EDGAR 10-K Filing

Company CIK: 1784567
Filing Year: 2024
Filename: 1784567_10-K_2024_0001493152-24-011935.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Our Company
Harbor Custom Development, Inc. is a real estate development company which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Plan (the “Proposed Plan”), subject to Bankruptcy Court approval.
For the years ended December 31, 2023, and December 31, 2022, our total revenues were $59.3 million and $55.4 million, respectively. As of December 31, 2023, and December 31, 2022, our backlogs of fully executed contracts for the sale of developed residential lots and single-family homes were $0.6 million and $8.4 million, respectively. Our fee build backlogs as of December 31, 2023, and December 31, 2022, were $0.02 million and $0.8 million, respectively.
In 2022, we had two entitled land sales and sold 33 developed lots and 27 homes. The two entitled land sales represented 14% of total revenue in 2022. The 33 developed lot sales represented 17% of total revenue in 2022. Our 2022 home sales represented 52% of total revenue, and home selling prices ranged from $0.7 million to $1.7 million.
In 2023, we had no entitled land sales and sold two multi-family properties, 56 developed lots, and six homes. The multi-family revenues represented 65% of total revenue in 2023. The developed lot sales represented 19% of total revenue in 2023. Our 2023 home sales represented 15% of total revenue, and home selling prices ranged from $1.0 million to $1.6 million.
As of March 28, 2024, we own or control 15 communities in Washington, Texas, California, and Florida, containing approximately 517 units or lots in various stages of development. (See Item 2. Properties) We have 15 single family homes, three multi-family apartments, 106 developed lots, and 13 land parcels. All single-family homes and developed lots are being offered for sale. The majority of land projects are offered for sale in existing condition. Several parcels in Semiahmoo are near the next stage of entitlements which we are working towards achieving. All multi-family apartments are substantially complete with lease up in progress. We have engaged a real estate brokerage and workout firm and an investment banking firm specializing in special situations, restructurings, bankruptcies, receiverships and Article 9 sales to sell our multi-family portfolio in Washington, which includes four of the 15 communities and 385 of the referenced 517 units or lots, as more further described below. We will continue to collect lease revenue from our multi-family properties until such communities have been sold.
While we have continued to generate revenue, these revenue streams have proved insufficient to cover our ongoing cash requirements. In addition, we faced several issues in our operations including: (1) cost overruns and construction delays on land development; (2) continuing challenges resulting from the Covid-19 Global Pandemic; (3) a shift in building strategy; (4) a decline in the real estate market leading to delayed sales at lower-than-expected prices; (5) delayed timelines and contractor issues that affected our ability to realize revenue on their expected timelines; and (6) debt service payment requirements to a revolving lender that strained our cash position and ability to meet our obligations to our stakeholders. These factors, among others, placed significant strain on cash flow and cash reserves, ultimately leading to filing for Chapter 11 protection as our management and board of directors determined that it was in the best interests of the Company and its stakeholders.
Chapter 11 Bankruptcy
On December 11, 2023 (the “Petition Date”), we and certain of our wholly owned subsidiaries, including Belfair Apartments, LLC; Pacific Ridge CMS, LLC; HCDI FL Condo LLC; HCDI Bridgeview LLC; HCDI Semiahmoo LLC; and Beacon Studio Farms LLC (collectively, the “Debtors”), filed a voluntary petition (the “Bankruptcy Petition”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Washington (such court, the “Bankruptcy Court” and such case, the “Chapter 11 Case”). We expect to continue to operate our business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure our ability to continue operating in the ordinary course of business, we filed motions seeking customary “first-day” relief with the Bankruptcy Court, including, among other things, authority to use cash collateral, pay employee wages and benefits, and pay other vendors and suppliers in the ordinary course for all services provided after the Petition Date, limit certain Bankruptcy Court requirements for notice to equity security holders, sell real property in the ordinary course of business, and other motions, as appropriate. These motions remain subject to approval by the Bankruptcy Court.
On December 15, 2023, the Bankruptcy Court entered an Interim Order Approving Notification and Hearing Procedures for Certain Transfers of Common and Preferred Stock and Granting Related Relief (the “Order”). The Order is designed to establish certain procedures (the “Procedures”) to protect any potential value of our net operating loss carryforwards and other tax attributes (the “NOLs”). The Order establishes, among other things, the Procedures with respect to direct and indirect trading and transfers of our stock in order to protect any potential value of our NOLs for use in connection with the reorganization. As approved on an interim basis, the Procedures restrict transactions involving, and require notices of the holdings of and proposed transactions by, any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Shareholder. A “Substantial Shareholder” for purposes of the Procedures, is defined as any entity or individual that has Beneficial Ownership of at least (a) 5% of all issued and outstanding shares of common stock (being 2,686,431 shares as of March 28, 2024) or (b) 5% of all issued and outstanding shares of preferred stock (being 3,799,799 shares as of March 28, 2024). Any prohibited transfer of common or preferred stock in violation of the Procedures shall be null and void ab initio.
