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Item 7. Management’s Discussion and Analysis

2025-02-25 compared with 2024-02-29 · 329 added, 313 removed, 182 unchanged (78% of the section changed)

8 unchanged sentences

Business Overview and Outlook

We design, build and sell homes in high-growth markets using our asset-light lot acquisition strategy.

Our primary focus is on constructing and selling single-family homes across entry-level, first-time move-up, second-time move-up, and active adult markets.

We design, build and sell homes primarily in high-growth markets using our asset-light lot acquisition strategy.

Our primary focus is on constructing and selling single-family homes across entry-level, first-time move-up, second-time move-up, and active adult markets as well as homes under built-for-rent contracts.

To fully serve our homebuyers and capture ancillary business opportunities, we have financial services operations that offer title insurance and mortgage banking solutions.

The easing of mortgage interest rates toward the end of 2023 resulted in accelerated demand for homebuilders heading into the spring selling season.

Although macroeconomic indicators suggest that interest rates will continue to fall moderately in 2024, which, if those indicators come to fruition, should have a consistent positive impact on demand, we remain cautious and committed to our goals to deliver affordability and value to our homebuyers.

We continue to strategically release quick move-in homes in our communities at competitive price points and we offer flexible sales incentives aimed at reducing our homebuyers’ monthly mortgage payments and closings costs.

This strategy has served us well during 2023, and we believe it will continue to effectively generate new sales and faster inventory turnover in 2024.

Inflation in the United States materially increased during the year ended December 31, 2022, and has remained elevated throughout 2023.

Despite this fact, the homebuilding industry has shown consistent growth in 2023, driven by constrained housing supply dynamics that favor new home sales as the resale home market continues to face inventory shortages.

If interest rates start to decline in 2024, increased demand for homes is likely to follow.

Through our close monitoring of net new orders and community-level traffic, we are able to respond promptly to changes in local market conditions.

As needed, we are able to strategically renegotiate lot option takedowns to match sales pace, which exemplifies how advantageous our asset-light strategy can be.

Excluding built-for-rent deals that occurred in 2022 that did not repeat in 2023, the Company had an increase in net new orders of 43% when compared to the prior year.

These focused efforts by management not only drove our strong performance this year, but also showcase our ability to navigate a challenging macroeconomic environment.

Key financial results for the year ended December 31, 2023, as compared to the year ended December 31, 2022 (unless otherwise noted) were as follows:

• Revenues increased 12% to $3.7 billion from $3.3 billion

• Home closings increased 6% to 7,314 from 6,878

• Average sales price of homes (“ASP”) closed increased 7% to $505,764 from $474,292

• Net new orders decreased 5% to 5,744 from 6,045

• Gross margin as a percentage of homebuilding revenues increased 100 basis points (“bps”) to 19.4% from 18.4%

• Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased 260 bps to 27.2% from 24.6%

• Income before taxes increased 14% to $404 million from $356 million

• Net and comprehensive income attributable to DFH increased 13% to $296 million from $262 million

• Basic earnings per share (“EPS”) was $3.03 and diluted EPS was $2.79, compared to $2.67 and $2.45, respectively

• EBITDA (non-GAAP) as a percentage of total revenues increased 130 bps to 13.9% from 12.6%

• Active community count increased to 221 from 206

• Backlog of sold homes decreased 28% to 3,978 from 5,548, and the value of backlog decreased 25% to $1.9 billion from $2.5 billion

• Return on participating equity was 36.3%, compared to 49.1%

• Issuance of $300 million in aggregate principal amount of 8.25% senior unsecured notes used to repay a portion of the outstanding balance under the revolving credit facility

• Net debt to net capitalization of 23.3% as of December 31, 2023, compared to 42.9% as of December 31, 2022

• Total liquidity, comprised of cash and cash equivalents, and availability under the revolving credit facility, increased to $828 million as of December 31, 2023, compared to $487 million as of December 31, 2022

For reconciliations of the non-GAAP financial measures, including adjusted gross margin and EBITDA, to the most directly comparable GAAP financial measures, see “— Non-GAAP Financial Measures .”

Our markets have experienced sustained home affordability challenges and significant competition and although our net sales have increased from the prior year, the increase was below our expectations.

Despite ticking down since last year, mortgage interest rates and inflationary pressures remain elevated.

We believe uncertainty and interest rate volatility are keeping homebuyers on the sidelines.

We have consistently used incentives, such as mortgage buydowns, to sustain demand, and we have continued to build affordable speculative inventory at higher than historical levels.

Our asset-light strategy has allowed us to remain agile in these market conditions by strategically renegotiating lot option takedowns that align with our sales pace.

We continue to see the positive effects of our commitment to future growth, whether through organic efforts, acquisitions, or a combination of both, all while keeping an asset-light approach.

This strategy is reflected in our homebuilding revenues and closings, which grew by 18% and 17%, respectively, when comparing 2024 to 2023.

Notably, our acquisition of Crescent Homes played a significant role in these achievements.

We believe this success, coupled with our increased investments in our lot pipeline, inventories and construction starts, positions us well for the future.

We are optimistic based on the limited supply of homes, both new and existing resales, at affordable price points and demographic trends that continue to support favorable demand dynamics in our markets.

We believe that the current environment will continue to support faster inventory turnover and reinforce our shift towards spec sales for the foreseeable future.

Our strategy has also allowed us to continue to pursue opportunities that contribute to our long-term outlook, including acquiring Jet HomeLoans in July 2024 and Liberty Communities, LLC (“Liberty Communities”) in January 2025.

We anticipate future organic and acquisitive growth in the years ahead across our homebuilding and financial services operations.

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Recent Developments

Crescent Homes Acquisition

On February 1, 2024, we acquired the majority of the homebuilding assets of Crescent Ventures, LLC (“Crescent Homes”), expanding our operations into the Charleston and Greenville, South Carolina and Nashville, Tennessee markets.

Liberty Communities Acquisition

On January 23, 2025, we acquired the majority of the homebuilding assets of Liberty Communities, allowing us to enter the Atlanta, Georgia market and further expand our operations in Greenville, South Carolina.

Assets acquired include over 750 lots and home sites in different stages of construction.

Additionally, the Company expects to control approximately 5,000 lots as a result of the transaction.

The operations of Liberty Communities will be included in our Southeast segment as of the date of acquisition.

Refer to Note 15, Subsequent Events to our consolidated financial statements for more information.

Expansion in the Southeast Segment

In 2023, we expanded into the Tampa, Florida market.

As of December 31, 2023, we owned 12 lots and controlled 623 lots in Tampa.

We opened for sales in Tampa in January 2024.

Results of Operations

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table sets forth our res ults of operations and balance sheet data (in thousands, except per share and share amounts) for the periods indicated:

Year Ended December 31,

2023 2022 Amount Change

Homebuilding $ 3,738,888 $ 3,334,559 $ 404,329 12 %

Other 9,698 7,776 1,922 25 %

Total revenues 3,748,586 3,342,335 406,251 12 %

Homebuilding cost of sales 3,011,813 2,722,139 289,674 11 %

Selling, general and administrative expense 308,795 271,040 37,755 14 %

Income from unconsolidated entities (18,075) (16,122) (1,953) 12 %

Contingent consideration revaluation 46,590 11,053 35,537 322 %

Other income, net (4,962) (1,931) (3,031) 157 %

In the fourth quarter of 2024, we expanded organically into southwest Florida.

As of December 31, 2024, we controlled 42 lots in this market.

Alliant Title Acquisition

On October 18, 2024, the Company entered into a definitive agreement to acquire Colorado-based title insurance underwriter, Alliant National Title Insurance Company, Inc.

and a related affiliate.

The closing of this transaction is subject to customary closing conditions, including insurance regulatory approvals, which are currently ongoing.

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Results of Consolidated Operations

The following table summarizes our res ults of operations and other financial data (in thousands, except per share amounts) for the periods indicated:

Income before taxes:

Homebuilding $ 434,308 $ 406,298

Financial services 31,959 19,741

(28,413) (21,614)

Income before taxes 437,854 404,425

Income tax expense (97,272) (96,483)

(96,483) (81,859) (14,624) 18 %

Net and comprehensive income 340,582 307,942

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$ 335,341 $ 295,900

Earnings per share (1)

Basic $ 3.03 $ 2.67 $ 0.36 13 %

Diluted $ 2.79 $ 2.45 $ 0.34 14 %

Weighted-average number of shares

Basic 93,066,564 92,745,781 320,783 — %

Diluted 106,027,548 106,691,248 (663,700) (1) %

Consolidated Balance Sheets Data (as of period end):

Cash and cash equivalents $ 494,145 $ 364,531 $ 129,614 36 %

Total assets $ 2,562,439 $ 2,371,137 $ 191,302 8 %

Total debt $ 824,302 $ 966,248 $ (141,946) (15) %

Total mezzanine and stockholders’ equity $ 1,086,150 $ 800,693 $ 285,457 36 %

Other Financial and Operating Data

Active communities as of period-end (2)

Other Financial Data:

Basic EPS (2)

$ 3.44 $ 3.03

Home closings 7,314 6,878 436 6 %

Average sales price of homes closed (3)

Diluted EPS (2)

$ 3.34 $ 2.79

Net new orders 5,744 6,045 (301) (5) %

Cancellation rate 18.3 % 21.5 % (3.2) % (15) %

Ending backlog - homes 3,978 5,548 (1,570) (28) %

Ending backlog - value (in thousands) $ 1,887,368 $ 2,502,564 $ (615,196) (25) %

EBITDA (in thousands) (3)

$ 629,750 $ 521,495

EBITDA margin % (3)(4)

14.1 % 13.9 %

Return on participating equity (5)

29.7 % 36.3 %

Net debt to net capitalization (5)

Consolidated Balance Sheets Data (as of period end):

Cash and cash equivalents $ 274,384 $ 494,145

Construction lines of credit 701,386 530,384

Senior unsecured notes, net 295,049 293,918

Mortgage warehouse facilities 289,617 —

Total mezzanine equity 169,951 148,500

Total Dream Finders Homes, Inc.

stockholders’ equity 1,244,922 924,584

Total equity 1,250,409 937,650

(1) Represents amounts within our corporate component (“Corporate”).

