Dream Finders Homes, Inc. [DFH] Filings

10-Q 1 dfh-20230930.htm 10-Q dfh-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023


o			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to _________.

Commission file number 001-39916

___________________________________________________________

DREAM FINDERS HOMES, INC.

(Exact name of registrant as specified in its charter)


Delaware			85-2983036
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)


14701 Philips Highway, Suite 300, Jacksonville, FL			32256
(Address of principal executive offices)			(Zip code)

(904) 644-7670

(Registrant’s Telephone Number, Including Area Code)

___________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered

Class A Common Stock, par value $0.01 per share	DFH	New York Stock Exchange

___________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of November 2, 2023, there were 32,882,124 shares of the registrant’s Class A common stock, par value $0.01 per share, issued and outstanding and 60,226,153 shares of the registrant’s Class B common stock, par value $0.01 per share, issued and outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION			3

ITEM 1. DREAM FINDERS HOMES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			3

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)			3

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)			4

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)			5

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)			7

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)			8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34

ITEM 4. CONTROLS AND PROCEDURES			34

PART II. OTHER INFORMATION			35

ITEM 1. LEGAL PROCEEDINGS			35

ITEM 1A. RISK FACTORS			35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			35

ITEM 5. OTHER INFORMATION			35

ITEM 6. EXHIBITS			36

SIGNATURES			39

Table of Contents,

PART I. FINANCIAL INFORMATION

ITEM 1. DREAM FINDERS HOMES, INC. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)


	September 30, 2023		December 31, 2022
Assets
Cash and cash equivalents	$	330,129	$	364,531
Restricted cash	33,172		30,599
Accounts receivable	33,315		43,490
Inventories	1,473,917		1,378,185
Lot deposits	241,280		277,258
Other assets	56,532		59,438
Investments in unconsolidated entities	14,297		14,008
Property and equipment, net	7,523		7,337
Operating lease right-of-use assets	21,676		24,084
Goodwill	172,207		172,207
Total assets	$	2,384,048	$	2,371,137

Liabilities
Accounts payable	$	137,146	$	134,702
Accrued expenses	122,924		184,051
Customer deposits	163,544		145,654
Construction lines of credit	555,512		966,248
Senior unsecured notes, net	293,604		—
Operating lease liabilities	22,433		24,661
Contingent consideration	102,813		115,128
Total liabilities	$	1,397,976	$	1,570,444
Commitments and contingencies (Note 4)
Mezzanine Equity
Preferred mezzanine equity	148,500		156,421
Stockholders’ Equity
Class A common stock, $0.01 per share, 289,000,000 authorized, 32,882,124 and 32,533,883 outstanding as of September 30, 2023 and December 31, 2022, respectively	329		325
Class B common stock, $0.01 per share, 61,000,000 authorized, 60,226,153 outstanding	602		602
Additional paid-in capital	271,429		264,381
Retained earnings	549,837		365,994
Noncontrolling interests	15,375		12,970
Total mezzanine and stockholders’ equity	986,072		800,693
Total liabilities, mezzanine equity and stockholders’ equity	$	2,384,048	$	2,371,137

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Homebuilding	$	893,502	$	783,945	$	2,603,858	$	2,237,648
Other	2,328		1,724		6,731		5,221
Total revenues	895,830		785,669		2,610,589		2,242,869
Homebuilding cost of sales	709,286		638,456		2,109,485		1,812,746
Selling, general and administrative expense	79,963		68,839		214,433		196,564
Income from unconsolidated entities	(4,557)		(5,137)		(12,219)		(11,431)
Contingent consideration revaluation	9,026		2,641		32,608		11,875
Other income, net	(1,646)		(1,119)		(2,711)		(1,784)
Income before taxes	103,758		81,989		268,993		234,899
Income tax expense	(24,158)		(10,371)		(66,000)		(50,576)
Net and comprehensive income	79,600		71,618		202,993		184,323
Net and comprehensive income attributable to noncontrolling interests	(3,503)		(1,977)		(9,043)		(8,342)
Net and comprehensive income attributable to Dream Finders Homes, Inc.	$	76,097	$	69,641	$	193,950	$	175,981
Earnings per share
Basic	$	0.79	$	0.71	$	1.98	$	1.78
Diluted	$	0.75	$	0.64	$	1.83	$	1.67
Weighted-average number of shares
Basic	93,108,277		92,760,013		93,052,507		92,760,013
Diluted	102,052,181		108,286,433		105,819,964		105,117,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

Three and nine months ended September 30, 2023

(In thousands, except share amounts)

(Unaudited)


	Redeemable Preferred Mezzanine			Common Stock - Class A			Common Stock - Class B			Additional Paid-in Capital		Retained Earnings		Total Non- Controlling Interests		Total Equity
	Units	Amount		Shares	Amount		Shares	Amount
Balance as of June 30, 2023	157,143	$	156,855	32,882,124	$	329	60,226,153	$	602	$	270,529	$	476,663	$	14,501	$	919,479
Stock-based compensation	—	—		—	—		—	—		3,812		—		—		3,812
Vesting of stock-based compensation	—	—		—	—		—	—		—		—		—		—
Withholding of common stock for taxes	—	—		—	—		—	—		—		—		—		—
Distributions	—	—		—	—		—	—		—		—		(2,629)		(2,629)
Redemption of Series B preferred units	(7,143)	(8,508)		—	—		—	—		(2,912)		343		—		(11,077)
Preferred dividends declared	—	—		—	—		—	—		—		(3,113)		—		(3,113)
Net and comprehensive income	—	153		—	—		—	—		—		75,944		3,503		79,600
Balance as of September 30, 2023	150,000	$	148,500	32,882,124	$	329	60,226,153	$	602	$	271,429	$	549,837	$	15,375	$	986,072


	Redeemable Preferred Mezzanine			Common Stock - Class A			Common Stock - Class B			Additional Paid-in Capital		Retained Earnings		Total Non- Controlling Interests		Total Equity
	Units	Amount		Shares	Amount		Shares	Amount
Balance as of December 31, 2022	157,143	$	156,421	32,533,883	$	325	60,226,153	$	602	$	264,381	$	365,994	$	12,970	$	800,693
Stock-based compensation	—	—		—	—		—	—		10,286		—		—		10,286
Vesting of stock-based compensation	—	—		371,841	4		—	—		(4)		—		—		—
Withholding of common stock for taxes	—	—		(23,600)	—		—	—		(322)		—		—		(322)
Distributions	—			—	—		—	—		—		—		(6,638)		(6,638)
Redemption of Series B preferred units	(7,143)	(8,508)		—	—		—	—		(2,912)		343		—		(11,077)
Preferred dividends declared	—	—		—	—		—	—		—		(9,863)		—		(9,863)
Net and comprehensive income	—	587		—	—		—	—		—		193,363		9,043		202,993
Balance as of September 30, 2023	150,000	$	148,500	32,882,124	$	329	60,226,153	$	602	$	271,429	$	549,837	$	15,375	$	986,072

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (continued)

Three and nine months ended September 30, 2022

(In thousands, except share amounts)

(Unaudited)


	Redeemable Preferred Mezzanine			Common Stock - Class A			Common Stock - Class B			Additional Paid-in Capital		Retained Earnings		Total Non- Controlling Interests		Total Equity
	Units	Amount		Shares	Amount		Shares	Amount
Balance as of June 30, 2022	157,143	$	155,621	32,378,939	$	323	60,380,000	$	602	$	261,207	$	217,346	$	12,056	$	647,155
Stock-based compensation	—	—		1,074	—		—	—		1,576		—		—		1,576
Distributions	—	—		—	—		—	—		—		—		(526)		(526)
Preferred dividends declared	—	—		—	—		—	—		—		(3,451)		—		(3,451)
Net and comprehensive income	—	209		—	—		—	—		—		69,431		1,977		71,618
Balance as of September 30, 2022	157,143	$	155,830	32,380,013	$	323	60,380,000	$	602	$	262,783	$	283,326	$	13,508	$	716,372