On February 2, 2024, our wholly owned subsidiary, Tanglewilde, LLC (included as a “Debtor”), also filed a Bankruptcy Petition for reorganization under Chapter 11 of the Bankruptcy Code. Tanglewilde, LLC has been added into our pending Chapter 11 Case.
On February 16, 2024, we issued a press release announcing our intention to file a Chapter 11 plan (the “Chapter 11 Plan”) with the Bankruptcy Court approximately in late February proposing the orderly wind down of our operations and the voluntary liquidation of all of our remaining assets, rather than a restructuring of our business. The proposed Chapter 11 Plan is subject to the approval of the Bankruptcy Court.
Further, we retained Keen-Summit Capital Partners LLC (“Keen”), a real estate brokerage and workout investment banking firm, to manage the sale of our multi-family real estate portfolio. The portfolio includes the Belfair View Apartments in Belfair, Washington; the Bridgeview Trail Apartments in Port Orchard, Washington; the Meadowscape Apartments in Olympia, Washington; and the Pacific Ridge Apartments in Tacoma, Washington. Any sale by Keen is subject to approval by the Bankruptcy Court.
On March 5, 2024, we filed a Joint Chapter 11 Plan which contains multiple proposals to handle the liquidation of our company (the “Proposed Plan”) and a related proposed disclosure statement with the Bankruptcy Court (“Disclosure Statement”). We can provide no assurance that the Proposed Plan will be accepted by creditors or shareholders, who may object to the Proposed Plan, or confirmed by the Bankruptcy Court (or, even if confirmed, that the Proposed Plan will become effective). We are authorized to solicit votes from our creditors and our shareholders for approval of the Proposed Plan. The Proposed Plan (and its consummation) remain subject to Bankruptcy Court approval and satisfaction of other conditions contained in the Proposed Plan. The Proposed Plan and Disclosure Statement describe, among other things, the material terms of the Proposed Plan; our corporate history, structure, and business overview; the events leading to the Chapter 11 Case; the proposed treatment of Claims and Interests (defined below) under the Proposed Plan; certain events that have occurred or are anticipated to occur during the Chapter 11 Case, and certain other aspects of the Proposed Plan. All distributions under the Proposed Plan would come from the Debtors’ cash on hand and other assets, which would generally be distributed, subject to the terms of the Proposed Plan, to classes of claims of creditors (“Claims”) and treatment of equity interests of shareholders (“Interests”) in order of their respective priorities under the Bankruptcy Code. The Disclosure Statement provides disclosures regarding the anticipated recoveries to holders of Claims and Interests pursuant to the Proposed Plan, including holders of our securities, which remain to be determined. No assurance can be made with respect to any distributions or recoveries with respect to Claims or Interests under the Proposed Plan.
Outstanding Debt
The filing of the Bankruptcy Petition constitutes an event of default under our outstanding indebtedness for borrowed money as of the petition date, including (collectively, the “Outstanding Indebtedness”):
- Loan Agreements with related lenders known as “Sound Capital,” specifically, Sound Capital Loans, LLC; Sound Capital Construction Fund, LLC; and Sound Equity High Income Debt Fund, LLC, dated various dates, in the principal amount in the aggregate of $60,108,867 plus accrued interest thereon, including interest at the lesser of (a) annualized default interest rate of approximately 24% or (b) interest rate allowed by law since default thereon;
- Loan Agreements with related lenders known as “Marquee,” specifically Mandalay Income Fund, I, LP; Oakhurst Income Fund II, LP; and Oakhurst Opportunity Lending Fund I, L.P., dated various dates, in the principal amount in the aggregate of $31,289,325 plus accrued interest thereon, including an annual default interest rate at 13.55%, 13.625%, 15.75%, or 16.00% depending on the loan agreement or the maximum interest rate allowed by law since default thereon;
- the Loan Agreement with Fratelli’s LLC, dated May 25, 2022, in the principal amount of $8,000,000 plus accrued interest thereon, including interest at the default interest rate of 18% since November 30, 2023;
- the Loan Agreement with Benaroya Holdings, LLC, dated January 30, 2023 and the Amendment to the Loan Agreement, dated May 5, 2023, in the principal amount of $5,300,000 plus accrued interest thereon, including default interest at the rate of 18% per annum since default thereon;
- the Loan Agreement with 222, Limited Liability Company; Cynthia A. Blair; Michael A. Raquiza; and William Chunyk, dated September 19, 2022, in the principal amount of $3,500,000 plus accrued interest thereon, including interest at a rate equal to 4% greater than the current rate of 10% since default thereon;
- the Loan Agreement with North Carolina Empowering Kids & Communities Foundation, Inc., dated November 1, 2022, in the principal amount of $2,500,000 plus accrued interest thereon, including interest at a rate equal to 4% greater than the current rate of 10% since default thereon;
- the Loan Agreement with BankUnited, N.A., dated March 7, 2022 and the Amendment to the Loan Agreement, dated February 22, 2023, in the principal amount of $14,178,674 (according to BankUnited, N.A.) plus accrued interest thereon, including interest at the default rate from December 4, 2023, which rate floats at the contract rate plus 3%, until the debt is paid in full; and
- the Promissory Note with Buchanan Mortgage Holdings, LLC dated August 19, 2022, in the principal amount of $34,048,901 as of February 2, 2024.