(2) Refer to Note 14, Earnings Per Share to the consolidated financial statements for disclosures related to the calculation of EPS.

Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the redeemable preferred stock and the associated preferred dividends.

(3) EBITDA is a non-GAAP financial measure.

For a definition of this non-GAAP financial measure and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “— Non-GAAP Financial Measures.

(4) Calculated as a percentage of total revenues.

(5) Return on participating equity is calculated as net and comprehensive income attributable to DFH, less redeemable preferred stock distributions, divided by average beginning and ending total Dream Finders Homes, Inc.

stockholders’ equity (“participating equity”) for the trailing twelve months.

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Results of Homebuilding Operations

The following table sets forth our results of homebuilding operations (in thousands) for the periods indicated:

2024 2023 Change % Change

Homebuilding revenues $ 4,397,877 $ 3,738,888 $ 658,989 18 %

Homebuilding cost of sales 3,591,483 3,011,813 579,670 19 %

Selling, general and administrative expense (1)

395,751 303,068 92,683 31 %

Gross margin (in thousands) (6)

(Income) loss from unconsolidated entities (433) 12 (445) (3708) %

Contingent consideration revaluation (2)

13,939 46,590 (32,651) (70) %

Gross margin % (7)

Other income, net (1,443) (635) (808) 127 %

Total income before taxes related to homebuilding operations (1)(2)

$ 398,580 $ 378,040 $ 20,540 5 %

Adjusted gross margin (in thousands) (8)

Other Financial and Operating Data:

Home closings 8,583 7,314 1,269 17 %

Average sales price of homes closed (3)

$ 509,249 $ 505,764 $ 3,485 1 %

Adjusted gross margin % (7)(8)

Net sales 6,727 5,744 983 17 %

Cancellation rate 16.6 % 18.3 % (1.7) % (9) %

Homebuilding gross margin (in thousands) (4)

$ 806,394 $ 727,075 $ 79,319 11 %

EBITDA (in thousands) (8)

Homebuilding gross margin % (4)(5)

18.3 % 19.4 % (1.1) % (6) %

EBITDA margin % (8)(9)

Adjusted homebuilding gross margin (in thousands) (6)

$ 1,186,019 $ 1,015,624 $ 170,395 17 %

Adjusted EBITDA (in thousands) (8)

Adjusted homebuilding gross margin % (5)(6)

27.0 % 27.2 % (0.2) % (1) %

Adjusted EBITDA margin % (8)(9)

Active communities as of period end (7)

242 221 21 10 %

(1) Refer to Note 14, Earnings Per Share to the consolidated financial statements for disclosures related to the calculation of EPS.

Diluted shares were calculated by using the treasury stock method for stock grants and the if-converted method for the convertible preferred stock and the associated preferred dividends.

(2) A community becomes active once the model is completed or the community has its fifth net sale.

A community becomes inactive when it has fewer than five homesites remaining to sell.

Backlog - units 2,599 3,978 (1,379) (35) %

Backlog - value (in thousands) $ 1,304,463 $ 1,887,368 $ (582,905) (31) %

Net homebuilding debt to net capitalization (6)

33.7 % 23.3 % 10.4 % 45 %

(1) Selling, general and administrative expense, which is comprised of homebuilding segments and Corporate expense (“SG&A”), includes $33 million and $19 million of Corporate SG&A for the year ended December 31, 2024 and 2023, respectively.

Corporate amounts are included as they primarily relate to our homebuilding business.

(2) Contingent consideration revaluation, which is comprised of amounts from the homebuilding segments and Corporate, (“contingent consideration”) includes $3 million and $9 million of Corporate contingent consideration expense for the year ended December 31, 2024 and 2023, respectively.

Corporate amounts are included as they represent contingent consideration relating to our homebuilding business that the Company does not charge to the segments.

(3) Average sales price of homes closed is calculated based on homebuilding revenues, adjusted for the impact of percentage of completion revenues, and excluding deposit forfeitures and land sales, over homes closed.

(4) Return on participating equity is calculated as net income attributable to DFH, less redeemable preferred stock distributions, dividends and redemptions, divided by average beginning and ending participating equity.

Participating equity is stockholders’ equity excluding noncontrolling interests.

(5) Net debt to net capitalization is defined as the sum of the senior unsecured notes, net, and construction lines of credit, less cash and cash equivalents (“net debt”), divided by the sum of net debt and total mezzanine and stockholders’ equity.

(6) Gross margin is homebuilding revenues less homebuilding cost of sales.

(4) Homebuilding gross margin is homebuilding revenues less homebuilding cost of sales.

(5) Calculated as a percentage of homebuilding revenues.

(8) Adjusted gross margin, EBITDA and adjusted EBITDA are non-GAAP financial measures.

For definitions of these non-GAAP financial measures and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”

(9) Calculated as a percentage of total revenues.

The following tables summarize homes closings, and ASP of homes closed by homebuilding segment for the years ended December 31, 2023 and 2022, as well as active communities as of December 31, 2023 and 2022:

Year Ended December 31, 2023 As of December 31, 2023

(6) Adjusted homebuilding gross margin and net homebuilding debt to net capitalization are non-GAAP financial measures.

For definitions of these non-GAAP financial measures and reconciliations to our most directly comparable financial measures calculated and presented in accordance with GAAP, see “— Non-GAAP Financial Measures .”

(7) A community becomes active once the model is completed or the community has its fifth net sale.

A community becomes inactive when it has fewer than five homesites remaining to sell.

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The following tables summarize home closings and average sales price (“ASP”) of homes closed by homebuilding segment for the year ended December 31, 2024 and 2023, as well as active communities as of December 31, 2024 and 2023:

Year Ended December 31, 2024 As of

December 31, 2024

Segment Home Closings ASP Active Communities

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Total 8,583 $ 509,249 242

Year Ended December 31, 2022 As of December 31, 2022

Year Ended December 31, 2023 As of

December 31, 2023

Segment Home Closings ASP Active Communities

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Total 7,314 $ 505,764 221

The following table presents income before taxes (in thousands), and homebuilding gross margin percentage by segment for the years ended December 31, 2023 and 2022:

The following tables present income before taxes (in thousands) and homebuilding gross margin (or “gross margin”) percentage by segment for the year ended December 31, 2024 and 2023:

Year Ended December 31,

Segment Income Before Taxes

Gross Margin % Income Before Taxes

Gross Margin %

Segment Income Before Taxes Gross Margin % Income Before Taxes Gross Margin %

Southeast $ 141,465 19.1 % $ 183,537 18.9 %

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Midwest 162,776 17.0 % 168,115 20.6 %

Total $ 406,298 19.4 % $ 369,772 18.4 %

Revenues for the year ended December 31, 2023 were $3.7 billion, an increase of $0.4 billion, or 12%, from $3.3 billion for the year ended December 31, 2022 .

The increase in revenues was attributable to home closings of 7,314 for the year ended December 31, 2023, an increase of 436 homes, or 6%, from 6,878 for the year ended December 31, 2022.

Also contributing to the increase was the average sales price of homes closed for the year ended December 31, 2023 was $505,764, an increase of $31,472, or 7%, from $474,292 for the year ended December 31, 2022.

The increase was due to overall price appreciation, as well as product mix.

Homebuilding Cost of Sales and Gross Margin .

Homebuilding cost of sales for the year ended December 31, 2023 was $3.0 billion, an increase of $0.3 billion, or 11%, from $2.7 billion for the year ended December 31, 2022.

Homebuilding gross margin for the year ended December 31, 2023 was $727 million, an increase of $115 million, or 19%, from $612 million for the year ended December 31, 2022.

Homebuilding gross margin percentage was 19.4% for the year ended December 31, 2023, an increase of 100 bps, or 5%, from 18.4% for the year ended December 31, 2022.

The increase in gross margin percentage was primarily a result of continued cost management and cycle time improvement efforts.

The increase was partially offset by higher financing and closing costs.

To facilitate home closings, we provided closing cost incentives, which, among other options, could be used by the customer to buy down their mortgage interest rate.

Adjusted Gross Margin.

Adjusted gross margin for the year ended December 31, 2023 was $1.0 billion, an increase of $196 million, or 24%, from $820 million for the year ended December 31, 2022.

Adjusted gross margin as a percentage of homebuilding revenues for the year ended December 31, 2023 was 27.2%, an increase of 260 bps, or 11%, from 24.6% for the year ended December 31, 2022.

