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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
COMPASS DIVERSIFIED HOLDINGS
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34927
 
57-6218917
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
 
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34926
 
20-3812051
 
 
(State or other jurisdiction of
incorporation or organization)
 
(Commission
file number)
 
(I.R.S. employer
identification number)
 
301 Riverside Avenue, Second Floor, Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Shares representing beneficial interests in Compass Diversified Holdings
 
CODI
 
New York Stock Exchange
Series A Preferred Shares representing Series A Trust Preferred Interest in Compass Diversified Holdings
 
CODI PR A
 
New York Stock Exchange
Series B Preferred Shares representing Series B Trust Preferred Interest in Compass Diversified Holdings
 
CODI PR B
 
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
 
Smaller reporting company
 
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ý

As of July 30, 2019, there were 59,900,000 Trust common shares of Compass Diversified Holdings outstanding.
 



COMPASS DIVERSIFIED HOLDINGS
QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2019
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
ITEM 3.
 
 
 
 
 
 
 
ITEM 4.
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
ITEM 1.
 
 
 
 
 
 
 
ITEM 1A.
 
 
 
 
 
 
 
ITEM 6.
 
 
 
 
 
 
 
 
 


2


NOTE TO READER
In reading this Quarterly Report on Form 10-Q, references to:
the "Trust" and "Holdings" refer to Compass Diversified Holdings;
the "Company" refer to Compass Group Diversified Holdings LLC;
"businesses," "operating segments," "subsidiaries" and "reporting units" refer to, collectively, the businesses controlled by the Company;
the "Manager" refer to Compass Group Management LLC ("CGM");
the "Trust Agreement" refer to the Second Amended and Restated Trust Agreement of the Trust dated as of December 6, 2016;
the "2014 Credit Facility" refer to the credit agreement, as amended, entered into on June 14, 2014 with a group of lenders led by Bank of America N.A. as administrative agent, as amended from time to time, which provides for a Revolving Credit Facility and a Term Loan;
the "2018 Credit Facility" refer to the amended and restated credit agreement entered into on April 18, 2018 among the Company, the Lenders from time to time party thereto (the "Lenders"), Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (the "agent") and other agents party thereto.
the "2018 Revolving Credit Facility" refers to the $600 million in revolving loans, swing line loans and letters of credit provided by the 2018 Credit Facility that matures in 2023;
the "2018 Term Loan" refer to the $500 million term loan provided by the 2018 Credit Facility that matures in April 2025;
the "LLC Agreement" refer to the fifth amended and restated operating agreement of the Company dated as of December 6, 2016; and
"we," "us" and "our" refer to the Trust, the Company and the businesses together.


3


FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as "project," "predict," "believe," "anticipate," "plan," "expect," "estimate," "intend," "should," "would," "could," "potentially," "may," or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:
our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve future acquisitions;
our ability to remove CGM and CGM’s right to resign;
our organizational structure, which may limit our ability to meet our dividend and distribution policy;
our ability to service and comply with the terms of our indebtedness;
our cash flow available for distribution and reinvestment and our ability to make distributions in the future to our shareholders;
our ability to pay the management fee and profit allocation if and when due;
our ability to make and finance future acquisitions;
our ability to implement our acquisition and management strategies;
the regulatory environment in which our businesses operate;
trends in the industries in which our businesses operate;
changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
environmental risks affecting the business or operations of our businesses;
our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.


4


PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2019
 
December 31,
2018
(in thousands)
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
485,864

 
$
48,771

Accounts receivable, net
 
187,321

 
205,545

Inventories
 
327,657

 
307,437

Prepaid expenses and other current assets
 
85,280

 
29,670

Current assets of discontinued operations
 

 
89,762

Total current assets
 
1,086,122

 
681,185

Property, plant and equipment, net
 
143,313

 
146,601

Goodwill
 
471,400

 
471,115

Intangible assets, net
 
588,618

 
615,592

Other non-current assets
 
96,538

 
8,378

Non-current assets of discontinued operations
 

 
449,464

Total assets
 
$
2,385,991

 
$
2,372,335

 
 
 
 
 
Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
74,833

 
$
77,169

Accrued expenses
 
104,133

 
106,612

Due to related party
 
8,045

 
11,093

Current portion, long-term debt
 
5,000

 
5,000

Other current liabilities
 
26,650

 
6,912

Current liabilities of discontinued operations
 

 
52,494

Total current liabilities
 
218,661

 
259,280

Deferred income taxes
 
33,813

 
33,984

Long-term debt
 
869,918

 
1,098,871

Other non-current liabilities
 
86,818

 
12,615

Non-current liabilities of discontinued operations
 

 
48,243

Total liabilities
 
1,209,210

 
1,452,993

 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
Trust preferred shares, 50,000 authorized; 8,000 shares issued and outstanding at June 30, 2019 and December 31, 2018
 