The terms of the Outstanding Indebtedness provide that, as a result of the Bankruptcy Petition, the principal and interest under such Outstanding Indebtedness shall be immediately due and payable. Any efforts to enforce such payment obligations are automatically stayed as a result of the Bankruptcy Petition and the creditors’ rights of enforcement are subject to the Bankruptcy Code.
Nasdaq Delisting
On December 12, 2023, we received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, following Nasdaq’s review of our press release related to the Bankruptcy Petition and other publicly available information, and in accordance with Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that our securities will be delisted from Nasdaq. Trading of our common stock (HCDI), preferred stock (HCDIP), and two classes of warrants (HCDIW and HCDIZ) was suspended at the opening of trading on December 21, 2023.
Nasdaq based its determination upon concerns related to (i) our announcement that we filed for protection under Chapter 11 of the United States Bankruptcy Code and associated public interest concerns raised by such filing, (ii) the residual equity interest of the existing listed securities holders, and (iii) our ability to sustain compliance with all requirements for continued listing on Nasdaq. Nasdaq also noted that we no longer complied with Nasdaq’s audit committee requirements as set forth in Listing Rule 5605, which cure period to regain compliance was until the earlier of our next annual shareholders’ meeting or September 18, 2024. The Nasdaq notice also advised us of our right to request an appeal of the determination. We did not pursue such appeal.
On December 20, 2023, we received a notice from FINRA’s Department of Market Operations (the “FINRA Notice”) informing the Company that the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ were assigned to our common stock, preferred stock, and warrants, respectively, and that as of December 21, 2023, our aforementioned securities would be quoted and traded in the market for unlisted securities (i.e., the “over-the-counter market” or “OTC”). As a result, trading of such securities commenced on OTC Pink Current Information on December 21, 2023 under the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ.
On February 15, 2024, Nasdaq filed a Form 25-NSE with the Commission which will remove all of our securities from listing and registration on Nasdaq.
Additional Information on the Chapter 11 Case
Court filings and information related to the bankruptcy can be found at https://cases.creditorinfo.com/hcdi. The documents and other information available via website or elsewhere are not part of this Annual Report and shall not be deemed incorporated herein.
Our Business
Harbor Custom Development, Inc. is a real estate development company which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Plan (the “Proposed Plan”), subject to Bankruptcy Court approval. The description of our business below is presented for historical purposes to cover the time periods discussed in this Report as well as our current operations under Chapter 11 proceedings.
Our business is involved in all aspects of the land development cycle, including land acquisition, entitlements, development, construction of project infrastructure, single and multi-family vertical construction, marketing, and sales of various residential projects in Washington, California, Texas, and Florida.
As a land developer and builder of apartments, single-family luxury homes, and townhomes, our business strategy is to acquire and develop land strategically based on an understanding of population growth patterns, entitlement restrictions and land use evaluation, infrastructure development, and geo-economic forces. We endeavor to acquire land with scenic views or convenient access to freeways and public transportation to develop and sell residential lots, new home communities, townhomes, and multi-story apartment properties within a 20- to 60-minute commute of some of the nation’s fastest-growing metro employment corridors.
We have a portfolio of land, lots, home plans, and entitled multi-family plats. In addition to our single-family residential projects, we build, rent, and hold for sale townhomes and apartments on several multi-family sites in Washington. (See Item 2. Properties.)
We are a general contractor and constructed single-family homes, townhomes, and apartments utilizing a base of employees in conjunction with third-party subcontractors.
Our Markets
We own residential lots, single-family homes, townhomes, and apartments in Washington, California, Florida, and Texas.
Our Products
We offer a diverse portfolio of finished lots, single-family homes and multi-family communities, including townhomes, and apartments. Being product-agnostic provided us great flexibility to maintain appropriate consumer product and price level diversification for our specific markets. We focus on underserved consumer groups for each of our locations while attempting to diversify as to not overly concentrate our land portfolio in any one area. Building at multiple price points enables us to quickly adjust to changing consumer and market demands. Buyer profiles are developed for each market, and our communities are designed with the specific needs of those buyers in mind.
Land Acquisition and Development Process
Our integrated business model is designed to monetize land during three distinct stages of the development cycle.
● Sale of Entitled Land - Property sold following the controlling jurisdiction’s approval of a permitted residential use or other use, as applicable.
● Sale of Developed Lots - Property sold after infrastructure is completed, including roads, sidewalks, and utilities.
● Sale of Completed Building Product - Property sold following the construction of a single-family home, townhome, or apartment.