The adjusted gross margin percentage increased due to effective cost management strategies, partially offset by higher closing costs.

Adjusted gross margin is a non-GAAP financial measure.

For the defin ition of adjusted gross margin and a reconciliation to our most directly comparable financial measure calculated and presented in accordance with GAAP, see “—Non-GAAP Financial Measures.”

Our Southeast segment total revenues for the year ended December 31, 2023 were $1.5 billion , an increase of $0.3 billion, or 23%, from $1.2 billion for the year ended December 31, 2022.

This revenue growth was primarily driven by an increase in home closings of 448, or 16%.

Additionally, the ASP of homes closed of $470,405 for the year ended 2023, reflected an increase of 7% when compared to 2022, a result of price appreciation and product mix.

Homebuilding gross margin percentage was 18.9% for the year ended December 31, 2023, representing a decrease of 50 bps, or 0.5%, when compared to the year ended December 31, 2022.

The reduction in gross margin percentage was primarily attributed to higher financing and closing costs.

Mid-Atlantic.

Our Mid-Atlantic segment total revenues for the year ended December 31, 2023 were $633 million, an increase of $66 million, or 12%, from $567 million for the year ended December 31, 2022.

This revenue growth was primarily driven by an increase in ASP of homes closed of 11% to $396,462.

The increase in ASP of homes closed was largely influenced by changes in product mix.

Additionally, there was an increase in home closings of 35, or 2%, for the year ended December 31, 2023 compared to 2022.

$ 434,308 18.3 % $ 406,298 19.4 %

(1) Total income before taxes by segment does not include $33 million and $19 million of Corporate SG&A, and $3 million and $9 million of Corporate contingent consideration expense for the years ended December 31, 2024 and 2023, respectively.

These amounts are included within total income before taxes related to homebuilding operations, which is presented in the Results of Homebuilding Operations table above.

Refer to footnotes (1) and (2) above for more information.

Homebuilding Revenues.

The increase in homebuilding revenues was primarily attributable to 8,583 home closings for the year ended December 31, 2024, an increase of 1,269 homes, or 17%, from 7,314 home closings for the year ended December 31, 2023.

In 2024, 877 home closings with an ASP of $534,617 were contributed by the Crescent Homes acquisition.

The consolidated ASP of homes closed increased 1% when comparing the year ended December 31, 2024 to the year ended December 31, 2023.

Excluding Crescent Homes, 41% of our closings were in the Midwest segment with an ASP of $583,198, which is the highest ASP of our homebuilding segments.

Homebuilding Cost of Sales and Homebuilding Gross Margin.

The higher homebuilding cost of sales and homebuilding gross margin were primarily due to the increase in home closings for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

The decrease in homebuilding gross margin as a percentage of homebuilding revenues when comparing the years ended December 31, 2024 and 2023 was primarily attributable to higher land and financing costs, partially offset by direct cost reductions and changes in product mix.

Additionally, amortization of purchase accounting adjustments associated with home closings from the Crescent Homes acquisition negatively impacted the year ended December 31, 2024 homebuilding gross margin percentage by approximately 12 bps.

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Our Southeast segment homebuilding revenues for the year ended December 31, 2024 were $1.4 billion, a decrease of $135 million, or 9%, from $1.5 billion for the year ended December 31, 2023.

This decline in revenue was driven by a decrease in home closings of 332, or 10%, partially offset by a 3% increase in the ASP of homes closed.

Homebuilding gross margin percentage was 19.1% for the year ended December 31, 2024, representing an increase of 20 bps, or 1%, when compared to the year ended December 31, 2023.

The improvement in gross margin percentage was primarily due to cost management efforts, including cycle time reductions, partially offset by higher financing costs.

Our Midwest segment total revenues for the year ended December 31, 2023 were $1.6 billion, an increase of $0.1 billion, or 4%, from $1.5 billion for the year ended December 31, 2022.

This additional revenue was due to an ASP of homes closed of $618,306 for the year ended 2023, an increase of 6% when compared to 2022, partially offset by a decrease in home closings of 47, or 2%.

Homebuilding gross margin percentage was 20.6% for the year ended December 31, 2023, representing an increase of 150 bps, or 1.5%, when com pared to the year ended December 31, 2022 .

The growth in gross margin percentage year over year is due to effective cost management including impacts from overall cycle time reduction, partially offset by higher financing and closing costs.

The increase in homebuilding gross margin percentage was mostly the result of direct cost reductions and, to a lesser extent, cycle time improvements, partially offset by higher land and financing costs.

Mid-Atlantic.

Our Mid-Atlantic segment homebuilding revenues for the year ended December 31, 2024 were $1.2 billion, an increase of $530 million, or 84%, from $633 million for the year ended December 31, 2023.

This revenue growth was primarily driven by an increase in home closings of 997, or 62%, for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Crescent Homes contributed $470 million in homebuilding revenues and 877 home closings with an ASP of $534,617 for the year ended December 31, 2024.

Excluding Crescent, homebuilding revenues in the Mid-Atlantic segment increased by 9% when comparing the year ended December 31, 2024 and 2023, primarily due to more home closings and, to a lesser degree, a higher ASP of $401,744, an increase of $5,282, or 1%, when compared to the year ended December 31, 2023.

Without Crescent, homebuilding gross margin percentage was 18.5% for the year ended December 31, 2024, representing an increase of 60 bps, or 3%, when compared to the year ended December 31, 2023.

The improvement in this homebuilding gross margin percentage was primarily a result of direct cost reductions and, to a lesser extent, cycle time improvements, partially offset by higher land and financing costs.

Our Midwest segment homebuilding revenues for the year ended December 31, 2024 were $1.8 billion, an increase of $264 million, or 17%, from $1.6 billion for the year ended December 31, 2023.

This increase was due to higher home closings of 604, or 24%, partially offset by a decrease of 6% in the ASP of homes closed.

The decrease in ASP of homes closed was due to changes in the geographic mix of closings within the segment.

Homebuilding gross margin percentage was 17.0% for the year ended December 31, 2024, representing a decrease of 360 bps, or 17%, when compared to year ended December 31, 2023.

The reduction in homebuilding gross margin percentage was due to an increase in land costs and, to a lesser extent, higher financing costs, partially offset by direct cost reductions.

Selling, General and Administrative Expense.

Selling, general and administrative expense (“SG&A”) for the year ended December 31, 2023 was $309 million, an increase of $38 million, or 14%, from $271 million for the year ended December 31, 2022.

SG&A as a percentage of homebuilding revenues for the year ended December 31, 2023 increased 20 bps to 8.3% compared to 8.1% for the year ended December 31, 2022.

For the year ended December 31, 2023, SG&A included $28 million of costs related to mortgage forward commitment programs, allowing our homebuyers to lock their interest rates on home loans at the point of sale, which were not incurred in 2022.

We expense these costs as incurred.

Income from Unconsolidated Entities .

Income from unconsolidated entities for the year ended December 31, 2023 was $18 million, an increase of $2 million, or 12%, from $16 million for the year ended December 31, 2022 .

The increase in income from unconsolidated entities is primarily attributable to increased income from Jet HomeLoans, partially offset by fewer distributions of profits from DF Capital funds, as Fund I is nearing its final stage, and as Fund II is still in its investment period.

SG&A as a percentage of homebuilding revenues was 9.0% for the year ended December 31, 2024, a slight increase of 90 bps from 8.1% for the year ended December 31, 2023.

The dollar increase in SG&A was primarily attributable to higher compensation costs of $51 million due to our growth from continued expansion, including the February 2024 acquisition of Crescent Homes and our operational expansions in Florida and Arizona.

Additionally, for the year ended December 31, 2024, SG&A included $50 million of spend on forward commitment programs to allow our homebuyers to access lower mortgage interest rates on home loans at the point of sale, representing a $22 million increase when compared to the year ended December 31, 2023.

Contingent Consideration Revaluation.

Contingent consideration revaluation expense (“contingent consideration expense”) for the year ended December 31, 2023 was $47 million, an increase of $36 million, or 322%, from $11 million for the year ended December 31, 2022 .

The increase in contingent consideration expense was primarily due to actual 2023 pre-tax earnings of previously acquired entities, primarily MHI, being better than projected as well as revised projections for the MHI operations.

Contingent consideration liabilities are impacted by various inputs and estimates in addition to the fair value accretion, including:

(i) updates to the applied discount rate, (ii) changes to current year inputs based on year to date actual results, (iii) changes to future year’s forecast assumptions, which are affected by macro-economic conditions and local market conditions, as well as management actions including capital allocation, growth plans, and restructuring, and (iv) contractual modifications that may merit additional adjustments to final pre-tax income prior to the calculation of the annual earn out payments.

The change in estimates used to calculate the contingent consideration revaluation adjustment could be material at times and could potentially fluctuate between expense and income.

Our policy is to separately disclose the impact of contingent consideration revaluation adjustments within the Consolidated Statements of Comprehensive Income.

Other Income, Net .

Other income, net for the year ended December 31, 2023 was $5 million, an increase of $3 million, or 157%, from $2 million in other income, net for the year ended December 31, 2022.

The additional income was primarily due to increased interest income from our cash deposits with financial institutions.

Net and Comprehensive Income .

Net and comprehensive income for the year ended December 31, 2023 was $308 million, an increase of $34 million, or 12%, from $274 million for the year ended December 31, 2022.