	Redeemable Preferred Mezzanine			Common Stock - Class A			Common Stock - Class B			Additional Paid-in Capital		Retained Earnings		Total Non- Controlling Interests		Total Equity
	Units	Amount		Shares	Amount		Shares	Amount
Balance as of December 31, 2021	157,143	$	155,220	32,295,329	$	323	60,226,153	$	602	$	257,963	$	118,194	$	24,081	$	556,383
Stock-based compensation	—	—		84,684	—		153,847	—		4,819		—		—		4,819
Distributions	—	—		—	—		—	—		—		—		(18,916)		(18,916)
Preferred dividends declared	—	—		—	—		—	—		—		(10,238)		—		(10,238)
Net and comprehensive income	—	610		—	—		—	—		—		175,370		8,342		184,323
Balance as of September 30, 2022	157,143	$	155,830	32,380,013	$	323	60,380,000	$	602	$	262,783	$	283,326	$	13,508	$	716,372

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash Flows from Operating Activities
Net and comprehensive income	$	202,993	$	184,323
Adjustments to Reconcile Net Income to Net cash provided by/(used in) operating activities
Depreciation and amortization	7,983		8,006
Gain on sale of property and equipment	(44)		(99)
Extinguishment of unamortized debt issuance costs	—		282
Amortization of right-of-use operating lease assets	5,438		4,154
Stock-based compensation	10,286		4,819
Deferred tax benefit	(5,248)		(1,867)
Return on investments, net of income from unconsolidated entities	11		4,078
Revaluation of contingent consideration	32,608		11,875
Payments of contingent consideration	(12,331)		(4,056)
Changes in Operating Assets and Liabilities
Accounts receivable	10,175		(4,447)
Inventories	(95,623)		(446,168)
Lot deposits	35,978		(49,901)
Other assets	8,587		(8,263)
Accounts payable and accrued expenses	(58,683)		27,823
Customer deposits	17,890		(6,893)
Operating lease liabilities	(5,258)		(4,057)
Net cash provided by/(used in) operating activities	154,762		(280,391)
Cash Flows from Investing Activities
Purchase of property and equipment	(3,906)		(4,321)
Proceeds from disposal of property and equipment	201		127
Investments in unconsolidated entities	(300)		—
Return of investments from unconsolidated entities	—		449
Business combinations, net of cash acquired	—		(280)
Net cash used in investing activities	(4,005)		(4,025)
Cash Flows from Financing Activities
Proceeds from senior unsecured notes	300,000		—
Proceeds from construction lines of credit	5,410,000		8,008,078
Repayments on construction lines of credit	(5,820,736)		(7,794,929)
Payments of debt issuance costs	(11,358)		(5,490)
Redemption of Series B preferred units	(11,077)		—
Payments of preferred stock dividends	(9,863)		(10,238)
Payments for common stock withheld for taxes	(322)		—
Distributions to noncontrolling interests	(6,638)		(18,916)
Payments of contingent consideration	(32,592)		(13,679)
Net cash (used in)/provided by financing activities	(182,586)		164,826
Net decrease in cash, cash equivalents and restricted cash	(31,829)		(119,590)
Cash, cash equivalents and restricted cash at beginning of period	395,130		281,322
Cash, cash equivalents and restricted cash at end of period	$	363,301	$	161,732
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	330,129	$	123,692
Restricted cash	33,172		38,040
Total cash, cash equivalents and restricted cash	$	363,301	$	161,732
Supplemental disclosures of noncash activities:
Noncash Financing Activities
Leased assets obtained in exchange for new operating lease liabilities	$	3,030	$	8,864
Total noncash activities	$	3,030	$	8,864

The accompanying notes are an integral part of these condensed consolidated financial statements.

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DREAM FINDERS HOMES, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Business and Significant Accounting Policies

Nature of Business

Dream Finders Homes, Inc. (together with its subsidiaries, “Dream Finders”, the “Company” or “DFH, Inc.”) designs, builds and sells homes in markets throughout the United States. The Company also offers title insurance and mortgage banking solutions. The Company was incorporated in the State of Delaware on September 11, 2020.

Basis of Presentation and Consolidation

The accompanying unaudited, condensed consolidated financial statements include the accounts of DFH, Inc., its wholly owned subsidiaries and its investments that qualify for consolidation treatment (see Note 5, Variable Interest Entities). The accompanying statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for a complete set of financial statements. As such, the accompanying statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The accompanying statements include all adjustments that are of a normal, recurring nature and necessary for the fair presentation of our results for the interim periods presented, which are not necessarily indicative of results to be expected for the full year. All intercompany accounts and transactions have been eliminated in consolidation. There are no other components of comprehensive income not already reflected in net and comprehensive income on our Condensed Consolidated Statements of Comprehensive Income.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Contingent Consideration

In connection with applicable business combinations, the Company records the fair value of contingent consideration as a liability on the acquisition date as prescribed by the underlying agreement. The initial measurement of contingent consideration is based on projected cash flows such as revenues, gross margin, overhead expenses and pre-tax income of the acquired business and is discounted to present value using the discounted cash flow method. The remaining estimated contingent consideration payments are subsequently remeasured to fair value at each reporting date based on the estimated future earnings of the acquired entities and the re-assessment of risk-adjusted discount rates that reflect current market conditions.

Maximum potential exposure for contingent consideration is not estimable based on the contractual terms of the contingent consideration agreements, which allow for a percentage payout based on a potentially unlimited range of pre-tax net income.

As of September 30, 2023 and December 31, 2022, the Company remeasured the fair value of contingent consideration related to the 2020 acquisition of H&H Constructors of Fayetteville, LLC and adjusted the liability to $10.8 million and $11.6 million, respectively, based on actual results achieved, revised pre-tax income forecasts and revised discount rates as of the balance sheet date and from accretion of the liability. The Company recorded contingent consideration adjustments resulting in $0.6 million of expense and $2.5 million of income for the three months ended September 30, 2023 and 2022, and $3.8 million of expense and $0.1 million of expense for the nine months ended September 30, 2023 and 2022, respectively.

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As of September 30, 2023 and December 31, 2022, the Company remeasured the fair value of contingent consideration related to the 2021 acquisition of McGuyer Homebuilders, Inc. (“MHI”) and adjusted the liability to $92.0 million and $102.1 million, respectively, based on actual results achieved, revised pre-tax income forecasts and revised discount rates as of the balance sheet date and from accretion of the liability. The Company recorded contingent consideration adjustments resulting in $8.4 million of expense and $5.9 million of expense for the three months ended September 30, 2023 and 2022, and $28.4 million of expense and $9.9 million of expense for the nine months ended September 30, 2023 and 2022, respectively.

See Note 8, Fair Value Disclosures for the fair value measurement of contingent consideration.

Reclassifications

Certain reclassifications have been made in the condensed consolidated financial statements for 2022 to conform to the classifications used in 2023.

2. Debt

Senior Unsecured Notes

On August 22, 2023, the Company issued $300.0 million in aggregate principal amount of 8.25% senior unsecured notes due August 15, 2028 (the “2028 Notes”), which were issued pursuant to an indenture (the “Indenture”). Interest on the 2028 Notes is payable in arrears semiannually on each February 15 and August 15, beginning February 15, 2024. The 2028 Notes are fully and unconditionally guaranteed on a joint and several senior unsecured basis by certain of the Company’s subsidiaries.

The Company received net proceeds from the issuance and sale of the 2028 Notes of $293.5 million after unamortized debt issuance costs of $6.5 million, which reduce the carrying value of the 2028 Notes reported on the Condensed Consolidated Balance Sheets. The net proceeds from the 2028 Notes were used to repay a portion of the outstanding balance under the Company’s Credit Agreement.

The 2028 Notes are redeemable by the Company prior to August 15, 2025 through the payment of the principal amount due, which can be accomplished through the issuance of certain restricted equity offerings for specified portions of principal notes outstanding, plus specified rates and accrued and unpaid interest, and a make-whole premium in the event 100% of the principal amount is redeemed. On or after August 15, 2025, the 2028 Notes are redeemable at specified rates equal to 104.1% of the principal balance, plus accrued and unpaid interest, and periodically decrease to 100% on August 15, 2027. Upon the occurrence of a Change of Control (as defined in the Indenture), the holders of the 2028 Notes will have the right to require the Company to repurchase all or a portion of the 2028 Notes at a price equal to 101% of the aggregate principal amount of the 2028 Notes, plus any accrued and unpaid interest.

