Smith Douglas Homes Corp.

Previous wording

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 audited financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. 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 this Annual Report on Form 10-K 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. See Forward-Looking Statements. A discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021 has been reported previously in our Final Prospectus, under the heading Management’s discussion and analysis of financial condition and results of operations.

Current wording

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 audited financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. The following discussion and analysis reflects the historical results of operations and financial position of Smith Douglas Holdings LLC prior to the IPO and Reorganization Transactions on January 10, 2024 and that of Smith Douglas Homes Corp. and its consolidated subsidiary, Smith Douglas Holdings LLC, following the completion of the IPO and Reorganization Transactions. 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 this Annual Report on Form 10-K 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. See Forward-Looking Statements. We rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we choose to present only the two most recent fiscal years of audited financial statements in our Annual Report.

Previous wording

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.

Current wording

Smith Douglas is 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.

Previous wording

While inflation and higher interest rates impacted affordability and housing demand during 2022, new home demand picked up in 2023, primarily driven by historically 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 23% in the year ended December 31, 2023 compared to 2022. 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% for the years ended December 31, 2023 and 2022.

Current wording

Despite continued uncertainty in the mortgage interest rate environment during 2024, our net new orders increased by 12% in the year ended December 31, 2024 compared to 2023. 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 12% and 11% for the years ended December 31, 2024 and 2023, respectively.

Previous wording

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 December 31, 2023, we had 524 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.1% of our total controlled lot supply.

Current wording

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 December 31, 2024, we had 803 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.1% of our total controlled lot supply.

Previous wording

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.

Current wording

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 eight geographical divisions which comprise two reportable segments. Our Southeast segment consists of our Atlanta, Central Georgia, Charlotte, Greenville, and Raleigh divisions. Our Central segment consists of our Alabama, Houston, and Nashville divisions. 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.

Previous wording

Commencing in the first half of 2022, we began to see certain macroeconomic trends that affected our markets and industry such as higher inflation, rising interest rates and associated decreases in consumer discretionary income, the effects of supply chain challenges, declining government stimulus following the COVID-19 pandemic, and uncertainty regarding an economic recession. Any worsening of macroeconomic conditions in future periods could have a negative effect on our financial results.

Current wording

We continue to experience certain macroeconomic trends that affect our markets and industry such as higher inflation, elevated interest rates and associated decreases in consumer discretionary income, the effects of supply chain challenges, declining government stimulus following the COVID-19 pandemic, and uncertainty regarding an economic recession. Any worsening of macroeconomic conditions in future periods could have a negative effect on our financial results.

Previous wording

The results of operations data in the following tables for the periods presented have been derived from the audited financial statements included elsewhere in this Annual Report on Form 10-K. A discussion of the year ended December 31, 2022 compared to the year ended December 31, 2021 has been reported previously in our Final Prospectus, under the heading Management’s discussion and analysis of financial condition and results of operations.

Current wording

The results of operations data in the following tables for the periods presented have been derived from the audited financial statements included elsewhere in this Annual Report on Form 10-K. We rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we choose to present only the two most recent fiscal years of audited financial statements in our Annual Report.

Previous wording

Home closing revenue for the year ended December 31, 2023, was $764.6 million, an increase of $9.3 million, or 1.2%, from $755.4 million for the year ended December 31, 2022. The increase in revenue was primarily attributable to a 4.4% improvement in homes closed, primarily driven by our entry into the Houston market through our acquisition of Devon Street Homes, offset by a 2.9% decrease in ASP of homes closed across all reportable segments.

Current wording

Home closing revenue for the year ended December 31, 2024, was $975.5 million, an increase of $210.8 million, or 27.6%, from $764.6 million for the year ended December 31, 2023. The increase in revenue was primarily attributable to a 24.8% improvement in homes closed and a 2.1% increase in ASP of homes closed across both reportable segments.

Previous wording

Home closing gross profit for the year ended December 31, 2023 was $216.3 million, a decrease of $6.4 million, or 2.9%, from $222.8 million for the year ended December 31, 2022. Home closing gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 28.3% in 2023 compared to 29.5% in 2022. The decrease in home closing gross margin was primarily driven by home closings that carried higher homebuyer incentives, slightly offset by a decrease of 1.3% in the average cost of home closings during the period.