The increase in net and comprehensive income was primarily attributable to an increase in gross margin on homes closed of $115 million, or 19%, during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

This increase was partially offset by an increase in contingent consideration expense of $36 million, primarily related to the MHI acquisition, and forward commitment program costs, both discussed above.

The net and comprehensive income for the year ended December 31, 2023 includes income tax expense of $96 million, an increase of $14 million, or 18%, from $82 million of income tax expense for the year ended December 31, 2022.

This increase is primarily due to the increase in income before taxes and to a lesser extent the effective income tax rate increase of 0.9%.

The changes in net and comprehensive income attributable to Dream Finders Homes, Inc.

were consistent with the changes in net and comprehensive income as there were no significant changes in noncontrolling interests for the period.

Refer to the Form 10-K for the year ended December 31, 2022 filed on March 2, 2023 for the results of operations and related discussion for December 31, 2022 compared to the year ended December 31, 2021.

Financial Services

Income before taxes for the year ended December 31, 2023 for our Financial Services segment, net of reconciling items from equity method investments, was $19 million, an increase of $4 million, or 27%, from $15 million for the year ended December 31, 2022.

The increase in income before taxes for the Financial Services segment was primarily attributed to increased loans originated by Jet HomeLoans.

For the year ended December 31, 2023, Jet HomeLoans originated and funded 3,189 home loans with an aggregate principal amount of approximately $1.3 billion as compared to 2,370 home loans with an aggregate principal amount of approximately $879 million for the year ended December 31, 2022.

For the years ended December 31, 2023 and 2022, respectively, Jet HomeLoans had net income of approximately $20 million and $12 million.

Our interest in Jet HomeLoans is accounted for under the equity method and is not consolidated in our consolidated financial statements, as we do not control and are not deemed the primary beneficiary of the VIE.

Refer to N ote 1, Nature of Business and Significant Accounting Policies, to our consolidated financial statements for a discussion of accounting treatment of VIEs.

For the year ended December 31, 2023, our wholly owned subsidiary, DF Title, had income before taxes of $4 million, an increase of $1 million, or 33%, from $3 million for the year ended December 31, 2022.

The increase in income before taxes was driven by the increase in home closings and ASP of homes closed, as well as effective cost management.

$30 million of the decrease in contingent consideration expense for the year ended December 31, 2024 was attributable to lower fair value adjustments of future expected earnout payments related to the MHI acquisition, as actual results remained in line with forecasts when compared to the year ended December 31, 2023.

As the earnout period for the MHI acquisition is nearing its completion in the third quarter of 2025, it is less susceptible to changes in long-term underlying projections.

Additionally, the earnout period related to the 2020 acquisition of H&H Constructors of Fayetteville, LLC concluded in the third quarter of 2024 and the final payment for the contingent consideration agreement was made in the fourth quarter of 2024.

Income Before Taxes Related to Homebuilding Operations.

The increase in income before taxes related to homebuilding operations during the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to the increase in home closing volume and the reduction in contingent consideration expense, partially offset by the increase in SG&A, all explained above.

Refer to the Form 10-K for the year e nded December 31, 2023 filed on February 29, 2024 for the results of operations and related discussion for December 31, 2023 compared to the year ended December 31, 2022 .

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Net Sales, Backlog and Closings

The following table presents information concerning our net new orders (“net sales”), starts and c losings in each of our homebuilding segments for the periods set forth below:

The following table presents information concerning our net sales, starts and c losings in each of our homebuilding segments for the periods set forth below:

Year Ended December 31, Period Over Period

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Segment Net Sales

Starts Closings Net Sales (1)

Starts Closings Net Sales

Starts Closings

Southeast (1)(2)

1,754 2,868 2,838 1,822 2,693 3,170 -4 % 6 % -10 %

Mid-Atlantic 2,196 2,623 2,594 1,360 1,627 1,597 61 % 61 % 62 %

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Total 6,727 8,743 8,583 5,744 6,871 7,314 17 % 27 % 17 %

(1) Net sales are sales of homes during the period, less cancellations of existing sales contracts during the period.

(1) Excluding net sales under built-for-rent contracts, 2024 net sales in the Southeast segment increased 9% when compared to 2023.

The following table presents information concerning our ending backlog in number of homes, ASP and aggregate value (in thousands) for our homebuilding segments as of the dates set forth below:

The year ended December 31, 2024 also included a built-for-rent contract termination discussed further below.

(2) Closings under built-for-rent contracts decreased 18% when comparing the year ended December 31, 2024 to the year ended December 31, 2023.

The following table presents information concerning our backlog in number of homes, ASP and aggregate value (in thousands) for our homebuilding segments as of the dates set forth below:

As of December 31,

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Mid-Atlantic (2)

678 464,798 315,133 599 427,593 256,128

Midwest 771 677,234 522,147 1,145 657,190 752,483

Total 2,599 $ 501,910 $ 1,304,463 3,978 $ 474,451 $ 1,887,368

(1) Ending backlog represents the number of homes in backlog from the previous period, plus net sales during the period, minus the number of home closings during the current period.

Backlog of sold homes as of December 31, 2023 was 3,978 homes valued at approximately $1.9 billion based on ASP, a decrease of 1,570 homes and $0.6 billion in value, or 28% and 25%, respectively, from 5,548 homes valued at approximately $2.5 billion as of December 31, 2022.

The overall decrease in backlog is reflective of an increase in sales of move-in ready spec homes relative to pre-order sales.

Spec homes typically result in quicker closings and turnover of the backlog.

(1) Represents the number of homes in backlog from the previous period, plus net sales during the period, minus the number of home closings during the current period.

(2) On February, 1 2024, backlog increased by 477 due to our Crescent Homes acquisition on that date.

235 of the homes in backlog as of December 31, 2024 are from Crescent Homes.

Backlog of sold homes as of December 31, 2024 was 2,599 homes valued at approximately $1.3 billion based on ASP, a decrease of 1,379 homes and $583 million in value, or 35% and 31%, respectively, from 3,978 homes valued at approximately $1.9 billion as of December 31, 2023.

The overall decrease in backlog was mostly reflective of a continued trend toward move-in ready spec homes relative to pre-order sales, and to a lesser extent, a reduction in built-for-rent contracts in backlog.

Spec homes typically result in quicker closings and turnover of the backlog within the same reporting period.

Approximately 187 of the homes in our backlog are expected to be delivered in 2026 and beyond.

Backlog for the Southeast segment as of December 31, 2024 was 1,150 homes, a decrease of 1,084 from 2,234 homes as of December 31, 2023.

The decrease was primarily attributable to an increase in sales of move-in ready spec homes relative to pre-order sales and to a lesser extent built-for-rent sales in 2022 backlog that did not repeat in 2023.

The decrease from prior year was primarily attributable to a continued trend toward move-in ready spec homes relative to pre-order sales and a reduction in net sales under built-for-rent contracts.

Mid-Atlantic.

Backlog for the Mid-Atlantic segment as of December 31, 2023 was 599 homes, a decrease of 237 from 836 homes as of December 31, 2022.

The decrease in backlog was attributable to the increase in spec inventory sales relative to pre-order sales and to a lesser extent fewer sales under built-for-rent contracts in 2023 relative to 2022.

Backlog for the Midwest segment as of December 31, 2023 was 1,145 homes, an increase of 15 from 1,130 homes as of December 31, 2022.

The modest increase was primarily attributable to the higher net sales relative to closings in 2023, when compared to 2022.

Backlog for the Mid-Atlantic segment as of December 31, 2024 was 678 homes, an increase of 79 from 599 homes as of December 31, 2023.

The increase in backlog from prior year was attributable to the Crescent Homes acquisition and, to a lesser extent, higher net sales relative to closings, partially offset by lower net sales relative to closings under built-for-rent contracts.

Backlog for the Midwest segment as of December 31, 2024 was 771 homes, a decrease of 374 from 1,145 homes as of December 31, 2023.

The decrease from prior year was mostly a result of higher closings relative to net sales, as well as the continued trend toward more sales of move-in-ready spec homes relative to pre-order sales.

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The following table presents information concerning our cancellation rates for each of our homebuilding segments for the periods set forth below:

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Our cancellation rate for the year ended December 31, 2024 was 16.6%, an improvement of 170 basis points when compared to the 18.3% cancellation rate for the year ended December 31, 2023.

The reduction in the overall cancellation rate was primarily a result of significant improvement in the cancellation rates for the Mid-Atlantic and Midwest segments, driven by improved homebuyer sentiments in 2023 following a sharp spike in interest rates that occurred in the latter half of 2022.

This was partially offset by a higher proportion of 2022 gross sales under built-for-rent contracts for the Southeast segment relative to 2023.

Built-for-rent sales have a lower cancellation rate than retail sales.

The Southeast cancellation rate remained in line with the Company’s historical cancellation rates.

The overall improvement in cancellation rate was mostly a result of the trend toward higher spec sales relative to pre-order sales.

The higher cancellation rate in the Southeast segment for the year ended December 31, 2024 was primarily attributable to a built-for-rent contract of 229 units that was terminated during the first quarter of 2024 based on a strategic decision to convert the controlled lots underlying the deal into future retail sales.

The total cancellation rate and the Southeast cancellation rate excluding built-for-rent activity were 14.1% and 13.4%, respectively, for the year ended December 31, 2024.