The Indenture includes customary events of default. Subject to specified exceptions, the Indenture contains certain restrictive covenants that, among other things, limit our ability to incur or guarantee certain indebtedness, issue certain equity interests or engage in certain capital stock transactions. In addition, the Indenture contains certain limitations related to mergers, consolidations, and transfers of assets.

Credit Agreement

On July 19, 2023, the Company entered into amendments to its existing credit agreement (as amended, the “Credit Agreement”). The amendments, among other things, (i) provide for an increase in the aggregate commitments under the revolving credit facility to $1.2 billion, subject to a borrowing base; (ii) extend the maturity date from June 2, 2025 to July 17, 2026 for certain new and existing lenders comprising $1.1 billion of the $1.2 billion of aggregate commitments under the Credit Agreement; (iii) authorize the non-extending lenders to extend their maturity dates to July 17, 2026, with the consent of the Company; (iv) provide the Company with the ability to incur certain additional unsecured debt; and (v) reference a Secured Overnight Financing Rate (“SOFR”) based rate, as described below. Certain of our subsidiaries guaranteed the Company’s obligations under the Credit Agreement. The amendments also updated the Company’s minimum tangible net worth covenant which resulted in an increase to the base component of such covenant from $385 million to $607 million.The Credit Agreement retains an accordion feature that allows the aggregate commitments to increase up to $1.6 billion, subject to a borrowing base.

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Under the Credit Agreement, loans bear interest, at the Company’s option of a “Term SOFR Rate” or “Daily Simple SOFR Rate”, which means for any day a fluctuating rate per annum equal to credit spreads of 2.5% to 3.3%, which are determined based on the Company’s net debt to capitalization ratio, plus either the Daily Simple SOFR Rate (including a SOFR adjustment of 10 basis points) or the Term SOFR Rate, which is based on one, three or six-month interest periods (including a SOFR adjustment of 10 basis points for a one-month interest period, 15 basis points for a three-month interest period and 25 basis points for a six-month interest period), as applicable.

As of September 30, 2023 and December 31, 2022, the outstanding balance under the Credit Agreement was $555.0 million and $965.0 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, and finished homes inventory on the Condensed Consolidated Balance Sheets. The Company had capitalized debt issuance costs related to construction lines of credit, net of amortization, of $7.7 million and $7.3 million as of September 30, 2023 and December 31, 2022, respectively, which were included in other assets on the Condensed Consolidated Balance Sheets.

Debt issuance costs are expensed in cost of sales as the homes close. The Company was in compliance with all debt covenants as of September 30, 2023 and December 31, 2022. The Company expects to remain in compliance with all debt covenants over the next twelve months.

3. Inventories

Inventories consist of owned land and finished lots, and construction in process (“CIP”) and finished homes, including capitalized interest. In addition, interest and fees related to off-balance sheet arrangements and due diligence costs are also capitalized into inventory. Finished lots are generally purchased just-in-time for construction, whether for spec or sold homes, and are included within owned land and lots in the table below until construction begins when the finished lot cost is transferred to CIP. CIP represents homes under construction or completed, including sold, spec and model homes. CIP includes the cost of finished lots and all direct costs incurred to build homes. The cost of homes is expensed on a specific identification basis when the home is delivered to an end-customer.

As of September 30, 2023 and December 31, 2022, inventories consisted of the following:


	As of September 30,		As of December 31,
	2023		2022
Construction in process and finished homes	$	1,234,176	$	1,148,654
Owned land and lots	239,741		229,531
Inventories	$	1,473,917	$	1,378,185

Interest is capitalized and included within each inventory category above. Capitalized interest activity is summarized in the table below for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Capitalized interest at the beginning of the period	$	117,394	$	62,036	$	94,603	$	33,266
Interest incurred	37,262		33,630		115,271		84,063
Interest expensed	—		(5)		(1)		(31)
Interest charged to homebuilding cost of sales	(30,369)		(14,470)		(85,586)		(36,107)
Capitalized interest at the end of the period	$	124,287	$	81,191	$	124,287	$	81,191

The Company reviews the performance and outlook of its inventories for indicators of potential impairment on a quarterly basis at the community level. In addition to considering market and economic conditions, the Company assesses current sales absorption levels and recent profitability. The Company looks for instances where sales prices for a home in backlog or potential sales prices for a future sold home would be at a level at which the carrying value of the home may not be recoverable. There were $1.4 million inventory impairment charges and $2.0 million in inventory impairment charges recorded for the three and nine months ended September 30, 2023, respectively, and no inventory impairment charges recorded for the three and nine months ended September 30, 2022.

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The Company reviews lot deposits for impairment on a quarterly basis and will record an impairment charge if it believes it will forfeit its deposit on an individual or portfolio of lots. There were $1.5 million and $3.1 million in lot deposit impairment charges recorded for the three and nine months ended September 30, 2023, respectively, and no lot deposit impairment charges recorded for the three and nine months ended September 30, 2022.

4. Commitments and Contingencies

Legal Proceedings

We may be party to legal matters that typically are derived from the Company’s general business practices, primarily related to the construction of homes. The Company believes that if a claim has merit, parties other than the Company would be, at least in part, liable for the claim, and the eventual outcome of the claim would not have a material adverse effect upon our condensed consolidated financial statements. When we believe that a loss is probable and estimable, we record the estimated contingency loss in our Condensed Consolidated Statements of Comprehensive Income.

We do not believe that any future outcomes of any claims or lawsuits currently outstanding will have a material adverse effect upon our condensed consolidated financial statements.

5. Variable Interest Entities

The Company holds investments in certain limited partnerships and similar entities that conduct land acquisition, land development and/or other homebuilding activities in various markets where our homebuilding operations are located, which are considered variable interests. The Company has an interest in Jet HomeLoans LP (formerly, Jet HomeLoans LLC), where the primary activities include underwriting, originating and selling home mortgages. On September 30, 2023, the joint venture was converted into a limited partnership, now known as Jet HomeLoans LP (“Jet HomeLoans”). Refer to Note 9, Related Party Transactions for more information.

The Company’s investments create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. Additionally, the Company, in the ordinary course of business, enters into option contracts with third parties and unconsolidated entities for the ability to acquire rights to finished lots for the construction of homes. Under these contracts, the Company typically makes a specified earnest money deposit in consideration for the right to purchase finished lots in the future, usually at a predetermined price.

The VIEs are funded by initial capital contributions from the Company, as well as its other partners, and generally do not have significant debt. In some cases, an unrelated third party is the general partner or managing member and, in others, the general partner or managing member is a related party. The primary risk of loss associated with the Company’s involvement in these VIEs is limited to the Company’s initial capital contributions due to bankruptcy or insolvency of the VIE; however, management has deemed the likelihood of this as remote. The maximum exposure to loss related to the VIEs is disclosed below for both consolidated and unconsolidated VIEs, which equals the Company’s capital investment in each entity.

Pursuant to ASC 810 and subtopics related to the consolidation of VIEs, management analyzes the Company’s investments first under the variable interest model to determine if they are VIEs and, if so, whether the Company is the primary beneficiary. Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion if changes to the Company’s involvement arise. To make this determination, management considers factors such as whether the Company could direct finance, determine or limit the scope of the entity, sell or transfer property, direct development or direct other operating decisions. The primary beneficiary is defined as the entity having both of the following characteristics: 1) the power to direct the activities that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses and rights to receive the returns from the VIE that would be potentially significant to the VIE. Management consolidates the entity if the Company is the primary beneficiary or if a standalone primary beneficiary does not exist and the Company and its related parties collectively meet the definition of a primary beneficiary. If the investment does not qualify as a VIE under the variable interest model, management then evaluates the entity under the voting interest model to assess if consolidation is appropriate.