Current wording

Home closing gross profit for the year ended December 31, 2024 was $255.5 million, an increase of $39.2 million, or 18.1%, from $216.3 million for the year ended December 31, 2023. Home closing gross margin, expressed as a percentage and calculated as home closing gross profit divided by home closing revenue, was 26.2% in 2024 compared to 28.3% in 2023. The decrease in home closing gross margin was primarily driven by a 5.2% increase in the average cost of homes closed partially offset by a 2.1% increase in ASP of homes closed.

Previous wording

Selling, general, and administrative costs for the year ended December 31, 2023 were $92.4 million, an increase of $9.4 million, or 11.4%, from $83.0 million for the year ended December 31, 2022. 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, and higher professional fees related to the Devon Street Homes acquisition and our IPO.

Current wording

Selling, general, and administrative costs for the year ended December 31, 2024 were $136.4 million, an increase of $43.9 million, or 47.5%, from $92.4 million for the year ended December 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 higher professional fees related to the Devon Street Homes acquisition and our IPO.

Previous wording

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 year ended December 31, 2023, equity in income from unconsolidated entities decreased by $0.2 million from the year ended December 31, 2022, due to slightly lower title insurance revenue generated by the title company.

Current wording

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 year ended December 31, 2024, equity in income from unconsolidated entities increased by $0.2 million from the year ended December 31, 2023, due to a 19.8% increase in title insurance revenue generated by the title company.

Previous wording

Interest expense is comprised of interest incurred, but not capitalized on our Prior Credit Facility and other borrowings and amortization of debt issuance costs. Our interest expense increased $0.7 million to $1.7 million for the year ended December 31, 2023 from $1.0 million for the year ended December 31, 2022, which is primarily driven by an increase in the variable interest rate of our Prior Credit Facility, which bore interest at the Prime Rate plus an applicable margin and interest on the note payable related to the Devon Street Homes Acquisition.

Current wording

Interest expense is comprised of interest incurred, but not capitalized on our Amended Credit Facility and Prior Credit Facility and other borrowings and amortization of debt issuance costs. Our interest expense increased$0.8 million to$2.5 million for the year ended December 31, 2024 from$1.7 million for the year ended December 31, 2023, which was primarily driven by an increase in unused fees incurred on our Prior Credit Facility and Amended Credit Facility, amortization of deferred financing costs on our Amended Credit Facility, and interest on the note payable related to the Devon Street Homes Acquisition.

Previous wording

Other income, net primarily consists of interest income, credit card rebates, insurance settlements, and other miscellaneous income and expenses. For the year ended December 31, 2023, other income decreased by $0.6 million from the year ended December 31, 2022, which was primarily higher due to income from the sale of a small parcel of land, offset by an increase in interest income associated with higher average rates on our cash and cash equivalent balances.

Current wording

Other expense (income), net primarily consists of interest income, credit card rebates, insurance settlements, and other miscellaneous income and expenses. For the year ended December 31, 2024, other expense (income), net increased by $1.0 million from the year ended December 31, 2023, which was primarily due to the change in fair value of the contingent consideration liability related to the Devon Street Homes Acquisition.

Previous wording

Net income for the year ended December 31, 2023 decreased by $17.3 million, or 12.3%. The decrease was primarily due to a decrease in home closing gross profit, primarily driven by a 2.9% decrease in ASP of homes closed due to higher average homebuyer incentives, and a $9.4 million increase in selling, general and administrative costs due to higher commissions and advertising costs.

Current wording

Net income for the year ended December 31, 2024 decreased by $11.4 million, or 9.2%. The decrease was primarily due to an increase of $43.9 million in selling, general and administrative costs due to higher commissions and advertising costs and $5.1 million of income tax expense as a result of our IPO and Reorganization Transactions, partially offset by an increase in home closing gross profit of $39.2 million.

Previous wording

Alabama: The $1.9 million increase in net income compared to the prior year was primarily due to an increase in home closing revenue and gross profit due to a 17.2% increase in homes closed and 2.5% increase in ASP of homes closed, offset by an increase in selling, general, and administrative costs.

Current wording

Southeast: The $7.3 million increase in net income compared to the prior year was primarily due to a $16.5 million increase in gross profit due to a 14.1% increase in homes closed and 4.7% increase in ASP of homes closed, offset by a $9.2 million increase in selling, general, and administrative costs.

Previous wording

In addition to our results determined in accordance with GAAP, we have provided information in this Annual Report on Form 10-K 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.

Current wording

In addition to our results determined in accordance with GAAP, we have provided information in this Annual Report on Form 10-K relating to “adjusted home closing gross profit,” “adjusted home closing gross margin,” “adjusted net income,” “EBITDA”, “EBITDA margin”, “adjusted EBITDA”, “adjusted EBITDA margin”, and “net debt-to-net book capitalization.” We believe these non-GAAP financial measures are useful in evaluating our operating performance.