Financial Services

Our Financial Services segment provides mortgage financing and title services primarily through our wholly owned subsidiaries, Jet HomeLoans and DF Title, respectively.

The following table presents selected financial information and supplemental data for our Financial Services segment for the year ended December 31, 2024 and 2023 (dollars in thousands, unless otherwise indicated):

Year Ended December 31,

Mortgage revenues $ 34,786 $ —

Title services revenues 18,943 9,698

Total financial services revenues 53,729 9,698

Financial services expense 31,540 5,727

Income from unconsolidated entities 9,770 15,770

Financial services income before taxes $ 31,959 $ 19,741

Supplemental data (1) :

Total originations:

Number of loans 4,977 3,189

Principal (in millions) $ 2,196 $ 1,318

Capture rate 71.9 % 65.5 %

Average FICO score 744 741

Funded origination breakdown:

Government (FHA, VA, USDA) 40 % 41 %

Non-agency 60 % 59 %

(1) Supplemental data reflects operations of Jet HomeLoans prior to its consolidation in the Company’s financial statements beginning on July 1, 2024.

Refer to Note 2, Acquisitions to the consolidated financial statements for additional information.

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The $35 million, or 100%, increase in mortgage revenues, $21 million of the increase in financial services expense and $11 million of the increase in the financial services income before taxes for the year ended December 31, 2024 as compared to the year ended December 31, 2023, respectively, were all primarily due to the consolidation of Jet HomeLoans beginning July 1, 2024.

The income before taxes of Jet HomeLoans prior to July 1, 2024 was included in income from unconsolidated entities in the Consolidated Statements of Comprehensive Income.

The $9 million, or 95%, increase in title services revenues, $5 million of the increase in financial services expense and $4 million of the increase in the financial services income before taxes for the year ended December 31, 2024 as compared to the year ended December 31, 2023, were primarily the result of DF Title’s expansion of operations into the Texas market.

Our Texas market was previously serviced by our unconsolidated title joint ventures, which resulted in a partially offsetting impact to financial services income before taxes of $2 million.

Non-GAAP Financial Measures

Adjusted Gross Margin

Adjusted gross margin is a non-GAAP financial measure used by management as a supplemental measure in evaluating operating performance.

We define adjusted gross margin as gross margin excluding the effects of capitalized interest, lot option fees, amortization included in homebuilding cost of sales (adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense.

Our management believes this information is meaningful because it isolates the impact that these excluded items have on gross margin.

We include internal and external commission expense in homebuilding cost of sales, not selling, general and administrative expense, and therefore commission expense is taken into account in gross margin.

As a result, in order to provide a meaningful comparison to the public company homebuilders that include commission expense below the gross margin line in selling, general and administrative expense, we have excluded commission expense from adjusted gross margin.

However, because adjusted gross margin information excludes capitalized interest, lot option fees, purchase accounting amortization and commission expense, which have real economic effects and could impact our results of operations, the utility of adjusted gross margin information as a measure of our operating performance may be limited.

In addition, other companies may not calculate adjusted gross margin information in the same manner that we do.

Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance.

The following table presents a reconciliation of adjusted gross margin to the GAAP financial measure of gross margin for each of the periods indicated (unaudited and in thousands, except percentages):

Management utilizes specific non-GAAP financial measures as supplementary tools to evaluate operating performance.

These include adjusted homebuilding gross margin, EBITDA, and net homebuilding debt to net capitalization.

Other companies may not calculate non-GAAP financial measures in the same manner that we do.

Accordingly, these non-GAAP financial measures should be considered only as a supplement to relevant GAAP information, as reconciled for each measure below.

In the future, we may incorporate additional adjustments to these non-GAAP financial measures as we find them relevant and beneficial for both management and investors.

Adjusted Homebuilding Gross Margin

We define adjusted homebuilding gross margin as homebuilding gross margin excluding the effects of capitalized interest, lot option fees, amortization included in homebuilding cost of sales (adjustments resulting from the application of purchase accounting in connection with acquisitions) and commission expense.

Our management believes this information is meaningful because it isolates the impact that these excluded items have on homebuilding gross margin.

As a result, in order to provide a meaningful comparison to the public company homebuilders that include commission expense below the homebuilding gross margin line in selling, general and administrative expense, we have excluded commission expense from adjusted homebuilding gross margin.

However, because adjusted homebuilding gross margin information excludes capitalized interest, lot option fees, purchase accounting amortization and commission expense, which have real economic effects and could impact our results of operations, the utility of adjusted homebuilding gross margin information as a measure of our operating performance may be limited.

The following table presents a reconciliation of adjusted homebuilding gross margin to the GAAP financial measure of homebuilding gross margin for each of the periods indicated (unaudited and in thousands, except percentages):

Year Ended December 31,

2024 2023 2022

Gross margin (1)

Homebuilding gross margin (1)

$ 806,394 $ 727,075 $ 612,420

Interest charged to homebuilding cost of sales (2)

Interest expense in homebuilding cost of sales (2)

187,324 122,759 60,595

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Commission expense 187,214 165,790 140,442

Adjusted gross margin $ 1,015,624 $ 820,158 $ 416,382

Gross margin % (4)

Adjusted homebuilding gross margin $ 1,186,019 $ 1,015,624 $ 820,158

Homebuilding gross margin % (4)

18.3 % 19.4 % 18.4 %

Adjusted gross margin % (4)

Adjusted homebuilding gross margin % (4)

27.0 % 27.2 % 24.6 %

(1) Gross margin is homebuilding revenues less homebuilding cost of sales.

(1) Homebuilding gross margin is homebuilding revenues less homebuilding cost of sales.

(2) Includes interest charged to homebuilding cost of sales related to our construction lines of credit and senior unsecured notes, net, as well as lot option fees.

(3) Represents amortization of purchase accounting adjustments from the Company’s prior acquisitions.

(3) Represents amortization of purchase accounting adjustments from our acquisitions.

(4) Calculated as a percentage of homebuilding revenues.

EBITDA and Adjusted EBITDA

EBITDA and adjusted EBITDA are not measures of net income 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.

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EBITDA is not a measure of net income 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 in homebuilding cost of sales, (iii) interest expense, (iv) income tax expense and (v) depreciation and amortization.

We define adjusted EBITDA as EBITDA before stock-based compensation.

Management believes EBITDA and adjusted EBITDA 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 the comparability of financial results from period to period.

EBITDA and adjusted EBITDA should not be considered as alternatives to, or more meaningful than, net income or any other measure as determined in accordance with GAAP.

Our computations of EBITDA and adjusted EBITDA may not be comparable to EBITDA or adjusted EBITDA of other companies.

We present EBITDA and adjusted EBITDA because we believe they provide useful information regarding the factors and trends affecting our business.

EBITDA and adjusted EBITDA information should be considered only as a supplement to net income information as a measure of our performance.

The following table presents a reconciliation of EBITDA and adjusted EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages):

Management believes EBITDA is useful because it allows 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 the comparability of financial results from period to period.

EBITDA 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 computations of EBITDA may not be comparable to EBITDA of other companies.

The following table presents a reconciliation of EBITDA to the GAAP financial measure of net income for each of the periods indicated (unaudited and in thousands, except percentages):

Year Ended December 31,

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EBITDA $ 629,750 $ 521,495 $ 422,582

Stock-based compensation 14,098 6,796 5,233

Adjusted EBITDA $ 535,593 $ 429,378 $ 200,200

EBITDA margin % (3)

14.1% 13.9% 12.6%

Adjusted EBITDA margin % (3)

14.3% 12.8% 10.4%

(1) Includes interest charged to homebuilding cost of sales related to our construction lines of credit and senior unsecured notes, net, as well as lot option fees.

(2) Includes amortization of purchase accounting adjustments from prior acquisitions of $7 million and $10 million for the years ended December 31, 2022 and 2021, respectively, which is included in homebuilding cost of sales reported on the Consolidated Statements of Comprehensive Income.

For the year ended December 31, 2023, there was no such amortization of fair value adjustments of inventory.

(2) Includes amortization of purchase accounting adjustments from our acquisitions.

(3) Calculated as a percentage of total revenues.

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Net Homebuilding Debt to Net Capitalization

Net homebuilding debt to net capitalization is a non-GAAP financial measure that is the sum of construction lines of credit and senior unsecured notes, net less cash and cash equivalents (“net homebuilding debt”), divided by the sum of net homebuilding debt, total mezzanine equity and total equity (“net capitalization”).

Net homebuilding debt excludes borrowings under our mortgage warehouse facilities.

Management believes the ratio of net homebuilding debt to net capitalization is meaningful as it is used to assess the performance of our homebuilding segments, as well as to establish targets for performance-based compensation.

We also use this ratio as a measure of overall leverage.

The following table presents a reconciliation of net homebuilding debt to net capitalization to the GAAP financial measure of total debt to total capitalization for each of the periods indicated (unaudited and in thousands, except percentages):

Total debt $ 1,286,052 $ 824,302

Total mezzanine equity 169,951 148,500

Total equity 1,250,409 937,650

Total capitalization $ 2,706,412 $ 1,910,452

Total debt to total capitalization 47.5 % 43.1 %

Total debt $ 1,286,052 $ 824,302

Mortgage warehouse facilities 289,617 —

Cash and cash equivalents 274,384 494,145

Net homebuilding debt $ 722,051 $ 330,157

Total mezzanine equity 169,951 148,500

Total equity 1,250,409 937,650

Net capitalization $ 2,142,411 $ 1,416,307

Net homebuilding debt to net capitalization 33.7 % 23.3 %

Liquidity and Capital Resources

We generate cash from the sale of our inventory and we intend to re-deploy the net cash generated from the sale of inventory to acquire and control land and further grow our operations year over year.