 
 
 
Series A preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2019 and December 31, 2018
 
96,417

 
96,417

Series B preferred shares, no par value; 4,000 shares issued and outstanding at June 30, 2019 and December 31, 2018
 
96,504

 
96,504

Trust common shares, no par value, 500,000 authorized; 59,900 shares issued and outstanding at June 30, 2019 and December 31, 2018
 
924,680

 
924,680

Accumulated other comprehensive loss
 
(4,512
)
 
(8,776
)
Retained earnings (accumulated deficit)
 
17,715

 
(249,453
)
Total stockholders’ equity attributable to Holdings
 
1,130,804

 
859,372

Noncontrolling interest
 
45,977

 
39,922

Noncontrolling interest of discontinued operations
 

 
20,048

Total stockholders’ equity
 
1,176,781

 
919,342

Total liabilities and stockholders’ equity
 
$
2,385,991

 
$
2,372,335

See notes to condensed consolidated financial statements.

5


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended 
 June 30,
 
Six months ended 
 June 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net revenues
$
336,084

 
$
339,989

 
$
674,941

 
$
626,119

Cost of revenues
213,521

 
221,510

 
432,823

 
403,753

Gross profit
122,563

 
118,479

 
242,118

 
222,366

Operating expenses:
 
 
 
 
 
 

Selling, general and administrative expense
80,312

 
81,513

 
161,709

 
161,676

Management fees
8,521

 
10,799

 
19,478

 
21,436

Amortization expense
13,522

 
14,465

 
27,112

 
22,745

Operating income
20,208

 
11,702

 
33,819

 
16,509

Other income (expense):
 
 
 
 
 
 
 
Interest expense, net
(18,445
)
 
(13,474
)
 
(36,899
)
 
(19,592
)
Loss on sale of securities (refer to Note C)

 

 
(5,300
)
 

Amortization of debt issuance costs
(928
)
 
(953
)
 
(1,855
)
 
(2,051
)
Other income (expense), net
(90
)
 
(2,207
)
 
(524
)
 
(3,540
)
Income (loss) from continuing operations before income taxes
745

 
(4,932
)
 
(10,759
)
 
(8,674
)
Provision for income taxes
4,551

 
3,330

 
5,975

 
2,087

Loss from continuing operations
(3,806
)
 
(8,262
)
 
(16,734
)
 
(10,761
)
Income from discontinued operations, net of income tax
15,474

 
7,630

 
16,901

 
8,508

Gain on sale of discontinued operations
206,505

 
1,165

 
328,164

 
1,165

Net income (loss)
218,173

 
533

 
328,331

 
(1,088
)
Less: Net income from continuing operations attributable to noncontrolling interest
1,387

 
1,486

 
2,755

 
1,787

Less: Net income (loss) from discontinued operations attributable to noncontrolling interest
252

 
(45
)
 
(266
)
 
374

Net income (loss) attributable to Holdings
$
216,534

 
$
(908
)
 
$
325,842

 
$
(3,249
)
 
 
 
 
 
 
 
 
Amounts attributable to Holdings
 
 
 
 
 
 
 
Loss from continuing operations
$
(5,193
)
 
$
(9,748
)
 
$
(19,489
)
 
$
(12,548
)
Income from discontinued operations, net of income tax
15,222

 
7,675

 
17,167

 
8,134

Gain on sale of discontinued operations, net of income tax
206,505

 
1,165

 
328,164

 
1,165

Net income (loss) attributable to Holdings
$
216,534

 
$
(908
)
 
$
325,842

 
$
(3,249
)
 
 
 
 
 
 
 
 
Basic income (loss) per common share attributable to Holdings (refer to Note J)

 


 
 
 
 
Continuing operations
$
(0.32
)
 
$
(0.25
)
 
$
(0.64
)
 
$
(0.34
)
Discontinued operations
3.70

 
0.14

 
5.77

 
0.16

 
$
3.38

 
$
(0.11
)
 
$
5.13

 
$
(0.18
)
 
 
 
 
 
 
 
 
Basic weighted average number of shares of common shares outstanding
59,900

 
59,900

 
59,900

 
59,900

Cash distributions declared per Trust common share (refer to Note J)
$
0.36

 
$
0.36

 
$
0.72

 
$
0.72






See notes to condensed consolidated financial statements.

