UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2024
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________________ to ___________________
Commission File Number: 001-41917
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(Zip Code)
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(770 ) 213-8067
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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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 ☒ 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
☒ 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.
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Large accelerated filer
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Accelerated filer
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☐
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☒
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Smaller reporting company
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Emerging growth company
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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 ☒
As of May 10, 2024, the number of shares of the registrant’s Class A common stock outstanding was approximately 8,846,154 , and the number of shares of the registrant’s Class B common stock outstanding was approximately 42,435,897 .
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PART I
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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PART II
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54 |
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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BASIS OF PRESENTATION
Certain Definitions
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:
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“Average sales price” or “ASP” refers to the average sales price of either our homes closed, our new home orders, or our backlog homes (at period end).
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“Basis Adjustments” refers to an allocable share (and
increases thereto) of existing tax basis, in Smith Douglas Holdings LLC’s assets and tax basis adjustments with respect to such assets resulting from (a) Smith Douglas Homes Corp.’s purchase of LLC Interests from Smith Douglas Holdings
LLC and each Continuing Equity Owner in connection with the Transactions, (b) any future redemptions or exchanges of LLC Interests from the Continuing Equity Owners, (c) certain distributions (or deemed distributions) by Smith Douglas
Holdings LLC, and (d) payments made under the Tax Receivable Agreement.
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“Construction cycle time” refers, unless stated otherwise,
to the number of business days between the start of the construction of foundations in a home and quality acceptance.
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“Continuing Equity Owners” refers collectively to the
owners of LLC Interests in Smith Douglas Holdings LLC prior to the consummation of the Transactions, who are also holders of LLC Interests and our Class B common stock following consummation of the Transactions, including the Founder
Fund and GSB Holdings, who may exchange at each of their respective options, in whole or in part from time to time, their LLC Interests, as applicable, for, at our election (determined solely by our independent directors (within the
meaning of the Exchange rules) who are disinterested), cash or newly-issued shares of our Class A common stock as described under Part
III, Item 13. Certain Relationships and Related Transactions and Director Independence—Smith Douglas LLC Agreement of our
Annual Report on Form 10-K for the year ended December 31, 2023 (our “Annual Report”). In connection with an exchange of LLC Interests, a corresponding number of shares of Class B common stock shall be immediately and automatically
transferred to Smith Douglas Homes Corp. for no consideration and canceled.
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“Controlled lots” refers to lots that are either owned
or held under an option to be acquired for the relevant time frame set forth in the option contracts.
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“Devon Street Homes” refers to Devon Street Homes, L.P.
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“Devon Street Homes Acquisition” refers to the
transaction consummated on July 31, 2023, pursuant to which we acquired substantially all of the assets of Devon Street Homes pursuant to an asset purchase agreement (the “APA”). The purchase price equaled the net assets of Devon
Street Homes on a cash-free, debt-free basis, plus an agreed upon premium which is comprised primarily of real estate inventory, subject to purchase price adjustments. We funded the purchase price of $83.9 million, primarily from cash
on hand, $72.0 million of draws on our Prior Credit Facility, a three-year promissory note in the principal amount of $5.0 million payable to the seller, and approximately $3.0 million contingent consideration to the seller. The
contingent consideration will be paid to the seller upon the achievement of certain gross margin targets. Our unaudited financial statements as of March 31, 2024, include the results of operations of Devon Street Homes and may not be
directly comparable to the prior period.
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“Exchange” refers to the New York Stock Exchange.
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“Founder Fund” refers to The Bradbury Family Trust II A
U/A/D December 29, 2015, for which our founder and Executive Chairman, Tom Bradbury, is co-trustee.
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“GSB Holdings” refers to GSB Holdings LLC, for which our
Chief Executive Officer, President, and Vice Chairman, Greg Bennett, is the sole member and manager.
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“IPO” refers to our initial public offering, which we
completed on January 16, 2024, and through which we offered 8,846,154 shares of our Class A common stock at a price to the public of $21.00 per share, which includes the exercise in full by the underwriters of their option to purchase
an additional 1,153,846 shares of our Class A common stock. The gross proceeds to us from the IPO were $185.8 million, before deducting underwriting discounts.
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“LLC Interests” refers to the membership units of Smith
Douglas Holdings LLC, including those that we purchase with the net proceeds from the IPO.
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“Refinancing” refers to (i) concurrently with the
consummation of our IPO, the entry by Smith Douglas Holdings LLC and certain of our wholly-owned subsidiaries into an amended and restated revolving credit facility (the “Amended Credit Facility”) which replaced the $175.0 million
unsecured revolving credit facility with Wells Fargo Bank, National Association, as administrative agent for the lenders party thereto (the “Lenders”), and the Lenders, dated as of October 28, 2021, as amended to date (the “Prior
Credit Facility,” as amended and restated, the “Amended Credit Facility”), and (ii) the repayment, using a portion of the net proceeds from the IPO, of the $84.0 million outstanding under our Prior Credit Facility (the “Debt
Repayment”).
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“Section 704(c) Allocations” refers to disproportionate
allocations (if any) of income and gain from inventory property held by Smith Douglas Holdings LLC as of the date of the IPO under Section 704(c) of the Internal Revenue Code of 1986, as amended (the “Code”), resulting from our
acquisition of LLC Interests from Smith Douglas Holdings LLC including in connection with the Transactions.
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“Sunset Date” refers to the date upon which the
aggregate number of shares of Class B common stock then outstanding is less than 10% of the aggregate number of shares of Class A common stock and Class B common stock then outstanding.
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“Smith Douglas LLC Agreement” refers, as applicable, to
Smith Douglas Holdings LLC’s amended and restated limited liability company agreement, as in effect prior to the IPO, or to the amended and restated limited liability company agreement dated as of January 10, 2024, and as such
agreement may thereafter be amended and/or restated.
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“Tax Receivable Agreement” refers to the Tax Receivable
Agreement entered into by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC and the Continuing Equity Owners in connection with the IPO, pursuant to which, among other things, Smith Douglas Homes Corp. is required to pay
to each Continuing Equity Owner 85% of certain tax benefits, if any, that it realizes (or in certain cases is deemed to realize) as a result of the tax benefits provided by Basis Adjustments, Section 704(c) Allocations, and certain
other tax benefits (such as interest deductions) covered by the Tax Receivable Agreement as described in Part III, Item 13. Certain
Relationships and Related Transactions, and Director Independence—Tax Receivable Agreement of our Annual Report.
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“Transactions” refers to the organizational transactions
described in Basis of Presentation—The Transactions below and the IPO, and the application of the net proceeds therefrom.
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“We,” “us,” “our,” the “Company,” “Smith Douglas,” and similar references refer: (i) following the
consummation of the Transactions, including the IPO, to Smith Douglas Homes Corp., and, unless otherwise stated, all of its direct and indirect subsidiaries, including Smith Douglas Holdings LLC, and (ii) prior to the completion of
the Transactions, including the IPO, to Smith Douglas Holdings LLC.
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The Transactions
Smith Douglas Homes Corp., a Delaware corporation, was formed on June 20, 2023. Smith Douglas Homes Corp. is a holding company and the
sole managing member of Smith Douglas Holdings LLC, and its principal asset consists of LLC Interests. Prior to our IPO and the Transactions, all of our business operations were conducted through Smith Douglas Holdings LLC, and the Continuing
Equity Owners were the only members of Smith Douglas Holdings LLC. In connection with the consummation of the IPO, we undertook certain organizational transactions, described further below, to reorganize our corporate structure:
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we amended the Smith Douglas LLC Agreement to, among other things, (i) recapitalize all existing ownership interests in Smith Douglas Holdings LLC into
44,871,794 LLC Interests (before giving effect to the use of proceeds from the IPO, as described below), (ii) appoint Smith Douglas Homes Corp. as the sole managing member of Smith Douglas Holdings LLC upon its acquisition of LLC
Interests in connection with the IPO, and (iii) provide certain redemption rights to the Continuing Equity Owners;
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we amended and restated Smith Douglas Homes Corp.’s certificate of incorporation to, among other things, provide (i) for Class A common stock, with each share
of our Class A common stock entitling its holder to one vote per share on all matters presented to our stockholders generally; (ii) for Class B common stock, with each share of our Class B common stock entitling its holder to ten
votes per share on all matters presented to our stockholders generally prior to the Sunset Date and from and after the occurrence of the Sunset Date each share of our Class B common stock will entitle its holder to one vote per share
on all matters presented to our stockholders generally; (iii) that shares of our Class B common stock may only be held by the Continuing Equity Owners and their respective permitted transferees; and (iv) for preferred stock, which can
be issued by our board of directors in one or more series without stockholder approval;
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we issued 42,435,897 shares of our Class B common stock (after giving effect to the use of net proceeds from our IPO as described below and taking into account
the exercise in full of the underwriters’ option to purchase an additional 1,153,846 shares of our Class A common stock in the IPO) to the Continuing Equity Owners at the time of such issuance of Class B common stock, which is equal
to the number of LLC Interests held by such Continuing Equity Owners, for nominal consideration;
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we issued 8,846,154 shares of our Class A common stock to the purchasers in the IPO in exchange for gross proceeds of approximately $185.8 million based upon
the IPO price of $21.00 per share, before deducting the underwriting discount;
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we used the net proceeds from the IPO (i) to purchase 6,410,257 newly issued LLC Interests for approximately $125.2 million directly from Smith Douglas Holdings
LLC at the IPO price less the underwriting discount; and (ii) to purchase 2,435,897 LLC Interests from the Continuing Equity Owners on a pro rata basis for $47.6 million at a price per unit equal to the initial public offering price
per share of Class A common stock less the underwriting discount;
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Smith Douglas Holdings LLC used the net proceeds from the sale of LLC Interests to Smith Douglas Homes Corp. (i) to repay approximately $84.0 million of
borrowings outstanding under the Prior Credit Facility as part of the Refinancing, (ii) to redeem all outstanding Class C Units and Class D Units of Smith Douglas Holdings LLC at par in aggregate for $2.6 million, (iii) to repay $0.9
million in notes payable to certain related parties, and (iv) for general corporate purposes as described under Part I, Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources of this Quarterly Report on Form 10-Q, and Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence of our Annual Report;
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Smith Douglas Homes Corp. entered into (i) the Registration Rights Agreement with certain of the Continuing Equity Owners and (ii) the Tax Receivable Agreement
with Smith Douglas Holdings LLC and the Continuing Equity Owners. For a description of the terms of the Registration Rights Agreement and the Tax Receivable Agreement, see Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence of our Annual Report.
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Following the Transactions:
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Smith Douglas Homes Corp. is a holding company and its principal asset consists of LLC Interests it acquired directly from Smith Douglas Holdings LLC and from
each Continuing Equity Owner;
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Smith Douglas Homes Corp. is the sole managing member of Smith Douglas Holdings LLC and controls the business and affairs of Smith Douglas Holdings LLC;
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Smith Douglas Homes Corp. owns, directly or indirectly, 8,846,154 LLC Interests, representing approximately 17.3% of the economic interest in Smith Douglas
Holdings LLC;
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the Continuing Equity Owners own (i) 42,435,897 LLC Interests, representing approximately 82.7% of the economic interest in Smith Douglas Holdings LLC and (ii)
42,435,897 shares of Class B common stock of Smith Douglas Homes Corp.;
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the purchasers in the IPO own (i) 8,846,154 shares of Class A common stock of Smith Douglas Homes Corp., representing approximately 2.0% of the combined voting
power of all of Smith Douglas Homes Corp.’s common stock and approximately 100% of the economic interest in Smith Douglas Homes Corp., and (ii) through Smith Douglas Homes Corp.’s ownership of LLC Interests, indirectly hold
approximately 17.3% of the economic interest in Smith Douglas Holdings LLC; and
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our Class A common stock and Class B common stock have what is commonly referred to as a “high/low vote structure,” which means that shares of our Class B
common stock initially have ten votes per share and our Class A common stock have one vote per share. Upon the occurrence of the Sunset Date, each share of Class B common stock will then be entitled to one vote per share. This
high/low vote structure enables the Continuing Equity Owners to control the outcome of matters submitted to our stockholders for approval, including the election of our directors, as well as the overall management and direction of our
company. Furthermore, the Continuing Equity Owners exert a significant degree of influence, or actual control, over matters requiring stockholder approval. We believe that maintaining this control by the Continuing Equity Owners will
help enable them to successfully guide the implementation of our growth strategies and strategic vision.
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Our corporate structure following the IPO is commonly referred to as an umbrella partnership-C corporation (“Up-C”) structure, which is
often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure allows the Continuing Equity Owners to retain their equity ownership in Smith Douglas Holdings LLC and
to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “flow-through” entity, for U.S. federal income tax purposes. Investors in and after our IPO, by contrast, hold their equity
ownership in Smith Douglas Homes Corp., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. One of the tax benefits to the Continuing Equity Owners associated
with this structure is that future taxable income of Smith Douglas Holdings LLC that is allocated to the Continuing Equity Owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level.
Additionally, because the Continuing Equity Owners may have their LLC Interests redeemed by Smith Douglas Holdings LLC (or at our option, directly exchanged by Smith Douglas Homes Corp.) for newly issued shares of our Class A common stock on a
one-for-one basis (subject to customary adjustments, including for stock splits, stock dividends, and reclassifications) or, at our option, for cash, the Up-C structure also provides the Continuing Equity Owners with potential liquidity that
holders of non-publicly traded limited liability companies are not typically afforded. In connection with any such redemption or exchange of LLC Interests, a corresponding number of shares of Class B common stock held by the relevant Continuing
Equity Owner will automatically be transferred to Smith Douglas Homes Corp. for no consideration and be canceled. The Continuing Equity Owners and Smith Douglas Homes Corp. also each expect to benefit from the Up-C structure as a result of
certain cash tax savings arising from redemptions or exchanges of the Continuing Equity Owner’s LLC Interests for Class A common stock or cash, and certain other tax benefits covered by the Tax Receivable Agreement discussed under Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence—Tax Receivable Agreement. See Part I, Item 1A. Risk Factors—Risks Related to our Organizational Structure of our Annual Report. In general, the Continuing Equity Owners expect
to receive payments under the Tax Receivable Agreement of 85% of the amount of certain tax benefits, as described below, and Smith Douglas Homes Corp. expects to benefit in the form of cash tax savings in amounts equal to 15% of certain tax
benefits, as described below. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will reduce cash otherwise arising from such tax savings. We expect such payments will be substantial.
As described under Part III, Item 13.
Certain Relationships and Related Transactions, and Director Independence—Tax Receivable Agreement of our Annual Report, prior to the completion of the IPO, we entered into the Tax Receivable Agreement with Smith Douglas Holdings LLC
and the Continuing Equity Owners that provides for the payment by Smith Douglas Homes Corp. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Smith Douglas Homes Corp. actually realizes (or in some circumstances
is deemed to realize) as a result of (i) Basis Adjustments, (ii) Section 704(c) Allocations, and (iii) certain tax benefits (such as interest deductions) arising from payments made under the Tax Receivable Agreement.
Presentation of Financial Information
Smith Douglas Holdings LLC is the accounting predecessor of Smith Douglas Homes Corp. for financial reporting purposes. As a result,
the condensed consolidated financial statements of the combined entity represent a continuation of the financial position and results of operations of Smith Douglas Holdings LLC.
Certain monetary amounts, percentages, and other figures included in this Quarterly Report on Form 10-Q have been subject to rounding
adjustments. Percentage amounts included in this Quarterly Report on Form 10-Q have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in
this Quarterly Report on Form 10-Q may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Certain other amounts that
appear in this Quarterly Report on Form 10-Q may not sum due to rounding.
Key Terms and Performance Indicators used in this Quarterly Report on Form 10-Q; Non-GAAP Financial Measures
Throughout this Quarterly Report on Form 10-Q, we use a number of key terms and provide a number of key performance indicators and
non-GAAP financial measures used by management. Please see Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Key Metrics and Non-GAAP Financial Measures for definitions and further information about why and how we calculate key performance indicators and non-GAAP financial measures, including a reconciliation of the following:
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adjusted home closing gross profit, defined as home
closing revenue less cost of home closings, excluding capitalized interest charged to cost of home closings, impairment charges and adjustments resulting from the application of purchase accounting included in cost of sales, if
applicable;
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adjusted home closing gross margin, defined as adjusted
home closing gross profit as a percentage of home closing revenue;
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adjusted net income, defined as net income adjusted for
the income tax expense effect of the pass-through entity taxable income of Smith Douglas Holdings LLC as if Smith Douglas Holdings LLC was a subchapter C corporation in periods presented. This assumption uses an effective tax rate of
25% for pass-through taxable income, which is our anticipated federal and state blended tax rate as a public company;
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EBITDA, defined as net income before (i) interest
income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense, (iv) income tax expense, and (v) depreciation;
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EBITDA margin, defined as EBITDA as a percentage of home
closing revenue; and
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Net-debt-to-net book capitalization, defined as (i)
total debt, less cash and cash equivalents, divided by (ii) total debt, less cash and cash equivalents, plus stockholders’ equity.
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We use non-GAAP financial measures, such as adjusted home closing gross profit, adjusted home closing gross margin, adjusted net
income, EBITDA, EBITDA margin, and net-debt-to-net book capitalization, to supplement financial information presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”). We believe that excluding certain items from
our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance, as applicable, as forecasts are developed at a level of detail
different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results and make more meaningful period
to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other
companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. See Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and Non-GAAP Financial Measures.