We generate cash from the sale of our homes and from providing ancillary financial services.

We intend to re-deploy our generated net cash to acquire and control land and further grow our operations year over year.

We believe that our sources of liquidity are sufficient to satisfy our current commitments.

Our liquidity comes from a variety of sources, including cash, borrowings under a credit agreement (the “Credit Agreement”), and net proceeds from the senior unsecured notes (“2028 Notes”).

As of December 31, 2023, we had $494 million in cash and cash equivalents, excluding $54 million of restricted cash.

The Credit Agreement had an aggregate commitment of up to $1.2 billion and $1.1 billion, and outstanding borrowings of $530 million and $965 million as of December 31, 2023 and 2022, respectively.

The Company had $334 million of availability under the Credit Agreement with a borrowing base of $1.2 billion as of December 31, 2023 .

On August 22, 2023, the Company issued the 8.25% 2028 Notes with $300 million in aggregate principal amount.

The Company used the net proceeds from the issuance of the 2028 Notes to repay a portion of the then outstanding borrowings under the Credit Agreement.

Total liquidity as of year-end was $828 million, inclusive of reduced availability under the Credit Agreement for the 2028 Notes, which are permitted unsecured indebtedness .

The Credit Agreement will mature on July 17, 2026.

We finance our operations through a variety of sources, including cash, borrowings under a revolving credit facility (the “Credit Agreement”), net proceeds from the senior unsecured notes (“2028 Notes”) and mortgage warehouse facilities used in our mortgage banking operations.

Our principal uses of capital are for lot deposits, lot purchases just-in-time for construction, vertical home construction, operating expenses, the payment of routine liabilities, business acquisitions and the origination of mortgage loans.

Cash allocated to 2024 business acquisitions was approximately $220 million as of December 31, 2024 and none as of December 31, 2023.

There was no acquisition activity in 2023.

Refer to Note 2, Acquisitions to the consolidated financial statements for more information.

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As of December 31, 2024 and 2023, our cash and total liquidity were as follows (in thousands):

Borrowing base (1)

$ 1,254,094 $ 864,272

Outstanding balance under Credit Agreement (700,000) (530,000)

Letters of credit outstanding (2)

Availability under Credit Agreement $ 541,645 $ 334,272

Cash and cash equivalents (3)

274,384 494,145

Total liquidity $ 816,029 $ 828,417

(1) As of December 31, 2024 and 2023, the borrowing base under the Credit Agreement was reduced by the principal amount of the senior unsecured notes of $300 million.

(2) The availability under the Credit Agreement is reduced by outstanding letters of credit that are not fully cash collateralized.

(3) Includes cash and cash equivalents reported on the Consolidated Balance Sheets related to financial services operations, which are not subject to restrictions and are regularly remitted to Corporate.

As of December 31, 2024, the Credit Agreement had an aggregate commitment of up to $1.4 billion.

The Credit Agreement will mature on June 4, 2027.

Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement and the 2028 Notes.

As of December 31, 2023 , we were in compliance with the covenants set forth in our Credit Agreement and under the indenture related to the 2028 Notes.

See below and refer to Note 2, Debt to our consolidated financial statements for more information on the Credit Agreement and the 2028 Notes.

We continue to evaluate our capital structure and explore options to strengthen our balance sheet.

We will remain opportunistic while assessing available capital in the debt and equity markets.

Our principal uses of capital are for lot deposits, lot purchases just-in-time for construction, vertical home construction, operating expenses and the payment of routine liabilities.

Cash flows generated by our projects can differ materially from our results of operations, as these depend upon the stage in the life cycle of each project.

The majority of our projects begin at the land acquisition stage when we enter into finished lot option contracts by placing a deposit with a land seller, banker or developer.

Our lot deposits are an asset on our balance sheets and these cash outflows are not recognized in our results of operations.

Early stages in our communities require material cash outflows relating to finished rolling option lot purchases, entitlements and permitting, construction and furnishing of model homes, roads, utilities, general landscaping and other amenities, as well as ongoing association fees and property taxes.

Except for furnishings of model homes, these costs are capitalized within our real estate inventory and are not recognized in our operating income until a home sale closes.

As such, we incur significant cash outflows prior to the recognition of revenues.

As of December 31, 2024, we were in compliance with the covenants set forth for all of our debt obligations.

Refer to Note 3, Debt, to the consolidated financial statements for more information on the Credit Agreement, 2028 Notes and the mortgage warehouse facilities.

Cash flows generated by our homebuilding projects can differ materially from our results of operations, as these depend upon the stage in the life cycle of each project.

The majority of our projects begin at the land acquisition and development stage when we enter into finished lot option and land bank option contracts by placing a deposit with a land seller, developer or land banker.

Our lot deposits are an asset on our Consolidated Balance Sheets.

Early stages in our communities require material cash outflows relating to finished lot purchases from option contracts, entitlements and permitting, construction and furnishing of model homes, roads, utilities, general landscaping and other amenities, as well as ongoing association fees and property taxes.

Except for furnishings of model homes, these costs are capitalized within our inventories and are not recognized as an expense until a home sale closes.

As such, we incur significant cash outflows prior to the recognition of revenues and the related cost of sales.

In later stages of the life cycle of a community, cash inflows could significantly exceed our results of operations, as the cash outflows associated with land purchase and home construction and other expenses were previously incurred.

We actively enter into finished lot option contracts by placing deposits with land sellers based on the aggregate purchase price of the finished lots.

When entering into these contracts, we also agree to purchase finished lots at predetermined prices, time frames, and quantities that match our expected selling pace in the community.

We actively enter into finished lot option contracts by placing deposits with land sellers or land bankers based on the aggregate purchase price of the finished lots.

When entering into these contracts, we also agree to purchase finished lots at predetermined prices, time frames, and quantities that match our expected selling pace in the communities.

We also enter into land development arrangements with land sellers, land developers and land bankers.

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Refer to “— Off-Balance Sheet Arrangements ” for additional information.

The above cash strategies allow us to maintain adequate lot supply in our existing markets and support ongoing growth and profitability.

Although currently there is economic uncertainty that is impacting the homebuilding industry, we continue to operate in geographic regions with consistent increases in demand for new homes and constrained lot and inventory supply compared to population and job growth trends.

Our lot deposits are generally 100% applicable to the lot purchase price.

In these transactions, we also incur lot option fees on the outstanding capital balance held by the land banker.

The initial investment and lot option fees require us to have the ability to allocate liquidity resources to projects that will not generate cash inflows or operating income in the near term.

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The above cash and land-light strategies allow us to maintain an adequate lot supply in our existing markets and support ongoing growth and profitability.

We continue to operate in geographic regions with consistent increases in demand for new homes and constrained lot and inventory supply compared to population and job growth trends.

We intend to continue to reinvest our earnings into our business and focus on expanding our operations.

In addition, as the opportunity to purchase finished lots in desired locations becomes increasingly more limited and competitive, we are committed to allocating additional liquidity to land bank deposits on land development projects, as this strategy mitigates the risks associated with holding undeveloped land on our balance sheet, while allowing us to control adequate lot supply in our key markets to support forecasted growth.

As of December 31, 2024 and 2023, our lot deposits related to finished lot option contracts and land bank option contracts were $458 million and $247 million, respectively.

We continue to evaluate our overall capital structure and explore options to strengthen our balance sheet.

We will remain opportunistic while assessing available capital in the debt and equity markets.

The following table summarizes our cash flows for the periods indicated (in thousands):

Year Ended December 31,

2024 2023 2022

Net cash (used in)/provided by operating activities $ (256,648) $ 374,234 $ (27,623)

Net cash used in investing activities (221,672) (4,484) (5,524)

Net cash provided by/(used in) financing activities 269,689 (216,424) 146,955

Net cash used in operating activities was $257 million for the year ended December 31, 2024, compared to $374 million of net cash provided by operating activities for the year ended December 31, 2023.

The change in net cash (used in)/provided by operating activities was primarily driven by higher lot deposits of $240 million, the $189 million increase of mortgage loans held for sale resulting from the Jet HomeLoans acquisition on July 1, 2024, higher increases in inventories in 2024 of $86 million as a result of higher construction starts and lot purchases and lower customer deposit activity in 2024.

All of these changes are inclusive of the impact of acquisitions related to Crescent Homes and Jet HomeLoans.

Net cash used in investing activities was $222 million for the year ended December 31, 2024, compared to $4 million of net cash used in investing activities for the year ended December 31, 2023, primarily attributable to the acquisition of Crescent Homes on February 1, 2024 for a purchase price of $210 million, of which $188 million was paid during the year ended December 31, 2024, partially offset by net cash acquired of $10 million from the Jet HomeLoans acquisition, which was in excess of $9 million of cash consideration paid for the transaction.

To a lesser extent, the change was also driven by $14 million in cash paid for the purchase of an aircraft for corporate use and $11 million in deposits placed for our pending acquisitions.