We also provide services as fee build revenues to construct the required infrastructure so that houses can be developed on the lots.
Our acquisition process generally includes the following steps:
● review of the status of entitlements and other governmental processing, including title reviews;
● complete due diligence on the land parcel prior to committing to the acquisition;
● prepare detailed budgets for all cost categories;
● complete environmental reviews and third-party market studies; and
● evaluate economic feasibility within the context of the above strategies.
Before purchasing large land tracts, we engage outside engineers and consultants to help review the proposed acquisition and assist with community and home design.
Home Building, Marketing, and Sales Process
Our philosophy is to develop beautiful and practical living spaces for growing communities. Our strategy is to acquire land with scenic views or convenient access to freeways and public transportation to develop and sell residential lots, new home communities, and multi-story apartment properties within a 20- to 60-minute commute of the nation’s fastest-growing metro employment corridors.
Since our founding in 2014, we are dedicated to building quality homes with thoughtful design. Our floorplans support the modern family’s lifestyle by providing flexible spaces, outdoor living, one-story homes, main-floor living with master bedroom suites on the first floor, and luxury finishes to appeal to universal design needs. Our homes are engineered for energy-efficiency to reduce impact on the environment and lower energy costs to our homebuyers.
Our multi-family construction offers comparable finishes to a new construction home, featuring quartz countertops, stainless steel kitchen appliances, in-unit washer and dryer, and premium flooring. The floorplans are designed to support the communities we serve, including but not limited to, studios, one bedroom with one bath, two bedrooms with two baths, and a loft feature. Many communities offer recreational buildings for tenants to gather with neighbors, and entertain their families.
We utilize strategic partnerships with local real estate brokers and property management companies who specialize in their local markets. We sell our homes, land, and apartments through independent real estate brokers and sales representatives who assisted potential buyers by providing them with basic floor plans, price information, development and construction timetables, and property tours. We rent our multi-family properties through property management companies who assist potential renters by providing them with floor plans, pricing information, tours of the apartments, and screening and processing applications.
The home building revenues are recognized when home sales are finished, closed, and title and possession are transferred to the buyer. Our sales contracts typically require an earnest money deposit. Buyers are generally required to pay an additional deposit when they select options or upgrades for their homes. The amount of earnest money required varies between markets and communities but typically averaged approximately 2% of the home’s total purchase price. Most of our sales contracts stipulate when homebuyers cancel their contracts with us, following a specified period of time, we have the right to retain their earnest money and option deposits. Our sales contracts may also include contingencies that permit homebuyers to cancel and receive a partial or full refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified time period or if they cannot sell an existing home. The length of time between the signing of a sales contract for a home and delivery of the house to the buyer varies depending on closing schedules.
Our multi-family communities are constructed to satisfy market demand for available rental housing, and construction is generally facilitated when financing is secured. We begin renting the units once we have acquired occupancy permits with the intention to sell the project during construction or upon complete build-out of the project and rental stabilization.
Materials
When constructing our projects, we use various materials and components. The typical build time for our single-family homes is nine to 12 months, and for our multi-family communities is 18 to 24 months, during which time materials are subject to price fluctuations. Such price fluctuations are caused by several factors, including seasonal variations in availability, international trade disputes and resulting tariffs, and increased demand for materials due to the improved market.
Our material suppliers are subcontractors that are licensed, bonded, and insured. Each subcontractor provides a bid for the materials and work required and is awarded a contract based on price, reputation, and ability to meet our time frames.
Our material suppliers provide us with credit terms for materials used in the construction of our projects. Credit terms typically range from a 30 to 60-day payment cycle following the delivery or installation of a product or service.
Seasonality
We experience seasonal variations in our quarterly operating results and capital requirements. We typically experienced the highest new home sale activity in the spring and summer, although this activity also highly depends on the number of active selling communities, the timing of new community openings, and other market factors. Since it typically takes nine to 12 months to construct a new home, we generally deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs, and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year.
While the leasing side of multi-family communities can experience some seasonality during the winter holiday months, the construction side typically doesn’t show seasonality patterns. The building process typically takes 18 to 24 months, depending on the size of the project, the site development scope, and other project or market factors.
Governmental Regulation and Environmental Matters
We are subject to numerous local, state, federal, and other statutes, ordinances, rules, and regulations concerning zoning, development, building design, construction, and similar matters which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Projects that are not entitled may be subject to periodic delays, changes in use, less intensive development, or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development.
We are also subject to a variety of local, state, federal, and other statutes, ordinances, rules, and regulations concerning the environment. The particular environmental laws which apply to any given construction site varied according to the site’s location, its environmental conditions, and the uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays and can prohibit or severely restrict building activity in environmentally sensitive regions or areas.
Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and remediate hazardous or toxic substances or petroleum product releases and may be held liable to a governmental entity or to third parties for property damage and for investigation and remediation costs incurred by such parties in connection with the contamination. In addition, in cases where an endangered species is involved, environmental rules and regulations can result in the elimination of development in identified environmentally sensitive areas.
