References to the "Company," "DHHC," "our," "us" or "we" refer to DiamondHead
Holdings Corp. The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
unaudited condensed consolidated financial statements and the notes thereto
contained elsewhere in this report. Certain information contained in the
discussion and analysis set forth below includes forward-looking statements that
involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements are subject to known and unknown risks, uncertainties and assumptions
about us that may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "should," "could," "would," "expect,"
"plan," "anticipate," "believe," "estimate," "continue," or the negative of such
terms or other similar expressions. Such statements include, but are not limited
to, possible business combinations and the financing thereof, and related
matters, as well as all other statements other than statements of historical
fact included in this Form 10-Q. Factors that might cause or contribute to such
a discrepancy include, but are not limited to, those described in our other
Securities and Exchange Commission ("SEC") filings.
Overview
We are a blank check company incorporated in Delaware on October 7, 2020 for the
purpose of effecting a merger, capital stock exchange, asset acquisition, stock
purchase, reorganization or similar business combination with one or more
businesses (the "Initial Business Combination"). Our sponsor is DHP SPAC-II
Sponsor LLC ("Sponsor").
The registration statement for our Initial Public Offering was declared
effective on January 25, 2021. On January 28, 2021, we consummated our Initial
Public Offering of 34,500,000 units (the "Units" and, with respect to the Class
A common stock included in the Units being offered, the "Public Shares"),
including 4,500,000 additional Units to cover over-allotments (the
"Over-Allotment Units"), at $10.00 per Unit, generating gross proceeds of $345.0
million, and incurring offering costs of approximately $19.6 million, of which
approximately $12.1 million was included in deferred underwriting commissions.
On August 10, 2022, the underwriter from the Initial Public Offering resigned
from their role in any Business Combination and waived its entitlement to the
deferred underwriting commissions in the amount of $12.1 million. Simultaneously
with the closing of the Initial Public Offering, we consummated the private
placement ("Private Placement") of 5,933,333 warrants (each, a "Private
Placement Warrant" and collectively, the "Private Placement Warrants") at a
price of $1.50 per Private Placement Warrant to our Sponsor and to certain
qualified institutional buyers or institutional accredited investors, including
certain funds and accounts managed by subsidiaries of BlackRock, Inc. and
Millennium Management LLC (each an "Anchor Investor"), generating proceeds of
$8.9 million.
Upon the closing of the Initial Public Offering and the Private Placement,
$345.0 million ($10.00 per Unit) of the net proceeds of the Initial Public
Offering and certain of the proceeds of the Private Placement was placed in a
trust account ("Trust Account"), located in the United States and invested only
in U.S. government securities, within the meaning set forth in Section 2(a)(16)
of the Investment Company Act of 1940, as amended (the "Investment Company
Act"), with a maturity of 185 days or less or in any open-ended investment
company that holds itself out as a money market fund selected by us meeting the
conditions of Rule 2a-7 of the Investment Company Act, as determined by us,
until the earlier of: (i) the completion of a Business Combination and (ii) the
distribution of the Trust Account, as described below.
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If we are unable to complete a Business Combination within the Combination
Period, we will (i) cease all operations except for the purpose of winding up,
(ii) as promptly as reasonably possible but not more than ten business days
thereafter, redeem the Public Shares, at a per-share price, payable in cash,
equal to the aggregate amount then on deposit in the Trust Account including
interest earned on the funds held in the Trust Account and not previously
released to us to pay its tax obligations (less up to $100,000 of interest to
pay dissolution expenses), divided by the number of then outstanding Public
Shares, which redemption will completely extinguish Public Stockholders' rights
as stockholders (including the right to receive further liquidating
distributions, if any), subject to applicable law, and (iii) as promptly as
reasonably possible following such redemption, subject to the approval of our
remaining stockholders and our board of directors, dissolve and liquidate,
subject in each case to our obligations under Delaware law to provide for claims
of creditors and the requirements of other applicable law. There will be no
redemption rights or liquidating distributions with respect to our warrants,
which will expire worthless if we fail to complete a Business Combination within
the Combination Period.
Proposed Business Combination
On September 10, 2022, the Company entered into the Business Combination
Agreement with Merger Sub and GSH, pursuant to which the Company expects to
effect a business combination with GSH through the merger of Merger Sub with and
into GSH (the "Merger"), with GSH surviving the Merger as a wholly-owned
subsidiary of the Company. Upon the consummation of the Transactions, the
Company expects to be renamed United Homes Group, Inc. The obligations of the
Company, Merger Sub and GSH to consummate the Merger are subject to the
satisfaction or waiver of certain closing conditions, which are further
described in the Business Combination Agreement.
We cannot assure you that our plans to complete our Business Combination will be
successful. Further, we may need to pursue third-party financing, among other
things, to satisfy the closing condition that at Closing, the amount of Closing
DHHC Cash be equal to or exceed $125,000,000 (the "Minimum Cash Condition").