Net cash provided by financing activities was $270 million for the year ended December 31, 2024, as compared to $216 million of net cash used in financing activities for the year ended December 31, 2023.

The change in net cash provided by/(used in) financing activities was primarily attributable to net proceeds from our homebuilding debt of $171 million during the year ended December 31, 2024 used to release housing starts and purchase lots for our homebuilding operations, compared to $136 million of net homebuilding debt repayments during the year ended December 31, 2023.

Additionally, there were $180 million of net proceeds from the mortgage warehouse facilities during the year ended December 31, 2024 resulting from the Jet HomeLoans acquisition.

Refer to the Form 10-K for the year ended December 31, 2023 filed on February 29, 2024 for the cash flows and related discussion for December 31, 2023 compared to year ended December 31, 2022.

Senior Unsecured Notes

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The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of the Company’s subsidiaries.

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The Company received net proceeds from the issuance and sale of the 2028 Notes of $294 million after unamortized debt issuance costs of $7 million, which reduce the carrying value of the 2028 Notes reported on the Consolidated Balance Sheets.

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Credit Agreement

On July 19, 2023, the Company entered into amendments to its existing credit agreement.

As amended, the Credit Agreement provides for a senior unsecured revolving credit facility with a syndicate of lenders with Bank of America, N.A.

acting as administrative agent.

The Credit Agreement provides for aggregate commitments of $1,240 million, which includes a $25 million letter of credit sublimit, is subject to a borrowing base, and has an accordion feature which allows the facility to expand up to $1,625 million.

The maturity date for lenders with $1,085 million worth of commitments is July 17, 2026.

The remaining lenders have a maturity date of June 2, 2025, but such lenders have the option, with the Company’s consent, to extend their applicable maturity date to July 17, 2026.

Outstanding borrowings under the Credit Agreement are subject to, among other things, a borrowing base.

The borrowing base includes, among other things, (a) 90% of the net book value of presold housing units, (b) 85% of the net book value of model housing units, (c) 85% of the net book value of speculative housing units, (d) 70% of the net book value of finished lots, (e) 85% of the net book value of certain built-for-rent units, and (f) 75% of the net book value of other built-for-rent units, in each case subject to certain exceptions and limitations set forth in the Credit Agreement.

The borrowing base availability is reduced dollar-for-dollar for any outstanding unsecured indebtedness permitted under the Credit Agreement.

Under the Credit Agreement, the Company has the option to draw “Term SOFR Rate Loans” or “Daily Simple SOFR Rate Loans”.

Term SOFR Rate Loans bear interest based on Term SOFR rates for one, three or six-month interest periods, which include SOFR adjustments of 10, 15 and 25 basis points for each interest period, respectively.

On June 6, 2024, the Company entered into an amendment to its existing revolving credit facility (as amended, the “Credit Agreement”).

The amendment, among other things, (i) provides for an increase in the aggregate commitments under the revolving credit facility to $1.4 billion, subject to a borrowing base;

(ii) extends the maturity date from July 17, 2026 to June 4, 2027 for certain new and existing lenders comprising $1.3 billion of the $1.4 billion of aggregate commitments under the Credit Agreement;

and (iii) provides the Company with the ability to incur certain additional unsecured debt.

Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement.

The Credit Agreement includes an accordion feature that allows the aggregate commitments to increase to up to $2.0 billion, subject to a borrowing base.

Under the Credit Agreement, the Company has the ability to draw “Term SOFR Rate Loans” or “Daily Simple SOFR Rate Loans”.

Term SOFR Rate Loans bear interest based on Term SOFR rates for one or three-month interest periods and include a SOFR adjustment of 10 basis points for each interest period.

Daily Simple SOFR Rate Loans bear interest based on Daily Simple SOFR rates and include a SOFR adjustment of 10 basis points.

Interest under Term SOFR Rate Loans and Daily Simple SOFR Rate Loans also include an “applicable rate margin” determined based on the Company’s net debt to capitalization ratio, equivalent to credit spreads of 2.00% to 2.95%.

The Credit Agreement contains covenants that, among other things, require that we (i) maintain a maximum debt to capitalization ratio, as of the last day of each fiscal quarter, of 60.0%;

(ii) maintain an interest coverage ratio, as of the last day of each fiscal quarter, of not less than 2.0 to 1.0;

(iii) maintain a liquidity ratio, as of the last day of each fiscal quarter, of not less than 1.0 to 1.0;

(iv) maintain tangible net worth of not less than the sum of (A) $607 million , (B) 50.0% of net income earned in each fiscal quarter after March 31, 3023 and (C) 50.0% of the aggregate increases in shareholders’ equity of the consolidated group after March 31, 2023 by reason of the issuance and sale of equity interests of the members of the consolidated group;

(v) maintain a risk assets ratio (defined as (A) the sum of the GAAP net book value for all finished lots, lots under development and land held for future development or disposition to (B) tangible net worth), as of the last day of each fiscal quarter, of no more than 1.0 to 1.0;

(vi) not allow aggregate investments in unconsolidated affiliates to exceed 15.0% of tangible net worth, as of the last day of any fiscal quarter;

and (vii) not incur indebtedness other than, among other things, (A) the obligations under the Credit Agreement, (B) non-recourse indebtedness in an amount not to exceed 15.0% of tangible net worth, as of the last day of each fiscal quarter, (C) operating lease liabilities, finance lease liabilities and purchase money obligations for fixed or capital assets not to exceed $5 million in the aggregate, (D) indebtedness of financial services subsidiaries and variable interest entities, (E) indebtedness under hedge contracts entered into for purposes other than for speculative purposes, and (F) permitted unsecured indebtedness (including the 2028 Notes).

As of December 31, 2024 and 2023, the outstanding balance under the Credit Agreement was $700 million and $530 million, respectively.

Under the Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on specific advance rates for each of finished lots, construction in process homes, and finished homes inventory on the Consolidated Balance Sheets, and reduced for any outstanding unsecured indebtedness permitted under the Credit Agreement, including the 2028 Notes.

The Company had capitalized debt issuance costs related to construction lines of credit, net of amortization, of $10 million and $7 million as of December 31, 2024 and 2023, respectively, which were included in other assets on the Consolidated Balance Sheets.

Debt issuance costs related to the 2028 Notes and the Credit Agreement that are recorded to capitalized interest are expensed in cost of sales as the homes close.

The Company was in compliance with all debt covenants as of December 31, 2024 and 2023.

The Company expects to remain in compliance with all debt covenants over the next 12 months.

The Company had capitalized debt issuance costs, net of amortization, related to construction lines of credit totaling $7 million as of both December 31, 2023 and 2022, which were included in other assets on the Consolidated Balance Sheets.

Debt issuance costs that are recorded to capitalized interest are expensed in cost of sales as the homes close.

Refer to Note 3, Debt, to the consolidated financial statements for more information on covenants in the Credit Agreement.

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Contingent Consideration

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This liability is remeasured to fair value quarterly and the adjustment is recorded in contingent consideration revaluation in the Consolidated Statements of Comprehensive Income.

As of December 31, 2023, the contingent consideration liability totaled $117 million, with approximately $50 million payable within 12 months.

As of December 31, 2024, the contingent consideration liability totaled $68 million, with the entire amount expected to be payable within 12 months.

Further information regarding our contingent consideration liability is provided in Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements.

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Following the redemption, no Series B preferred units remain outstanding.

Refer to Note 12, Mezzanine and Stockholders’ Equity to the consolidated financial statements for disclosure related to the redemption.

Convertible Preferred Stock

On September 29, 2021, we sold 150,000 shares of newly-created convertible preferred stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share, for an aggregate purchase price of $150 million.

We used the proceeds from the sale of the convertible preferred stock to partially fund the MHI acquisition and for general corporate purposes.

Pursuant to the Certificate of Designations, the convertible preferred stock ranks senior to the Class A and B common stock with respect to dividends and distributions on liquidation, winding-up and dissolution.

Accordingly, upon a liquidation, dissolution or winding up of the Company, each share of convertible preferred stock is entitled to receive the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon.

In addition, the convertible preferred stock has the following terms:

• Cumulative Dividends:

The convertible preferred stock accumulates cumulative dividends at a rate per annum equal to 9% payable quarterly in arrears.

The convertible preferred stock is perpetual with call and conversion rights.

The convertible preferred stock is not convertible by the Purchasers in the first five years following issuance, with the exception of the acceleration of the Conversion Right (as defined below) upon breach of the protective covenants (described below).

We can call the outstanding convertible preferred stock at any time for one-hundred and two percent (102%) of its liquidation preference during the fourth year following its issuance and for one-hundred and one percent (101%) of its liquidation preference during the fifth year following its issuance, plus accrued but unpaid dividends, if any.

Subsequent to the fifth anniversary of its issuance, a purchaser can convert the convertible preferred stock into Class A common stock (the “Conversion Right”).

The conversion price will be based on the average of the ninety trading days for the Class A common stock immediately preceding but not including the date of the optional conversion notice (as defined in the certificate of designations for the convertible preferred stock) , less 20% of the average and subject to a floor conversion price of $4.00 (the “Conversion Discount”).