Competition and Market Factors
We face competition in the homebuilding industry, which is characterized by relatively low barriers to entry. Homebuilders compete for, among other things, homebuying customers, desirable land parcels, financing, raw materials, and skilled labor. Increased competition may prevent us from acquiring attractive land parcels on which to build homes, apartments, townhomes, or deliver finished lots, make such acquisitions more expensive, hinder our market share expansion, or lead to pricing pressures that may adversely impact our margins and revenues. Competitors may independently develop land and construct housing units that are superior or substantially similar to our products and because they are or may be significantly larger, have a longer operating history, and have greater resources or lower cost of capital than us, may be able to compete more effectively in one or more of the markets in which we operate or plan to operate. We also compete with other homebuilders with longer-standing relationships with subcontractors and suppliers in the markets in which we operate or plan to operate. If our Proposed Plan is approved, we will face competition for the sale of our assets.
Human Capital
We experienced a significant decrease in the number of our employees. As of March 28, 2023, we had 41 full time employees and as of March 28, 2024, we had eight full-time employees; none of which are covered by a collective bargaining agreement.
Our human capital resources objectives include, as applicable, retaining, incentivizing and integrating our existing employees, advisors, and consultants. We do not plan to give additional equity in the future. The principal purposes of our equity incentive plans in the last two fiscal years were to attract, retain, and reward personnel through the granting of equity-based compensation awards.
Available Information
Our website address is www.harborcustomdev.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other publicly filed documents, including all exhibits filed therewith, are available and may be accessed free of charge through the Investor Relations section of our website under the SEC Filings subsection, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC at www.sec.gov. Also available through the Investor Relations section of our website are reports filed by our directors and executive officers on Forms 3, 4, and 5, and amendments to those reports. Our website and included or linked information on our website are not incorporated into this Annual Report. Resources for the Company’s creditors and equity interest holders can be found by visiting the website at https://cases.creditorinfo.com/hcdi, including court filings and other documents related to the Chapter 11 process. Aditi Paranjpye at Cairncross & Hempelmann, P.S. is serving as lead bankruptcy legal counsel to the Company.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our business, results of operations, and financial condition are subject to numerous risks and uncertainties. In connection with any investment decision with respect to our securities, you should carefully consider the following risk factors, as well as the other information contained in this report and our other filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should any of these risks materialize, our business, results of operations, financial condition and future prospects could be negatively impacted, which in turn could affect the trading value of our securities. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and related notes in Item 8. Additionally, some statements herein constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”
Bankruptcy Related Risks:
As a result of the Chapter 11 Case, our historical financial information may not be indicative of our future performance.
We previously had contracts for sale on several properties. However, some of these contracts were cancelled as the offerors were not able to obtain financing on acceptable terms. Any additional offers that we received for our properties were substantially lower than our listing price whereby we would not generate a profitable exit at such prices. Due to these factors, along with cost overruns and construction delays, a decline in the real estate market, delayed timelines, and debt service payments, we determined it was in the best interests of our shareholders and creditors to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Case, cease our real estate acquisition, development, and construction operations and cease any new projects.
Therefore, the nature of our current business activities is materially different than prior to filing the Chapter 11 Case on December 11, 2023. Furthermore, during the Chapter 11 Case, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, new claims that may be significant, and claims assessments significantly impact our consolidated financial statements.
The Bankruptcy Court established February 16, 2024 as the deadline by which parties were required to file proofs of claim in the Chapter 11 Case and June 10, 2024 for all governmental entities to file their proofs of claim. However, we cannot provide any assurances regarding what our total actual liabilities based on such claims will be. As a result, our historical financial performance, including information presented as of December 31, 2023, is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Case.
In particular, the amount and composition of our assets and liabilities will be significantly different as a result of the Chapter 11 Case, and the description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in our periodic reports or in any filing we make with the Bankruptcy Court may not accurately reflect our such matters during the pendency of or following the Chapter 11 Case or the value of our remaining assets in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result. A number of additional claims may be filed in the Chapter 11 Case which may be substantial and may result in a greater number of allowed Claims than estimated in the Disclosure Statement. In addition, we face uncertainty with respect to liabilities for potential future litigation and claims, as well as potential regulatory actions and government investigations and inquiries, for which we may incur significant legal costs and may be subject to significant uninsured losses that cannot yet be determined and may be significantly higher than any related accruals.
Further, if confirmation by the Bankruptcy Court of the Proposed Plan does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of Claims and Interests or upon the showing of cause, the Bankruptcy Court may convert the Chapter 11 Case to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
There is substantial doubt regarding our ability to continue as a going concern and our liquidity requirements during and following the pendency of the Chapter 11 Case and the adequacy of our capital resources are difficult to predict at this time.