Previous wording

Our adjusted home closing gross profit and adjusted home closing gross margin decreased from 2022 to 2023 primarily as a result of an increase in cost of home closings partially offset by a slight increase in home closing revenue, resulting in a reduction in home closing gross margin as a percentage of home closing revenue.

Current wording

Our adjusted home closing gross profit increased while adjusted home closing gross margin decreased from the year ended December 31, 2023 to 2024. The increase in adjusted home closing gross profit primarily results from an increase in home closings of 24.8%. The decrease in adjusted home closing gross margin was driven by an increase in the average cost of home closings of 5.2% partially offset by an increase in the ASP of homes closed of 2.1%.

Previous wording

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% 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).

Current wording

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 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).

Previous wording

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.

Current wording

EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin are not measures of net income or net income margin as determined by GAAP. EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures 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. We define adjusted EBITDA as net income before (i) interest income, (ii) capitalized interest charged to cost of home closings, (iii) interest expense, (iv) income tax expense, (v) depreciation, (vi) share-based payment expense, (vii) adjustments resulting from the application of purchase accounting included in cost of sales, (viii) adjustments resulting from the application of purchase accounting included in other expense (income), net, and (ix) severance expenses.

Previous wording

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.

Current wording

Management believes EBITDA, EBITDA margin, adjusted EBITDA, and adjusted 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, EBITDA margin, adjusted EBITDA, and adjusted 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, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin may not be comparable to EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin of other companies. We present EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin because we believe they provide useful information regarding the factors and trends affecting our business.

Previous wording

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:

Current wording

The following table presents a reconciliation of EBITDA, EBITDA margin, adjusted EBITDA, and adjusted EBITDA margin to the GAAP financial measure of net income and net income margin for each of the periods indicated:

Previous wording

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. See Part II, Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Use of Proceeds From Registered Securitiesfor a description of the use of proceeds from the IPO. 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).

Current wording

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).

Previous wording

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.

Current wording

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.

Previous wording

As of December 31, 2023, we had $19.8 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.

Current wording

As of December 31, 2024, we had $22.4 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.

Previous wording

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. The Prior Credit Facility included a $25.0 million accordion feature, subject to additional commitments, and provided that up to $10.0 million could have been used for letters of credit. Prior to December 2022, borrowings under the Prior Credit Facility bore interest at prime plus the applicable margin ranging from minus 10 basis points to 25 basis points based on our leverage ratio as determined in accordance with a pricing grid defined in the Prior Credit Facility. In December 2022, the Prior Credit Facility was amended to reduce the applicable margin to minus 25 basis points to 20 basis points based on our leverage ratio, among other amendments. As of December 31, 2023 and 2022, the interest rate on outstanding borrowings under the Prior Credit Facility was 8.25% and 7.25%, respectively.

Current wording

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.

Previous wording

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.

Current wording

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 December 31, 2024, we were in compliance with all covenants related to the Amended Credit Facility.

Previous wording

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.

Current wording

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 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024.

Previous wording

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.

Current wording

See Part I—Item 1A. Risk Factors—Risks Related to our Organizational Structure.

Previous wording

We generated $76.3 million and $132.1 million in net cash provided by operating activities for the years ended December 31, 2023 and 2022, respectively. Operating cash flows for 2023 benefited from cash generated by net income of $123.2 million primarily offset by a $33.7 million increase in real estate inventory and a $16.6 million increase in deposits on real estate under option or contract. Operating cash flows for 2022 benefited from cash generated by net income of $140.4 million primarily offset by a $8.6 million increase in deposits on real estate under option or contract.

Current wording

We generated $19.1 million and $76.3 million in net cash from operating activities for the years ended December 31, 2024 and 2023, respectively. Operating cash flows for 2024 benefited from cash generated by net income of $111.8 million primarily offset by a $53.7 million increase in real estate inventory and a $45.9 million increase in deposits on real estate under option or contract. Operating cash flows for 2023 benefited from cash generated by net income of $123.2 million primarily offset by a $33.7 million increase in real estate inventory and a $16.6 million increase in deposits on real estate under option or contract.

Previous wording

We used approximately $76.8 million and generated approximately $0.4 million in net cash from investing activities for the years ended December 31, 2023 and 2022, respectively. The net cash used in investing activities during 2023 is primarily due to the Devon Street Homes Acquisition.