This Quarterly Report on Form 10-Q contains forward‑looking statements. We intend such forward‑looking statements to be covered by the
safe harbor provisions for forward‑looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All
statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward‑looking statements. Statements regarding our future results of operations and financial position, business strategy, and plans and
objectives of management for future operations, including, among others, statements regarding the Transactions, expected growth, future capital expenditures, and debt service obligations are forward-looking statements. In some cases, you can
identify forward‑looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the
negative of these terms or other similar expressions.
The forward‑looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward‑looking
statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward‑looking statements involve known and unknown
risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward‑looking
statements. We believe that these factors include:
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our inability to successfully identify, secure, and control an adequate inventory of lots at reasonable prices;
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the tightening of mortgage lending standards and mortgage financing requirements;
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the housing market may not continue to grow at the same rate, or may decline;
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the availability, skill, and performance of trade partners;
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a shortage or increase in the costs of building materials could delay or increase the cost of home construction;
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efforts to impose joint employer liability on us for labor, safety, or worker’s compensation law violations committed by our trade partners;
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volatility in the credit and capital markets may impact our cost of capital and our ability to access necessary financing and the difficulty in obtaining
sufficient capital could prevent us from acquiring lots for our development or increase costs and delays in the completion of our homebuilding expenditures;
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an active, liquid trading market for our Class A common stock may not continue, which may make it difficult for you to sell your shares of Class A common stock;
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we cannot predict the effect our dual class structure may have on the market price of our Class A common stock;
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the Tax Receivable Agreement requires us to make cash payments to the Continuing Equity Owners in respect of certain tax benefits to which we may become
entitled, and we expect that such payments will be substantial;
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our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit holders
of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners;
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the significant influence the Continuing Equity Owners have over us, including control over decisions that require the approval of stockholders; and
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the factors set forth under Part I, Item 1A. Risk Factors of
our Annual Report.
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Because forward‑looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified,
you should not rely on these forward‑looking statements as predictions of future events. The events and circumstances reflected in our forward‑looking statements may not be achieved or occur and actual results could differ materially from those
projected in the forward‑looking statements. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have
filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward‑looking
statements by these cautionary statements.
These forward‑looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law,
we do not plan to publicly update or revise any forward‑looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
SMITH DOUGLAS HOMES CORP.
(Unaudited, in thousands except share and per share amounts)
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March 31,
2024
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December 31,
2023
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Assets
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Cash and cash equivalents
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$
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$
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Real estate inventory
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Deposits on real estate under option or contract
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Real estate not owned
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Property and equipment, net
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Goodwill
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Deferred tax asset, net
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Other assets
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Total assets
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$
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$
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Liabilities and Stockholders’/Members’ Equity
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Liabilities:
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Accounts payable
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$
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$
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Customer deposits
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Notes payable
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Liabilities related to real estate not owned
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Accrued expenses and other liabilities
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Tax receivable agreement liability
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Total liabilities
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||||||
|
Commitments and contingencies (Note 15)
|
||||||||
|
Members’ equity:
|
||||||||
|
Class A units
|
|
|
||||||
|
Class C units
|
|
|
||||||
|
Class D units
|
|
|
||||||
|
Total members’ equity
|
|
|
||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, $
|
|
|
||||||
|
Class A common stock, $
|
|
|
||||||
|
Class B common stock, $
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Retained earnings
|
|
|
||||||
|
Total stockholders’ equity attributable to Smith Douglas Homes Corp.
|
|
|
||||||
|
Non-controlling interests attributable to Smith Douglas Holdings LLC
|
|
|
||||||
|
Total members’/stockholders’ equity
|
|
|
||||||
|
Total liabilities and stockholders’/members’ equity
|
$
|
|
$
|
|
||||
See accompanying notes to condensed consolidated financial statements.
SMITH DOUGLAS HOMES CORP.
(Unaudited, in thousands except share and per share amounts)
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Home closing revenue
|
$
|
|
$
|
|
||||
|
Cost of home closings
|
|
|
||||||
|
Home closing gross profit
|
|
|
||||||
|
Selling, general and administrative costs
|
|
|
||||||
|
Equity in income from unconsolidated entities
|
(
|
)
|
(
|
)
|
||||
|
Interest expense
|
|
|
||||||
|
Other income, net
|
(
|
)
|
(
|
)
|
||||
|
Income before income taxes
|
|
|
||||||
|
Provision for income taxes
|
|
|
||||||
|
Net income
|
|
$
|
|
|||||
|
Net income attributable to non-controlling interests and LLC members prior to IPO
|
|
|||||||
|
Net income attributable to Smith Douglas Homes Corp.
|
$
|
|
||||||
|
Period from January 11,
2024 to March 31, 2024
|
||||||||
|
Earnings per share:
|
||||||||
|
Basic
|
$
|
|
||||||
|
Diluted
|
$
|
|
||||||
|
Weighted average shares of common stock outstanding:
|
||||||||
|
Basic
|
|
|||||||
|
Diluted
|
|
|||||||
See accompanying notes to condensed consolidated financial statements.
SMITH DOUGLAS HOMES CORP.
(Unaudited and in thousands, except unit and share amounts)
|
Smith Douglas Holdings LLC Members’ Equity (prior to Reorganization Transactions) Note 1
|
Smith Douglas Homes Corp. Stockholders’ Equity
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Class A Units
|
Class C Units
|
Class D Units
|
Class A
Common Stock
|
Class B
Common Stock
|
Non-Controlling
Interests
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Units
|
Amount
|
Units
|
Amount
|
Units
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-in Capital
|
Retained
Earnings
|
Stockholders’
Equity
|
Amounts
|
Total
Equity
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Balance December 31, 2022
|
|
$
|
|
|
$
|
|
|
$
|
|
$
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions
|
—
|
(
|
)
|
—
|
(
|
)
|
—
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
—
|
|
—
|
|
—
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance March 31, 2023
|
|
$
|
|
|
$
|
|
|
$
|
|
$
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance December 31, 2023
|
|
$
|
|
|
$
|
|
|
$
|
|
$
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Distributions
|
—
|
(
|
)
|
—
|
—
|
—
|
—
|
(
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net loss prior to Reorganization Transactions and IPO
|
—
|
(
|
)
|
—
|
—
|
—
|
—
|
(
|
)
|
|||||||||||||||||||||||||||||||||||||||||||||||||||
|
Reorganization Transactions
|
(
|
)
|
(
|
)
|
—
|
—
|
—
|
—
|
—
|
$
|
—
|
|
$
|
|
$
|
—
|
$
|
—
|
$
|
|
$
|
|
$
|
|
||||||||||||||||||||||||||||||||||||
|
IPO and Related Transactions
|
—
|
—
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
—
|
|
—
|
|
|
|
||||||||||||||||||||||||||||||||||||||||
|
Increase in deferred tax asset from IPO and Related Transactions
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Equity-based compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
—
|
|
—
|
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Net income subsequent to Reorganization Transactions and IPO
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||
|
Balance March 31, 2024
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
SMITH DOUGLAS HOMES CORP.
(Unaudited, in thousands)
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation
|
|
|
||||||
|
Accrued incentive compensation expense
|
|
|
||||||
|
Share-based payment expense
|
|
|
||||||
|
Amortization of debt issuance costs
|
|
|
||||||
|
Equity in earnings from unconsolidated entities
|
(
|
)
|
(
|
)
|
||||
|
Distributions of income from unconsolidated entities
|
|
|
||||||
|
Noncash lease expense
|
|
|
||||||
| Provision for deferred income taxes |
|
|||||||
|
Other
|
(
|
)
|
|
|||||
|
Changes in assets and liabilities:
|
||||||||
|
Real estate inventory
|
(
|
)
|
(
|
)
|
||||
|
Deposits on real estate under option or contract
|
(
|
)
|
(
|
)
|
||||
|
Other assets
|
|
|
||||||
|
Accounts payable
|
(
|
)
|
|
|||||
|
Customer deposits
|
|
|
||||||
|
Accrued expenses and other liabilities
|
(
|
)
|
(
|
)
|
||||
|
Net cash (used in) provided by operating activities
|
(
|
)
|
|
|||||
|
Cash flows from investing activities:
|
||||||||
|
Purchases of property and equipment
|
(
|
)
|
(
|
)
|
||||
|
Distributions of capital from unconsolidated entities
|
|
|
||||||
|
Other
|
|
|
||||||
|
Net cash (used in) provided by investing activities
|
(
|
)
|
|
|||||
|
Cash flows from financing activities:
|
||||||||
|
Issuance of Class A common stock in IPO, net of underwriting discount
|
|
|
||||||
|
Issuance of Class B common stock
|
|
|
||||||
|
Payment of offering costs
|
(
|
)
|
|
|||||
|
Redemption of Class C and D units
|
(
|
)
|
|
|||||
|
Purchase of LLC interests from Continuing Equity Owners
|
(
|
)
|
|
|||||
|
Borrowings under revolving credit facility
|
|
|
||||||
|
Repayments under revolving credit facility
|
(
|
)
|
(
|
)
|
||||
|
Payments on notes payable
|
(
|
)
|
(
|
)
|
||||
|
Payments on notes payable related party
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from sales of real estate not owned
|
|
|
||||||
|
Payments related to repurchases of real estate not owned
|
(
|
)
|
(
|
)
|
||||
|
Distributions to members of Smith Douglas Holdings LLC
|
(
|
)
|
(
|
)
|
||||
|
Payment of debt issuance costs
|
(
|
)
|
|
|||||
|
Net cash provided by (used in) financing activities
|
|
(
|
)
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
|
(
|
)
|
|||||
|
Cash and cash equivalents, beginning of period
|
|
|
||||||
|
Cash and cash equivalents, end of period
|
$
|
|
$
|
|
||||
See accompanying notes to condensed consolidated financial statements.
SMITH DOUGLAS HOMES CORP.
Condensed Consolidated Statements of Cash Flows - Continued
(Unaudited, in thousands)
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Supplemental Disclosure of Cash Flow Information:
|
||||||||
|
Cash paid for interest, net of amounts capitalized
|
$
|
|
$
|
|
||||
|
Cash paid for income taxes
|
$
|
|
$
|
|
||||
See accompanying notes to condensed consolidated financial statements.
SMITH DOUGLAS HOMES CORP.
Note 1 - Description of business and summary of significant accounting policies:
Nature of business
Smith Douglas Homes Corp. (the Company) was incorporated in the state of Delaware on June 20, 2023 (Date of Formation) for the purpose of
facilitating an initial public offering (IPO) of its common stock and executing other related transactions in order to carry on the business of Smith Douglas Holdings LLC and its consolidated subsidiaries as a publicly-traded entity.
The Company is a builder of single-family homes in communities in certain markets in the southeastern and southwestern United States. The
Company’s homes and communities are primarily targeted to first-time and empty-nest homebuyers. The Company currently operates in metropolitan Atlanta, Birmingham, Charlotte, Huntsville, Nashville, Raleigh and Houston. The Company operates a
land-light business model whereby the Company typically purchases finished lots via lot-option contracts from various third-party land developers or land bankers. Additionally, the Company offers title insurance services through an unconsolidated
title company.
Initial Public Offering and Reorganization Transactions
The Company successfully closed an IPO of 8,846,154
shares of Class A common stock at a public offering price of $21.00 per share on January 16, 2024, which included 1,153,846 shares of Class A common stock issued pursuant to the underwriters’ option to purchase additional shares of Class A common stock. The net
proceeds from the IPO aggregated approximately $172.8 million. Shares of Class A common stock began trading on the New York Stock
Exchange under the ticker symbol "SDHC" on January 11, 2024.
In connection with the IPO, Smith Douglas Holdings LLC amended and restated its existing limited liability company agreement to, among other
things, (i) recapitalize all existing ownership interests in Smith Douglas Holdings LLC into 44,871,794 LLC Interests (before giving
effect to the use of proceeds from the IPO, as described below), (ii) appoint Smith Douglas Homes Corp. as the sole managing member of Smith Douglas Holdings LLC upon its acquisition of LLC Interests in connection with the IPO, and (iii) provide
certain redemption rights to the owners of the LLC Interests in Smith Douglas Holdings LLC, exclusive of the Company (the Continuing Equity Owners).
Simultaneously, Smith Douglas Homes Corp. amended and restated its certificate of incorporation to, among other things, provide (i) for Class A
common stock, with each share of Class A common stock entitling its holder to one vote per share on all matters presented to the
stockholders generally; (ii) for Class B common stock, with each share of Class B common stock entitling its holder to ten votes per
share on all matters presented to the stockholders generally, until the aggregate number of shares of Class B common stock then outstanding is less than 10 %
of the aggregate number of shares of Class A common stock and Class B common stock then outstanding (Sunset Date), and from and after the occurrence of the Sunset Date, each share of Class B common stock will entitle its holder to one vote per share on all matters presented to the stockholders generally; (iii) that shares of Class B common stock may only be held by the
Continuing Equity Owners and their respective permitted transferees; and (iv) for preferred stock, which can be issued by the board of directors in one or more series without stockholder approval. As a result, Smith Douglas Homes Corp. became a
holding company and the sole managing member of Smith Douglas Holdings LLC and controls the business and affairs of Smith Douglas Holdings LLC. After giving effect to the use of net proceeds as described below, Smith Douglas Homes Corp. issued 42,435,897 shares of Class B common stock to the Continuing Equity Owners, which is equal to the number of LLC Interests held by such Continuing
Equity Owners, for nominal consideration.
Subsequent to the IPO, Smith Douglas Homes Corp. used the net proceeds to: (i) purchase 6,410,257 newly issued LLC Interests for approximately $125.2 million
directly from Smith Douglas Holdings LLC at a price per unit equal to $21.00 per share (IPO price) of Class A common stock less the
underwriting discount; and (ii) purchase 2,435,897 LLC Interests from the Continuing Equity Owners on a pro rata basis for $47.6 million in aggregate at a price per unit equal to the IPO price per share of Class A common stock less the underwriting discount.
Basis of presentation
In accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), since the Continuing Equity Owners
continue to hold a controlling interest in Smith Douglas Holdings LLC after the IPO (i.e., there was no change in control of Smith Douglas Holdings LLC), the financial statements of the combined entity represent a continuation of the financial
position and results of operations of Smith Douglas Holdings LLC. Accordingly, the historical cost basis of assets, liabilities, and equity of Smith Douglas Holdings LLC are carried over to the condensed consolidated financial statements of the
combined company as a common control transaction.
The accompanying unaudited condensed consolidated financial statements for the periods prior to the Reorganization Transactions and IPO have
been presented to combine the previously separate entities. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and the applicable rules and regulations of the Securities and Exchange
Commission for interim financial information. As such, these financial statements do not include all information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited condensed
consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows as of the dates and for the
periods presented. A reclassification to the interim condensed consolidated financial statements and notes has been made to the prior year amount to conform to the current year presentation, which is not material.
These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto
as of and for the year ended December 31, 2023, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Historically, the homebuilding industry has experienced seasonal fluctuations; therefore, interim
results are not necessarily indicative of results for the full fiscal year.
Principles of consolidation and non-controlling interests
The accompanying condensed consolidated financial statements include the accounts of Smith Douglas Homes Corp. and Smith Douglas Holdings LLC
and its wholly-owned subsidiaries. Smith Douglas Holdings LLC is considered a variable interest entity and Smith Douglas Homes Corp. is the primary beneficiary and sole managing member of Smith Douglas Holdings LLC and has decision making
authority that significantly affects the performance of the entity. Accordingly, the Company consolidates Smith Douglas Holdings LLC and reports non-controlling interests representing the economic interest in Smith Douglas Holdings LLC held by
the Continuing Equity Owners.
All intercompany balances and transactions have been eliminated in consolidation. Investments in unconsolidated entities in which the Company
has less than a controlling financial interest are accounted for using the equity method.
The non-controlling interests in the condensed consolidated statement of income for the three months ended March 31, 2024 represent the portion
of earnings attributable to the economic interest in Smith Douglas Holdings LLC held by the Continuing Equity Owners. The non-controlling interests in the condensed consolidated balance sheet as of March 31, 2024 represent the portion of the net
assets of the Company attributable to the Continuing Equity Owners, based on the portion of the LLC Interests owned by such unit holders. As of March 31, 2024, the non-controlling interests were 82.7 %.
Use of estimates in the preparation of condensed consolidated financial statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the
amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Business combinations
From time to time, the Company may enter into business combinations. In accordance with Accounting Standards Codification (ASC) Topic 805, Business Combinations, the Company generally recognizes the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition. The Company measures goodwill as the
excess of consideration transferred over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. Goodwill is assigned to each reporting unit based upon the relative fair value of tangible assets
acquired. The acquisition method of accounting requires the Company to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of real
estate inventory and contingent consideration. Significant estimates and assumptions impacting the fair value of the acquired real estate inventory include subjective and/or complex judgments regarding items such as estimates of future net
proceeds, discount rate, and costs to complete. Significant estimates and assumptions impacting the fair value of contingent consideration include subjective and/or complex judgments regarding items such as the gross margin discount rate, gross
margin volatility, drift rate, and cost of debt.
