BASIS OF PRESENTATION
Certain Definitions
As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to:
•“Adjusted return on equity” refers, for us, to pre-tax income attributable to Smith Douglas Holdings LLC tax effected for our anticipated 24.6% 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, divided by average total equity.
•“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).
•“Average total equity” refers to the average of current and prior period closing total equity.
•“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.
•“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.
•“CAGR” refers to compound annual growth rate.
•“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. 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.
•“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.
•“Devon Street Homes” refers to Devon Street Homes, L.P.
•“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.
•“Exchange” refers to the New York Stock Exchange.
•“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.
•“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.
•“Inventory turnover” refers, unless stated otherwise, to cost of sales divided by the average of current and prior period real estate inventory.
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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.
•“LLC Interests” refers to the membership units of Smith Douglas Holdings LLC, including those that we purchased with the net proceeds from the IPO.
•“Non-U.S. Holder” is any beneficial owner of our Class A common stock that is an individual, corporation, estate or trust that is not a “U.S. person.”
•“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”).
•“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.
•“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.
•“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.
•“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.
•“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.
•“U.S. person” is any person that, for U.S. federal income tax purposes, is or is treated as any of the following (i) an individual who is a citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia; (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
•“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:
•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;
•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 in one or more series without stockholder approval;
•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;
•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;
•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;
•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 II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and Part II, Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Use of Proceeds From Registered Securities.
•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.
Following the Transactions:
•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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