Current wording

We used $4.7 million and $76.8 million in net cash in investing activities for the years ended December 31, 2024 and 2023, respectively. The net cash used in investing activities during 2024 was primarily due to purchases of property and equipment and investments in unconsolidated entities. The net cash used in investing activities during 2023 was primarily due to the $75.9 million used to fund the Devon Street Homes Acquisition.

Previous wording

Net cash used in financing activities was $9.2 million and $128.2 million for the years ended December 31, 2023 and 2022, respectively. The $119.0 million decrease in cash used in financing activities was primarily attributable to an increase of $112.6 million in net borrowings under our revolving credit facility during 2023 compared to 2022.

Current wording

Net cash used in financing activities was $11.8 million and $9.2 million for the years ended December 31, 2024 and 2023, respectively. The $2.6 million increase in cash used in financing activities was primarily attributable to a $126.6 million increase in net repayments under the revolving credit facility and a $25.4 million increase in net cash used in real estate not owned transactions, partially offset by net proceeds from the IPO and Reorganization Transactions of $117.5 million and a $38.8 million decrease in distributions to members of Smith Douglas Holdings LLC.

Previous wording

We expect our future cash requirements will relate to working capital, capital expenditures, benefits expenses, interest expense and debt service obligations. In addition, we may use cash and cash equivalents to enter into strategic transactions, such as potential joint ventures or other unconsolidated entities, or acquisitions. Our material cash commitments as of December 31, 2023 were our $1.8 million operating lease obligation, which primarily consists of our $1.4 million office lease obligation for our headquarters in Woodstock, Georgia where we lease approximately 13,750 square feet of office space under a lease agreement that expires on August 31, 2028 and, prior to its repayment concurrently with the consummation of the IPO, the interest on our Prior Credit Facility on the amounts outstanding from time to time. In connection with the consummation of the IPO, we repaid the Prior Credit Facility and replaced it with the Amended Credit Facility. As of the filing of this Annual Report on Form 10-K, our material cash commitments are for our headquarters in Woodstock, Georgia and the interest on our Amended Credit Facility on the amounts outstanding from time to time. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Amended Credit Facility.

Current wording

We expect our future cash requirements will relate to working capital, capital expenditures, benefits expenses, interest expense and debt service obligations. In addition, we may use cash and cash equivalents to enter into strategic transactions, such as potential joint ventures or other unconsolidated entities, or acquisitions. Our material cash commitments as of December 31, 2024 were our $3.2 million operating lease obligation, which primarily consists of our$1.2 million office lease obligation for our headquarters in Woodstock, Georgia where we lease approximately 26,800 square feet of office space under a lease agreement that expires on August 31, 2028 and the interest on our Amended Credit Facility on the amounts outstanding from time to time.

Previous wording

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 December 31, 2023, we had 524 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.1% of our total controlled lot supply.

Current wording

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 December 31, 2024, we had 803 owned unstarted lots in real estate inventory on our balance sheet which represented only 4.1% of our total controlled lot supply.

Previous wording

As of December 31, 2023, we had $54.4 million of non-refundable cash deposits under land and lot-option contracts, including option contracts with unconsolidated entities, pertaining to 11,501 lots with a remaining aggregate purchase price of approximately $652.1 million.

Current wording

As of December 31, 2024, we had $85.4 million of non-refundable cash deposits under land and lot-option contracts pertaining to 10,132 lots with a remaining aggregate purchase price of approximately $707.8 million.

Previous wording

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 December 31, 2023, 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 $26.1 million and $21.4 million as of December 31, 2023 and 2022, 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.

Current wording

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 December 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 $26.1 million as of December 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.

Previous wording

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 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 us for annual periods beginning after January 1, 2024 and interim periods beginning after January 1, 2025. We are currently evaluating the impact ASU 2023-07 will have on our financial statement disclosures.

Current wording

In November 2023, the Financial Accounting Standards Board (FASB) issued ASU 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 adopted ASU 2023-07 in the fourth quarter of 2024 and applied the disclosure requirements retrospectively to all prior periods presented. As a result of the adoption, there was no impact on our consolidated balance sheets or consolidated statements of income. Note 18 (Segment Information) was updated to comply with the new disclosure requirements.

Previous wording

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.

Current wording

In addition, we intend to rely on the other exemptions and reduced reporting requirements provided by the JOBS Act. Specifically, subject to the satisfaction of certain conditions set forth in the JOBS Act, we are not required to, and do not intend to, among other things, (i) provide an auditor’s attestation report on our systems of internal control 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.