6


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three months ended June 30,
 
Six months ended 
 June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income (loss)
$
218,173

 
$
533

 
$
328,331

 
$
(1,088
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
(324
)
 
(3,004
)
 
253

 
(4,027
)
Foreign currency amounts reclassified from accumulated other comprehensive income (loss) that increase (decrease) net income:
 
 
 
 
 
 
 
   Disposition of Manitoba Harvest

 

 
4,791

 

Pension benefit liability, net
(671
)
 
168

 
(780
)
 
609

Other comprehensive income (loss)
(995
)
 
(2,836
)
 
4,264

 
(3,418
)
Total comprehensive income (loss), net of tax
$
217,178

 
$
(2,303
)
 
$
332,595

 
$
(4,506
)
Less: Net income attributable to noncontrolling interests
1,639

 
1,441

 
2,489

 
2,161

Less: Other comprehensive income attributable to noncontrolling interests
(32
)
 
(352
)
 
(30
)
 
(727
)
Total comprehensive income (loss) attributable to Holdings, net of tax
$
215,571

 
$
(3,392
)
 
$
330,136

 
$
(5,940
)

See notes to condensed consolidated financial statements.


7


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

(in thousands)
Trust Preferred Shares
 
Trust Common Shares
 
Retained Earnings (Accumulated Deficit)
 
Accumulated Other
Comprehensive
Loss
 
Stockholders' Equity Attributable
to Holdings
 
Non-
Controlling
Interest
 
Non-
Controlling
Interest Attributable to Disc. Ops.
 
Total
Stockholders’
Equity
 
Series A
 
Series B
 
 
 
 
 
 
 
Balance — January 1, 2018
$
96,417

 
$

 
$
924,680

 
$
(145,316
)
 
$
(2,573
)
 
$
873,208

 
$
33,709

 
$
19,082

 
$
925,999

Net income (loss)

 

 

 
(3,249
)
 

 
(3,249
)
 
1,787

 
374

 
(1,088
)
Total comprehensive loss, net

 

 

 

 
(3,418
)
 
(3,418
)
 

 

 
(3,418
)
Issuance of Trust preferred shares, net of offering costs

 
96,504

 

 

 

 
96,504

 

 

 
96,504

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
5,165

 

 
5,165

Effect of subsidiary stock option exercise

 

 

 

 

 

 
(6,377
)
 

 
(6,377
)
Distributions paid - Trust Common Shares

 

 

 
(43,128
)
 

 
(43,128
)
 

 

 
(43,128
)
Distributions paid - Trust Preferred Shares

 

 

 
(3,625
)
 

 
(3,625
)
 

 

 
(3,625
)
Balance — June 30, 2018
$
96,417

 
$
96,504

 
$
924,680

 
$
(195,318
)
 
$
(5,991
)
 
$
916,292

 
$
34,284

 
$
19,456

 
$
970,032

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2019
$
96,417

 
$
96,504

 
$
924,680

 
$
(249,453
)
 
$
(8,776
)
 
$
859,372

 
$
39,922

 
$
20,048

 
$
919,342

Net income (loss)

 

 

 
325,842

 

 
325,842

 
2,755

 
(266
)
 
328,331

Total comprehensive income, net

 

 

 

 
4,264

 
4,264

 

 

 
4,264

Option activity attributable to noncontrolling shareholders

 

 

 

 

 

 
3,329

 
1,939

 
5,268

Effect of subsidiary stock option exercise

 

 

 

 

 

 
41

 

 
41

Purchase of noncontrolling interest

 

 

 

 

 

 
(70
)
 

 
(70
)
Disposition of Manitoba Harvest

 

 

 

 

 

 

 
(10,799
)
 
(10,799
)
Disposition of Clean Earth

 

 

 

 

 

 

 
(10,922
)
 
(10,922
)
Distributions paid - Allocation Interests

 

 

 
(7,983
)
 

 
(7,983
)
 

 

 
(7,983
)
Distributions paid - Trust Common Shares

 

 

 
(43,128
)
 

 
(43,128
)
 

 

 
(43,128
)
Distributions paid - Trust Preferred Shares

 

 

 
(7,563
)
 

 
(7,563
)
 

 

 
(7,563
)
Balance — June 30, 2019
$
96,417

 
$
96,504

 
$
924,680

 
$
17,715

 
$
(4,512
)
 
$
1,130,804

 
$
45,977

 
$

 
$
1,176,781

See notes to condensed consolidated financial statements.


8


    


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
(in thousands)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
328,331

 
$
(1,088
)
Income from discontinued operations, net of income tax
16,901

 
8,508

Gain on sale of discontinued operations
328,164

 
1,165

Loss from continuing operations
(16,734
)
 
(10,761
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation expense
16,225

 
14,861

Amortization expense
27,112

 
28,026

Amortization of debt issuance costs and original issue discount
2,159

 
2,324

Unrealized (gain) loss on interest rate swap
3,350

 
(3,900
)
Noncontrolling stockholder stock based compensation
3,329

 
3,999

Provision for loss on receivables
498

 
(177
)
Deferred taxes
(36
)
 
(1,052
)
Other
427

 
123

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
16,492

 
249

Inventories
(19,778
)
 