However, there can be no assurance that any third-party financing will be
entered into in connection with the Merger, and there can be no assurance that
the Minimum Cash Condition will be satisfied. If the Minimum Cash Condition is
not satisfied, amended or waived by GSH pursuant to the terms of the Business
Combination Agreement, then the Merger would not be consummated.
Liquidity and Going Concern
As of September 30, 2022, we had approximately $11,000 in cash and a working
capital deficit of approximately $2.1 million (not taking into account tax
obligations of approximately $369,000 that may be paid using investment income
earned in the Trust Account).
Our liquidity needs to date have been satisfied through a payment of $25,000
from our Sponsor to pay for certain offering costs in exchange for issuance of
Founder Shares, the loan under the Promissory Note of $130,000, and the net
proceeds from the consummation of the Private Placement not held in the Trust
Account. We fully repaid the Promissory Note on February 1, 2021. In addition,
in order to finance transaction costs in connection with an Initial Business
Combination, our officers, directors and initial stockholders may, but are not
obligated to, provide us Working Capital Loans. As of September 30, 2022, there
were no amounts outstanding under any Working Capital Loans.
In connection with our assessment of going concern considerations in accordance
with FASB ASC Topic 205-40, "Presentation of Consolidated Financial
Statements-Going Concern," we have determined that the existing liquidity
condition, mandatory liquidation and subsequent dissolution raise substantial
doubt about its ability to continue as a going concern. No adjustments have been
made to the carrying amounts of assets or liabilities should the Company be
required to liquidate on or after January 28, 2023.
Results of Operations
Our entire activity since inception up to September 30, 2022 related to our
formation, the preparation for the Initial Public Offering, and since the
closing of the Initial Public Offering, the search for a prospective initial
Business Combination. We will not be generating any operating revenues until the
closing and completion of our initial Business Combination, at the earliest.
For the three months ended September 30, 2022, we had net loss of approximately
$2.8 million, which consisted of non-operating expense of approximately $2.0
million resulting from changes in the fair value of derivative warrant
liabilities, approximately $2.1 million in general and administrative expenses,
approximately $50,000 of franchise tax expense and income tax expense of
approximately $394,000, partially offset by approximately $1.6 million in
interest income from investments held in the Trust Account and approximately
$272,000 gain from settlement of deferred underwriting commissions.
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For the three months ended September 30, 2021, we had income of approximately
$6.5 million, which consisted of $6.7 million for change in fair value of
derivative warrant liabilities, approximately $5,000 of income from investments
held in Trust Account, offset by approximately $101,000 of general and
administrative expenses and approximately $50,000 of franchise tax expense.
For the nine months ended September 30, 2022, we had net income of approximately
$4.5 million, which consisted of approximately $2.1 million in interest income
from investments held in the Trust Account, non-operating income of
approximately $5.3 million resulting from changes in the fair value of
derivative warrant liabilities and approximately $272,000 gain from settlement
of deferred underwriting commissions, partially offset by approximately $2.5
million in general and administrative expenses, approximately $148,000 of
franchise tax expense and income tax expense of approximately $457,000.
For the nine months ended September 30, 2021, we had net income of approximately
$2.5 million, which consisted of $3.9 million for change in fair value of
derivative warrant liabilities and approximately $14,000 of income from
investments held in Trust Account, offset by approximately $449,000 of financing
costs, approximately $868,000 of general and administrative expenses and
approximately $147,000 of franchise tax expense.
Contractual Obligations
As of September 30, 2022, we do not have any long-term debt obligations, capital
lease obligations, operating lease obligations, purchase obligations or
long-term liabilities.
Registration Rights
The holders of the Founder Shares, Private Placement Warrants and warrants that
may be issued upon conversion of Working Capital Loans (and any shares of Class
A common stock issuable upon the exercise of the Private Placement Warrants and
warrants that may be issued upon conversion of Working Capital Loans and upon
conversion of the Founder Shares) were entitled to registration rights pursuant
to a registration rights agreement signed upon the effective date of Initial
Public Offering, requiring us to register such securities for resale (in the
case of the Founder Shares, only after conversion to Class A common stock). The
holders of the majority of these securities were entitled to make up to three
demands, excluding short form demands, that we register such securities. In
addition, the holders have certain "piggy-back" registration rights with respect
to registration statements filed subsequent to the completion of a Business
Combination and rights to require us to register for resale such securities
pursuant to Rule 415 under the Securities Act. We will bear the expenses
incurred in connection with the filing of any such registration statements.