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Consolidated VIEs

For VIEs that the Company does consolidate, management has the power to direct the activities that most significantly impact the VIEs’ economic performance. The Company typically serves as the party with homebuilding expertise in the VIE. The Company does not guarantee the debts of the VIEs, and creditors of the VIEs have no recourse against the Company.

The table below displays the carrying amounts of the assets and liabilities related to the consolidated VIEs (in thousands):


	As of September 30,		As of December 31,
Consolidated	2023		2022
Assets	$	11,726	$	13,344
Liabilities	$	2,492	$	4,787

Unconsolidated VIEs

For VIEs that the Company does not consolidate, the Company does not hold the power to direct the activities that most significantly impact the VIEs’ economic performance. The Company’s maximum exposure to loss is limited to its investment in the entities because the Company is not obligated to provide them any additional capital and does not guarantee any of the unconsolidated VIEs’ debt.

The table below shows the Company’s investments in the unconsolidated VIEs (in thousands):


	As of September 30,		As of December 31,
Unconsolidated	2023		2022
Jet HomeLoans	$	8,073	$	7,102
Other unconsolidated VIEs	6,224		6,906
Total investment in unconsolidated VIEs	$	14,297	$	14,008

Lot Option Contracts

The Company generally does not engage in the land development business. Instead, the Company employs an asset-light land financing strategy, providing us optionality to purchase lots on a ‘‘just-in-time’’ basis for construction and affording us flexibility to acquire lots at a rate that matches the expected sales pace in a given community. The Company primarily employs two variations of our asset-light land financing strategy—finished lot option contracts and land bank option contracts—pursuant to which the Company secures the right to purchase finished lots at predetermined market prices from various land sellers and land bank partners, by paying deposits based on the aggregate purchase price of the finished lots. These option contracts generally allow us, at our option, to forfeit our right to purchase the lots controlled for any reason, and our sole legal obligation and economic loss as a result of such forfeitures is limited to the amount of the deposits paid pursuant to such option contracts and, in the case of land bank option contracts, 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.

None of the creditors of any of the land bank entities with which the Company enters into lot option contracts have recourse to our general credit. The Company generally does not have any specific performance obligations to purchase a certain number or any of the lots or guarantee any of the land bankers’ financial or other liabilities. The Company is not involved in the design or creation of the land bank entities from which the Company purchases lots under lot option contracts. The land bankers’ equity holders have the power to direct 100% of the operating activities of the land bank entity. The Company has no voting rights in any of the land bank entities. The sole purpose of the land bank entity’s activities is to generate positive cash flow returns for such entity’s equity holders. Further, the Company does not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the land bankers’ equity holders.

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The deposit placed by us pursuant to the lot option contracts is deemed to be a variable interest in the respective land bank entities. Certain of those land bank entities are deemed to be VIEs. Therefore, the land bank entities with which the Company enters into lot option contracts are evaluated for possible consolidation by the Company.

The Company believes the activities that most significantly impact a land bank entity’s economic performance are the operating activities of the land bank entity. In the case of development projects, unless and until a land bank entity delivers finished lots for sale, the land bank entity’s equity investors bear the risk of land ownership and do not earn any revenues, except for lot option fees paid by the Company. The operating development activities are directed by the land bank entity’s equity investors.

Dream Finders possesses no more than limited protective legal rights through the lot option contracts in the specific finished lots that are purchased, and possesses no participative rights in the land bank entities. Accordingly, the Company does not have the power to direct the activities of a land bank entity that most significantly impact its economic performance. For the aforementioned reasons, the Company concluded that it is not the primary beneficiary of the land bank entities with which it enters into lot option contracts, and therefore the Company does not consolidate any of these VIEs. The Company’s risk of loss related to finished lot option and land bank option deposits and related fees and interest was $298.2 million and $461.6 million as of September 30, 2023 and December 31, 2022, respectively.

6. Income Taxes

The Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 is estimated to be 24.5% and 21.5%, respectively. The effective tax rate increase of 3.0% is primarily attributable to legislation that changed the qualifications for the 45L tax credit effective January 1, 2023 that were not in effect during the nine months ended September 30, 2022, which resulted in a reduction of the estimated tax credit for 2023.

7. Segment Reporting

The Company primarily operates in the homebuilding business and is organized and reported primarily by region. During the third quarter of 2023, organization of the homebuilding segments for making operating decisions and assessing performance changed from divisional to regional. There are now four reportable segments, which are comprised of the following:

•Southeast (Jacksonville, Orlando, Savannah, GA, Hilton Head and Bluffton, SC, Active Adult, Custom Homes)

•Mid-Atlantic (The Carolinas and DC Metro)

•Midwest (Texas, including legacy DFH Austin, TX and Colorado)

•Financial Services (primarily Jet HomeLoans and Golden Dog Title and Trust)

The corporate component, which is not considered an operating segment, is reported separately as “Corporate”. The disclosures below reflect these changes in segment reporting for the three and nine months ended September 30, 2023 and 2022.

The following tables summarize revenues and income before taxes by segment for the three and nine months ended September 30, 2023 and 2022, as well as total assets and goodwill by segment as of September 30, 2023 and December 31, 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Revenues:	2023		2022		2023		2022
Southeast	$	370,761	$	263,597	$	1,051,389	$	807,011
Mid-Atlantic	163,834		141,994		446,745		368,000
Midwest	358,907		378,355		1,105,725		1,062,638
Financial Services	12,120		6,971		33,584		24,121
Total segment revenues	905,622		790,917		2,637,443		2,261,770
Reconciling items from equity method investments	(9,792)		(5,248)		(26,854)		(18,901)
Consolidated revenues	$	895,830	$	785,669	$	2,610,589	$	2,242,869

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	Three Months Ended September 30,				Nine Months Ended September 30,
Income before taxes	2023		2022		2023		2022
Southeast	$	46,520	$	31,428	$	119,455	$	106,165
Mid-Atlantic	16,300		12,311		31,466		25,456
Midwest	44,284		38,243		115,802		106,317
Financial Services	7,193		4,033		20,418		14,591
Corporate(1)	(8,042)		(3,072)		(11,161)		(13,590)
Total segment income before taxes	106,255		82,943		275,980		238,939
Reconciling items from equity method investments	(2,497)		(954)		(6,987)		(4,040)
Consolidated income before taxes	$	103,758	$	81,989	$	268,993	$	234,899


	Assets:				Goodwill:
	September 30,		December 31,		September 30,		December 31,
	2023		2022		2023		2022
Southeast	$	775,260	$	770,029	$	14,003	$	14,003
Mid-Atlantic	386,391		422,490		16,853		16,853
Midwest	892,339		1,007,604		141,071		141,071
Financial Services	123,669		170,151		280		280
Corporate(1)	293,310		89,696		—		—
Total segments	2,470,969		2,459,970		172,207		172,207
Reconciling items from equity method investments	(86,921)		(88,833)		—		—
Consolidated	$	2,384,048	$	2,371,137	$	172,207	$	172,207

(1)Corporate includes operations of the corporate component, and corporate assets such as cash and cash equivalents, cash held in trust, prepaid insurance, operating and financing leases, as well as property and equipment.

8. Fair Value Disclosures

Fair value represents the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values are determined using a fair value hierarchy based on the inputs used to measure fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable and significant to the fair value.

The following table presents a summary of the change in fair value measurement of contingent consideration, which is based on Level 3 inputs and is the only asset or liability measured at fair value on a recurring basis (in thousands):


Beginning balance, December 31, 2022	$	115,128
Fair value adjustments related to prior year acquisitions	32,608
Contingent consideration payments	(44,923)
Ending balance, September 30, 2023	$	102,813

Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets and inventory. The fair value of financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, notes payable and customer deposits, approximate their carrying amounts due to the short-term nature of these instruments. The fair value of the construction lines of credit approximate their carrying amounts since they are subject to short-term floating interest rates that reflect current market rates. Senior unsecured notes are Level 2 financial instruments. The estimated fair value of the 2028 Notes as of September 30, 2023 is $301.7 million, based on recent trades or quoted market prices for debt of similar terms, including maturity, to achieve comparable yields.

