents the value that is expected from expanding the Company’s product offerings and other synergies. Factors that contributed to the recognition of goodwill included the expected future revenue growth of Chubbies. None of the goodwill recognized was expected to be deductible for tax purposes. Purchase accounting has been finalized, with the exception of the finalization of settlements in accordance with the purchase agreement.

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The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed by the Company at the acquisition date:

Accounts receivable 1,962

Property and equipment 401

Prepaid expenses and other assets 893

Accounts payable and accrued liabilities (15,590)

Deferred revenue (392)

Deferred tax liability (12,095)

Other non-current liabilities (12)

Total identifiable net assets 56,363

Less: cash acquired (7,990)

Less: fair value of class B units (29,075)

Total, net of cash acquired $ 92,416

Acquisition-related costs, which include legal, accounting, and valuation fees, totaled $1.6 million in the Successor period for the year ended December 31, 2021, and were paid by the Company subsequent to the transaction date. These costs are included in other operating expenses on the consolidated statements of operations.

The amounts of net sales and net loss of Chubbies included in the Company’s consolidated income statement from the acquisition date to the year ended December 31, 2021 are $16.4 million and $8.1 million, respectively.

The historical net loss of Chubbies for the eight months ended August 31, 2021 was $7.9 million. This, if combined with the net income of $56.5 million in the Successor period for the year ended December 31, 2021 would have resulted in net income of $48.6 million.

The historical net sales of Chubbies for the eight months ended August 31, 2021 was $58.5 million. This, if combined with the net sales of $403.7 million in the Successor period for the year ended December 31, 2021 would have resulted in net sales of $462.2 million.

NOTE 5 – Inventory

Inventory consisted of the following:

Raw materials 2,148 —

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NOTE 6 – Property and Equipment, net

Property and equipment, net consisted of the following:

Leasehold improvements $ 6,121 $ 48

Computer, software, and other equipment 3,032 923

Furniture and fixtures 746 46

Construction in progress 166 —

Accumulated depreciation (750) (37)

Property and equipment, net $ 10,603 $ 980

Depreciation expense was $0.8 million in the Successor period for the year ended December 31, 2021. Depreciation expense was nominal in the Successor period from October 9, 2020 through December 31, 2020 and in the Intermediate Successor period from January 1, 2020 through October 8, 2020.

NOTE 7 – Intangible Assets, net

Intangible assets consisted of the following:

Gross carrying value

Developed technology 17,871 —

Accumulated amortization

Trademark (901) —

Customer relationships (1,915) (257)

Developed technology (1,702) —

Accumulated amortization, gross (20,701) (3,248)

Amortization expense was $17.5 million in the Successor period for the year ended December 31, 2021. Amortization expense was $3.2 million in the Successor period from October 9, 2020 through December 31, 2020 and $2.3 million in the Intermediate Successor period from January 1, 2020 through October 8, 2020.

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Estimated amortization expense for the next five years was as follows:

Years ending December 31, Amount

Total future amortization expense $ 257,234

NOTE 8 – Goodwill

The carrying value of goodwill was as follows:

The change in goodwill during fiscal year 2021 is attributable to the acquisitions of Oru, ISLE, and Chubbies (see Note 4, Acquisitions) as well as the measurement period adjustments recorded during the fourth quarter of 2021. The measurement period adjustments relate to the finalization of the valuations and tax provisions for each acquisition noted above. The final fair values of certain assets changed from the preliminary values that we previously disclosed which resulted in an increase in goodwill.

NOTE 9 – Accrued Expenses and Other Current Liabilities

Significant accrued expenses and other current liabilities were as follows:

Accrued expenses and other current liabilities $ 28,150 $ 15,203

NOTE 10 – Long-Term Debt

Long-term debt consisted of the following:

Revolving credit facility 32,500 —

Senior debt facility — 45,000

Subordinated debt - related party — 30,000

Unamortized debt issuance costs (3,727) (1,652)

Less current portion of long-term debt 3,125 450

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Interest expense related to long-term debt was $10.2 million in the Successor period for the year ended December 31, 2021. Interest expense was $1.5 million in the Successor period from October 9, 2020 through December 31, 2020 and $1.7 million in the Intermediate Successor period from January 1, 2020 through October 8, 2020.

Revolving Credit Facility and Term Loan

On May 12, 2021, the Company entered into a credit agreement with a bank (the “Revolving Credit Facility”). Under the terms of this agreement, the Company may borrow up to $200 million under a revolving credit facility. On June 2, 2021, the Company entered into an amendment to the Revolving Credit Facility to increase the maximum amount available under the Revolving Credit Facility to $250 million. On September 1, 2021, the Company entered into an amendment to the Revolving Credit Facility to increase the maximum amount available under the Revolving Credit Facility to $350 million. Under the terms of the Revolving Credit Facility, the Company has access to certain swing line loans and letters of credit. The Revolving Credit Facility matures on May 12, 2026 and bears interest at a rate equal to the base rate as defined in the agreement plus an applicable margin, which as of December 31, 2021, was based on LIBOR. All outstanding principal and interest due under the Revolving Credit Facility are due at maturity.