Amended and Restated Registration Rights Agreement
The Business Combination Agreement contemplates that, upon completion of the
Merger, the Company (which expects to be named United Homes Group, Inc. at that
time), the Sponsor, certain securityholders of the Company and certain former
stockholders of GSH will enter into an Amended and Restated Registration Rights
Agreement (the "A&R Registration Rights Agreement"). Pursuant to the A&R
Registration Rights Agreement, among other things, UHG agrees to file a shelf
registration statement with respect to the registrable securities under the A&R
Registration Rights Agreement within 45 days of the Closing. Up to two times in
any 12-month period, certain legacy DHHC securityholders and legacy GSH
stockholders may request to sell all or any portion of their registrable
securities in an underwritten offering that is registered pursuant to the shelf
registration statement, so long as the total offering price is reasonably
expected to exceed $10,000,000. The combined company will also provide customary
"demand" and "piggyback" registration rights. The A&R Registration Rights
Agreement will provide that UHG will pay certain expenses relating to such
registrations and indemnify the securityholders against certain liabilities.
Further, each securityholder party to the A&R Registration Rights Agreements
agrees not to transfer any of their registerable securities subject to lock-up
transfer restrictions (as described in the A&R Registration Rights Agreement)
until the end of the applicable Lock-Up Period (as defined in the A&R
Registration Rights Agreement) subject to certain customary exceptions described
therein.
Underwriting Agreement
We granted the underwriter a 45-day option from the date of Initial Public
Offering to purchase up to 4,500,000 additional Units at the Initial Public
Offering price less the underwriting discounts and commissions. On January 28,
2021, the underwriter fully exercised the over-allotment option.
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The underwriter was entitled to a cash underwriting discount of $0.20 per Unit,
or $6.9 million in the aggregate, paid upon the closing of the Initial Public
Offering. In addition, the underwriter was entitled to a deferred fee of $0.35
per Unit, or approximately $12.1 million in the aggregate.
Effective as of August 10, 2022, the underwriter from the Initial Public
Offering resigned and withdrew from its role in any Business Combination and
waived its entitlement to the deferred underwriting commissions in the amount of
approximately $12.1 million. We recognized approximately $11.8 million of the
commissions waiver as a reduction to additional paid-in capital in the condensed
consolidated statements of changes in stockholders' deficit for the three and
nine months ended September 30, 2022, as this portion represents an
extinguishment of deferred underwriting commissions on public shares which was
originally recognized in accumulated deficit. The remaining balance of
approximately $272,000 is recognized as a gain from settlement of deferred
underwriting commissions on public warrants in the condensed consolidated
statements of operations, which represents the original amount expensed in our
initial public offering.
Critical Accounting Policies
The preparation of condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. A summary of our
significant accounting policies is included in Note 2 to our condensed
consolidated financial statements in Part I, Item 1 of this Quarterly Report.
Certain of our accounting policies are considered critical, as these policies
are the most important to the depiction of our condensed consolidated financial
statements and require significant, difficult or complex judgments, often
employing the use of estimates about the effects of matters that are inherently
uncertain. Such policies are summarized in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section in our 2021
Annual Report on Form 10-K filed with the SEC on April 13, 2022. There have been
no significant changes in the application of our critical accounting policies
during the nine months ended September 30, 2022.
Recent Accounting Pronouncements
See Note 2 to the unaudited condensed consolidated financial statements included
in Part I, Item 1 of this Quarterly Report for a discussion of recent accounting
pronouncements.
Off-Balance Sheet Arrangements
As of September 30, 2022, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K.
JOBS Act
The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") contains
provisions that, among other things, relax certain reporting requirements for
qualifying public companies. We qualify as an "emerging growth company" and
under the JOBS Act are allowed to comply with new or revised accounting
pronouncements based on the effective date for private (not publicly traded)
companies. We are electing to delay the adoption of new or revised accounting
standards, and as a result, we may not comply with new or revised accounting
standards on the relevant dates on which adoption of such standards is required
for non-emerging growth companies. As a result, the condensed consolidated
financial statements may not be comparable to companies that comply with new or
revised accounting pronouncements as of public company effective dates.
Additionally, we are in the process of evaluating the benefits of relying on the
other reduced reporting requirements provided by the JOBS Act. Subject to
certain conditions set forth in the JOBS Act, if, as an "emerging growth
company," we choose to rely on such exemptions we may not be required to, among
other things, (i) provide an auditor's attestation report on our system of
internal controls over financial reporting pursuant to Section 404, (ii) provide
all of the compensation disclosure that may be required of non-emerging growth
public companies under the Dodd-Frank Wall Street Reform and Consumer Protection
Act, (iii) comply with any requirement that may be adopted by the PCAOB
regarding mandatory audit firm rotation or a supplement to the auditor's report
providing additional information about the audit and the condensed consolidated
financial statements (auditor discussion and analysis) and (iv) disclose certain
executive compensation related items such as the correlation between executive
compensation and performance and comparisons of the CEO's compensation to median
employee compensation. These exemptions will apply for a period of five years
following the completion of our Initial Public Offering or until we are no
longer an "emerging growth company," whichever is earlier.
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