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9. Related Party Transactions

The Company enters into or participates in related party transactions. The majority of these transactions are entered into to secure finished lots for the construction of new homes.

DF Capital Management, LLC Funds

DF Capital Management, LLC (“DF Capital”) organizes real estate investment funds to acquire land and develop and sell finished lots. DF Capital is the investment manager of the funds. The Company owns a 49% membership interest in DF Capital. DF Capital is controlled by unaffiliated parties. DF Residential I, LP (“Fund I”), the first of such investment vehicles was fully committed in 2019 with total capital commitments of $36.7 million. Dream Finders Homes LLC and DFH Investors LLC, collectively, invested $1.4 million or 3.8% of the total committed capital of Fund I. Fund I is nearing its final stage in which residual earnings are distributed.

DF Residential II, LP (“Fund II”) was organized in 2021. DF Management GP II, LLC, serves as the general partner of Fund II (the “General Partner”). The Company indirectly owns 72.0% of the membership interests in the General Partner and receives 72.0% of the economic interests. The General Partner is controlled by unaffiliated parties. Fund II was fully committed as of January 2022 with total capital commitments of $322.1 million. The Company invested $3.0 million or 0.9% of the total committed capital of Fund II.

Certain directors, executive officers and members of management invested as limited partners in Fund II in an aggregate amount of $33.9 million or 10.5% of the total committed capital. In addition, Rockpoint Group, LLC, an affiliate of a former director of the Company, as discussed below, made a $100.0 million commitment.

On March 11, 2021, the Company entered into land bank financing arrangements and a Memorandum of Right of First Offer with Fund II, under which Fund II has an exclusive right of first offer on any land bank financing projects that meet its investment criteria and are undertaken by the Company during Fund II’s investment period.

Land Bank Transactions with DF Capital

DF Capital raised additional commitments from limited partners through deals other than Fund I and Fund II, which provided land bank financing for specific projects. One of the Company’s officers invested $0.2 million in one of these funds managed by DF Capital as a limited partner in 2019. The Company continues to purchase lots controlled by these funds.

As of September 30, 2023 and December 31, 2022, the Company had $56.9 million and $58.6 million, respectively, in outstanding lot deposits primarily related to Fund II and other land bank transaction deals in relation to DF Capital projects, controlling approximately 4,600 lots.

Transactions with Rockpoint Group, LLC and affiliates

From time to time, the Company enters into land bank option contracts with Rockpoint Group, LLC (“Rockpoint”) or its affiliates in connection with the Company’s acquisition and development of land. Rockpoint or its affiliate provides the funding for the land acquisition and the Company secures the right to purchase finished lots at market prices by paying deposits based on the aggregate purchase price of the finished lots and any related fees, similar to land bank option contracts with third-party land bankers. William H. Walton III is the founding principal and chief executive officer of Rockpoint. Mr. Walton served as a member of the Board through May 21, 2023. During the nine months ended September 30, 2023, no transactions were entered into between Rockpoint and the Company.

Jet HomeLoans LP, formerly Jet HomeLoans LLC

Jet HomeLoans performs mortgage origination activities for the Company, including underwriting and originating home mortgages for Company customers and non-Company customers. On September 30, 2023, the Company entered into a limited partnership agreement with the partners of Jet HomeLoans LLC to convert the venture into Jet HomeLoans LP. As of September 30, 2023, as part of the limited partnership agreement, the Company’s ownership percentage changed from 49.9% to 60.0%, but the Company is not the primary beneficiary. The change in ownership was effectuated through a distribution to the partners in exchange for the additional 10.1% ownership. Jet HomeLoans is accounted for under the equity method and is a related party of the Company. Jet HomeLoans is included within the Financial Services segment (Note 7, Segment Reporting).

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10. Mezzanine and Stockholders’ Equity

Series B Preferred Units

On August 31, 2023, the Company redeemed all of its previously outstanding Series B preferred units. The Company made an aggregate cash payment to the Series B holders of $11.1 million, which included $7.1 million in principal plus cumulative undistributed earnings, less a negotiated discount on that date. Following the redemption, no Series B preferred units remain outstanding. The difference between the carrying amount and the cash redemption was reclassified to retained earnings as it reflects a return from the Series B unit holders and resulted in a one-time, non-cash increase to net income available to common stockholders of $0.3 million utilized in the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2023.

Share Buyback Program

In June 2023, the Company’s Board of Directors (the “Board”) approved a share buyback program under which the Company can repurchase up to $25.0 million of its Class A common stock through June 30, 2026 in open market purchases, privately negotiated transactions, or otherwise in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares repurchased under the share buyback program will depend on a number of factors, including constraints specified in any Rule 10b5-1 trading plans, price, general business and market conditions, and alternative investment opportunities. The share buyback program does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time.

During the three and nine months ended September 30, 2023, the Company has not repurchased any stock under the share buyback program.

11. Earnings per Share

The following weighted-average shares and share equivalents were used to calculate basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2023 and 2022 (in thousands, except share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator
Net and comprehensive income attributable to Dream Finders Homes, Inc.	$	76,097	$	69,641	$	193,950	$	175,981
Less: Preferred dividends, net(1)	2,923		3,660		10,107		10,848
Net and comprehensive income available to common stockholders(2)	$	73,174	$	65,981	$	183,843	$	165,133
Denominator
Weighted-average number of common shares outstanding - basic	93,108,277		92,760,013		93,052,507		92,760,013
Add: Common stock equivalent shares(3)	8,943,904		15,526,420		12,767,457		12,357,221
Weighted-average number of shares outstanding - diluted	102,052,181		108,286,433		105,819,964		105,117,234

(1)Includes a one-time increase of $0.3 million to the numerator of the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2023 for the excess of the carrying amount over the redemption amount of the Series B preferred units. Refer to Note 10, Mezzanine and Stockholders’ Equity.

(2)For the diluted earnings per share calculation, $3.1 million and $9.9 million in preferred dividends associated with convertible preferred stock that are assumed to be converted have been added back to the numerator for both the three months ended September 30, 2023 and 2022, and for both the nine months ended September 30, 2023 and 2022, respectively. Since the conversion price of the Company’s convertible preferred stock is based on an average of the closing price of Class A common stock for the 90 trading days immediately preceding the end of the current period, changes in the price of the Class A common stock may significantly affect the number of additional assumed common shares outstanding under the if-converted method for diluted earnings per share, even when the number of convertible preferred stock shares outstanding is unchanged.

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The remaining amount of preferred dividends not added back to the numerator are associated with paid-in-kind dividends for preferred mezzanine equity which is not convertible into the Company’s common stock.

(3)Stock-based compensation awards are excluded from the calculation of diluted EPS in the event they are antidilutive. There were no common stock equivalent shares and 0.9 million of common stock equivalent shares excluded from the diluted earnings per share calculation during the three months ended September 30, 2023 and 2022, respectively, and 0.8 million and 0.7 million of common stock equivalent shares excluded from the diluted earnings per share calculation during the nine months ended September 30, 2023 and 2022, respectively, related to unvested restricted stock that were antidilutive.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or the context requires, “DFH,” “Dream Finders,” the “Company,” “we,” “our” and “us” refer collectively to Dream Finders Homes, Inc. and its subsidiaries.

Business Overview and Outlook

We design, build and sell homes in high-growth markets, including Charlotte, Raleigh, Jacksonville, Orlando, Denver, the Washington D.C. metropolitan area, Austin, Dallas, and Houston. We sell homes under the Dream Finders Homes, DF Luxury, Craft Homes and Coventry Homes brands. We employ an asset-light lot acquisition strategy with a focus on the design, construction and sale of single-family entry-level, first-time move-up and second-time move-up homes. To fully serve our homebuyer customers and capture ancillary business opportunities, we have financial services operations that offers title insurance primarily through DF Title, LLC, doing business as Golden Dog Title & Trust (“DF Title”) and mortgage banking solutions primarily through our mortgage banking joint venture, Jet HomeLoans, LP (“Jet HomeLoans”).

Market conditions have remained optimistic for homebuilders during the third quarter of 2023, despite the spike in interest rates in August. While higher interest rates negatively impact homebuyers, they are also meaningful in battling inflation, and so far, the economy is growing consistently. Housing supply dynamics remain constrained, benefiting new homes sales. We continue to offer sales incentives directly focused on addressing affordability concerns by reducing homebuyer closing costs and monthly mortgage payments. We closely monitor net new orders and traffic at the community level and react quickly to local market conditions. Finally, we continue to review our lot option contracts and strategically renegotiate lot takedowns to match sales absorption. Our strategic and determined focus have materially contributed to our strong performance in the third quarter of 2023.

Key Results

Key financial results as of and for the three months ended September 30, 2023, as compared to as of and for the three months ended September 30, 2022 (unless otherwise noted), were as follows:

•Revenues increased 14% to $896 million from $786 million.

•Home closings increased 17% to 1,798 from 1,542.

•Net new orders increased 38% to 1,535 from 1,110.

•Backlog of sold homes decreased 26% to 5,025 from 6,758, and the value of backlog decreased 23% to $2,410 million from $3,137 million.

•Average sales price of homes closed increased 3% to $501,536 from $487,852.

•Gross margin as a percentage of homebuilding revenues increased 200 basis points to 20.6% from 18.6%.

•Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased 350 basis points to 28.4% from 24.9%.

•Net and comprehensive income attributable to DFH increased 9% to $76 million from $70 million.

•Basic earnings per share was $0.79 and diluted earnings per share was $0.75, compared to $0.71 and $0.64, respectively.

•EBITDA (non-GAAP) as a percentage of total revenues increased 220 basis points to 14.7% from 12.5%.

•Active community count increased to 219 from 197.

•Return on participating equity (“ROE”) was 38.9% for the trailing twelve months ended September 30, 2023, compared to 50.3% for the trailing twelve months ended September 30, 2022.

•Total liquidity, comprised of cash and cash equivalents, and availability under the revolving credit facility, of $564 million as of September 30, 2023, compared to $487 million as of December 31, 2022.

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Key financial results for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022 (unless otherwise noted), were as follows:

•Revenues increased 16% to $2,611 million from $2,243 million.

•Homes closed increased 13% to 5,161 from 4,562.

•Net new orders decreased 6% to 4,638 from 4,938.

•Average sales price of homes closed increased 6% to $499,433 from $471,621.

•Gross margin as a percentage of homebuilding revenues remained consistent at 19.0%.

•Adjusted gross margin (non-GAAP) as a percentage of homebuilding revenues increased 170 basis points to 26.7% from 25.0%.

•Net and comprehensive income attributable to DFH increased 10% to $194 million from $176 million.

•Basic earnings per share was $1.98 and diluted earnings per share was $1.83 compared to $1.78 and $1.67, respectively.

•EBITDA (non-GAAP) as a percentage of total revenues increased 100 basis points to 13.4% from 12.4%.

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.”

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Results of Operations

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table sets forth our results of operations and balance sheet data for the periods indicated:


	Three Months Ended September 30, (unaudited)
	2023			2022			Amount Change			% Change
Revenues:
Homebuilding	$	893,502		$	783,945		$	109,557		14	%
Other	2,328			1,724			604			35	%
Total revenues	895,830			785,669			110,161			14	%
Homebuilding cost of sales	709,286			638,456			70,830			11	%
Selling, general and administrative expense	79,963			68,839			11,124			16	%
Income from unconsolidated entities	(4,557)			(5,137)			580			(11	%)
Contingent consideration revaluation	9,026			2,641			6,385			242	%
Other income, net	(1,646)			(1,119)			(527)			47	%
Income before taxes	103,758			81,989			21,769			27	%
Income tax expense	(24,158)			(10,371)			(13,787)			133	%
Net and comprehensive income	79,600			71,618			7,982			11	%
Net and comprehensive income attributable to noncontrolling interests	(3,503)			(1,977)			(1,526)			77	%
Net and comprehensive income attributable to Dream Finders Homes, Inc.	$	76,097		$	69,641		$	6,456		9	%

Earnings per share(1)
Basic	$	0.79		$	0.71		$	0.08		11	%
Diluted	$	0.75		$	0.64		$	0.11		17	%
Weighted-average number of shares
Basic	93,108,277			92,760,013			348,264			—	%
Diluted	102,052,181			108,286,433			(6,234,252)			(6	%)

Condensed Consolidated Balance Sheets Data (at period end):
Cash and cash equivalents	330,129			123,692			206,437			167	%
Total assets	2,384,048			2,287,262			96,786			4	%
Construction lines of credit	555,512			976,440			(420,928)			(43	%)
Senior unsecured notes, net	293,604			—			293,604			100%
Preferred mezzanine equity	148,500			155,830			(7,330)			(5	%)
Total mezzanine and stockholders’ equity	986,072			716,372			269,700			38	%

Other Financial and Operating Data
Active communities at end of period(2)	219			197			22			11	%
Home closings	1,798			1,542			256			17	%
Average sales price of homes closed(3)	$	501,536		$	487,852		$	13,684		3	%
Net new orders	1,535			1,110			425			38	%
Cancellation rate	14.9		%	25.5		%	(10.6		%)	(42	%)
Ending backlog - homes	5,025			6,758			(1,733)			(26	%)
Ending backlog - value (in thousands)	$	2,410,181		$	3,137,243		$	(727,062)		(23	%)
Gross margin (in thousands)(4)	$	184,216		$	145,489		$	38,727		27	%
Gross margin %(5)	20.6		%	18.6		%	2.0		%	11	%
Adjusted gross margin (in thousands)(6)	$	254,172		$	195,042		$	59,130		30	%
Adjusted gross margin %(5)(6)	28.4		%	24.9		%	3.5		%	14	%
EBITDA (in thousands)(6)	$	131,542		$	97,939		$	33,603		34	%
EBITDA margin %(6)(7)	14.7		%	12.5		%	2.2		%	18	%
Adjusted EBITDA (in thousands)(6)	$	135,354		$	99,515		$	35,839		36	%
Adjusted EBITDA margin %(6)(7)	15.1		%	12.7		%	2.4		%	19	%

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(1)Refer to Note 11, Earnings per Share to the condensed consolidated financial statements for disclosure related to the calculation of earnings per share (“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 new order. A community becomes inactive when it has fewer than five units remaining to sell.

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

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

(5)Calculated as a percentage of homebuilding revenues.

(6)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.”

(7)Calculated as a percentage of total revenues.

Revenues. Revenues for the three months ended September 30, 2023 were $896 million, an increase of $110 million, or 14%, from $786 million for the three months ended September 30, 2022. The increase in revenues was primarily attributable to 1,798 home closings for the three months ended September 30, 2023, an increase of 256 homes, or 17%, from the 1,542 home closings for the three months ended September 30, 2022. The average sales price of homes closed for the three months ended September 30, 2023 was $501,536, an increase of $13,684, or 3%, over an average sales price of homes closed of $487,852 for the three months ended September 30, 2022. The increase was due to overall price appreciation.

Homebuilding Cost of Sales and Gross Margin. Homebuilding cost of sales for the three months ended September 30, 2023 was $709 million, an increase of $71 million, or 11%, from $638 million for the three months ended September 30, 2022. The increase in homebuilding cost of sales was primarily due to the increase in home closings for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Homebuilding gross margin for the three months ended September 30, 2023 was $184 million, an increase of $39 million, or 27%, from $145 million for the three months ended September 30, 2022. Homebuilding gross margin as a percentage of homebuilding revenues was 20.6% for the three months ended September 30, 2023, an increase of 200 basis points, or 11%, from 18.6% for the three months ended September 30, 2022. The increase in gross margin percentage was primarily due to continued cost management and cycle-time improvement efforts across our segments. The increase was partially offset by higher cost of funds as well as closing costs, as part of our on-going commitment to helping entry-level and first-time homebuyers close homes through our targeted mortgage buydown programs.

Adjusted Gross Margin. Adjusted gross margin for the three months ended September 30, 2023 was $254 million, an increase of $59 million, or 30%, from $195 million for the three months ended September 30, 2022. Adjusted gross margin as a percentage of homebuilding revenues for the three months ended September 30, 2023 was 28.4%, an increase of 350 basis points, or 14%, from 24.9% for the three months ended September 30, 2022. Proactive cost management efforts coupled with modest home sales price appreciation were key factors in the improved adjusted gross margin percentage, outpacing increased closing costs. Adjusted gross margin is a non-GAAP financial measure. For the definition 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.”

Selling, General and Administrative Expense. Selling, general and administrative expense (“SG&A”) for the three months ended September 30, 2023 was $80 million, an increase of $11 million, or 16%, from $69 million for the three months ended September 30, 2022. SG&A as a percentage of homebuilding revenues was 9% in the third quarter of 2023, remaining consistent compared to the third quarter of 2022. For the third quarter of 2023, SG&A included $9 million of spend in relation to forward commitment programs to allow our homebuyers to lock their interest rates on home loans at the point of sale. We expense these costs as incurred. In addition, SG&A for the third quarter of 2023 included a $3 million charge related to write-offs of inventory, earnest deposits and due diligence costs for lot option contracts that were terminated.

Income from Unconsolidated Entities. Income from unconsolidated entities for the three months ended September 30, 2023 was $4 million, a decrease of $1 million, or 11%, from $5 million for the three months ended September 30, 2022. The decrease in income from unconsolidated entities is primarily attributable to fewer distributions of profits from DF Capital funds, as expected based on Fund I nearing its final stage.

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Contingent Consideration Revaluation. Contingent consideration revaluation expense for the three months ended September 30, 2023 was $9 million, an increase of $6 million, or 242%, from $3 million for the three months ended September 30, 2022. The increase in contingent consideration expense is primarily due to actual results achieved being better-than-projected and the related fair value adjustments of expected future earnout payments related to the current full year results from the MHI acquisition. Revised projections for the remainder of 2023 were a result of the improved sales activity in the first six months of the year and management’s ability to release starts timely for the 2023 fiscal year.

Other (Income) Expense, Net. Other income, net for the three months ended September 30, 2023 was $2 million, an increase of $1 million, or 47%, from $1 million of other income, net for the three months ended September 30, 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 three months ended September 30, 2023 was $80 million, an increase of $8 million, or 11%, from $72 million for the three months ended September 30, 2022. The change in net and comprehensive income was primarily attributable to an increase in gross margin on home closings of $39 million during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. However, an increase of contingent consideration expense related to the MHI acquisition discussed above and an increase in the effective tax rate during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, partially offset the increased gross margin from home closings. The changes in net and comprehensive income attributable to Dream Finders Homes, Inc. are consistent with the changes in net and comprehensive income as there was no significant change in noncontrolling interests for the period.

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Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The following table sets forth our results of operations for the periods indicated:


	Nine Months Ended September 30, (unaudited)
	2023			2022			Amount Change			% Change
Revenues:
Homebuilding	$	2,603,858		$	2,237,648		$	366,210		16	%
Other	6,731			5,221			1,510			29	%
Total revenues	2,610,589			2,242,869			367,720			16	%
Homebuilding cost of sales	2,109,485			1,812,746			296,739			16	%
Selling, general and administrative expense	214,433			196,564			17,869			9	%
Income from unconsolidated entities	(12,219)			(11,431)			(788)			7	%
Contingent consideration revaluation	32,608			11,875			20,733			175	%
Other income, net	(2,711)			(1,784)			(927)			52	%
Income before taxes	268,993			234,899			34,094			15	%
Income tax expense	(66,000)			(50,576)			(15,424)			30	%
Net and comprehensive income	202,993			184,323			18,670			10	%
Net and comprehensive income attributable to noncontrolling interests	(9,043)			(8,342)			(701)			8	%
Net and comprehensive income attributable to Dream Finders Homes, Inc.	$	193,950		$	175,981		$	17,969		10	%

Earnings per share(1)
Basic	$	1.98		$	1.78		$	0.20		11	%
Diluted	$	1.83		$	1.67		$	0.16		10	%
Weighted-average number of shares
Basic	93,052,507			92,760,013			292,494			—	%
Diluted	105,819,964			105,117,234			702,730			1	%

Other Financial and Operating Data
Home closings	5,161			4,562			599			13	%
Average sales price of homes closed(3)	$	499,433		$	471,621		$	27,812		6	%
Net new orders	4,638			4,938			(300)			(6	%)
Cancellation rate	17.1		%	18.6		%	(1.5		%)	(8	%)
Gross margin (in thousands)(4)	$	494,373		$	424,902		$	69,471		16	%
Gross margin %(5)	19.0		%	19.0		%	—		%	—	%
Adjusted gross margin (in thousands)(6)	$	696,276		$	560,329		$	135,947		24	%
Adjusted gross margin %(5)(6)	26.7		%	25.0		%	1.7		%	7	%
EBITDA (in thousands)(6)	$	351,040		$	277,098		$	73,942		27	%
EBITDA margin %(6)(7)	13.4		%	12.4		%	1.0		%	8	%
Adjusted EBITDA (in thousands)(6)	$	361,326		$	281,918		$	79,408		28	%
Adjusted EBITDA margin %(6)(7)	13.8		%	12.6		%	1.2		%	10	%

See notes (1) to (7) under results of operations for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Revenues. Revenues for the nine months ended September 30, 2023 were $2,611 million, an increase of $368 million, or 16%, from $2,243 million for the nine months ended September 30, 2022. The increase in revenues was primarily attributable to 5,161 home closings for the nine months ended September 30, 2023, an increase of 599 homes, or 13%, from the 4,562 home closings for the nine months ended September 30, 2022. The average sales price of homes closed for the nine months ended September 30, 2023 was $499,433, an increase of $27,812, or 6%, over an average sales price of homes closed of $471,621 for the nine months ended September 30, 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 nine months ended September 30, 2023 was $2,109 million, an increase of $296 million, or 16%, from $1,813 million for the nine months ended September 30, 2022. The increase in homebuilding cost of sales was primarily due to the increase in home closings for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

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Homebuilding gross margin for the nine months ended September 30, 2023 was $494 million, an increase of $69 million, or 16%, from $425 million for the nine months ended September 30, 2022. Homebuilding gross margin as a percentage of homebuilding revenues was 19.0% for the nine months ended September 30, 2023, remaining consistent compared to 19.0% for the nine months ended September 30, 2022. The increased costs of funds, and closing costs as management proactively assisted homebuyers to close homes, fully offset the benefits from the cost management and cycle time improvement during the nine months ended September 30, 2023.

Adjusted Gross Margin. Adjusted gross margin for the nine months ended September 30, 2023 was $696 million, an increase of $136 million, or 24%, from $560 million for the nine months ended September 30, 2022. Adjusted gross margin as a percentage of homebuilding revenues for the nine months ended September 30, 2023 was 26.7%, an increase of 170 basis points, or 7%, when compared to 25.0% for the nine months ended September 30, 2022. The adjusted gross margin percentage increased due to overall homes sales price appreciation combined with proactive cost management efforts, partially offset by increased closing costs. Adjusted gross margin is a non-GAAP financial measure. For the definition 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.”

Selling, General and Administrative Expense. SG&A for the nine months ended September 30, 2023 was $214 million, an increase of $17 million, or 9%, from $197 million for the nine months ended September 30, 2022. SG&A as a percentage of homebuilding revenues was 8% for the nine months ended September 30, 2023, a decrease of 100 bps compared to 9% for the nine months ended September 30, 2022. The decrease in SG&A as a percentage of homebuilding revenues was primarily due to overall cost management efforts. For the nine months ended September 30, 2023, SG&A included $17 million of spend in relation to forward commitment programs to allow our homebuyers to lock their interest rates on home loans at the point of sale. In addition, SG&A for the nine months ended September 30, 2023 included $5 million in charges related to write-offs of inventory, earnest deposits and due diligence costs for lot option contracts that were terminated.