The acquisition method of accounting also requires the Company to refine these estimates over a measurement period not to exceed one year to
reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If the Company is required to adjust provisional
amounts that have been recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on the Company’s financial condition and results of operations. If the subsequent actual
results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, the Company could record future impairment charges.
Note 19 describes the business combination completed during the year ended December 31, 2023 and the estimates, assumptions used, and areas for
which the acquisition accounting is not yet finalized.
Cash and cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of March 31,
2024 and December 31, 2023, the majority of cash and cash equivalents were in demand deposit accounts with major financial institutions. At various times throughout the year, the Company may have cash deposited with these financial institutions
that exceeds federally insured limits, and the Company could be negatively impacted if the underlying financial institutions fail or are subject to other adverse conditions. To date, the Company has experienced no loss or diminished access to
cash in its demand deposit accounts.
Real estate inventory
Real estate inventory consists primarily of the capitalized costs of finished homes, homes under construction, and residential lots. The
Company includes the costs of lot acquisitions, development, direct home construction, capitalized interest, closing costs and direct and certain indirect overhead costs incurred during home construction in real estate inventory.
Real estate inventory is stated at cost unless a community is determined to be impaired, at which point the inventory is written down to fair
value as required by ASC Topic 360‑10, Property, Plant, and Equipment. The Company reviews its real estate inventory for indicators of potential impairment on a quarterly basis at the community level
considering market and economic conditions, current sales absorption rates and recent profitability of new home sales. When an indicator of impairment is identified, the Company prepares and analyzes cash flows at the community level on an
undiscounted basis. If the undiscounted cash flows are less than the community’s carrying value, the Company generally estimates the fair value using the estimated future discounted cash flows of the respective community. A community with a fair
value less than its carrying value is written down to such fair value and resulting losses are reported within cost of home closings in the accompanying condensed consolidated statements of income. No
Deposits on real estate under option or contract
Deposits paid related to land and lot option purchase contracts are recorded and classified as deposits on real estate under option or contract
until the related lots are purchased. Deposits are reclassified as a component of real estate inventory at the time the deposit is used to offset the acquisition price of the lots based on the terms of the underlying agreements. To the extent
they are nonrefundable, deposits are expensed to cost of home closings if the option agreement is terminated or lot acquisition is no longer considered probable. There were no
Real estate not owned
In limited circumstances, the Company may sell finished lots it owns to a land banker and simultaneously enter into an option agreement to
repurchase those finished lots. In accordance with ASC 606‑10‑55‑70, these transactions are considered a financing arrangement rather than a sale because of the Company’s options to repurchase these parcels at a higher price. As of March 31, 2024
and December 31, 2023, approximately $13.6 million and $16.8 million, respectively, was recorded to real estate not owned, with a corresponding amount of approximately $13.6 million and $16.8 million, respectively, recorded to liabilities related
to real estate not owned for the remaining balance of net cash received from the transactions for lots not yet repurchased (see Note 16 for information on transactions with related parties). The liabilities related to real estate not owned are
excluded from the Company’s debt covenant calculations.
Investments in unconsolidated entities
Investments in unconsolidated entities, in which the Company has an ownership percentage interest or otherwise exercises significant influence,
are accounted for under the equity method of accounting and are carried at cost, adjusted for the Company’s proportionate share of earnings or losses and distributions. Such investments are included in other assets in the accompanying condensed
consolidated balance sheets. For cash flow classification, to the extent distributions do not exceed cumulative earnings, the Company designates such distributions as return on capital. Distributions in excess of cumulative earnings are treated
as return of capital.
The Company regularly reviews its investments in unconsolidated entities to determine whether there is a decline in fair value below book
value. If there is a decline that is other-than-temporary, the investment is written down to fair value. There were no
Property and equipment
Property and equipment are recorded at cost. Depreciation is generally recorded using the straight-line method over the estimated useful lives
of the assets, which range from to five years . Expenditures for maintenance and repairs are charged to expense as incurred. Additions and betterments are capitalized. The cost of property and equipment sold or otherwise disposed of, and the accumulated depreciation
thereon, is eliminated from the property and equipment and accumulated depreciation accounts, and gains and losses are reflected in other income in the accompanying condensed consolidated statements of income.
Other assets
Other assets consist of the following (in thousands):
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Development reimbursement receivables from land bankers (Note 10)
|
$
|
|
$
|
|
||||
|
Debt issuance costs, net of accumulated amortization
|
|
|
||||||
|
Prepaid insurance and other expenses
|
|
|
||||||
|
Operating lease right-of-use assets
|
|
|
||||||
|
Other assets
|
|
|
||||||
|
Total other assets
|
$
|
|
$
|
|
||||
Debt issuance costs represent the fees associated with the Company’s revolving credit facility. These costs are recorded in the accompanying
condensed consolidated balance sheets within other assets and amortized using the straight-line method over the term of the credit facility. As of March 31, 2024 and December 31, 2023, debt issuance costs net of accumulated amortization totaled
approximately $1.7 million and $0.7
million, respectively. Amortization of debt issuance costs was approximately $0.3 million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively, and is included in interest expense in the accompanying condensed consolidated statements of
income.
Goodwill
Goodwill totaled $25.7 no
Warranty reserves
Homebuyers are provided with a limited warranty against certain building defects for up to one year after the home closing and a limited warranty against structural claims for up to 10 years after the home closing. The Company estimates the costs to be incurred under these warranties and records a liability in the amount of such costs at the time revenue is recognized. Such costs primarily
include repairs of minor construction and cosmetic defects associated with homeowner claims. The Company estimates warranty reserves based on historical data and trends for its communities and periodically assesses the adequacy of its recorded
warranty liability and adjusts the amounts as necessary. Warranty reserves are included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets, and additions and adjustments to the reserves are
included in cost of home closings within the accompanying condensed consolidated statements of income. Actual warranty costs could differ from the current estimates.
Leases
ASC Topic 842, Leases, provides practical expedients and accounting policy elections for ongoing
lease accounting. The Company has elected the recognition exemption for short-term leases for all leases that qualify. Under this exemption, the Company will not recognize right-of-use (ROU) assets or lease liabilities for those leases that
qualify as a short-term lease (a lease term of 12 months of less), which includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company has also elected the practical expedient
to not separate lease and non-lease components for all existing asset classes.
Revenue recognition
The Company recognizes revenue when a home closes with a homebuyer, which is the time at which title and possession of the property are
transferred to that homebuyer and all cash consideration due from the homebuyer is received. The Company’s performance obligation, to deliver the home, is generally satisfied in less than one year from the original contract date.
When the Company executes sales contracts with its homebuyers, or when it requires advance payment from homebuyers for custom changes, upgrades
or options related to their homes, the cash deposits received are recorded as contract liabilities until the homes are closed or the contracts are canceled. The Company either retains or refunds to the customer deposits on canceled sales
contracts, depending upon the applicable provisions of the contract or other circumstances. As of March 31, 2024 and December 31, 2023, customer deposits totaled $9.0 million and $7.2 million, respectively. Substantially all customer
deposits are recognized in revenue within one year of being received from homebuyers.
Cost of home closings
Cost of home closings includes the costs of lot acquisition, development, direct home construction, capitalized interest, closing costs, direct
and certain indirect overhead costs and estimated warranty for the homes. Estimates of costs incurred or to be incurred but not paid are accrued and expensed at the time of closing.
Share-based payments
Equity-based compensation is accounted for as an expense in accordance with the fair value recognition and measurement provisions of U.S. GAAP
which requires compensation cost for the grant-date fair value of equity-based awards to be recognized over the requisite service period. The Company accounts for forfeitures when they occur, and any compensation expense previously recognized on
unvested equity-based awards will be reversed when forfeited. The fair value of restricted stock units (RSUs) is based on the fair value of the Class A common stock at the time of grant.
Income taxes
After consummation of the IPO, Smith Douglas Homes Corp. became subject to U.S. federal, state, and local income taxes with respect to its
allocable share of taxable income of Smith Douglas Holdings LLC assessed at the prevailing corporate tax rates. Smith Douglas Holdings LLC operates as a limited liability company and is treated as a partnership for income tax purposes.
Accordingly, it incurs no significant liability for federal or state income taxes since the taxable income or loss is passed through to its members. Smith Douglas Holdings LLC incurs liabilities for certain state taxes payable directly by it,
which are not significant and for which the expense is included in the provision for income taxes in the accompanying condensed consolidated statement of income for the three months ended March 31, 2024 and in selling, general and administrative
costs in the accompanying condensed consolidated statement of income for the three months ended March 31, 2023.
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, Income Taxes,
an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method
utilized at the end of an annual period.
For annual periods, income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred
tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authority, based on the technical merits of the position. As of March 31, 2024 and December 31, 2023, there were no
Tax receivable agreement
In connection with the IPO and related
transactions, the Company entered into a Tax Receivable Agreement (TRA) with Smith Douglas Holdings LLC and the Continuing Equity Owners that will provide for the payment by Smith Douglas Homes Corp. to the Continuing Equity Owners of 85 % of the amount of tax benefits, if any, that Smith Douglas Homes Corp. realizes (or in some circumstances is deemed to realize) related to the
tax basis adjustments described in Note 14 as such savings are realized.
In addition to tax expenses, the
Company will also make payments under the TRA, which are expected to be significant. The Company will account for the income tax effects and corresponding TRA’s effects resulting from future taxable purchases or redemptions of LLC Interests
of the Continuing Equity Owners by recognizing an increase in deferred tax assets, based on enacted tax rates at the date of the purchase or redemption. Further, the Company will evaluate the likelihood that it will realize the benefit
represented by the deferred tax asset and, to the extent that management estimates that it is more likely than not that the Company will not realize the benefit, the Company will reduce the carrying amount of the deferred tax asset with a
valuation allowance. The amounts to be recorded for both the deferred tax assets and the liability for obligations under the TRA will be estimated at the time of any purchase or redemption as a reduction to stockholders’ equity, and the
effects of changes in any estimates after this date will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income. Judgement is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial statements. A change in the Company’s assessment of such consequences, such as realization of deferred tax assets, changes in tax laws or interpretations thereof
could materially impact results.
Advertising costs
The Company expenses advertising costs as they are incurred. Advertising expense, which is included in selling, general and administrative
costs in the accompanying condensed consolidated statements of income, was approximately $1.2 million and $1.0 million for the three months ended March 31, 2024 and 2023, respectively.
Recent rules and accounting pronouncements
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment
Disclosures" (ASU 2023-07), which requires expanded disclosure of significant segment expenses and other segment items on an annual and interim basis. ASU 2023-07 is effective for the Company for annual periods beginning after January 1, 2024
and interim periods beginning after January 1, 2025. The Company is currently evaluating the impact ASU 2023-07 will have on its financial statement disclosures.
In December 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (ASU 2023-09), which requires expanded disclosure of the
Company’s income rate reconciliation and income taxes paid. ASU 2023-09 is effective for the Company for annual periods beginning after January 1, 2025. The Company is currently evaluating the impact ASU 2023-09 will have on its financial
statement disclosures.
In March 2024, the Securities and Exchange Commission (SEC) adopted the final rules that will require certain climate-related information in registration statements
and annual reports. In April 2024, the SEC voluntarily stayed the new rules as a result of pending legal challenges. The new rules include a requirement to disclose material climate-related risks, descriptions of board oversight and risk
management activities, the material impacts of these risks on a registrants' strategy, business model and outlook, and any material climate-related targets or goals, as well as material effects of severe weather events and other natural
conditions and greenhouse gas emissions. Prior to the stay in the new rules, they would have been effective for annual periods beginning January 1, 2025, except for the greenhouse gas emissions disclosure which would have been effective for
annual periods beginning January 1, 2026. The Company is currently evaluating the impact of these rules on its disclosures.
Note 2 ‑ Real estate inventory and capitalized interest:
A summary of real estate inventory is as follows as of March 31, 2024 and December 31, 2023 (in thousands):
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Lots held for construction
|
$
|
|
$
|
|
||||
|
Homes under construction, completed homes and model homes
|
|
|
||||||
|
Total real estate inventory
|
$
|
|
$
|
|
||||
The Company capitalizes into real estate inventory interest costs incurred on homes under construction during the construction period until
substantial completion. The Company does not capitalize interest on homes where construction has been suspended.
A summary of capitalized interest is as follows (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Capitalized interest, beginning of period
|
$
|
|
$
|
|
||||
|
Interest incurred
|
|
|
||||||
|
Interest expensed
|
(
|
)
|
(
|
)
|
||||
|
Interest charged to cost of home closings
|
(
|
)
|
(
|
)
|
||||
|
Capitalized interest, end of period
|
$
|
|
$
|
|
||||
Note 3 ‑ Property and equipment:
Property and equipment consists of the following as of March 31, 2024 and December 31, 2023 (in thousands):
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Automobiles
|
$
|
|
$
|
|
||||
|
Airplanes
|
|
|
||||||
|
Furniture and fixtures
|
|
|
||||||
|
Computer equipment
|
|
|
||||||
|
|
|
|||||||
|
Less: Accumulated depreciation and amortization
|
(
|
)
|
(
|
)
|
||||
|
Net property and equipment
|
$
|
|
$
|
|
||||
Depreciation expense was $0.3
million and $0.2 million for the three months ended March 31, 2024 and 2023, respectively.
Note 4 – Notes payable:
As of March 31, 2024, the Company has a $250.0
million unsecured revolving credit facility that was entered into concurrently with the IPO (the Amended Credit Facility), which replaced the previous $175.0
million unsecured revolving credit facility. The Amended Credit Facility matures in , except that the Company may request
a one-year extension of such maturity date. The Amended Credit Facility also includes a $100.0 million accordion feature, subject to additional commitments, and provides that up to $20.0 million may be used for letters of credit.
The borrowings and letters of credit outstanding under the Amended Credit Facility may not exceed the borrowing base as defined in the Amended
Credit Facility. The borrowing base primarily consists of a percentage of commercial land, land held for development, lots under development and finished lots held by the Company.
Borrowings under the Amended Credit Facility bear interest, at the borrower’s option, at either a base rate or Secured Overnight Financing Rate
(which may be a daily simple rate or based on 1-, 3- or 6-month interest periods, in each case at the borrower’s option), plus an applicable margin. The applicable margin ranges from 2.35 % to 3.00 % based on the Company’s leverage ratio as determined in
accordance with a pricing grid defined in the Amended Credit Facility. Interest is payable in arrears on the last business day of each month or at the end of each 1, 3 or 6month interest period, as applicable. As of March 31, 2024, the interest
rate on outstanding borrowings under the Amended Credit Facility was 7.76 %. Borrowings under the previous credit facility bore
interest at the Prime Rate, as defined, plus an applicable margin ranging from minus (25 ) basis points to 20 basis points based on the Company’s leverage ratio as determined in accordance with a pricing grid. As of December 31, 2023, the interest rate on
outstanding borrowings was 8.25 %.
The Amended Credit Facility contains certain financial covenants, including requirements to maintain (i) a minimum tangible net worth equal to
the sum of (a) $130.0 million, (b) 32.5 %
of pre‑tax income earned in any fiscal quarter after June 30, 2023, (c) 75 % of the equity proceeds of Smith Douglas Homes Corp. from
the IPO and (d) 50 % of any new equity proceeds of Smith Douglas Homes Corp. and its subsidiaries after the IPO, (ii) a maximum
leverage ratio of 60 %, (iii) a minimum ratio of EBITDA to interest incurred of 2.00 to 1.0, and (iv) a minimum liquidity requirement of $15.0 million. The
Amended Credit Facility also contains various covenants that, among other restrictions, limit the ability of Smith Douglas Homes LLC and the other borrowers to incur additional debt and to make certain investments and distributions. Additionally,
the Amended Credit Facility contains certain covenants that restricts certain activities of Smith Douglas Homes Corp. The Amended Credit Facility also contains customary events of default relating to, among other things, failure to make payments,
breach of covenants and breach of representations. If an event of default occurs and is continuing, the borrowers may be required to immediately repay all amounts outstanding under the Amended Credit Facility.
As of March 31, 2024, there were no
outstanding borrowings under the Amended Credit Facility. As of December 31, 2023, outstanding borrowings under the previous credit facility totaled $71.0
million. As of March 31, 2024 and December 31, 2023, there were no 118.5 million as of March 31, 2024.
On July 31, 2023, the Company entered into a three-year
seller note payable of $5.0 million as part of the consideration for the acquisition of Devon Street Homes, L.P., which bears interest
at 8 % per annum. The seller note is payable in quarterly installments of principal and accrued interest beginning September 30, 2023 through maturity on September 30, 2026 . The seller is currently employed as the division president of the Houston division.