• Protective Covenants:

The protective covenants of the convertible preferred stock require us to maintain compliance with all covenants related to (i) the Credit Agreement, as may be further amended from time to time;

provided that any amendment, restatement, modification or waiver of the Credit Agreement that would adversely and materially affect the rights of the Purchasers will require the written consent of holders of a majority of the then-outstanding shares of convertible preferred stock;

and (ii) any agreement between the Company and any Purchaser (the covenants referred to in clauses (i) and (ii), collectively, the “Protective Covenants”).

Non-compliance beyond any applicable cure period with the Protective Covenants (in the case of the Protective Covenants related to the Credit Agreement) will accelerate the Conversion Right, and in the event of such acceleration that occurs before the fifth anniversary following the issuance of the convertible preferred stock, the Conversion Discount shall be increased from 20% to 25%.

• Voting Rights:

Except as may be expressly required by Delaware law, the shares of convertible preferred stock have no voting rights.

• Redemption in a Change of Control:

The convertible preferred stock will be redeemed, contingent upon and concurrently with the consummation of a change of control of the Company.

Shares of convertible preferred stock will be redeemed in a change of control of the Company at a price, in cash, equal to the liquidation preference, subject to adjustment, plus all accumulated and unpaid dividends, plus, if the change of control occurs before the fourth anniversary of the date of issuance of the convertible preferred stock, a premium equal to the dividends that would have accumulated on such share of convertible preferred stock from and after the change of control redemption date and through the fourth anniversary of the issuance of the convertible preferred stock.

Pursuant to the terms of the Certificate of Designations, unless and until approval of the Company’s stockholders is obtained, no shares of Class A common stock will be issued or delivered upon conversion of any convertible preferred stock to the extent that such issuance would (i) result in the holder beneficially owning in excess of 19.99% of the outstanding Class A common stock as of the date of the Certificate of Designations or (ii) exceed 19.99% of the outstanding shares of Class A and Class B common stock combined as of the date of the Certificate of Designations.

The following table summarizes our cash flows for the periods indicated (in thousands):

Year Ended December 31,

2023 2022 2021

Net cash provided by/(used in) operating activities $ 374,234 $ (27,623) $ 64,972

Net cash used in investing activities (4,484) (5,524) (523,043)

Net cash (used in)/provided by financing activities (216,424) 146,955 646,020

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Net cash provided by operating activitie s was $374 million for the year ended December 31, 2023, compared to $28 million of net cash used in operating activities for the year ended December 31, 2022.

The change in net cash provided by operating activities was primarily driven by a lower increase in inventories when compared to the prior year of $250 million, as well as higher net income in 2023, largely driven by an increase in home closings when compared to 2022.

There was also a decrease in lot deposits in 2023, compared to an increase in lot deposits in 2022.

Customer deposits also increased versus a decrease in customer deposits in the prior year.

Net cash used in investing activities was $4 million for the year e nded December 31, 2023, compared to $6 million of cash used in investing activities for the year ended December 31, 2022, primarily attributable to higher purchases of property and equipment during the year ended December 31, 2022 .

Net cash used in financing activities was $216 million for the year ended December 31, 2023, as comp ared to $147 million of cash provided by financing activities for the year ended December 31, 2022.

The change in net cash used in financing activities was primarily attributable to higher net payments on the construction lines of credit of $436 million in 2023 compared to $203 million of net proceeds in 2022, and to a lesser extent, a one-time payment related to the redemption of the Series B preferred units during the year ended December 31, 2023.

The full net proceeds from the issuance of unsecured senior notes of $300 million during the year were used to pay down a portion of the outstanding balance under the Credit Agreement.

Refer to the Form 10-K for the year ended December 31, 2022 filed on March 2, 2023 for the cash flows and related discussion for December 31, 2022 compared to year ended December 31, 2021.

Refer to Note 12, Equity to the consolidated financial statements for disclosure related to the redemption.

Redeemable Noncontrolling Interest

Based on the terms of the purchase agreement, at the time of an acquisition, we may issue redeemable noncontrolling interest.

Redeemable noncontrolling interest is reported within m ezzanine equity on the Company’s Consolidated Balance Sheets at the greater of the initial carrying amount (its fair value on the acquisition date) adjusted for the noncontrolling interest’s share of net income (loss) or its redemption value.

After achieving the minimum earnings threshold, the amount of net and comprehensive income that is attributable to the redeemable noncontrolling interest will be presented within net and comprehensive income attributable to noncontrolling interests on the Consolidated Statements of Comprehensive Income.

As of December 31, 2024, the redeemable noncontrolling interest totaled $21 million , of which no amount was redeemable within 12 months.

Refer to Note 1, Nature of Business and Significant Accounting Policies to our consolidated financial statements for more information.

Redeemable Preferred Stock

On September 29, 2021, we sold 150,000 shares of newly-created redeemable preferred stock with an initial liquidation preference of $1,000 per share and a par value $0.01 per share, for an aggregate purchase price of $150 million.

We used the proceeds from the sale of the redeemable preferred stock to partially fund the MHI acquisition and for general corporate purposes.

Pursuant to the Certificate of Designations, the redeemable preferred stock ranks senior to the Class A and B common stock with respect to dividends and distributions on liquidation, winding-up and dissolution.

Accordingly, upon a liquidation, dissolution or winding up of the Company, each share of redeemable preferred stock is entitled to receive the initial liquidation preference of $1,000 per share, subject to adjustment, plus all accrued and unpaid dividends thereon.

Refer to Note 12 , Equity to the consolidated financial statements for additional terms of the redeemable preferred stock.

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Off-Balance Sheet Arrangements

Asset-Light Lot Acquisition Strategy

We employ an asset-light and cost-effective lot acquisition strategy to achieve our growth goals.

This strategy involves two key approaches:

finished lot option contracts and land bank option contracts.

These contracts grant us the right to purchase finished lots at predetermined fixed prices from various land developers, sellers, and land bank partners.

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, our loss is limited to the related lot option fees paid to the land bank partner, any potential performance obligations, management of the land development to completion and any cost overruns relative to the project.

As of December 31, 2023, our lot deposits for finished lot option and land bank option contracts that are within the Consolidated Balance Sheets were $247 million.

As of December 31, 2023, we controlled 29,748 lots under finished lot option and land bank option contracts.

We operate an asset-light and capital-efficient lot acquisition strategy primarily through finished lot option contracts and land bank option contracts.

Refer to “Item 1.

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These arrangements relate to certain performance-related obligations and serve as security for certain land option agreements.

As of December 31, 2023 , we had outstanding surety bonds and letters of credit totaling $195 million and $1 million, respectively.

As of December 31, 2024 and 2023, we had outstanding surety bonds of $298 million and $195 million, respectively, and outstanding letters of credit of $21 million and $1 million, respectively.

We believe we will fulfill our obligations under the related arrangements and do not anticipate any material losses under these surety bonds and letters of credit.

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Revenue Recognition

We recognize revenue in two ways in accordance with Accounting Standards Codification (“ASC”) 606.

This includes revenues from home sales with respect to homes that we construct on homesites to which we own title that are recorded at the time each home sale is closed and title and possession are transferred to the buyer, or upon delivery of homes sold to third-party investors intending to lease the homes, as well as revenues from home sales in which the buyer retains title to the homesite while we build the home that are recognized based on the percentage of completion of the home construction, which is measured on a quarterly basis.

We recognize homebuilding revenue in two ways in accordance with Accounting Standards Codification (“ASC”) Topic 606.

This includes revenues from home sales with respect to homes that we construct on homesites to which we own title that are recorded at the time each home sale is closed and title and possession are transferred to the buyer, or upon delivery of homes sold to third-party investors intending to lease the homes, as well as revenues from home sales in which the buyer or third-party investor retains title to the homesites while we build the homes that are recognized based on the percentage of completion of the home construction, which is measured on a quarterly basis.

We determine the percentage of completion based on the number of days of construction completed to the total estimated number of days to construct the home.

Real Estate Inventory and Homebuilding Cost of Sales

Inventories and Homebuilding Cost of Sales

Inventories include the cost of direct land acquisition, land development, construction, capitalized interest, lot option fees, real estate taxes and direct overhead costs incurred related to land acquisition and development and home construction.

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Land and development costs are typically allocated to individual residential lots on a pro rata basis based on the number of lots in the development, and the costs of residential lots are transferred to construction work in progress when home construction begins.

The carry cost for land and development, recognized in homebuilding cost of sales as homes close, is impacted by our ability to estimate the timing to completion for land development deals and expected sales pace.

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Sold units are expensed on a specific identification basis as homebuilding cost of sales.

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The Company accounts for business combinations using the acquisition method.

Under ASC 805 a business combination occurs when an entity obtains control of a “business.” The Company determines whether or not the gross assets acquired meet the definition of a business.

Under ASC Topic 805 a business combination occurs when an entity obtains control of a “business.” The Company determines whether or not the gross assets acquired meet the definition of a business.

If they meet this criteria, the Company accounts for the transaction as a stock purchase.

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Transaction costs are expensed as incurred, except if related to the issuance of debt or equity securities.

Any contingent consideration is measured at fair value at the date of acquisition and is based on expected cash flow of the acquisition target discounted over time using an observable market discount rate.

Any contingent consideration is measured at fair value at the date of acquisition and is based on expected cash flows of the acquisition target discounted over time using an observable market discount rate.

The Company generally utilizes outside valuation experts to determine the amount of contingent consideration.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis