Compass Diversified last week revealed the carnage allegedly created by Lugano founder Moti Ferder and it’s a doozy.
Compass reduced its 2024 revenue by $410.2 million to $1.79 billion, a 19% drop. It cut its income from continuing operations from a profit of $42.3 million in 2024 to a loss of $327.8 million, a $370 million haircut. The company reported similar but smaller reductions for 2023 and said it’s looking to sell a couple of its brands.
“The financial and accounting fraud perpetrated by the former CEO of Lugano Holding Inc. was pervasive, complex and isolated to Lugano,” Compass CEO Elias Sabo said in a statement.
“Our restatement is an important step in putting this chapter behind us. We are focused on reducing our leverage and continuing to execute on the strategy that has made CODI successful since inception: managing and growing high-quality middle-market companies to generate durable, long-term value for our shareholders.”
The restatement is the latest saga in a case involving a one-time stalwart member of Orange County’s business community, where Ferder could often be seen at charity fundraisers. Ferder, who, along with his wife Idit, founded the company in 2004, sold a 62% stake to Compass in 2021 for an estimated $159 million.
Last week, Compass executives revealed that its investigation, restatement and legal fees are costing about $50 million to $60 million this year.
Compass, while technically headquartered in Connecticut, has an office in Costa Mesa where several of its top executives work.
Ferder, who is living in Israel, has denied the allegations and will be vindicated, according to his lawyer, Jeffrey Reeves of Reeves & Weiss LLP.
He left the country in the spring before the allegations of accounting irregularities were reported in May. In the trading session after the alleged fraud was revealed, shares plummeted 62%, wiping about $700 million off Compass’ market cap. In recent months, the company has slowly regained investor confidence, with shares reaching as high as $7.75 on Nov. 28.
This month, however, following the restatement and a conference call, the shares have declined 28%. At press time, the shares traded at $5.34 and a $403 million market cap (NYSE: CODI).
Sale of a Subsidiary?
On Dec. 4, Compass executives held a conference call to discuss the restatement.
“I want to begin by saying that this has been, without question, the most challenging period in CODI’s history,” Sabo said on the call. “We recognize the impact this situation has had on our shareholders, creditors, employees and partners.
“The former Lugano CEO engaged in a scheme to significantly overstate Lugano’s sales and profits, misrepresent the existence and value of Lugano’s inventory and keep potential financial liabilities off Lugano’s books and records. His efforts to hide his fraud were extensive. He created fake sales transactions to inflate Lugano’s reported revenues, claimed inventory that either didn’t exist or didn’t belong to Lugano and entered into numerous unreported financing arrangements with third parties that he kept off Lugano’s balance sheet.”
In November, Lugano filed for bankruptcy protection and is commencing the sale process for all its assets. Lugano, which plans to continue as an ongoing concern, reached an agreement with Enhanced Retail Funding, an investment firm in the jewelry sector.
Enhanced will “support the smooth continuation of retail sales and operations through the court-supervised sale process,” Lugano said in a statement.
Financial Problems
The restatement revealed that Compass’ cash and equivalents has dropped from $447 million on Dec. 31, 2023, to $59.7 million a year later, Dec. 31, 2024. The company has about $65 million in “consolidated cash” as of Sept. 30. It is facing several lawsuits from plaintiffs who allege they were defrauded.
During the Dec. 4 call, Compass executives said its eight other subsidiaries are in good shape and weren’t involved in the fraud.
Executives revealed that they may have to sell one or two of them to raise cash; they didn’t say which subsidiaries are up for sale. Compass is the parent of Costa Mesa-based 5.11 Tactical, which reported $532 million in sales in 2024.
“We’re going to put a couple of companies kind of out in market, put out feelers, see where kind of valuation is, and then we’ll hone in on an asset or two that will allow us to achieve kind of meaningful deleveraging,” Sabo said.
“We may need to forgo some future opportunity on a great asset if we can get a great price today because it assists in the deleveraging efforts, which we think is, from a strategy standpoint, the Number 1 top priority.”
Excluding Lugano, the company currently owes about $1.9 billion, which executives said is six times its annual adjusted profit and above its five times agreement with lenders.
“Our leverage ratio is significantly above our leverage covenants and also above where we’d like to operate from a long-term risk perspective,” Chief Financial Officer Stephen Keller said. “We are in active discussions with our senior lenders regarding the amendment to our credit agreement that will provide additional flexibility around our current leverage profile.”
At the start of 2025, Compass predicted adjusted EBITDA of $570 million to $610 million, including Lugano. Without Lugano, it’s now forecasting adjusted EBITDA of $330 million to $360 million.
The executives said they expect in the coming weeks to file 2025 first, second and third quarter financial results to bring the company back in compliance with the Securities and Exchange Commission.
“In retrospect, Lugano was a unique un-CODI-like acquisition in terms of structure, industry and capital intensity,” Sabo said. “Based on what we’ve learned, we are refining our acquisition criteria and governance expectations.”