The Company also has loans payable to banks collateralized by vehicles purchased from the proceeds of the loans with an outstanding balance of
$7,000 and $8,000 as of
March 31, 2024 and December 31, 2023, respectively, which are included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
Future maturities of notes payable to third parties, including borrowings under the Amended Credit Facility, are as follows as of March 31,
2024 (in thousands):
|
Year ending December 31,
|
||||
|
2024 (1)
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
$
|
|
|||
|
(1)
|
|
Note 5 ‑ Accrued expenses and other liabilities:
Accrued expenses and other liabilities consist of the following (in thousands):
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Payroll and related liabilities
|
$
|
|
$
|
|
||||
|
Accrued incentive compensation
|
|
|
||||||
|
Warranty reserves
|
|
|
||||||
|
Lease liabilities
|
|
|
||||||
|
Due to related parties and notes payable – related party
|
|
|
||||||
|
Accruals related to real estate development and other liabilities
|
|
|
||||||
|
Contingent consideration
|
|
|
||||||
|
Total accrued expenses and other liabilities
|
$
|
|
$
|
|
||||
Note 6 ‑ Warranty reserves:
A summary of the activity in the Company’s warranty liability account is as follows (in thousands):
|
Three Months Ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Balance, beginning of period
|
$
|
|
$
|
|
||||
|
Additions to reserves from new home closings
|
|
|
||||||
|
Warranty claims
|
(
|
)
|
(
|
)
|
||||
|
Adjustments to pre‑existing reserves
|
(
|
)
|
(
|
)
|
||||
|
Balance, end of period
|
$
|
|
$
|
|
||||
Note 7 ‑ Accrued incentive compensation:
The Company has incentive compensation agreements in place with certain employees, whereby a portion of the employee’s annual bonus is paid
over a three-year period. The long-term incentive compensation vests annually over the three-year period and is forfeited if the employee leaves without good reason or is terminated for cause. All long-term incentive compensation vests immediately upon a
change in control. The Company recognized $0.7 million and $0.4 million of deferred compensation expense related to these incentive compensation agreements during the three months ended March 31, 2024 and 2023, respectively, which is included
within selling, general and administrative costs in the accompanying condensed consolidated statements of income. As of March 31, 2024 and December 31, 2023, the Company had accumulated a total liability of approximately $1.7 million and $1.8 million,
respectively, related to the incentive compensation agreements, which is included within accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.
Note 8 ‑ Leases:
The Company leases certain office space and equipment for use in its operations. The Company assesses each of these contracts to determine
whether the arrangement contains a lease as defined by ASC Topic 842. In order to meet the definition of a lease under ASC Topic 842, the contractual arrangement must convey to the Company the right to control the use of an identifiable asset
for a period of time in exchange for consideration. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Some leases contain renewal options and, in accordance with ASC Topic 842, the lease term
includes those renewals only to the extent that they are reasonably certain to be exercised.
In accordance with ASC Topic 842, the lease liability is equal to the present value of the remaining lease payments while the ROU asset is
based on the lease liability, subject to adjustment, such as for lease incentives. The Company’s leases do not provide a readily determinable implicit interest rate and, therefore, the Company must estimate its incremental borrowing rate. In
determining an appropriate incremental borrowing rate, the Company considers the lease period, market interest rates, current interest rates on the Company’s notes payable and the effects of collateralization.
The Company’s lease population as of March 31, 2024 and December 31, 2023 is comprised of operating leases where the Company is the lessee,
and these leases are primarily for office space for corporate and division offices, as well as certain equipment leases.
Lease cost included in the accompanying condensed consolidated statements of income as a component of selling, general and administrative
costs is presented in the table below (in thousands).
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Operating leases costs
|
$
|
|
$
|
|
||||
|
Variable lease costs - operating
|
$
|
|
$
|
|
||||
ROU assets are included within other assets and lease liabilities are included within accrued expenses and other liabilities in the
accompanying condensed consolidated balance sheets.
The following table presents additional information about the Company’s leases (dollars in thousands):
|
March 31,
2024 |
December 31,
2023
|
|||||||
|
|
$
|
|
$
|
|
||||
|
|
$
|
|
$
|
|
||||
|
Weighted average remaining lease term (in months)
|
|
|
||||||
|
Weighted average discount rate
|
|
%
|
|
%
|
||||
As of March 31, 2024, the future minimum payments required under operating leases are as follows (in thousands):
|
Year ending December 31,
|
||||
|
2024 (1)
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Total lease payments
|
|
|||
|
Less: imputed interest
|
(
|
)
|
||
|
|
$
|
|
||
|
(1)
|
Remaining payments are for the nine months ending December 31, 2024.
|
Note 9 ‑ Investments in unconsolidated entities:
The Company has non‑controlling equity interests in various entities. The Company uses the equity method of accounting for these
investments. The Company’s proportionate share of the entities’ income during the three months ended March 31, 2024 and 2023 was approximately $0.2 0.2 million and $0.5 million to the Company during the three months ended March 31, 2024 and 2023, respectively, resulting in a total equity investment of approximately $0.1
The Company does not consolidate the investments because the Company does not have a controlling interest in them.
Note 10 ‑ Variable interest entities:
The Company enters into lot option agreements to procure finished lots for the construction of homes in the future. Pursuant to these
option agreements, the Company generally provides a deposit to the seller as consideration for the right to purchase lots at different times in the future at predetermined prices. Such contracts enable the Company to defer acquiring portions
of properties owned by third parties or unconsolidated entities until the Company has determined whether and when to exercise the option, which may serve to reduce the Company’s financial risks associated with long‑term land holdings.
Based on the provisions of the relevant accounting guidance, the Company has concluded that when it enters into an option or purchase
agreement to acquire lots from an entity, a variable interest entity (VIE) may be created. The Company evaluates all option and purchase agreements and amendments for land to determine if the related entity is a VIE. As required by ASC Topic
810, Consolidation, the Company assesses whether it is the primary beneficiary for each VIE.
In order to determine if the Company is the primary beneficiary, the Company must first assess whether it has the ability to control the
activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing
decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with the Company; and the ability to change or amend the existing option contract with the VIE.
If the Company does not control such activities, the Company is not considered the primary beneficiary of the VIE. If the Company has the
ability to control such activities, the Company will continue its analysis by determining if the Company is also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if
the Company will benefit from a potentially significant amount of the VIE’s expected gains. As of March 31, 2024 and December 31, 2023, the Company was not identified as the primary beneficiary of any VIEs associated with option and purchase
agreements. Therefore, no such VIEs required consolidation under ASC Topic 810.
In all cases, creditors of the entities with which the Company has option agreements have no recourse against the Company and the maximum
exposure to loss in option agreements is limited to the Company’s option deposits and any capitalized pre‑acquisition costs. In certain instances where the Company has entered into option agreements to purchase finished lots from a land
banker, the Company may also enter into an agreement to complete the development of the lots on behalf of the land banker at a fixed cost. The Company may be at risk for items over budget related to the development of the property under
option. Any unpaid amounts under these development agreements are recorded as development reimbursement receivables from land bankers and are included in other assets (see Note 1 for information on other assets).
As of March 31, 2024, the Company had deposits of $64.8 million related to land option agreements with an aggregate remaining purchase price of $742.6 million. As of December 31, 2023, the Company had deposits of $57.1
million related to land option agreements with an aggregate remaining purchase price of $652.1 million.
Deposits on option contracts are included in deposits on real estate under option or contract, and investments in option contracts with
unconsolidated entities are included in investments in unconsolidated entities within other assets in the accompanying consolidated balance sheets.
For lot option contracts where the lot seller entity is not required to be consolidated under the variable interest model, the Company
considers whether such contracts should be accounted for as financing arrangements. Lot option contracts that may be considered financing arrangements include those entered into with third‑party land banks or developers in conjunction with
such third parties acquiring a specific land parcel(s) on the Company’s behalf, at the Company’s direction, and those with other landowners where the Company or its designee makes improvements to the optioned land parcel(s) during the
applicable option period. For these lot option contracts, the Company records the remaining purchase price of the associated land parcel(s) in inventory in its consolidated balance sheets with a corresponding financing obligation if the
Company determines that it is effectively compelled to exercise the option to purchase the land parcel(s). In making this determination with respect to a land option contracts, the Company considers the non‑refundable deposit(s), any
capitalized pre‑acquisition costs and additional costs associated with abandoning the contract.
As a result of such evaluations of lot option contracts, no lot option contracts were determined to be financing arrangements for which the
remaining purchase price should be recorded as a financing obligation in the accompanying consolidated balance sheets.
Note 11 - Stockholders’/ members’ equity:
The following table summarizes the capitalization and voting rights of the Company’s classes of stock as of March 31, 2024:
|
Authorized
|
Issued & Outstanding
|
Votes per
share
|
Economic
Rights
|
||||
|
Preferred stock
|
|
|
|||||
|
Common stock:
|
|||||||
|
Class A
|
|
|
|
|
|||
|
Class B
|
|
|
|
|
| (1) |
|
The following table summarizes Class A common stock reserved for issuances as of March 31, 2024:
|
Conversion of LLC Interests held by Continuing Equity Owners
|
|
|||
|
RSUs
|
|
|||
| Total |
|
The Company’s board of directors is authorized to direct the Company to issue shares of preferred stock in one or more series and the
discretion to determine the number and designation of such series and the powers, rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences,
of each series of preferred stock. Through March 31, 2024, no series of preferred stock have been issued.
Holders of shares of Class A common stock are entitled to receive dividends when and if declared by the board of directors out of funds legally available
therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon dissolution or liquidation, after
payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A common stock will be entitled to receive pro rata the remaining
assets available for distribution. Holders of shares of Class A common stock do not have preemptive, subscription, redemption, or conversion rights. There are no redemption or sinking fund provisions applicable to the Class A common stock.
Except in certain limited circumstances, holders of Class B common stock do not have any right to receive dividends or to
receive a distribution upon dissolution or liquidation. Additionally, holders of shares of Class B common stock do not have preemptive, subscription or redemption rights. There are no redemption or sinking fund provisions applicable to the
Class B common stock. Any amendment of the Company’s amended and restated certificate of incorporation that gives holders of Class B common stock (1) any rights to receive dividends or any other kind of distribution, (2) any right to
convert into or be exchanged for shares of Class A common stock, or (3) any other economic rights (except for payments in cash in lieu of receipt of fractional stock) will require, in addition to any stockholder approval required by
applicable law, the affirmative vote of holders of a majority of the voting power of the outstanding shares of Class A common stock
voting separately as a class. The Company must, at all times, maintain (i) a one -to-one ratio between the number of shares of
Class A common stock issued by Smith Douglas Homes Corp. and the number of LLC Interests owned by Smith Douglas Homes Corp., and (ii) maintain a one -to-one
ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and the number of LLC Interests owned by them.
Shares of Class B common stock will be issued in the future only to the extent necessary to maintain a one -to-one ratio between the number of LLC Interests held by the Continuing Equity Owners and the number of shares of Class B common stock issued to
the Continuing Equity Owners. Shares of Class B common stock are transferable only together with an equal number of LLC Interests. Only permitted transferees of LLC Interests held by the Continuing Equity Owners will be permitted transferees of
Class B common stock. Shares of Class B common stock automatically transferred to Smith Douglas Homes Corp. upon the redemption or exchange of their LLC Interests pursuant to the terms of the Smith Douglas LLC Agreement will be canceled and may
not be reissued.
As of March 31, 2024, Smith Douglas Homes Corp. holds a 17.3 % economic interest in Smith Douglas Holdings LLC through its ownership of 8,846,154
LLC Interests but consolidates Smith Douglas Holdings LLC as sole managing member. The remaining 42,435,897 LLC Interests
representing an 82.7 % interest are held by the Continuing Equity Owners and presented in the condensed consolidated financial
statements as non-controlling interests.
The LLC Interests held by Continuing Equity Owners include a redemption right which may be settled by the Company, at the Company’s election,
through the (1) issuance of a new share of Class A Common Stock for each LLC Interest redeemed or (2) settled by cash proceeds received from a qualifying offering of Class A Common Stock. The LLC Interests are not classified as temporary equity
as the cash settlement is limited to the proceeds from a new offering of Class A Common Stock which is equity-classified.
Distributions to Members Related to Their Income Tax Liabilities
As a limited liability company treated as a partnership for income tax purposes, Smith Douglas Holdings LLC does not incur
significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. Under the LLC Agreement, Smith Douglas Holdings LLC is required to distribute cash, to the extent that Smith Douglas Holdings LLC
has cash available, on a pro rata basis to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Smith Douglas Holdings LLC taxable earnings. Smith Douglas Holdings LLC makes
such tax distributions to its members quarterly, based on an estimated tax rate and projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. Before the IPO, Smith Douglas Holdings
LLC made tax distributions to the Continuing Equity Owners totaling approximately $14.5
million and $19.5 million for the three months ended March 31, 2024 and 2023, respectively.
Subsequent to March 31, 2024, Smith Douglas Holdings LLC made tax distributions to the Continuing Equity Owners totaling approximately $6.4
million.
Redemption of Class C & Class D Units
On January 16, 2024, after the IPO, Smith Douglas Holdings LLC redeemed all of its Class C and Class D Units at an aggregate redemption price
of $2.6 million.
Note 12 - Share-based payments:
In connection with the IPO, the stockholders approved the 2024 Incentive Award Plan (the 2024 Plan), which became effective on January 10,
2024. The 2024 Plan generally is administered by the board of directors of with respect to awards to non-employee directors and by the compensation committee with respect to other participants and authorizes the Company to grant incentive
stock-based awards.
Under the 2024 Plan, 2,051,282
shares of Class A common stock were initially reserved for issuance, which shares may be granted pursuant to a variety of equity-based compensation awards, including stock options, stock appreciation rights, RSUs, and other equity-based
awards. The number of shares initially reserved for issuance pursuant to awards under the 2024 Plan includes an annual increase on the first day of each calendar year beginning on January 1, 2025 and ending on January 1, 2034, equal to (a) a
number of shares of Class A common stock equal to 1 % of the aggregate number of shares of Class A and Class B common stock
outstanding on the last day of the immediately preceding calendar year or (b) such smaller number of shares of Class A common stock as determined by the board of directors. No more than 10,000,000 shares of Class A common stock may be issued upon the exercise of incentive stock options. As of March 31, 2024, 1,610,555 shares of Class A common stock are available for future grant under the 2024 Plan.
In January 2024, the Company granted an aggregate of 440,727 RSUs to certain of the Company’s executives, directors, and employees under the 2024 Plan with an aggregate grant date fair value of $9.3 million. The awards vest in full upon the one-year
anniversary of the closing date of the IPO, subject to the employee’s continued employment or the director’s continued service, with the exception of one executive’s award that will vest in six equal installments on each
of the first anniversaries of the closing date of the IPO, subject to the employee’s continued employment through the
applicable vesting date. Additionally, vesting is subject to certain change in control and qualifying termination provisions as provided in the award agreements.
As of March 31, 2024, all of the RSUs are outstanding and remain unvested. The fair value of the RSUs of $21.00 per unit was based on the fair value of a share of Class A common stock at the time of the IPO. Total compensation expense for RSUs was
approximately $0.9 million for the period from January 11, 2024 to March 31, 2024, and is included in selling, general and
administrative costs in the accompanying condensed consolidated statement of income for the three months ended March 31, 2024.
The unamortized compensation cost related to RSUs of approximately $8.4 million as of March 31, 2024 is expected to be recognized over a weighted-average period of approximately 2.2 years.
Note 13 ‑ Employee benefit plan:
The Company has a defined contribution 401(k) plan, which is offered to all employees who have attained the age of 21 and meet the minimum
service requirements as defined in the plan document. Employer contributions under the plan are at management’s discretion. During the three months ended March 31, 2024 and 2023, employer contributions to the plan totaled approximately $0.4 million and $0.3 million,
respectively, and are included within selling, general and administrative costs in the accompanying condensed consolidated statements of income. Participants are immediately vested in all contributions and earnings thereon.
Note 14 - Income taxes and tax receivable agreement:
Smith Douglas Homes Corp. is taxed as a subchapter C corporation and is subject to federal and state income taxes. Smith Douglas Homes
Corp.’s sole material asset is its ownership interest in Smith Douglas Holdings LLC, which is a limited liability company that is taxed as a partnership for U.S. federal and certain state and local income tax purposes. Smith Douglas Holdings
LLC’s net taxable income and related tax credits, if any, are passed through to its members and included in the members’ tax returns. The income tax burden on the earnings taxed to the non-controlling interest holders is not reported by the
Company in its condensed consolidated financial statements under U.S. GAAP.
The estimated annual effective tax rate for the year ending December 31, 2024 is 25.0 %. The difference between the estimated annual effective income tax rate and the U.S. federal statutory rate is primarily attributable to income allocable to non-controlling
interests, which is not taxable, and state income taxes.
The Company’s income tax provision was $0.9
million for the period from January 11, 2024 to March 31, 2024. As the IPO occurred during the quarter ended March 31, 2024, and the Company had no
business transactions or activities prior to the IPO, no amounts related to the provision for income taxes were incurred for the
period from January 1, 2024 to January 10, 2024.
On January 11, 2024, the Company recorded a deferred tax asset of $12.2 million resulting from the step-up in basis allowed under Section 743(b) and 197 of the Internal Revenue Code related to the purchase of 2,436 LLC Interests from the Continuing Equity Owners discussed in Note 1, Description of business and summary of significant accounting
policies, which is expected to be amortized over the useful lives of the underlying assets. The Company also recorded a deferred tax asset of $17.6
million resulting from the outside basis difference related to its investment in Smith Douglas Holdings LLC by applying the look-through method to record the Company's proportionate share of inside basis differences within Smith Douglas
Holdings LLC. The Company recognizes deferred tax assets to the extent it believes these assets are more likely than not to be realized. In making such a
determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of
operations. After considering all those factors, management has recorded a valuation allowance of $16.7 million for certain
deferred tax assets the Company has determined are not more likely than not to be realized. The initial deferred tax asset of $17.6
million for the investment in Smith Douglas Holdings LLC and the related valuation allowance of $16.7 million were recorded
against additional paid-in capital and included within increase in deferred tax asset from IPO and related transactions in the condensed consolidated statements of stockholders’/members’ equity.