We have concluded that there is substantial doubt regarding our ability to continue as a going concern. We face uncertainty regarding the adequacy of our liquidity and capital resources to be used during the Chapter 11 Case as well as to maintain our limited expected operations if and when we emerge from bankruptcy. Through the Chapter 11 Case, we plan to continue to sell our homes, lands, and lots in California and Texas, sell our multifamily properties through a sale and auction process, and then, following the effectiveness of the Proposed Plan, a Plan Administrator will continue to hold, market, and sell any remaining real property. We have ceased the majority of our land development and construction operations, but we plan to continue to lease our multi-family properties through the pendency of the auction and sale of such properties. We have not identified sources of material revenue, earnings, operations, or near term actionable opportunities following the Chapter 11 Case. We can give no assurances as to the outcome of any efforts to realize any value from our assets.
We have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Case and expect to continue to incur significant professional fees and costs throughout our Chapter 11 Case. In addition, we face uncertainty with respect to ongoing and potential future litigation and claims, as well as regulatory actions and government investigations and inquiries, for which we will continue to incur significant legal costs. Due to cessation of our construction and development operations, we may lack any material sources of revenue, our ability to obtain additional financing is highly unlikely, and our ongoing operations following the completion of the Chapter 11 Case are expected to be limited. There can be no assurances that cash on hand and our current capital resources will be sufficient to allow us to satisfy our obligations related to the Chapter 11 Case or the pending litigation, claims and investigations, and may negatively impact our ability to make any distribution and, if so, the amount of such distribution, to our creditors and shareholders.
Trading our securities is highly speculative and poses substantial risks.
Our post-bankruptcy capital structure has yet to be determined, and it is uncertain whether our Proposed Plan will be approved by the Bankruptcy Court. The Proposed Plan proposes that our common stock will be cancelled, released, extinguished, and discharged and will be of no further force or effect and that each holder of common stock will receive no recovery or distribution on account of their interests in the common stock. The Proposed Plan further contemplates that each holder of our Class A Preferred Stock shall be entitled to receive such holder’s pro rata share of 49% of the “Post-Effective Date New Interests,” which is defined as the common stock (or other equity interests) of the Company to be issued on or after the effectiveness of the Proposed Plan. Once the Proposed Plan is effective, all of the shares of our Class A Preferred Stock shall be cancelled, released, extinguished, and discharged and will be of no further force or effect, including any right a holder of a Class A Preferred Stock may assert for declared or undeclared dividends prior to the Petition Date.
Although we cannot predict how the Claims and Interests of holders in the Chapter 11 Case, including holders of our securities, will ultimately be resolved, any trading in our securities during the pendency of the Chapter 11 Case is highly speculative and poses substantial risks to purchasers of our securities. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Bankruptcy Chapter 11 Case.
In addition, on December 15, 2023, the Bankruptcy Court entered an Interim Order Approving Notification and Hearing Procedures for Certain Transfers of Common and Preferred Stock and Granting Related Relief (the “Trading Restriction Order”), which was designed to enable us to protect any potential value of our NOLs. The Trading Restriction Order restrict transactions involving any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Shareholder of our common stock or Class A Preferred Stock (i.e., would beneficially own, directly or indirectly, (a) 5% of all issued and outstanding shares of common stock (being 2,686,431 shares as of March 28, 2024) or (b) 5% of all issued and outstanding shares of preferred stock (being 3,799,799 shares as of March 28, 2024).
During the Chapter 11 Case, the value that may be available to our various stakeholders, including our creditors and shareholders, is uncertain and our ability to generate value for shareholders, if any, will be subject to the risks and uncertainties associated with bankruptcy proceedings, including, among others, those described elsewhere in this and subsequent filings that we make with the SEC. Accordingly, we urge extreme caution with respect to existing and future investments in our securities.
We are subject to the risks and uncertainties associated with the Chapter 11 Case.
Since filing the Chapter 11 Case, we have operated our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Code. As a consequence of filing the Chapter 11 Case, we have been and will continue to be subject to the risks and uncertainties associated with bankruptcy. These risks include, but are not limited to, the following:
- our ability to successfully develop, prosecute, confirm, and consummate the Proposed Plan with respect to the Chapter 11 Case, which we may seek to amend, waive, modify, or withdraw at any time before confirmation;
- our ability to satisfy any conditions to the Proposed Plan’s effectiveness;
- our ability to obtain the Bankruptcy Court’s approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 Case;
- the possibility that actions and decisions of our creditors and other third parties with interests in the Chapter 11 Case may be inconsistent with our plans;
- the high costs of bankruptcy proceedings and related fees, particularly if delays in the Chapter 11 Case increase fees and costs;
- our long-term liquidity requirements and whether our capital resources will be sufficient to allow us to emerge from the Chapter 11 Case and execute our limited activities upon emergence;
- our ability to motivate and retain key employees, and the costs associated therewith, throughout the Chapter 11 Case;
- we may no longer have any ongoing sources of revenue;
- our ability to realize any value with respect to our remaining assets;
- the ability of third parties to assert claims against us, which may be substantial or terminate our rights with respect to contracts, leases, agreements, or other assets;
- our ability to maintain our relationships with our vendors, customers, and other third parties, including those providing services that are integral to maintaining operations of our business;
- our ability to maintain adequate financial, information technology and management processes, controls and procedures, particularly in light of the reduction in personnel and risk of further attrition; and
- the ability of third parties to seek and obtain court approval to terminate or shorten the exclusivity period for us to propose and confirm a Plan, to appoint a Chapter 11 trustee, or to convert the Chapter 11 Case to Chapter 7 cases.