Income from Unconsolidated Entities. Income from unconsolidated entities for the nine months ended September 30, 2023 was $12 million, an increase of $1 million, or 7%, from $11 million for the nine months ended September 30, 2022. The increase in income from unconsolidated entities is primarily attributable to income from Jet HomeLoans partially offset by fewer distributions of profits from DF Capital funds, as expected based on Fund I nearing its final stage.

Contingent Consideration Revaluation. Contingent consideration revaluation expense for the nine months ended September 30, 2023 was $33 million, an increase of $21 million or 175%, from $12 million for the nine months ended September 30, 2022. The increase in contingent consideration expense is primarily due to actual results achieved during the second quarter of 2023 being better-than-projected and the related fair value adjustments of revised expected future earnout payments from the MHI acquisition. The projections for the remainder of 2023 and beyond, which were revised during the second quarter of 2023 for MHI were a result of the improved sales activity in the first six months of the year and management’s ability to release starts timely for the 2023 fiscal year.

Other (Income) Expense, Net. Other income, net for the nine months ended September 30, 2023 was $3 million, an increase of $1 million, or 52%, from $2 million of other income, net for the nine months ended September 30, 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 nine months ended September 30, 2023 was $203 million, an increase of $19 million, or 10%, from $184 million for the nine months ended September 30, 2022. The increase in net and comprehensive income was primarily attributable to an increase in gross margin on home closings of $69 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. This increase was partially offset by an increase in contingent consideration expense from the MHI acquisition of $21 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, discussed above. The changes in net and comprehensive income attributable to Dream Finders Homes, Inc. are consistent with the changes in net and comprehensive income as there was no significant change in noncontrolling interests for the period.

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Land Acquisition and Development Process

We operate an asset-light and capital-efficient lot acquisition strategy to meet our growth objectives. We generally seek to avoid engaging in land development, which requires significant capital expenditures, and can take several years to realize returns on the investment. Our asset-light lot acquisition strategy generally enables us to purchase land in a “just-in-time” manner in both new and existing markets with reduced up-front capital commitments, and, in turn, allows us to increase our inventory turnover rate, enhance our ROE and contributes to our growth. Our strategy is intended to avoid the financial commitments and risks associated with direct land ownership and land development by allowing us to increase optionality and control a significant number of lots for a relatively low capital cost. We believe our asset-light business model reduces our balance sheet risk relative to other homebuilders that own a higher percentage of their land supply.

We primarily employ two variations of our asset-light land financing strategy—finished lot option contracts and land bank option contracts—pursuant to which we secure the right to purchase finished lots at predetermined fixed contractual pricing from various land developers, land sellers and land bank partners.

As of September 30, 2023, our lot deposits and investments in finished lot option and land bank option contracts were $241 million. As of September 30, 2023, we controlled 30,614 lots under lot option and land bank option contracts.

Owned and Controlled Lots

Our owned and controlled lot supply is a critical input to the future revenue of our business. The following table presents our owned finished lots purchased just-in-time for production and controlled lots by homebuilding segment as of September 30, 2023 and December 31, 2022:


	As of September 30, 2023			As of December 31, 2023
Segment	Owned (2)	Controlled	Total	Owned	Controlled	Total	% Change
Southeast	2,985	12,622	15,607	2,939	16,255	19,194	-19	%
Mid-Atlantic	1,392	5,658	7,050	1,766	14,891	16,657	-58	%
Midwest	2,140	12,334	14,474	1,238	6,469	7,707	88	%
Grand Total	6,517	30,614	37,131	5,943	37,615	43,558	-15	%

(1)See Note 7, Segment Reporting to the condensed consolidated financial statements for further explanation of our reportable segments.

(2)As of September 30, 2023, the Company had 6,517 owned lots, of which 4,500 were included in construction in process (“CIP”) and finished homes within the Condensed Consolidated Balance Sheets. Of the 4,500 owned lots included in CIP and finished homes, 4,118 were under construction, 268 were completed spec homes and 114 were model homes. The remaining owned lots were purchased just-in-time to start construction through existing lot option contracts.

Owned Real Estate Inventory Status

The following table presents our owned real estate inventory status as of September 30, 2023 and December 31, 2022:


	As of September 30, 2023		As of December 31, 2022
Construction in process and finished homes (1)	84	%	83	%
Owned land and lots (2)	16	%	17	%
Total	100	%	100	%

(1)Represents our owned homes that are under construction or completed, including sold, spec and model homes.

(2)Represents finished lots purchased just-in-time for production and capitalized costs related to land under development held by third-party land bank partners, including lot option fees, property taxes and due diligence costs.

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Our Active Communities

We define an active community as a community where we have recorded five net new orders or a model home is currently open to customers. A community is no longer active when we have less than five home sites to sell to customers. Active community count is an important metric to forecast future net new orders for our business. As of September 30, 2023, we had 219 active communities, an increase of 22 communities, or 11%, as compared to 197 active communities as of September 30, 2022.

Our active community count excludes communities under the Company's built-for-rent contracts, as all sales to investors occur at one point in time and these communities would have no home sites remaining to sell. As of September 30, 2023, the Company had 20 communities delivering closings under built-for-rent contracts.

Costs of Building Materials and Labor

Our cost of sales includes the acquisition and finance costs of home sites or lots, municipality fees, the costs associated with obtaining building permits, materials and labor to construct the home, interest costs for construction loans, internal and external realtor commissions and other miscellaneous closing costs. Home site costs range from 20-30% of the average cost of a home. Building materials range from 35-45% of the average cost to build the home, labor ranges from 25-30% of the average cost to build the home, and interest, commissions and closing costs range from 5-10% of the average cost to build the home.

In general, the cost of building materials fluctuates with overall trends in the underlying prices of raw materials. The cost of certain of our building materials, such as lumber and oil-based products, fluctuates with market-based pricing curves. We often obtain volume discounts and/or rebates with certain suppliers of our building materials, which in turn reduces our cost of sales.

However, increases in the cost of building materials may reduce gross margin to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. The price changes that most significantly influence our operations are price increases in commodities. Significant price increases of these materials may negatively impact our cost of sales and, in turn, our net income.

Backlog, Sales and Closings

A new order (“new sale”) is reported when a customer has received preliminary mortgage approval and the sales contract has been signed by the customer, approved by us and secured by a deposit of approximately 6% of the purchase price of the home. These deposits are typically nonrefundable, but each customer situation is evaluated individually. Sales to investors that intend to lease the homes are recognized when the Company has received a nonrefundable deposit.

Net new orders are sales of homes during the period less cancellations of existing sales contracts during the period. Our cancellation rate for a given period is calculated as the total number of new sales contracts cancelled during the period, divided by the total number of new gross sales contracts entered into during the period. Our cancellation rate for the three months ended September 30, 2023, was 14.9%, an improvement of 1,060 basis points compared to the 25.5% cancellation rate for the three months ended September 30, 2022. Our cancellation rate for the nine months ended September 30, 2023, was 17.1%, a decrease of 150 basis points compared to the 18.6% cancellation rate for the nine months ended September 30, 2022.

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The following tables present information concerning our new home sales (net), starts and closings in each of our homebuilding segments for the three and nine months ended September 30, 2023 and 2022. See Note 7, Segment Reporting to the condensed consolidated financial statements for further explanation of our reportable segments:


	Three Months Ended September 30,						Period Over Period Percent Change
	2023			2022
Segment	Sales	Starts	Closings	Sales	Starts	Closings	Sales		Starts		Closings
Southeast	443	678	828	683	718	547	-35	%	-6	%	51	%
Mid-Atlantic	471	399	388	166	242

Dream Finders Homes, Inc. [DFH] Filings
10-Q	[2023-11-02]
10-Q	[2023-08-03]
10-Q	[2023-05-04]
10-K	[2023-03-02]
10-Q	[2022-11-03]
10-Q	[2022-08-04]
10-Q	[2022-05-10]
10-K	[2022-03-16]
10-Q	[2021-11-10]
10-Q	[2021-08-10]
10-Q	[2021-05-17]
10-K	[2021-03-30]
S-1	[2020-12-22]