As each of the Continuing Equity Owners elects to convert their LLC Interests into Class A common stock, Smith Douglas Homes Corp. will
succeed to their aggregate historical tax basis which will create a net tax benefit to the Company. These tax benefits are expected to be amortized over 15.0 years pursuant to Sections 743(b) and 197 of the Code. The Company will only recognize a deferred tax asset for financial reporting purposes when it is more likely than not that
the tax benefit will be realized.
In connection with the IPO and related transactions, the Company entered into a TRA with Smith Douglas Holdings LLC and the Continuing
Equity Owners that will provide for the payment by Smith Douglas Homes Corp. to the Continuing Equity Owners of 85 % of the amount
of tax benefits, if any, that Smith Douglas Homes Corp. realizes (or in some circumstances is deemed to realize) related to the tax basis adjustments as such savings are realized.
The purchase of 2,436
LLC Interests from the Continuing Equity Owners triggered a tax basis increase subject to the provisions of the TRA. On January 11, 2024, the date of the purchase, the Company recognized (i) a deferred tax asset in the amount of $12.2 million, (ii) a corresponding estimated liability of $10.4 million to the Continuing Equity Owners representing 85 % of the
projected tax benefits, and (iii) $1.8 million of additional paid-in capital.
Note 15 ‑ Commitments and contingencies:
The Company is subject to certain contingent liabilities resulting from litigation, claims, and other commitments which arise in the
ordinary course of business. Management and legal counsel believe that the probable resolution of such contingencies will not materially affect the financial position, results of operations, or cash flows of the Company. In the normal course
of business, the Company posts letters of credit and performance and other surety bonds related to certain development obligations with local municipalities, government agencies and developers. As of March 31, 2024 and December 31, 2023,
performance and surety bonds totaled $32.1 million and $26.1 million, respectively. As of March 31, 2024 and December 31, 2023, there were no
Note 16 ‑ Transactions with related parties:
The Company rents office space under a lease with JBB Cherokee Holdings LLC, an entity affiliated by common ownership. Related party lease cost included in the accompanying consolidated statements of income as a component of selling, general and administrative costs is presented in the
table below (in thousands).
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Operating lease costs (related party)
|
$
|
|
$
|
|
||||
|
Variable lease costs ‑ operating (related party)
|
$
|
|
$
|
|
||||
As of March 31, 2024, the future minimum payments required under operating leases with related parties are as follows (in thousands):
|
Year ending December 31,
|
||||
|
2024 (1)
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Total lease payments
|
|
|||
|
Less: imputed interest
|
(
|
)
|
||
|
Total lease liability (related party)
|
$
|
|
||
|
(1)
|
Remaining payments are for the nine months ending December 31, 2024.
|
Payments under the office lease agreement, along with costs associated with the office space, totaled approximately $0.1
During each of the three months ended March 31, 2024 and 2023, the Company incurred fees of $0.4 million and $6,000 , respectively, in the aggregate from
certain entities affiliated by common ownership for use of facilities related to business development and vendor relations, which is included in selling, general and administrative costs in the accompanying consolidated statements of income.
The Company paid fees of $3,000 and $6,000
for use of these facilities during each of the three months ended March 31, 2024 and 2023, respectively.
While the Company typically enters into lot option agreements whereby a deposit is provided to the seller, the Company has in the past, in
lieu of providing a deposit, invested a minority interest in certain of the land banking entities with which it contracts. During the three months ended March 31, 2023, the Company purchased 26 lots totaling approximately $2.2 million under lot
option agreements with unconsolidated land bank entities in which the Company had a non‑controlling ownership interest. There was no
such activity during the three months ended March 31, 2024. The Company has identified these entities as VIEs; however, the Company has not been identified as the primary beneficiary of the VIEs and the entities are not consolidated in the
accompanying condensed consolidated financial statements (see Note 10 for information related to VIEs).
The Company has entered into lot option transactions with a former member of the Company’s Board of Managers. During the three months ended
March 31, 2023, the Company sold 5 finished lots at cost for approximately $0.3 million to the then member of the Company’s Board of Managers. During the three months ended March 31, 2023, the Company purchased 82 lots totaling $4.6 million
related to these lot option agreements.
The Company charters aircraft services from companies that are controlled by a related entity of the Company’s managing member. Expenses
incurred and paid to these companies under a dry lease agreement for the use of the aircraft for business travel totaled approximately $0.1
Historically, since August 2016, one
of the members of Smith Douglas Holdings LLC’s Board of Managers was party to a consulting agreement with Smith Douglas Holdings LLC pursuant to which he provided services to Smith Douglas Holdings LLC in exchange for (i) an annual fee equal
to approximately $0.6 million plus (ii) eligibility to earn an annual bonus, subject to the terms and conditions therein. During
each of the three months ended March 31, 2024 and 2023, the member of Smith Douglas Holdings LLC’s Board of Managers earned fees under the consulting agreement of approximately $0.1 0.7
million, which is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. There was no
such balance outstanding as of March 31, 2024.
The Company had two
uncollateralized notes payable bearing interest at 2.12 % and 2.56 %, respectively, and other payables to certain related parties for the purchase of airplanes totaling approximately $0.9 million as of December 31, 2023, which are included in accrued expenses and other liabilities in the accompanying 2023 condensed consolidated balance sheet. The notes
payable were repaid during the three months ended March 31, 2024.
The Company has related party receivables totaling approximately $0.1
As of December 31, 2023, the Company had a balance due to related parties of $11,000 for various expenses paid by the related parties on behalf of the Company, which is included in accrued expenses and other liabilities in the accompanying 2023
condensed consolidated balance sheet. There was no such balance outstanding as of March 31, 2024.
Note 17 ‑ Segment information:
The Company operates one principal homebuilding business that is organized, managed and reported by geographic division. Management of the
six geographic divisions report to the Company’s chief operating decision maker (CODM), which consists of the Chief Executive Officer and Chief Financial Officer of the Company. The CODM reviews the results of operations, including, among
other things, total revenue and net income to assess profitability and allocate resources. Accordingly, the Company has presented its operations for the following six reportable segments: Alabama, Atlanta, Charlotte, Houston, Nashville, and Raleigh. Each reportable segment follows the accounting policies described in Note 1.
The following tables summarize financial information by segment (in thousands):
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Home closing revenue:
|
||||||||
|
Alabama
|
$
|
|
$
|
|
||||
|
Atlanta
|
|
|
||||||
|
Charlotte
|
|
|
||||||
|
Houston
|
|
|
||||||
|
Nashville
|
|
|
||||||
|
Raleigh
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
|
Three months ended March 31,
|
||||||||
|
2024
|
2023
|
|||||||
|
Net income (loss):
|
||||||||
|
Alabama
|
$
|
|
$
|
|
||||
|
Atlanta
|
|
|
||||||
|
Charlotte
|
|
|
||||||
|
Houston
|
|
|
||||||
|
Nashville
|
|
|
||||||
|
Raleigh
|
|
|
||||||
|
Segment total
|
|
|
||||||
|
Corporate (1)
|
(
|
)
|
(
|
)
|
||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
|
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Assets:
|
||||||||
|
Alabama
|
$
|
|
$
|
|
||||
|
Atlanta
|
|
|
||||||
|
Charlotte
|
|
|
||||||
|
Houston (1)
|
|
|
||||||
|
Nashville
|
|
|
||||||
|
Raleigh
|
|
|
||||||
|
Segment total
|
|
|
||||||
|
Corporate (2)
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
| (1) |
|
| (2) |
|
Note 18 - Earnings per share:
Basic earnings per share is computed by dividing net income attributable to Smith Douglas Homes Corp. by the weighted-average number of
shares of Class A common stock outstanding during the period. Diluted earnings per share is computed by adjusting the net income available to Smith Douglas Homes Corp. and the weighted average shares outstanding to give effect to
potentially dilutive securities. Shares of Class B common stock are not entitled to receive any distributions or dividends and are therefore excluded from this presentation since they are not participating securities.
All earnings prior to January 11, 2024, the date of the IPO, were entirely allocable to the non-controlling interests and, as a result,
earnings per share information is not applicable for reporting periods prior to this date. Consequently, only earnings per share for net income for periods subsequent to January 10, 2024 are presented.
Basic and diluted earnings per share of common stock for the period from January 11, 2024 to March 31, 2024 have been computed as follows
(in thousands, except share and per share amounts):
|
For the period from
January 11, 2024 to
March 31, 2024
|
||||
|
Numerator:
|
||||
|
Net income attributable to Smith Douglas Homes Corp, Basic
|
$
|
|
||
|
Add: Net income impact from assumed redemption of all LLC Interests to common stock
|
|
|||
|
Less: Income tax expense on net income attributable to NCI at
|
(
|
)
|
||
|
Net income attributable to Smith Douglas Homes Corp., after adjustment for assumed redemption, Diluted
|
$
|
|
||
|
Denominator:
|
||||
|
Weighted average shares of common stock outstanding, Basic
|
|
|||
|
Dilutive effects of:
|
||||
|
LLC Interests that are exchangeable for common stock
|
|
|||
|
Unvested RSUs
|
|
|||
|
Weighted average shares of common stock outstanding, Diluted
|
|
|||
|
Basic earnings per share
|
$
|
|
||
|
Diluted earnings per share
|
$
|
|
||
Net income attributable to the non-controlling interests added back to net income in the fully dilutive computation has been adjusted for
income taxes which would have been expensed had the income been recognized by Smith Douglas Homes Corp., a taxable entity. The weighted average common shares outstanding in the diluted computation per share assumes all outstanding LLC
Interests are redeemed and the Company elects to issue Class A shares of common stock upon redemption rather than cash-settle.
For the period from January 11, 2024 to March 31, 2024, the dilutive impact of LLC Interests assumed to be redeemed in exchange for the
issuance of Class A common stock was included in the computation of diluted earnings per share under the if-converted method. The dilutive impact of unvested RSUs was included using the treasury stock method.
Note 19 ‑ Acquisition of Devon Street Homes, L.P.:
On July 31, 2023 (the Acquisition Date), the Company acquired substantially all of the assets of Devon Street Homes, L.P. (Devon Street).
Devon Street is a builder of single-family homes in Houston, Texas, and targets entry-level and first-time homebuyers. The acquisition of Devon Street allows the Company to expand its operations into the Houston, Texas market area. The
Company funded the acquisition, with an estimated purchase price of approximately $83.9 million, primarily from cash on hand,
availability under the Credit Facility and a three-year promissory note in the principal amount of $5.0 million payable to the seller. In addition to the purchase price, the agreement also contemplates two earnout payments that will be paid to the seller upon the achievement of certain gross margin targets and contracting for future lots. The preliminary estimate of
goodwill arising from the acquisition primarily relates to acquired workforce, synergies, and economies of scale expected from combining the operations of Devon Street with the Company. Goodwill recognized is expected to be deductible for
income tax purposes. The Company recognized transaction expense of approximately $0.8 million related to the acquisition of Devon
Street during the year ended December 31, 2023.
The following table summarizes the estimated fair value of each class of consideration transferred or expected to be transferred in
relation to the Devon Street acquisition as of the Acquisition Date (in thousands):
|
Cash consideration (1)
|
$
|
|
||
|
Seller note payable
|
|
|||
|
Contingent consideration (2)
|
|
|||
|
Total estimated consideration to be paid
|
$
|
|
| (1) |
|
| (2) |
|
The Company accounted for the Devon Street acquisition as a business combination, which requires assets acquired and liabilities assumed
to be recorded at fair value as of the Acquisition Date. The preliminary fair values of the assets acquired and liabilities assumed, which are presented in the table below, and the related preliminary acquisition accounting, are based on
management’s estimates and assumptions, as well as information compiled by management, including the books and records of Devon Street, as of the date these financial statements were available to be issued. The Company believes that the
information gathered to date provides a reasonable basis for estimating the preliminary fair values of assets acquired and liabilities assumed. The Company’s estimates and assumptions are subject to change during the measurement period, not
to exceed one year from the Acquisition Date. Any potential adjustments made could be material in relation to the values
presented in the table below.
The following table summarizes the allocation of the preliminary purchase price as of the Acquisition Date (in thousands):
|
Real estate inventory
|
$
|
|
||
|
Deposits on real estate under option or contracts
|
|
|||
|
Property and equipment, net
|
|
|||
|
Goodwill
|
|
|||
|
Other assets
|
|
|||
|
Accounts payable
|
(
|
)
|
||
|
Customer deposits
|
(
|
)
|
||
|
Accrued expenses and other liabilities
|
(
|
)
|
||
|
Fair value of consideration transferred
|
$
|
|
As discussed above, the Company’s acquisition accounting for the Devon Street acquisition is preliminary. The primary areas of the
acquisition accounting that are not yet finalized include, but are not limited to, the following: (1) finalizing the review and valuation of the acquired tangible and intangible assets and liabilities (including the models, key assumptions,
inputs, and estimates) and (2) finalizing the identification of the tangible and intangible assets acquired and liabilities assumed and identified. The Company will continue to evaluate these items until they are satisfactorily resolved and
adjust the acquisition accounting accordingly within the allowable measurement period (not to exceed one year from the date of
acquisition), as defined by ASC 805. During the fourth quarter of 2023, certain measurement period adjustments were made to the total estimated consideration to be paid and the allocation of the purchase price. These adjustments resulted in
an increase in goodwill of $9.3 million.
The following presents the Company’s unaudited proforma consolidated home closing revenue and net income for the three months ended March
31, 2023 as if the Devon Street acquisition had occurred on January 1, 2022. This unaudited pro forma consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results
that would have occurred if the acquisition of Devon Street had been completed on January 1, 2022, nor is it indicative of the Company’s future results. As a result, actual results could differ materially from the unaudited pro forma
consolidated financial information presented below.
|
Pro Forma for the Three Months
Ended March 31, 2023
|
||||
|
(In thousands)
|
||||
|
Home closing revenue
|
$
|
|
||
|
Net income
|
$
|
|
||
The unaudited proforma consolidated financial information was prepared using the acquisition method of accounting and was based on the
historical financial information of the Company and Devon Street. In order to reflect the occurrence of the acquisition on January 1, 2022, the unaudited proforma financial information includes adjustments to reflect the following: (i) the
additional interest expense associated with new borrowings to finance the acquisition; (ii) incremental amortization expense based on the current preliminary fair values of inventory step-up; and (iii) the change in fair value for
contingent consideration.
Note 20 ‑ Fair value of financial instruments:
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring
fair value and disclosing fair value measurements. ASC Topic 820 establishes a three‑level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value. The
valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.
| • |
Level 1 ‑ Valuation is based on quoted prices in active markets for identical assets and liabilities;
|
| • |
Level 2 ‑ Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by
model‑based techniques in which all significant inputs are observable in the market;
|
| • |
Level 3 ‑ Valuation is derived from model‑based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market
participants would use to value the asset or liability.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair
value measurement. The Company’s assessment of the significance of particular inputs to those fair value measurements requires judgment and considers factors specific to each asset or liability.
The Company’s financial instruments measured or disclosed at fair value are summarized below. The summary excludes cash and cash
equivalents, receivables and accounts payable, all of which had fair values approximating their carrying values due to the liquid nature and short maturities of these instruments.
|
Fair Value (In Thousands)
|
||||||||||
|
Asset or Liability
|
Fair Value Hierarchy
|
March 31,
2024
|
December 31,
2023
|
|||||||
|
Measured at fair value on a recurring basis:
|
||||||||||
|
Contingent consideration
|
Level 3
|
$
|
|
$
|
|
|||||
|
Disclosed at fair value:
|
||||||||||
|
Borrowings under Credit Facility
|
Level 2
|
$
|
|
$
|
|
|||||
|
Seller note payable
|
Level 2
|
$
|
|
$
|
|
|||||
The carrying value of the borrowings under the Credit Facility approximates fair value due to variable rate terms that approximate market
rates.
The carrying value of the seller note payable approximates fair value because the interest rate on the note approximates market rates as
of March 31, 2024 and December 31, 2023.
The fair value of the contingent consideration related to the Devon Street acquisition as of the acquisition date was estimated using a
Monte Carlo simulation to model the likelihood of achieving the agreed‑upon gross margin target based on available information as of the acquisition date. The valuation methodology includes assumptions and judgments regarding the gross
margin discount rate, gross margin volatility, drift rate, and cost of debt, which are primarily Level 3 assumptions. The contingent consideration liability is remeasured at fair value on a quarterly basis. The change in the fair value of
the contingent consideration from the acquisition date to December 31, 2023 and March 31, 2024 of approximately $0.3 million and
$0.1 million, respectively, relates to a change in the estimated fair value of the gross margin earnout payment liability and is
included in other income, net in the accompanying condensed consolidated statement of income for the three months ended March 31, 2024.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this
analysis in conjunction with our unaudited financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, this discussion and analysis contains statements of
a forward-looking nature relating to future events or our future financial performance, based upon our current plans, expectations and beliefs involving risks and uncertainties. These statements are only predictions, and actual events or results
may differ materially. In evaluating such statements, you should carefully consider the various factors identified in the Annual Report, as updated by this Quarterly Report on Form 10-Q, which could cause actual results to differ materially from
those expressed in, or implied by, any forward-looking statements, including those set forth in Part I, Item 1A. Risk Factors of our Annual Report.
