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DIAMONDHEAD(DHHC) - 2024 Q2 - Quarterly Report
DIAMONDHEADDIAMONDHEAD(US:DHHC)2024-08-09 20:08

PART I. FINANCIAL INFORMATION Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements present the company's financial position, operations, equity changes, and cash flows, highlighting a shift from a $31.2 million deficit to $25.7 million positive equity and a decrease in cash from $56.7 million to $24.9 million Condensed Consolidated Balance Sheets Total assets decreased to $284.0 million from $298.6 million, while total liabilities significantly reduced to $258.3 million from $329.8 million, leading to a shift from a $31.2 million equity deficit to a $25.7 million positive equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $24,916 | $56,671 | | Inventories | $168,789 | $182,810 | | Total Assets | $284,033 | $298,647 | | Liabilities & Equity | | | | Homebuilding debt | $72,724 | $80,451 | | Derivative liabilities | $69,168 | $127,611 | | Convertible note payable | $69,041 | $68,039 | | Total Liabilities | $258,288 | $329,830 | | Total Stockholders' equity (deficit) | $25,745 | $(31,183) | Condensed Consolidated Statements of Operations Q2 2024 revenue decreased to $109.4 million with net income of $28.6 million, while H1 2024 revenue was $210.3 million with net income of $53.6 million, both significantly impacted by non-cash derivative gains Key Operating Results (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Revenue, net | $109,420 | $122,092 | $210,258 | $216,918 | | Gross profit | $19,578 | $23,917 | $35,672 | $40,695 | | Change in fair value of derivative liabilities | $32,056 | $242,343 | $58,435 | $35,278 | | Net income | $28,640 | $245,363 | $53,578 | $40,858 | | Diluted EPS | $0.50 | $4.27 | $0.93 | $0.89 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity improved from a $31.2 million deficit at year-end 2023 to a $25.7 million positive balance by June 30, 2024, primarily due to $53.6 million in net income - The company's equity position shifted from a deficit of $(31,182,536) at year-end 2023 to a positive equity of $25,745,352 at June 30, 202417 - The primary driver for the improvement in stockholders' equity was the net income of $53,578,257 recorded during the first six months of 20241517 Condensed Consolidated Statements of Cash Flows Operating activities used $19.1 million in cash for H1 2024, a reversal from $50.3 million provided in H1 2023, with overall cash and cash equivalents decreasing by $31.8 million Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2024 | 2023 | | :--- | :--- | :--- | | Net cash from operating activities | $(19,142,916) | $50,316,249 | | Net cash from investing activities | $(12,733,095) | $37,966 | | Net cash from financing activities | $120,322 | $30,148,781 | | Net change in cash | $(31,755,689) | $80,502,996 | - The significant decrease in operating cash flow in H1 2024 compared to H1 2023 was primarily due to changes in working capital, particularly a smaller positive change in inventories ($8.0 million in 2024 vs. $65.6 million in 2023)21 Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, the land-light strategy, segment reporting, the Creekside Custom Homes acquisition, debt and convertible note terms, derivative liabilities, and a significant August 2024 credit agreement amendment - The company operates under a land-light strategy, constructing single-family homes in South Carolina, North Carolina, and Georgia2324 - On January 26, 2024, the company acquired Creekside Custom Homes for $12.7 million in cash, recognizing $3.6 million in goodwill5960 - The company has a $240 million syndicated credit facility with Wells Fargo, amended on August 2, 2024, to waive a debt service coverage ratio covenant default, extend maturity, and reduce capacity to $220 million9195162 - The company has $80 million in principal of convertible notes outstanding, maturing in 2028 with a 15% interest rate123124 - Derivative liabilities, primarily from contingent earnout shares and warrants, are significant and subject to fair value changes based on the company's stock price, causing large non-cash gains or losses in the income statement82148 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A covers decreased revenue from fewer home closings, declining gross margins due to incentives and costs, net income impacted by derivative gains, and liquidity supported by cash and an amended credit line, all within a land-light strategy facing higher mortgage rates - The company's strategy is multifaceted, focusing on organic growth, expansion of business verticals like its mortgage joint venture, and targeted acquisitions of private homebuilders168 - Macro-economic headwinds, particularly higher mortgage rates, have negatively impacted new home demand, leading the company to offer additional sales incentives like mortgage rate buy-downs172 - A key component of the company's strategy is acquiring developed lots via lot option contracts with related parties and third-party developers, which limits financial risk associated with long-term land holdings217 Results of Operations Q2 2024 revenue decreased 10.4% to $109.4 million due to fewer closings, despite an 8.9% ASP increase, with