(9,311
)
Other current and non-current assets
(6,272
)
 
(3,770
)
Accounts payable and accrued expenses
(7,980
)
 
8,124

Cash provided by operating activities - continuing operations
18,792

 
28,735

Cash provided by (used in) operating activities - discontinued operations
(10,138
)
 
6,577

Cash provided by operating activities
8,654

 
35,312

Cash flows from investing activities:
 
 
 
Acquisitions, net of cash acquired

 
(391,243
)
Purchases of property and equipment
(14,360
)
 
(25,177
)
Payment of interest rate swap
(303
)
 
(1,086
)
Proceeds from sale of businesses
451,654

 

Other investing activities
1,790

 
74

Cash provided by (used in) investing activities - continuing operations
438,781

 
(417,432
)
Cash provided by (used in) investing activities - discontinued operations
279,219

 
(37,283
)
Cash provided by (used in) investing activities
718,000

 
(454,715
)


9


COMPASS DIVERSIFIED HOLDINGS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Six months ended June 30,
(in thousands)
2019
 
2018
Cash flows from financing activities:
 
 
 
Proceeds from the issuance of Trust preferred shares, net

 
96,504

Borrowings under credit facility
108,000

 
1,093,750

Repayments under credit facility
(338,500
)
 
(1,106,223
)
Issuance of senior notes

 
400,000

Distributions paid - common shares
(43,128
)
 
(43,128
)
Distributions paid - preferred shares
(7,563
)
 
(3,625
)
Distributions paid - allocation interests
(7,983
)
 

Net proceeds provided by noncontrolling shareholders
41

 
14

Repurchases of subsidiary stock
(70
)
 
(6,392
)
Debt issuance costs

 
(14,860
)
Other
(3,547
)
 
(682
)
Net cash provided by (used in) financing activities
(292,750
)
 
415,358

Foreign currency impact on cash
(1,366
)
 
1,616

Net increase (decrease) in cash and cash equivalents
432,538

 
(2,429
)
Cash and cash equivalents — beginning of period (1)
53,326

 
39,885

Cash and cash equivalents — end of period
$
485,864

 
$
37,456


(1) Includes cash from discontinued operations of $4.6 million at January 1, 2019 and $4.2 million at January 1, 2018.











See notes to condensed consolidated financial statements.

10


COMPASS DIVERSIFIED HOLDINGS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2019

Note A - Presentation and Principles of Consolidation
Compass Diversified Holdings, a Delaware statutory trust (the "Trust" or "Holdings") and Compass Group Diversified Holdings LLC, a Delaware limited liability company (the "Company"), were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. In accordance with the second amended and restated Trust Agreement, dated as of December 6, 2016 (as amended and restated, the "Trust Agreement"), the Trust is sole owner of 100% of the Trust Interests (as defined in the Company’s fifth amended and restated operating agreement, dated as of December 6, 2016 (as amended and restated, the "LLC Agreement")) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.
The Company is a controlling owner of eight businesses, or reportable operating segments, at June 30, 2019. The segments are as follows: 5.11 Acquisition Corp. ("5.11" or "5.11 Tactical"), Velocity Outdoor, Inc. (formerly Crosman Corp.) ("Velocity Outdoor" or "Velocity"), The Ergo Baby Carrier, Inc. ("Ergobaby"), Liberty Safe and Security Products, Inc. ("Liberty Safe" or "Liberty"), Compass AC Holdings, Inc. ("ACI" or "Advanced Circuits"), AMT Acquisition Corporation ("Arnold"), FFI Compass Inc. ("Foam Fabricators" or "Foam") and The Sterno Group, LLC ("Sterno"). Refer to Note E - "Operating Segment Data" for further discussion of the operating segments. Compass Group Management LLC, a Delaware limited liability company ("CGM" or the "Manager"), manages the day to day operations of the Company and oversees the management and operations of our businesses pursuant to a Management Services Agreement ("MSA").
Basis of Presentation
The condensed consolidated financial statements for the three and six month periods ended June 30, 2019 and June 30, 2018 are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Consolidation
The condensed consolidated financial statements include the accounts of Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Discontinued Operations
During the first quarter of 2019, the Company completed the sale of Fresh Hemp Foods Ltd. ("Manitoba Harvest"). Additionally, during the second quarter of 2019, the Company completed the sale of Clean Earth Holdings, Inc. ("Clean Earth"). The results of operations of Manitoba Harvest and Clean Earth are reported as discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2019. Refer to Note C - "Discontinued Operations" for additional information. Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Seasonality
Earnings of certain of our operating segments are seasonal in nature due to various recurring events, holidays and seasonal weather patterns, as well as the timing of our acquisitions during a given year. Historically, the third and fourth quarter produce the highest net sales during our fiscal year.

11


Recently Adopted Accounting Pronouncements