Company Overview
Prior to our IPO, we were one of the nation’s fastest growing private homebuilders by number of closings and are engaged in the design, construction, and sale of single-family homes in some of the
highest growth and most desirable markets in the Southeastern and Southern United States. We employ an efficient land-light, production focused, and conservatively leveraged business model, which we believe results in a compelling combination of
strong home closing gross margins, construction cycle times, and returns. Our communities are primarily targeted to entry-level and empty-nest homebuyers. We offer our homebuyers an attractive value proposition by providing a personalized home
buying experience at affordable price points. With the goal of becoming one of the most dominant homebuilders in the Southeastern and Southern United States, we intend to grow operations within our existing footprint and to expand into new
markets where we can most effectively implement our business strategy and maximize our profit and returns.
During the three months ended March 31, 2024, we were encouraged by the demand for new homes even as mortgage rates continued to fluctuate throughout the period. We believe demand for new homes is
being primarily driven by the continued low levels of housing inventory and homebuyers adjusting to a more normalized higher interest rate environment. As a result, our net new orders increased by 15% in the three months ended March 31, 2024
compared to the three months ended March 31, 2023. We expect the housing undersupply in the resale market and favorable demographic trends to provide a strong, long-term runway for future new home buying demand. We believe our dedication to
entry-level and empty-nest homebuyers with a focus on price points that fall below FHA guidelines, our efficient construction process, and our affordable luxury sales experience caters to the desires of today’s aspiring homeowners and is
resilient across economic cycles. We believe our focus on affordable luxury will continue to serve us well as we remain optimistic about long-term demand due to favorable homebuyer demographics. Additionally, we construct most of our homes on a
pre-sold basis, where our homebuyers choose their homes based on a select number of value-engineered floor plans and are offered flexibility on the selection of home options. Our SMART Builder enterprise resource planning system and efficient
construction process, which we call Rteam, allows this optionality for homebuyers based on just-in-time modifications. As a result of our differentiated value proposition and efficient construction cycle times, we believe we typically achieve a
high level of homebuyer satisfaction and experience low cancellation rates, which were 11% and 9% for the three months ended March 31, 2024 and 2023, respectively.
At the core of our land-light operating strategy lies the principle and discipline of primarily acquiring finished lots from a diverse pool of third-party land developers or land bankers through the
effective utilization of lot-option contracts. Our lot acquisition strategy reduces our upfront capital requirements and generally provides for “just-in-time” lot delivery, better aligning our pace of home orders and home starts. While using land
bankers and third-party developers comes at an additional cost, we believe our lot acquisition strategy reduces our operating and financial risk relative to other homebuilders that own a higher percentage of their land supply. As of March 31,
2024, we had 693 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.9% of our total controlled lot supply.
We believe the geographic markets in which we operate demonstrate strong population and employment growth trends, favorable migration patterns, and desirable lifestyle and weather conditions. Our
operations are currently organized into six geographical segments; our reportable segments include Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Raleigh, Charlotte, Nashville, Alabama (which consists of both Birmingham and
Huntsville), and Houston. Each of our markets is experiencing strong momentum in housing demand drivers relative to historic averages, and we believe there is significant opportunity to expand our presence in each of our respective markets.
We believe our dedication to entry-level and empty-nest homebuyers with a focus on price points that fall below FHA guidelines, our efficient construction process, and our affordable luxury sales
experience caters to the desires of today’s aspiring homeowners and is resilient across economic cycles. While we expect the current housing undersupply in the resale market and favorable demographic trends to provide a strong, long-term runway
for future new home buying demand, there are several factors beyond our control that could have a significant impact on our business including, but not limited to, rising inflation, future increases in interest rates, availability and cost of
land, labor and construction, availability of mortgage and land bank financing, macroeconomic trends and other factors described elsewhere in this Quarterly Report on Form 10-Q.
Recent Developments
IPO
We completed our IPO on January 16, 2024, through which we offered 8,846,154 shares of our Class A common stock at a price to the public of $21.00 per share, which includes the exercise in full by the
underwriters of their option to purchase an additional 1,153,846 shares of our Class A common stock. The gross proceeds to us from the IPO were $185.8 million, before deducting underwriting discounts and commissions, and the net proceeds to us
from the IPO were approximately $172.8 million, after deducting the underwriting discount of approximately $13.0 million.
The Transactions
The results of operations discussed in this Quarterly Report on Form 10-Q include those of Smith Douglas Holdings LLC prior to the completion of the Transactions, including the IPO. As a result, the
historical consolidated financial data may not give you an accurate indication of what our actual results would have been if the transactions described in Basis of Presentation—The Transactions had been
completed at the beginning of the periods presented or of what our future results of operations are likely to be. See Basis of Presentation—The Transactions.
Segments
Our operations are currently organized into six geographical segments. Our reportable segments include Atlanta (which includes certain Atlanta suburbs like Dalton, GA), Raleigh, Charlotte, Nashville,
Alabama (which consists of both Birmingham and Huntsville), and Houston.
Key Factors Affecting Our Performance
We believe our future performance will depend on many factors, including those described in Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations of our Annual Report, to which there have been no material changes.
Components of Results of Operations
There have been no material changes to the components of our results of operations described in Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations of our Annual Report.
Other Factors Impacting Results of Operations
There have been no material changes to the other factors impacting our results of operations described in Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations of our Annual Report.
Results of Operations Data
The results of operations data in the following tables for the periods presented have been derived from the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of three months ended March 31, 2024 and 2023
The following table sets forth our statements of income and other operating data for the three months ended March 31, 2024 and 2023, along with the period over period change in dollars and other
amounts and percent (amounts in thousands):
|
Three months ended March 31,
|
2024
|
2023
|
Period over period change
|
|||||||||||||
|
Amount
|
Amount
|
Amount
|
Percent
|
|||||||||||||
|
Consolidated Statements of Income Data:
|
||||||||||||||||
|
Home closing revenue
|
$
|
189,209
|
$
|
168,144
|
$
|
21,065
|
12.5
|
%
|
||||||||
|
Cost of home closings
|
139,749
|
119,611
|
20,138
|
16.8
|
%
|
|||||||||||
|
Home closing gross profit
|
49,460
|
48,533
|
927
|
1.9
|
%
|
|||||||||||
|
Selling, general, and administrative costs
|
27,541
|
19,794
|
7,747
|
39.1
|
%
|
|||||||||||
|
Equity in income from unconsolidated entities
|
(184
|
)
|
(210
|
)
|
26
|
(12.4
|
)%
|
|||||||||
|
Interest expense
|
698
|
245
|
453
|
184.9
|
%
|
|||||||||||
|
Other income, net
|
(2
|
)
|
(122
|
)
|
120
|
(98.4
|
)%
|
|||||||||
|
Income before income taxes
|
21,407
|
28,826
|
(7,419
|
)
|
(25.7
|
)%
|
||||||||||
|
Provision for income taxes
|
921
|
—
|
921
|
100.0
|
%
|
|||||||||||
|
Net income
|
20,486
|
$
|
28,826
|
$
|
(8,340
|
)
|
(28.9
|
)%
|
||||||||
|
Net income attributable to non-controlling interests and LLC members prior to IPO
|
17,514
|
|||||||||||||||
|
Net income attributable to Smith Douglas Homes Corp.
|
$
|
2,972
|
||||||||||||||
|
Earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.34
|
||||||||||||||
|
Diluted
|
$
|
0.33
|
||||||||||||||
|
Other operating data:
|
||||||||||||||||
|
Home closings
|
566
|
500
|
66
|
13.2
|
%
|
|||||||||||
|
ASP of homes closed
|
$
|
334
|
$
|
336
|
$
|
(2
|
)
|
(0.6
|
)%
|
|||||||
|
Net new home orders
|
765
|
664
|
101
|
15.2
|
%
|
|||||||||||
|
Contract value of net new home orders
|
$
|
259,440
|
$
|
215,118
|
$
|
44,322
|
20.6
|
%
|
||||||||
|
ASP of net new home orders
|
$
|
339
|
$
|
324
|
$
|
15
|
4.6
|
%
|
||||||||
|
Cancellation rate(1)
|
10.6
|
%
|
8.9
|
%
|
1.7
|
%
|
19.1
|
%
|
||||||||
|
Backlog homes (period end)(2)
|
1,110
|
934
|
176
|
18.8
|
%
|
|||||||||||
|
Contract value of backlog homes (period end)
|
$
|
381,155
|
$
|
305,643
|
$
|
75,512
|
24.7
|
%
|
||||||||
|
ASP of backlog homes (period end)
|
$
|
343
|
$
|
327
|
$
|
16
|
4.9
|
%
|
||||||||
|
Active communities (period end)(3)
|
70
|
47
|
23
|
48.9
|
%
|
|||||||||||
|
Controlled lots:
|
||||||||||||||||
|
Homes under construction
|
896
|
638
|
258
|
40.4
|
%
|
|||||||||||
|
Owned lots
|
693
|
370
|
323
|
87.3
|
%
|
|||||||||||
|
Optioned lots
|
12,528
|
6,734
|
5,794
|
86.0
|
%
|
|||||||||||
|
Total controlled lots
|
14,117
|
7,742
|
6,375
|
82.3
|
%
|
|||||||||||
| (1) |
The cancellation rate is the total number of cancellations during the period divided by the total gross new home orders during the period.
|
| (2) |
Backlog homes (period end) is the number of homes in backlog from the previous period plus the number of net new home orders generated during the current period minus the number of homes closed during the
current period.
|
| (3) |
A community becomes active once the model is completed or the community has its first sale. A community becomes inactive when it has fewer than two homes remaining to sell.
|
Home closing revenue
Home closing revenue for the three months ended March 31, 2024, was $189.2 million, an increase of $21.1 million, or 12.5%, from $168.1 million for the three months ended March 31, 2023. The increase
in revenue was primarily attributable to a 13.2% increase in home closings due to our Devon Street Homes acquisition, partially offset by a 0.6% decrease in ASP of homes closed.
The following table sets forth our home closing revenue, number of home closings, and ASP of homes closed for the three months ended March 31, 2024 and 2023, in each of our reportable segments (dollar
amounts in thousands):
|
Three months ended March 31,
|
2024
|
2023
|
||||||||||||||||||||||
|
Home
closing
revenue
|
Home
closings
|
ASP of
homes
closed
|
Home
closing
revenue
|
Home
closings
|
ASP of
homes
closed
|
|||||||||||||||||||
|
Alabama
|
$
|
39,655
|
132
|
$
|
300
|
$
|
24,067
|
81
|
$
|
297
|
||||||||||||||
|
Atlanta
|
62,620
|
183
|
342
|
76,174
|
235
|
324
|
||||||||||||||||||
|
Charlotte
|
13,464
|
34
|
396
|
12,502
|
33
|
379
|
||||||||||||||||||
|
Houston
|
24,030
|
74
|
325
|
—
|
—
|
—
|
||||||||||||||||||
|
Nashville
|
22,030
|
63
|
349
|
23,889
|
65
|
368
|
||||||||||||||||||
|
Raleigh
|
27,410
|
80
|
343
|
31,512
|
86
|
366
|
||||||||||||||||||
|
Total
|
$
|
189,209
|
566
|
$
|
334
|
$
|
168,144
|
500
|
$
|
336
|
||||||||||||||
Cost of home closings
Cost of home closings for the three months ended March 31, 2024, was $139.7 million, an increase of $20.1 million, or 16.8%, from $119.6 million for the three months ended March 31, 2023, which was
primarily driven by a 13.2% increase in home closings.
Home closing gross profit
Home closing gross profit for the three months ended March 31, 2024 was $49.4 million, an increase of $0.9 million, or 1.9%, from $48.5 million for the three months ended March 31, 2023. Home closing
gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 26.1% in the three months ended March 31, 2024 compared to 28.9% in the same period in 2023. The decrease in home closing
gross margin was primarily driven by a 3% increase in the average cost of home closings and 0.6% decrease in the ASP of homes closed.
Backlog homes
The following table sets forth our backlog homes and contract value and ASP of backlog homes by reportable segment as of March 31, 2024 and 2023, along with their period-to-period change in percent
(dollar amounts in thousands):
|
As of March 31,
|
2024
|
2023
|
Period over period change
|
|||||||||||||||||||||||||||||||||
|
Backlog
homes
|
Contract
value of
backlog
homes
|
ASP of
backlog
homes
|
Backlog
homes
|
Contract
value of
backlog
homes
|
ASP of
backlog
homes
|
Backlog
homes
|
Contract
value of
backlog
homes
|
ASP of
backlog
homes
|
||||||||||||||||||||||||||||
|
Alabama
|
172
|
$
|
52,198
|
$
|
303
|
151
|
$
|
43,928
|
$
|
291
|
21
|
$
|
8,270
|
$
|
12
|
|||||||||||||||||||||
|
Atlanta
|
434
|
151,356
|
349
|
445
|
140,209
|
315
|
(11
|
)
|
11,147
|
34
|
||||||||||||||||||||||||||
|
Charlotte
|
93
|
36,143
|
389
|
79
|
28,229
|
357
|
14
|
7,914
|
32
|
|||||||||||||||||||||||||||
|
Houston
|
197
|
63,839
|
324
|
—
|
—
|
—
|
197
|
63,839
|
324
|
|||||||||||||||||||||||||||
|
Nashville
|
68
|
25,531
|
375
|
116
|
42,110
|
363
|
(48
|
)
|
(16,579
|
)
|
12
|
|||||||||||||||||||||||||
|
Raleigh
|
146
|
52,088
|
357
|
143
|
51,167
|
358
|
3
|
921
|
(1
|
)
|
||||||||||||||||||||||||||
|
Total
|
1,110
|
$
|
381,155
|
$
|
343
|
934
|
$
|
305,643
|
$
|
327
|
176
|
$
|
75,512
|
$
|
16
|
|||||||||||||||||||||
The increase in the number of backlog homes and backlog value as of March 31, 2024, as compared to 2023, was primarily driven by our acquisition of Devon Street Homes.
Selling, general, and administrative costs
Selling, general, and administrative costs for the three months ended March 31, 2024 were $27.5 million, an increase of $7.7 million, or 39.1%, from $19.8 million for the three months ended March 31,
2023. The increase was primarily due to an increase in sales commissions and advertising costs associated with our increase in homes closed and related home closing revenue, increased payroll and performance-based bonus compensation expenses on
higher employee headcount, stock compensation expense and additional overhead related to our Devon Street Homes acquisition.
Equity in income from unconsolidated entities
Equity in income from unconsolidated entities consists of our portion of income from our interest in our title company in which we hold a 49% interest and which operates in certain of our markets to
provide title insurance to our homebuyers. For the three months ended March 31, 2024, equity in income from unconsolidated entities decreased slightly from the three months ended March 31, 2023, due to slightly lower title insurance revenue
generated by the joint venture.
Interest expense
Interest expense is comprised of interest incurred, but not capitalized on our Prior Credit Facility, Amended Credit Facility, other borrowings, and amortization of debt issuance costs. Our interest
expense increased $0.5 million to $0.7 million for the three months ended March 31, 2024 from $0.2 million for the three months ended March 31, 2023, which was primarily driven by an increase in unused fees incurred on our Prior Credit Facility
and Amended Credit Facility, and interest on the note payable related to the Devon Street Homes Acquisition.
Other income, net
Other income, net primarily consists of interest income, credit card rebates, insurance settlements, and other miscellaneous income and expenses. For the three months ended March 31, 2024, other
income decreased by $0.1 million from the three months ended March 31, 2023, which was primarily driven by the accretion of interest on the contingent consideration liability related to the Devon Street Homes Acquisition during the three months
ended March 31, 2024.
Provision for income taxes
After consummation of the IPO, Smith Douglas Homes Corp. became subject to U.S. federal, state, and local income taxes with respect to its allocable share of taxable income of Smith Douglas Holdings
LLC assessed at the prevailing corporate tax rates. Smith Douglas Holdings LLC operates as a limited liability company and is treated as a partnership for income tax purposes. Accordingly, it incurs no significant liability for federal or state
income taxes, since the taxable income or loss is passed through to its members.
Net income
The following table sets forth net income by reportable segment for the three months ended March 31, 2024 and 2023 (in thousands):
|
Three months ended March 31,
|
2024
|
2023
|
Period
over
period
change
|
|||||||||
|
Alabama
|
$
|
4,604
|
$
|
2,241
|
$
|
2,363
|
||||||
|
Atlanta
|
14,571
|
19,549
|
(4,978
|
)
|
||||||||
|
Charlotte
|
1,624
|
1,933
|
(309
|
)
|
||||||||
|
Houston
|
3,366
|
—
|
3,366
|
|||||||||
|
Nashville
|
2,313
|
3,231
|
(918
|
)
|
||||||||
|
Raleigh
|
4,810
|
7,231
|
(2,421
|
)
|
||||||||
|
Segment total
|
31,288
|
34,185
|
(2,897
|
)
|
||||||||
|
Corporate(1)
|
(10,802
|
)
|
(5,359
|
)
|
(5,443
|
)
|
||||||
|
Total
|
$
|
20,486
|
$
|
28,826
|
$
|
(8,340
|
)
|
|||||
| (1) |
Corporate primarily includes corporate overhead costs, such as payroll and benefits, business insurance, information technology, office costs, outside professional services and travel costs, and certain other
amounts that are not allocated to the reportable segments.
|
Net income for the three months ended March 31, 2024 decreased by $8.3 million, or 28.9%. The decrease was primarily due to a $7.7 million increase in selling, general and administrative costs due to
higher commissions and advertising costs and $0.9 million of income tax expense incurred for the three months ended March 31, 2024 after our IPO and Reorganization Transactions.