gross margin contracting to 17.9%, while H1 2024 saw similar trends Q2 2024 vs Q2 2023 Performance | Metric | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $109.4M | $122.1M | (10.4)% | | Home Closings | 337 | 385 | (12.5)% | | Average Sales Price | $340,803 | $313,075 | 8.9% | | Gross Profit % | 17.9% | 19.6% | (1.7) p.p. | | Net New Orders | 323 | 341 | (5.3)% | H1 2024 vs H1 2023 Performance | Metric | H1 2024 | H1 2023 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $210.3M | $216.9M | (3.0)% | | Home Closings | 648 | 713 | (9.1)% | | Average Sales Price | $337,994 | $313,591 | 7.8% | | Gross Profit % | 17.0% | 18.8% | (1.8) p.p. | | Net New Orders | 707 | 730 | (3.2)% | - Selling, general and administrative (SG&A) expenses increased 20.2% in Q2 2024 and 11.2% in H1 2024, driven by higher stock compensation, severance costs from a June 2024 workforce reduction, and increased advertising184198 Non-GAAP Financial Measures Non-GAAP Adjusted Gross Profit for Q2 2024 was $22.8 million (20.9% margin), and Adjusted EBITDA was $7.7 million (7.0% margin), both lower year-over-year, providing a clearer view of core operating performance Adjusted Gross Profit Reconciliation (in thousands) | | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Gross profit (GAAP) | $19,578 | $23,917 | $35,672 | $40,695 | | Adjustments | $3,267 | $2,160 | $7,787 | $4,547 | | Adjusted gross profit (Non-GAAP) | $22,845 | $26,077 | $43,459 | $45,242 | Adjusted EBITDA Reconciliation (in thousands) | | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Net income (GAAP) | $28,640 | $245,363 | $53,578 | $40,858 | | EBITDA (Non-GAAP) | $34,571 | $253,940 | $64,493 | $49,929 | | Adjustments | $(26,911) | $(240,831) | $(49,550) | $(28,303) | | Adjusted EBITDA (Non-GAAP) | $7,660 | $13,109 | $14,944 | $21,626 | Liquidity and Capital Resources As of June 30, 2024, the company held $24.9 million in cash and $55.5 million in available credit, with cash decreasing by $31.8 million in H1 2024, and its primary credit facility recently amended after a covenant default - Cash and cash equivalents stood at $24.9 million as of June 30, 2024, down from $56.7 million at the end of 2023211 - The company's main credit facility, the Wells Fargo Syndicated Line, was amended on August 2, 2024, to waive a debt service coverage ratio covenant default that occurred on June 30, 2024, and modified other financial covenants227228 Cash Flow Summary - H1 2024 vs H1 2023 (in millions) | Activity | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Operating | $(19.1) | $50.3 | | Investing | $(12.7) | $0.04 | | Financing | $0.1 | $30.1 | Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk, impacting homebuyer affordability and variable-rate debt costs, with a 100 basis point rate increase potentially reducing annual net income by $0.7 million on its $71.2 million outstanding balance - The company's main market risk is interest rate sensitivity, which affects both housing demand and the cost of its variable-rate debt243 - The interest rate on the Syndicated Line is variable (SOFR plus a margin); a hypothetical 100 basis point (1%) increase in rates would reduce annual net income by about $0.7 million based on the June 30, 2024 outstanding balance245 Controls and Procedures Management identified multiple material weaknesses in internal controls, including tax review, process-level reviews, IT controls, and a new issue with a related party lease, with remediation efforts underway - The company has identified multiple material weaknesses in its internal controls over financial reporting, including issues with tax review, process-level reviews, IT controls, and segregation of duties248 - A new material weakness was identified in Q2 2024 concerning the timely execution of a related party lease transaction after its approval249 - Remediation efforts are underway, including enhancing the control system, improving review processes, and realigning personnel, but the weaknesses are not yet fully remediated251252255 PART II. OTHER INFORMATION Legal Proceedings The company faces ordinary course legal claims, primarily construction defects, which management expects will not materially impact financial statements - The company faces ordinary course legal claims, primarily related to construction defects, but does not expect them to have a material financial impact122257 Risk Factors No material changes to previously disclosed risk factors were reported for the quarter - No material changes to risk factors were reported for the quarter258 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported for the quarter that were not previously disclosed - No unregistered sales of equity securities were reported for the quarter259 Defaults Upon Senior Securities The company reported no defaults upon senior securities - None260 Mine Safety Disclosures This item is not applicable to the company - Not applicable261 Other Information The company reported no other information for this item - None262 Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications, XBRL data, and the Third Amendment to the credit agreement - The Exhibit Index lists all documents filed with the report, including officer certifications and interactive data files263266