During the year ended December 31, 2021, the Company had total draws of $254.0 million, with a weighted average interest rate of 1.8%, and total repayments of $221.5 million on its Revolving Credit Facility. $196.1 million of the repayments were from the IPO proceeds. The remainder of the repayments were from operating cash flows.

In addition to the above, the amendment on September 1, 2021 included a provision for the Company to borrow up to $100.0 million under a term loan (the “Term Loan”). The proceeds from the Term Loan were used to fund the Chubbies acquisition (see Note 4 for information on the acquisition). The Term Loan matures on September 1, 2026 and bears interest at 1.25% plus an applicable margin, which as of December 31, 2021 was based on LIBOR. The Company was required to make quarterly principal payments on the Term Loan beginning on December 31, 2021. During the year ended December 31, 2021, the Company repaid $0.6 million on its Term Loan. All outstanding principal and interest due on the Term Loan are due at maturity.

During the year ended December 31, 2021, the Company recorded $3.3 million and $0.9 million of deferred debt issuance costs related to the Revolving Credit Facility and the Term Loan, respectively. These costs are amortized over the term of the related debt, and long-term debt is presented net of deferred debt issuance costs on the consolidated balance sheets.

Subordinated Debt - Related Party

On October 9, 2020, the Company entered into notes payable agreements (the “Subordinated Debt”) with certain Class A unitholders for $30 million that were subordinate to the Senior Debt Facility described below. The notes bore interest at 12 percent per annum and required quarterly interest payments, with principal due one year following the maturity of the Senior Debt Facility. In November 2021, the Company used the IPO and underwriters option proceeds to repay in full the Subordinated Debt of $30.0 million.

Senior Debt Facility

The Company voluntarily repaid in full the principal amount and $1.0 million of accrued interest outstanding under the Senior Debt Facility on May 31, 2021, using proceeds from the Revolving Credit Facility described above. The Company wrote off $1.5 million of debt issuance costs associated with the Senior Debt Facility during the year ended December 31, 2021.

As of December 31, 2021, the future maturities of principal amounts of our total debt obligations, excluding lease obligations (see Note 11 for future maturities of lease obligations), for the next five years and in total, consists of the following:

Years Ending December 31, Amount

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NOTE 11 – Leases

The Company is obligated under operating leases primarily for its warehouse, distribution and office space in Grapevine, Texas, expiring in March 2029, and warehouse and distribution space in Salt Lake City, Utah, expiring September 2025. The Company is also obligated through April 2026 for warehouse and distribution space in Elizabethtown, Pennsylvania, and warehouse and office space in Rotterdam, Netherlands expiring in October 2026. Chubbies, ISLE, and Oru maintain operating leases for retail locations and office operations in Texas, California, Georgia, Florida, and Mexico, all of which expire during or prior to December 2024. These leases require the Company to pay taxes, insurance, utilities, and maintenance costs.

Total rent expense under these leases was $2.7 million in the Successor period for the year ended December 31, 2021. This amount was $0.2 million the Successor period from October 9, 2020 through December 31, 2020. In the Intermediate Successor period from January 1, 2020 through October 8, 2020, total rent expense was $0.6 million. Rent expense is included in selling, general, & administrative expenses on the consolidated statements of operations. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term.

The Company completed the move of its global headquarters from Southlake, Texas, to Grapevine, Texas, in the fourth quarter of 2021 and entered into a surrender agreement to terminate our existing lease in Southlake, Texas. The new lease will require the Company to pay certain operating expenses, including utilities, maintenance, repairs, and insurance.

Future minimum annual commitments under these operating leases are as follows:

Years Ending December 31 Amount

Total minimum lease payments $ 30,640

NOTE 12 – Equity-Based Compensation

Fair Value Considerations

Determining the fair value of awards requires judgment. The Monte Carlo simulation model and Black-Scholes model is used to estimate the fair value of awards that have service, performance and/or market vesting conditions. The assumptions used in these models require the input of subjective assumptions as follows:

Fair value—The fair value of the common stock underlying the incentive units was determined by the Company’s board of directors (the “Board”). Because there is no public market for the incentive units, the Company’s Board determined the common stock fair value at the incentive unit grant date by considering several objective and subjective factors, including the price paid for its common and preferred stock, actual and forecasted operating and financial performance, market conditions and performance of comparable publicly traded companies, developments and milestones within the Company, the rights, preferences, and privileges of its common and preferred stock, and the likelihood of achieving a liquidity event. The fair value of the underlying common stock will be determined by the Board until such time as the Company’s common stock is listed on an established stock exchange or national market system. The fair value was determined in accordance with applicable elements of the practice aid issued by the American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

Expected volatility—Expected volatility is based on historical volatilities of a publicly-traded peer group based on weekly price observations over a period equivalent to the expected term of the award.

Expected term—For awards with only service vesting conditions, the expected term is determined using the simplified method, which estimates the expected term using the contractual life of the award and the vesting period. For awards with performance or market conditions, the term is estimated in consideration of the time period expected to achieve the performance or market condition, the contractual term of the award, and estimates of future exercise behavior.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury yield of treasury bonds with a maturity that approximates the expected term of the award.

Expected dividend yield—The dividend yield is based on the Company’s current expectations of dividend payouts. The Company has never declared or paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

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DLOM estimate—The discounts for lack of marketability are used to help calculate the value of closely held and restricted shares. A valuation discount exists between a share that is publicly traded, and thus has a market, and the market for privately held stock, which often has little, if any, marketplace.

Forfeiture rate—The Company will recognize forfeitures as they occur instead of estimating forfeitures based on historical activity.

During the year ended December 31, 2021, the Company recorded equity-based compensation expense related to performance-based units of $3.3 million. During the year ended December 31, 2020, the Company recognized no equity-based compensation expense related to performance-based units.

During the year ended December 31, 2021, the Company recorded equity-based compensation expense related to service-based units of $3.3 million. During the year ended December 31, 2020, the Company recognized no equity-based compensation expense related to service-based units.

Incentive Units

Certain employees of the Company purchased incentive units in Solo Stove Holdings, LLC for $0.000001 per unit. The majority of the incentive units were issued in December 2020 with additional issuances in March and June 2021. The Company used the Monte Carlo simulation model to determine the fair value of the incentive units. Each incentive award consists of service-based units (representing one-third (1/3) of the number of incentive units) and performance-based units (representing two-thirds (2/3) of the number of incentive units).

The incentive units with a service condition vest over four years with 25% vesting on the one-year anniversary of the grant date and the remaining 75% of such service-based units vesting in substantially equal monthly installments over the following three years, subject to the employee’s continued employment through each applicable vesting date. Additionally, the vesting of the service-based units will accelerate upon the occurrence of a sale transaction prior to the employee’s termination of employment. The IPO did not meet the definition of a sale transaction per the incentive unit agreement. Therefore, the vesting of the service-based units did not accelerate upon the IPO.

There were 27.6 million incentive units outstanding immediately before the Reorganization Transactions. After the Reorganization Transactions, the 27.6 million incentive units converted into 3.4 million common units in Solo Stove Holdings, LLC. The 3.4 million common units consist of service-based units representing one-third (1/3) of the common units and performance-based units representing two-thirds (2/3) of the common units.

The performance-based incentive units vest upon the Company’s achievement of specified performance objectives. Specifically provided that the employee remains employed through a Liquidity Event (as defined in the Solo Stove Holdings, LLC Limited Liability Company Agreement, including the IPO), up to 100% of the performance-based incentive units vest based on the investment return Summit Partners achieves in such Liquidity Event (0% if the investment return is equal to or less than 2.50x, 100% if the investment return is equal to or greater than 4.0x, with any vesting based on returns between 2.50x and 4.0x to be determined on the basis of linear interpolation).

Upon the IPO, 0.9 million of the 2.3 million performance-based common units vested with the remaining 1.4 million unvested performance-based common units being canceled. Associated with these units the Company recognized $3.3 million of stock compensation expense.

At IPO, the Company replaced the incentive units that did not vest under the above market conditions with service-based common units in Solo Stove Holdings, LLC that vest over two years, with 50% of units vesting after one year and 50% vesting in four quarterly installments in the following year, subject to the employee’s continued employment with the Company through the applicable vesting date. If Summit Partners sells all of its equity interests in the Company or if the investment return to Summit equals or exceeds 4.0x on a per-share basis for four consecutive quarters, and in each case the employee remains employed with the Company on such date, then all unvested service-based common units that were previously performance-based incentive units will vest. For accounting purposes, these awards were considered new awards with an estimated fair value of $25.8 million.

The grant date fair value of each incentive unit was calculated using a Monte Carlo simulation model, which incorporates a range of assumptions for inputs as follows:

Expected term (years) 4.0

Expected stock price volatility 36.0 %

Risk-free interest rate 0.3 %

Expected dividend yield —