Alabama: The $2.4 million increase in net income compared to the same period in the prior year was primarily due to an increase in home closing
revenue and gross profit due to a 63% increase in homes closed and 1% increase in ASP of homes closed, offset by an increase in selling, general, and administrative costs.
Atlanta: The $5.0 million decrease in net income compared to the same period in the prior year was primarily due to a 22% decrease in home closings largely
due to the timing of communities coming online, partially offset by a 6% increase in ASP of homes closed.
Charlotte: The $0.3 million decrease in net income compared to the same period in the prior year was primarily due to a decrease in home closing gross profit
driven by higher average lot costs on the mix of homes closed.
Houston: Net income of $3.4 million represents the results of operations due to the Devon Street Homes Acquisition.
Nashville: The $0.9 million decrease in net income compared to the same period in the prior year was primarily due to a decrease in home closing gross profit
driven by higher average lot costs on the mix of homes closed.
Raleigh: The $2.4 million decrease in net income compared to the same period in the prior year is primarily due to a decrease in home closing revenue and
gross profit due to a 7% decrease in homes closed and 6% decrease in ASP of homes closed.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we have provided information in this Quarterly Report on Form 10-Q relating to “adjusted home closing gross profit,” “adjusted home
closing gross margin,” “adjusted net income,” “EBITDA”, “EBITDA margin”, and “net-debt-to-net book capitalization.” We believe these non-GAAP financial measures are useful in evaluating our operating performance.
We report our financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance and to more
readily compare these financial measures between past and future periods. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q. For example, our non-GAAP financial measures may not be
comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative
purposes.
Adjusted home closing gross profit and adjusted home closing gross margin
Adjusted home closing gross profit and adjusted home closing gross margin are non-GAAP financial measures used by management as supplemental measures in evaluating operating performance. We define
adjusted home closing gross profit as home closing revenue less cost of home closings, excluding capitalized interest charged to cost of home closings, impairment charges and adjustments resulting from the application of purchase accounting
included in cost of sales, if applicable. We define adjusted home closing gross margin as adjusted home closing gross profit as a percentage of home closing revenue. Management believes this information is meaningful because it isolates the
impact that capitalized interest has on home closing gross margin. However, because adjusted home closing gross profit and adjusted home closing gross margin information excludes capitalized interest, which has real economic effects and could
impact our results of operations, the utility of adjusted home closing gross profit and adjusted home closing gross margin information as a measure of our operating performance may be limited. In addition, other companies may not calculate
adjusted home closing gross profit and adjusted home closing margin information in the same manner we do. Accordingly, adjusted home closing gross profit and adjusted home closing gross margin information should be considered only as a supplement
to home closing gross profit and home closing gross margin information as a measure of our performance.
The following table presents a reconciliation of adjusted home closing gross profit and adjusted home closing gross margin to the GAAP financial measure of home closing gross profit and home closing
gross margin for each of the periods indicated:
|
Three months ended March 31,
(in thousands, except percentages)
|
2024
|
2023
|
||||||
|
Home closing revenue
|
$
|
189,209
|
$
|
168,144
|
||||
|
Cost of home closings
|
139,749
|
119,611
|
||||||
|
Home closing gross profit(1)
|
$
|
49,460
|
$
|
48,533
|
||||
|
Capitalized interest charged to cost of home closings
|
721
|
603
|
||||||
|
Purchase accounting adjustments included in cost of home closings
|
119
|
—
|
||||||
|
Adj. home closing gross profit
|
$
|
50,300
|
$
|
49,136
|
||||
|
Home closing gross margin(2)
|
26.1
|
%
|
28.9
|
%
|
||||
|
Adj. home closing gross margin(2)
|
26.6
|
%
|
29.2
|
%
|
||||
| (1) |
Home closing gross profit is home closing revenue less cost of home closings.
|
| (2) |
Calculated as a percentage of home closing revenue.
|
Our adjusted home closing gross profit increased slightly while adjusted home closing gross margin decreased from the three months ended March 31, 2023 to the same period in 2024 primarily as a result
of a 13.2% increase in home closings offset by a 3% increase in the average cost of home closings and 0.6% decrease in the ASP of homes closed.
Adjusted net income
Adjusted net income is not a measure of net income or net income margin as determined by GAAP. Adjusted net income is a supplemental non-GAAP financial measure used by management and external users of
our consolidated financial statements, such as industry analysts, investors, lenders, and rating agencies. We define adjusted net income as net income adjusted for the tax impact using a 25.0% federal and state blended tax rate (assuming 100%
public ownership to adjust for the impact of taxes on earnings attributable to Smith Douglas Holdings LLC as if Smith Douglas Holdings LLC was a subchapter C corporation in the periods presented).
Management believes adjusted net income is useful because it allows management to more effectively evaluate our operating performance and comparability to industry peers who record income tax expense
on their income before tax as opposed to the income of Smith Douglas Holdings LLC not being taxed at the entity level and, therefore, not reflecting a charge against earnings for income tax expense. Adjusted net income should not be considered as
an alternative to, or more meaningful than, net income or any other measure as determined in accordance with GAAP. Our computation of adjusted net income may not be comparable to adjusted net income of other companies. We present adjusted net
income because we believe it provides useful information regarding our comparability to peers.
The following table presents a reconciliation of adjusted net income to the GAAP financial measure of net income for each of the periods indicated:
|
Three months ended March 31,
(in thousands, except percentages)
|
2024
|
2023
|
||||||
|
Net income
|
$
|
20,486
|
$
|
28,826
|
||||
|
Provision for income taxes
|
921
|
—
|
||||||
|
Income before income taxes
|
21,407
|
28,826
|
||||||
|
Tax-effected adjustments(1)
|
5,352
|
7,207
|
||||||
|
Adjusted net income
|
$
|
16,055
|
$
|
21,619
|
||||
| (1) |
For the three months ended March 31, 2024 and 2023, our tax expenses assumes a 25.0% federal and state blended tax rate (assuming 100% public ownership to adjust for the impact of taxes on earnings attributable
to Smith Douglas Holdings LLC as if Smith Douglas Holdings LLC was a subchapter C corporation in the periods presented).
|
EBITDA and EBITDA margin
EBITDA and EBITDA margin are not measures of net income or net income margin as determined by GAAP. EBITDA is a supplemental non-GAAP financial measure used by management and external users of our
consolidated financial statements, such as industry analysts, investors, lenders, and rating agencies. We define EBITDA as net income before (i) interest income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense,
(iv) income tax expense, and (v) depreciation. We define EBITDA margin as EBITDA as a percentage of home closing revenue.
Management believes EBITDA and EBITDA margin are useful because they allow management to more effectively evaluate our operating performance and compare our results of operations from period to period
without regard to our financing methods or capital structure, or other items that impact comparability of financial results from period to period. EBITDA and EBITDA margin should not be considered as alternatives to, or more meaningful than, net
income, net income margin, or any other measure as determined in accordance with GAAP. Our computation of EBITDA and EBITDA margin may not be comparable to EBITDA and EBITDA margin of other companies. We present EBITDA and EBITDA margin because
we believe they provide useful information regarding the factors and trends affecting our business.
The following table presents a reconciliation of EBITDA and EBITDA margin to the GAAP financial measure of net income and net income margin for each of the periods indicated:
|
Three months ended March 31,
(in thousands, except percentages)
|
2024
|
2023
|
||||||
|
Net income
|
$
|
20,486
|
$
|
28,826
|
||||
|
Capitalized interest charged to cost of home closings
|
721
|
603
|
||||||
|
Interest expense
|
698
|
245
|
||||||
|
Interest income
|
(78
|
)
|
(62
|
)
|
||||
|
Provision for income taxes
|
921
|
—
|
||||||
|
Depreciation
|
341
|
250
|
||||||
|
EBITDA
|
$
|
23,089
|
$
|
29,862
|
||||
|
Net income margin(1)
|
10.8
|
%
|
17.1
|
%
|
||||
|
EBITDA margin(1)
|
12.2
|
%
|
17.8
|
%
|
||||
| (1) |
Calculated as a percentage of home closing revenue.
|
Our EBITDA and EBITDA margin decreased from the three months ended March 31, 2023 to the same period in 2024 primarily as a result of an $8.4 million decrease in net income, partially offset by a
$0.5 million increase in interest expense and $0.9 million increase in provision for income taxes.
Net-debt-to-net book capitalization
Net-debt-to-net book capitalization is a supplemental measure of our leverage that is not required by, or presented in accordance with, GAAP and should not be considered as an alternative to
debt-to-book capitalization or any other measure derived in accordance with GAAP. We caution investors that amounts presented in accordance with our definition of net-debt-to-net book capitalization may not be comparable to similar measures
disclosed by our competitors because not all companies and analysts calculate this non-GAAP financial measure in the same manner. We present this non-GAAP financial measure because we consider it to be an important supplemental measure of our
leverage and believe it is frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.
We define Net-debt-to-net book capitalization as:
| • |
Total debt, less cash and cash equivalents, divided by
|
| • |
Total debt, less cash and cash equivalents, plus stockholders’ equity.
|
This non-GAAP financial measure has limitations as an analytical tool in that it subtracts cash and cash equivalents and therefore may imply that the Company has less debt than the most comparable
measure determined in accordance with GAAP. Because of this limitation, this non-GAAP financial measure should be considered along with other financial measures presented in accordance with GAAP. The presentation of this non-GAAP financial
measure is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. We have reconciled this non-GAAP financial measure with the most directly
comparable GAAP financial measure in the following table:
|
As of
(in thousands, except percentages)
|
March 31,
2024
|
December 31,
2023
|
||||||
|
Notes payable
|
$
|
4,247
|
$
|
75,627
|
||||
|
Stockholders’/ Members’ equity
|
333,115
|
208,903
|
||||||
|
Total capitalization
|
$
|
337,362
|
$
|
284,530
|
||||
|
Debt-to-book capitalization
|
1.3
|
%
|
26.6
|
%
|
||||
|
Notes payable
|
$
|
4,247
|
$
|
75,627
|
||||
|
Less: cash and cash equivalents
|
32,778
|
19,777
|
||||||
|
Net debt
|
(28,531
|
)
|
55,850
|
|||||
|
Stockholders’/ Members’ equity
|
333,115
|
208,903
|
||||||
|
Total net capitalization
|
$
|
304,584
|
$
|
264,753
|
||||
|
Net-debt-to-net book capitalization
|
(9.4
|
)%
|
21.1
|
%
|
||||
Liquidity and Capital Resources
IPO
On January 16, 2024, in connection with our IPO, we issued and sold 8,846,154 shares of our Class A common stock at a price to the public of $21.00 per share, resulting in gross proceeds to us of
approximately $185.8 million and net proceeds to us of approximately $172.8 million, after deducting the underwriting discount of approximately $13.0 million. We used the net proceeds from the IPO to: (i) purchase 6,410,257 newly issued LLC
Interests for approximately $125.2 million directly from Smith Douglas Holdings LLC at a price per unit equal to the IPO price per share of Class A common stock less the underwriting discount; and (ii) purchase 2,435,897 LLC Interests from the
Continuing Equity Owners on a pro rata basis for $47.6 million in aggregate at a price per unit equal to the IPO price per share of Class A common stock less the underwriting discount).
We only retained the net proceeds that were used to purchase newly issued LLC Interests from Smith Douglas Holdings LLC, which, in turn, Smith Douglas Holdings LLC used as follows: (i) to repay
approximately $84.0 million of borrowings outstanding under our Prior Credit Facility as part of the Refinancing, (ii) redeem all outstanding Class C Units and Class D Units of Smith Douglas Holdings LLC at par aggregating $2.6 million, (iii)
repay $0.9 million in notes payable to related parties, and (iv) the remainder for general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in businesses, products, services, or technologies; however, we do
not have agreements or commitments for any material acquisitions or investments at this time.
Overview
As of March 31, 2024, we had $32.8 million of cash and cash equivalents. We believe existing cash and cash equivalents, availability under our Amended Credit Facility and positive cash flows from
operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. We have historically generated cash and fund our operations primarily from cash flows from operating activities as well
as availability under our credit facilities and other borrowings. We exercise strict controls and have a prudent strategy for our cash management, including those related to cash outlays for lot acquisitions and deposits on lot-option contracts.
We require multiple party account control and authorization for payments. We competitively bid each phase of the development and construction process and closely manage production schedules and payments. Land acquisitions are reviewed and
analyzed by our senior management team and ultimately approved by our Chief Executive Officer and Chief Financial Officer. Additionally, our land-light business model reduces our upfront capital requirements and generally provides for
“just-in-time” lot delivery, which better aligns our pace of home orders and home starts. Our principal uses of cash include deposits on lot-option contracts, acquisition of finished lots, home construction, operating expenses, and the payment of
interest and routine liabilities.
In the coming 12 months, our primary funding needs will revolve around the construction of homes, acquisition of finished lots under new and existing contracts, and operating expenses. Additionally,
we may seek to use our capital to enter new markets through acquisition or greenfield startup if we believe such markets fit our business model. To address these short-term liquidity requirements, we anticipate relying on our existing cash and
cash equivalents, as well as the net cash flows generated by our operations and availability under our Amended Credit Facility.
However, the opportunity to purchase substantially finished lots in desired locations is becoming increasingly more competitive. As a result, we remain open to seeking additional capital if necessary
to enhance our liquidity position, further enable the acquisition of additional finished lot inventory in anticipation of improving market conditions and the competitive landscape and fortify our long-term capital structure.
Looking beyond the next 12 months, our primary funding needs will continue to center around home construction, finished lot acquisitions necessary to maintain a minimum four-year lot supply, growing
active community count, growth into new and existing markets, and interest payments on our Amended Credit Facility. We expect our existing cash reserves, along with generated cash flows and availability under our Amended Credit Facility, will be
sufficient to fund our ongoing operational activities and provide the necessary capital for future lot purchases and related growth strategies.
To the extent our current liquidity is insufficient to fund future activities, we may need to raise additional funds, such as refinancing or securing new secured or unsecured debt, common and
preferred equity, disposing of certain assets to fund our operations, and/or other public or private sources of capital. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The
incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations. We cannot assure you that we
could obtain refinancing or additional financing on favorable terms or at all. See Part I, Item 1A. Risk Factors—General Risk Factors—Access to financing sources may not be available on favorable terms, or at
all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns of our Annual Report.
Prior Credit Facility
On October 28, 2021, certain of our wholly-owned subsidiaries entered into a $175.0 million unsecured revolving credit facility with Wells Fargo Bank, National Association, as administrative agent for
the Lenders, as amended on December 19, 2022, and as amended concurrently with the consummation of the IPO to the Amended Credit Facility. Smith Douglas Holdings LLC and Smith Douglas Homes Corp. were not parties to the Prior Credit Facility.
Concurrently with the consummation of the IPO, we repaid the Prior Credit Facility.
Amended Credit Facility
Concurrently with the consummation of the IPO and pursuant to the Refinancing, Smith Douglas Holdings LLC and certain of its wholly-owned subsidiaries entered into the Amended Credit Facility, which
amended and replaced the Prior Credit Facility, and conducted the Debt Repayment, pursuant to which we used a portion of the net proceeds from the IPO to repay the $84.0 million outstanding under our Prior Credit Facility. Smith Douglas Homes
Corp. is not a party to the Amended Credit Facility.
The Amended Credit Facility, among other things, increases the aggregate principal amount of our revolving credit commitments to $250.0 million and extends the maturity date to January 16, 2027,
provided that the borrowers may request a one-year extension of its maturity date. The Amended Credit Facility also includes a $100.0 million accordion feature, subject to additional commitments, and provides that up to $20.0 million may be used
for letters of credit.
The borrowings and letters of credit outstanding under the Amended Credit Facility may not exceed the borrowing base as defined in the Amended Credit Facility. The borrowing base primarily consists of
a percentage of commercial land, land held for development, lots under development and finished lots held by Smith Douglas Holdings LLC and certain of its wholly-owned subsidiaries.
Borrowings under the Amended Credit Facility bear interest, at the borrower’s option, at either a base rate or SOFR (which may be a daily simple rate or based on 1-, 3- or 6-month interest periods, in
each case at the borrower’s option), plus an applicable margin. The applicable margin will range from 2.35% to 3.00% based on our leverage ratio as determined in accordance with a pricing grid defined in the Amended Credit Facility and is subject
to a floor of 0.00%. Interest is payable in arrears on the last business day of each month or at the end of each 1-, 3- or 6-month interest period, as applicable.
The Amended Credit Facility is unsecured. Upon the occurrence of certain triggers set forth in the Amended Credit Facility, Smith Douglas Homes Corp. may be required to provide a guarantee of the
obligations of Smith Douglas Holdings LLC and the other borrowers under the Amended Credit Facility.