Because of the risks and uncertainties associated with a voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during the Chapter 11 Case may have on ultimate recovery for our creditors and shareholders.
We may not be able to obtain confirmation of the Proposed Plan, or any amended or subsequent plan.
We may not receive the acceptances from holders of Claims and Interests entitled to vote on the Proposed Plan required to confirm the Proposed Plan. In the event that votes with respect to Claims in the classes entitled to vote are received in number and amount sufficient to enable the Bankruptcy Court to confirm the Proposed Plan, we intend to seek confirmation of the Proposed Plan by the Bankruptcy Court. However, if the requisite acceptances are not received, we may not be able to obtain confirmation of the Proposed Plan. Even if the requisite acceptances of the Proposed Plan are received, the Bankruptcy Court might not confirm the Proposed Plan if the Bankruptcy Court finds that any of the statutory requirements for confirmation under section 1129 of the Bankruptcy Code have not been met.
Moreover, certain holders of Claims or Interests may object to confirmation of the Proposed Plan, including on the basis that our proposed classification and treatment of Claims and Interests under the Proposed Plan does not comply with the Bankruptcy Code. There can be no assurance that such objections (if any) will be resolved or that the Bankruptcy Court will overrule such objections and confirm the Proposed Plan.
Even if the Proposed Plan or another plan of reorganization is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions (some of which are beyond our control) and is otherwise subject to the risks and uncertainties set forth in the Disclosure Statement, which shareholders are encouraged to read in its entirety. There can be no assurance that such conditions will be satisfied and, therefore, that a plan of reorganization will become effective and that we will emerge from the Chapter 11 Case as contemplated by a plan of reorganization. Further, the Proposed Plan was developed based on various assumptions regarding our potential sale of our assets, amounts of our liabilities, and the involvement of numerous parties, which assumptions may prove to be incorrect and could render the Proposed Plan unsuccessful and any payments thereunder may differ from estimates. If the transactions contemplated by the Proposed Plan are not completed, it may become necessary to amend the Proposed Plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Case. As a result, there can be no assurance as to what the state of our business would be following the Chapter 11 Case.
Any Chapter 11 plan that we may implement will likely be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.
The Proposed Plan or any other Chapter 11 plan that we may implement will affect both our capital structure and the ownership, structure and operation of our remaining business and will likely reflect assumptions and analyses based on our experience and perception of historical trends, current conditions, and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to the ability to substantially change our capital structure; the ability to sell our assets; and the overall strength and stability of general economic conditions.
In addition, the Proposed Plan may rely upon financial projections, including with respect to revenues, operating expenses, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan we may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business.
The Proposed Plan may not be approved by the creditors or confirmed by the Bankruptcy Court and we may have to amend the Proposed Plan.
The Proposed Plan is subject to vote by various classes of creditors and to confirmation by the Bankruptcy Court. There is no assurance that the Proposed Plan will be accepted by the requisite number of creditors or confirmed by the Court. Further, the effectiveness of the Proposed Plan is subject to the sale of certain of our multi-family properties. There is a risk that such properties will not be sold and the Proposed Plan does not become effective. In the event that any of the aforementioned occur, we may have to amend the Proposed Plan the terms of which may be less favorable to the holders of Claims and Interests under our current Proposed Plan.
In the event we are not able to obtain confirmation of the Proposed Plan, it may be necessary to pursue bankruptcy protection under Chapter 7 of the Bankruptcy Code for all or a part of our business.
If confirmation by the Bankruptcy Court of the Proposed Plan under Chapter 11 does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of Claims and Interests or upon the showing of cause, the Bankruptcy Court may convert our Chapter 11 Case to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. Although the value, if any, that would be available to any of our various stakeholders (including creditors and stockholders) would be uncertain in any bankruptcy proceeding, we believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our stakeholders than those we might obtain under Chapter 11 primarily because of the likelihood that the remaining assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty except for liabilities subject to compromise and not subject to compromise.
We depend on a few highly skilled key employees to navigate the Chapter 11 Case and contribute to our ability to realize future value of our remaining assets, and if we are unable to retain, manage, and appropriately compensate them, the outcome of the Chapter 11 Case and ability to realize value from our remaining assets could be adversely affected.
Our ability to successfully consummate the Proposed Plan and realize the value of our remaining assets is based on continued service of our senior management team and other key employees, and on our ability to continue to motivate and appropriately compensate key employees. Some of our employees may be subject to claims and risks of litigation for which indemnification may be uncertain. We may not be able to retain the services of our key employees, who work for us on an at-will basis, in the future.