The Amended Credit Facility contains certain financial covenants, among others, including requirements to maintain (i) a minimum tangible net worth equal to the sum of (a) $130.0 million, (b) 32.5% of
positive pre-tax income earned in any fiscal quarter after June 30, 2023, (c) 75% of the equity proceeds of Smith Douglas Homes Corp. and its subsidiaries from the IPO and (d) 50% of new equity proceeds of Smith Douglas Homes Corp. and its
subsidiaries after the IPO, (ii) a maximum leverage ratio of 60%, (iii) a minimum ratio of EBITDA to interest incurred of 2.00 to 1.00, and (iv) a minimum liquidity requirement of $15.0 million. The Amended Credit Facility also contains various
covenants that, among other restrictions, limit the ability of Smith Douglas Homes LLC and the other borrowers to incur additional debt and to make certain investments and distributions. Additionally, the Amended Credit Facility contains certain
covenants that restrict certain activities of Smith Douglas Homes Corp. The Amended Credit Facility also contains customary events of default relating to, among other things, failure to make payments, breach of covenants and breach of
representations. If an event of default occurs and is continuing, the borrowers may be required immediately to repay all amounts outstanding under the Amended Credit Facility.
As of March 31, 2024, there were no outstanding borrowings or letters of credit under the Amended Credit Facility.
The foregoing description of the Amended Credit Facility is qualified in its entirety by reference to the Amended Credit Facility, a copy of which is filed as an exhibit hereto.
Additional liquidity requirements
We are a holding company and have no material assets other than our ownership of LLC Interests. We have no independent means of generating revenue. The Smith Douglas LLC Agreement provides for the
payment of certain distributions to the Continuing Equity Owners and to us in amounts sufficient to cover the income taxes imposed on such members with respect to the allocation of taxable income from Smith Douglas Holdings LLC as well as to
cover our obligations under the Tax Receivable Agreement and other administrative expenses.
Regarding the ability of Smith Douglas Holdings LLC to make distributions to us, the terms of their financing arrangements (including the Amended Credit Facility) contain covenants that may restrict
Smith Douglas Holdings LLC or its subsidiaries from paying such distributions, subject to certain exceptions. Further, Smith Douglas Holdings LLC is generally prohibited under Delaware law from making a distribution to a member to the extent
that, at the time of the distribution, after giving effect to the distribution, liabilities of Smith Douglas Holdings LLC (with certain exceptions), as applicable, exceed the fair value of its assets.
In addition, under the Tax Receivable Agreement, we are required to make cash payments to the Continuing Equity Owners equal to 85% of the tax benefits, if any, that we actually realize (or in certain
circumstances are deemed to realize), as a result of (i) Basis Adjustments; (ii) Section 704(c) Allocations; and (iii) certain tax benefits (such as interest deductions) arising from payments made under the Tax Receivable Agreement. We expect the
amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors,
including the timing of redemptions or exchanges by the Continuing Equity Owners, the amount of gain recognized by the Continuing Equity Owners, the amount and timing of the taxable income we generate in the future, and the federal tax rates then
applicable. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us.
Additionally, in the event we declare any cash dividends, we intend to cause Smith Douglas Holdings LLC to make distributions to us in amounts sufficient to fund such cash dividends declared by us to
our stockholders. Deterioration in the financial condition, earnings, or cash flow of Smith Douglas Holdings LLC for any reason could limit or impair their ability to pay such distributions.
If we do not have sufficient funds to pay taxes or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial
condition and subject us to various restrictions imposed by any such lenders. To the extent we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until
paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. In addition, if
Smith Douglas Holdings LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired.
See Part I—Item 1A. Risk Factors—Risks Related to our Organizational Structure and Part III, Item 13. Certain Relationships
and Related Transactions, and Director Independence of our Annual Report.
Cash flows from operating, investing, and financing activities – comparison for the three months ended March 31, 2024 and 2023
The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023 (in thousands):
|
Three months ended March 31,
|
2024
|
2023
|
||||||
|
Net cash (used in) provided by operating activities
|
$
|
(9,273
|
)
|
$
|
26,555
|
|||
|
Net cash (used in) provided by investing activities
|
(430
|
)
|
38
|
|||||
|
Net cash provided by (used in) financing activities
|
22,704
|
(43,800
|
)
|
|||||
|
Net increase (decrease) in cash and cash equivalents
|
13,001
|
(17,207
|
)
|
|||||
|
Cash and cash equivalents, beginning of period
|
19,777
|
29,601
|
||||||
|
Cash and cash equivalents, end of period
|
$
|
32,778
|
$
|
12,394
|
||||
Operating activities
We used approximately $9.3 million and generated approximately $26.6 million in net cash (used in) provided by operating activities for the three months ended March 31, 2024 and 2023, respectively.
Operating cash flows for the three months ended March 31, 2024 benefited from cash generated by net income of $20.5 million primarily offset by a $17.8 million increase in real estate inventory, $7.7 million increase in deposits on real estate
under option or contract, and $7.2 million decrease in accrued expenses and other liabilities. Operating cash flows for the three months ended March 31, 2023 benefited from cash generated by net income of $28.8 million primarily offset by a $5.2
million increase in real estate inventory.
Investing activities
We used approximately $0.4 million and generated approximately $38,000 in net cash from investing activities for the three months ended March 31, 2024 and 2023, respectively. The net cash used in
investing activities during the three months ended March 31, 2024 was primarily due to purchases of property and equipment. The net cash provided by investing activities during the three months ended March 31, 2023 was primarily due to purchases
of property and equipment offset by distributions of capital from unconsolidated entities.
Financing activities
Net cash provided by (used in) financing activities was approximately $22.7 million and $(43.8 million) for the three months ended March 31, 2024 and 2023, respectively. The $66.5 million increase in
cash provided by financing activities was primarily attributable to net proceeds from the IPO and Reorganization Transactions of $116.3 million and a $11.0 million decrease in distributions to members of Smith Douglas Holdings LLC, partially
offset by a $56.4 million increase in net repayments under revolving credit facility.
Material Cash Commitments
There have been no material changes to the material cash commitments described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations of our Annual Report.
Off-Balance Sheet Arrangements
While using land bankers and third-party developers as part of our land-light operating strategy comes at an additional cost, we believe our lot acquisition strategy reduces our operating and
financial risk relative to other homebuilders that own and develop a higher percentage of their land supply. As of March 31, 2024, we had 693 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.9% of our
total controlled lot supply.
Under the umbrella of our land-light strategy, we generally seek to avoid engaging in land development. Where possible, we prefer to work with third-party developers that will sell us finished lots
under lot-option contracts. In situations where we cannot find a developer partner, we will work with third-party land bankers. Under these land bank arrangements, we typically assign the land or lots we have under contract to the land banker.
The land banker will acquire the land or lots directly, and if land development is necessary, we will simultaneously enter into a development agreement to complete the lots for the land banker. Additionally, we will enter a lot-option contract to
acquire the finished lots on a takedown to match our projected sales absorption and starts pace. Typically, we are required to put up a deposit ranging between 5-20% on our lot-option contracts.
Our asset-light and capital efficient lot acquisition strategy is intended to avoid the financial commitments and risks associated with direct land ownership and land development by allowing us to
control a significant number of lots for a relatively low capital cost. These option contracts generally allow us, at our option, to forfeit our right to purchase the lots controlled by these option contracts for any reason, and our sole legal
obligation and economic loss as a result of such forfeitures is limited to the amount of the deposits paid pursuant to such option contracts and, in the case of land bank option contracts, any related fees paid to the land bank partner. We do not
have any financial guarantees and we typically do not guarantee lot purchases on a specific performance basis under these agreements. In certain circumstances, we may have a completion obligation under development agreements with land bankers
where we may be at-risk for certain cost overruns.
As of March 31, 2024 we had $62.0 million of non-refundable cash deposits under land and lot-option contracts pertaining to 12,528 lots with a remaining aggregate purchase price of approximately
$742.6 million.
Surety Bonds and Letters of Credit
From time to time, we may enter into surety bond and letter of credit arrangements with local municipalities, government agencies and developers. These arrangements relate to certain performance or
maintenance-related obligations. As of March 31, 2024, there were no outstanding letters of credit. Surety bonds do not have stated expiration dates, rather, we are released from the bonds as the contractual performance is completed. These bonds,
which totaled $32.1 million and $21.9 million as of March 31, 2024 and 2023, respectively, are typically outstanding over a period of approximately one to five years depending on the pace of development. If banks were to decline to issue letters
of credit or surety companies were to decline to issue surety bonds, our ability to operate could be restricted and could have an adverse effect on our business and results of operations.
Critical Accounting Policies and Estimates
In preparing our financial statements in conformity with U.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Such
decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the
relevant circumstances, historical experience, and business valuations. Actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared.
Our significant accounting policies are described in Note 1—Description of the business and summary of significant accounting policies to our accompanying
financial statements included elsewhere in this Quarterly Report on Form 10-Q. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An
accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly
uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. There have been no
material changes to the Company’s critical accounting estimates since our Annual Report, except as described below.
Income Taxes
After consummation of the IPO, Smith Douglas Homes Corp. became subject to U.S. federal, state, and local income taxes with respect to its allocable share of taxable income of Smith Douglas Holdings
LLC assessed at the prevailing corporate tax rates. Smith Douglas Holdings LLC operates as a limited liability company and is treated as a partnership for income tax purposes. Accordingly, it incurs no significant liability for federal or state
income taxes since the taxable income or loss is passed through to its members.
In calculating the provision for interim income taxes, in accordance with ASC Topic 740, Income Taxes, an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of
each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.
For annual periods, income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not
that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authority, based on the technical
merits of the position. As of March 31, 2024 and December 31, 2023, there were no known items which would result in a significant accrual for uncertain tax positions.
Non-controlling interests
After the IPO and Reorganization Transactions, we are the sole managing member of Smith Douglas Holdings LLC. The non-controlling interests in the condensed consolidated statement of income for the
three months ended March 31, 2024 represent the portion of earnings attributable to the economic interest in Smith Douglas Holdings LLC held by the Continuing Equity Owners. The non-controlling interests in the condensed consolidated balance
sheet as of March 31, 2024 represent the portion of the net assets of the Company attributable to the Continuing Equity Owners, based on the portion of the LLC Interests owned by such unit holders. As of March 31, 2024, the non-controlling
interests were 82.7%.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 1—Description of the business and summary of significant accounting policies to our
financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
JOBS Act
We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102 of the JOBS Act provides that an “emerging growth company” can take
advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We are choosing to “opt out” of this provision and, as a result, we will adopt new or revised
accounting standards upon or prior to required public company adoption dates. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if
as an emerging growth company we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our systems of internal controls over financial reporting pursuant to Section 404,
(ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Act, (iii) comply with the requirement of the PCAOB regarding the communication of critical audit matters in the
auditor’s report on the financial statements, and (iv) disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to
median employee compensation. These exemptions will apply until we no longer meet the requirements of being an emerging growth company. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a)
following the fifth anniversary of the completion of our initial public offering, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market
value of our common stock that is held by non-affiliates exceeds $700.0 million as of the last business day of our prior second fiscal quarter, and (ii) the date on which we have issued more than $1 billion in non-convertible debt during the
prior three-year period.
We are exposed to market risk from changes in interest rates and inflation. These market risks arise in the normal course of business. During the three months ended March 31, 2024, there have been no
material changes to the information included under Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2023.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the
benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10‑Q, the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of March
31, 2024, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we are subject to mediation, arbitration, litigation, or claims arising in the ordinary course of business. The results of any current or future claims or proceedings cannot be
predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and litigation costs, diversion of management resources, reputational harm, and other factors. We do not believe that any
existing claims or proceedings will have a material effect on our business, consolidated financial condition or results of operations.
In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2023. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to
differ materially from our historical results or the results contemplated by any forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes in the risks affecting the Company since the filing
of our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Sales of Unregistered Securities
None.
Use of Proceeds
On January 16, 2024, in connection with our IPO, we issued and sold 8,846,154 shares of our Class A common stock at a price to the public of $21.00 per share. All shares issued and sold were
registered pursuant to a registration statement on Form S‑1 (File No. 333-274379), as amended (the “Registration Statement”), declared effective by the SEC on January 10, 2024.
There has been no material change in the expected use of the net proceeds from our IPO as described under the heading Use of proceeds in our final prospectus,
filed with the SEC on January 10, 2024 pursuant to Rule 424(b)(4) relating to our Registration Statement (the “Final Prospectus”).
Purchases of equity securities by the issuer and affiliated purchasers
None.
None.
Not applicable.
| (a) |
Disclosure in lieu of reporting on a Current Report on Form 8-K.
|
None.
| (b) |
Material changes to the procedures by which security holders may recommend nominees to the board of directors.
|
None.
| (c) |
Insider Trading Arrangements and Policies.
|
|
Incorporated by Reference
|
||||||||||||
|
Exhibit
Number
|
Exhibit Description
|
Form
|
File No.
|
Exhibit
|
Filing
Date
|
Filed/
Furnished
Herewith
|
||||||
|
Asset Purchase Agreement, dated July 31, 2023, by and among SDH Houston LLC, Devon Street Homes, L.P., Devon Street Homes G.P., L.L.C., and John Stephen Ray, The BRR 2022 Trust U/T/A dated April 20, 2022, The
CAR 2022 Trust U/T/A dated April 20, 2022 and The TTR 2022 Trust U/T/A dated April 20, 2022
|
S‑1
|
333-274379
|
2.1
|
9/6/2023
|
||||||||
|
Amended and Restated Certificate of Incorporation
|
S-8
|
333-276503
|
4.1
|
1/12/2024
|
||||||||
|
Amended and Restated Bylaws
|
S‑8
|
333-276503
|
4.2
|
1/12/2024
|
||||||||
|
Specimen Class A Common Stock Certificate
|
S‑1
|
333‑235874
|
4.1
|
9/6/2023
|
||||||||
|
Amended and Restated Credit Agreement, dated January 16, 2024, by and among Smith Douglas Building Services LLC, SDH Atlanta LLC, SDH Alabama LLC, SDH Nashville LLC, SDH Raleigh LLC, SDH Charlotte LLC; and SDH
Houston LLC, the Lenders and their Assignees; Wells Fargo Bank, National Association, as Administrative Agent and Sole Bookrunner; Wells Fargo Bank, National Association, and BofA Securities, Inc., as Joint Lead Arrangers; and Bank of
America, N.A. as Syndication Agent
|
8-K
|
001-41917
|
10.4
|
1/16/2024
|
||||||||
|
Tax Receivable Agreement, dated as of January 10, 2024, by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC and its Members
|
8-K
|
001-41917
|
10.2
|
1/16/2024
|
||||||||
|
Amended and Restated Limited Liability Company Agreement of Smith Douglas Holdings LLC, dated as of January 10, 2024
|
8-K
|
001-41917
|
10.1
|
1/16/2024
|
||||||||
|
Registration Rights Agreement, dated January 10, 2024, by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC and its Original Equity Owners
|
8-K
|
001-41917
|
10.3
|
1/16/2024
|
||||||||
|
Smith Douglas Homes Corp. 2024 Incentive Award Plan
|
S‑8
|
333-276503
|
4.3
|
1/12/2024
|
||||||||
|
Form of Stock Option Grant Notice and Stock Option Agreement under the 2024 Incentive Award Plan
|
S‑8
|
333-276503
|
4.4
|
1/12/2024
|
||||||||
|
Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under the 2024 Incentive Award Plan
|
S‑8
|
333-276503
|
4.5
|
1/12/2024
|
||||||||
|
Employment Agreement, dated January 16, 2024 by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC, SDH Management Services LLC and Gregory S. Bennett
|
8-K
|
001-41917
|
10.5
|
1/16/2024
|
||||||||
|
Employment Agreement, dated January 16, 2024 by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC, SDH Management Services LLC and Russell Devendorf
|
8-K
|
001-41917
|
10.6
|
1/16/2024
|
||||||||
|
Employment Agreement, dated January 16, 2024 by and among Smith Douglas Homes Corp., Smith Douglas Holdings LLC, SDH Management Services LLC and Brett A. Steele
|
8-K
|
001-41917
|
10.7
|
1/16/2024
|
||||||||
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
|
*
|
|||||||||||
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
|
*
|
|||||||||||
|
Section 1350 Certification of Chief Executive Officer
|
**
|
|||||||||||
|
Section 1350 Certification of Chief Financial Officer
|
**
|
|||||||||||
|
101.INS
|
Inline XBRL Instance Document
|
*
|
||||||||||
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Document
|
*
|
||||||||||
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document
|
*
|
||||||||||
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document
|
*
|
||||||||||
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document
|
*
|
||||||||||
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
||||||||||
|
104
|
Cover Page Interactive Data File (embedded within the Inline XBRL document)
|
*
|
* Filed herewith
** Furnished herewith
† Certain portions of this exhibit (indicated by “[***]”) have been omitted pursuant to Regulation S-K, Item (601)(b)(10). The Registrant undertakes to furnish supplemental copies including the omitted portions upon
request by the SEC.
^ Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Smith Douglas Homes Corp.
|
||
|
Date: May 15, 2024
|
By:
|
/s/ Gregory S. Bennett
|
|
Gregory S. Bennett
|
||
|
President, Chief Executive Officer, Vice Chairman, and Director
|
||
|
(Principal Executive Officer)
|
||
|
Date: May 15, 2024
|
By:
|
/s/ Russell Devendorf
|
|
Russell Devendorf
|
||
|
Executive Vice President and
Chief Financial Officer
|
||
|
(Principal Financial Officer and
Principal Accounting Officer)
|
||
58