We have experienced significant voluntary resignations among our employees prior to and following the Chapter 11 Case. As a result of our ongoing reductions in force, we are operating with a severe shortage of personnel and may not be able to conduct even limited operations to implement the Proposed Plan. We have experienced a reduction in our workforce from 41 employees in March 2023 to eight employees in March 2024. We only have two outstanding employment agreements, one with Ms. Crocker, our Chief Restructuring Officer and one with Mr. Habersetzer, our Interim Chief Executive Officer and Interim President. All other employees are at-will employees.
We have already scaled back our information technology systems, and have terminated our IT Director. We have hired a third-party IT service provider to assist with the responsibilities previously conducted by the former IT Director. Though we do not anticipate collecting or storing any significant confidential information related to customers, employees, or vendors, we may be at increased risk of disruptions, cyberattacks or security breaches.
The attrition we have already experienced, and expect to continue to experience, causes us to rely on fewer employees, and in some cases these employees are less experienced which puts at greater risk our ability to execute our plans. Attrition has caused, and may continue to cause, us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees. If our key employees fail to work effectively and to execute our plans, the Chapter 11 Case, including our efforts to realize value from our remaining assets could be prolonged or adversely affected.
We expect to further reduce and streamline our operations in connection with the Chapter 11 Case.
In connection with the Chapter 11 Case, we expect to take measures to further streamline our operations and reduce our general and administrative expenses during the course of the Chapter 11 Case.
We also anticipate further reducing our workforce and restructuring, reducing, eliminating, or outsourcing certain management services, as necessary to manage our limited operations. It is difficult to predict what, if any, errors or delays might occur as the result of changes in controls or a reduced workforce. While we expect our operations to remain limited, implementing these measures may adversely impact our operations and increase liability exposure and our susceptibility to other risks inherent to operating our business with significantly limited resources and personnel.
The Chapter 11 Case limits the flexibility of our management team in running our business.
While we operate our business as debtors-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, possible negotiations with other parties-in-interest, and one or more hearings. The other parties-in interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.
We face risks and uncertainties related to potential future litigation and claims, as well as regulatory actions and government investigations and inquiries, for which we may incur significant legal costs and may be subject to losses.
We may in the future be subject to, or become a party to, litigation, claims, regulatory actions, and government investigations and inquiries, as we may be subject to claims by customers, suppliers, vendors, contractors, government agencies, stockholders, or other parties regarding our properties, developments, advertising, securities, warranties, contract, and corporate matter disputes, and employee claims against us. We have potential indemnification obligations with respect to the current and former directors named in the above-referenced actions, which obligations may or may not be covered by our applicable directors’ and officers’ insurance.
In the event we become subject to such litigation, it may divert our financial and management resources that would otherwise be used to benefit our operations, increase our insurance costs, and cause reputational harm. We would expect to incur significant legal expenses in defending any such claims.
While we currently carry commercial general liability, excess liability, builder’s risk, pollution, employment, fiduciary crime and legal, cyber security and directors’ and officers’ insurance policies, coverage amounts are limited. In the future, we may not maintain any insurance coverage at all or may reduce coverage due to lack of funding or insurers being unwilling to provide coverage at all, or at a substantially higher cost. In some cases, our insurance policies may expire and if we are not able to obtain replacement coverage, could have a material adverse effect on our operations if there were to be a material loss. Additionally, the policies that we do have may include significant deductibles and exclusions, and we cannot be certain that our insurance coverage will be applicable to or sufficient to cover all current and future claims against us. We may also seek to reduce or eliminate our insurance coverage or certain policies in the future.
We may not be able to realize value from our assets.
Under the Proposed Plan, we intend to continue to sell some of our properties in the ordinary course, and submit our multi-family properties to a sale and auction process. The remaining properties are intended to be sold by our Plan Administrator following the effectiveness of the Proposed Plan. In the event that all of our properties are sold, as a result, the assets that we would continue to hold that are of the type that were previously used in our operations are minimal. We cannot provide assurances as to the value of our other assets. Given general economic and market conditions, we can provide no assurance that we will be able to successfully complete any dispositions of our remaining assets, the timing or proceeds and other terms of any such transactions, and any ability to realize value from the NOLs.
The failure to realize value from our assets or to generate sufficient proceeds therefrom to sustain our Chapter 11 Case and post-emergence activities may have a material impact on the ultimate recovery for stakeholders, including creditors. As mentioned above, it is uncertain whether holders of our equity securities will recover any portion of their investments.
The amount of claims allowed could significantly exceed our estimates.
The Bankruptcy Court established February 16, 2024 as the general bar date for all creditors (except governmental entities) to file their proof of claim or interest, and June 10, 2024 as the bar date for all governmental entities. There can be no assurance regarding the amount of claims allowed for distributions under the Proposed Plan or that such claims will not be significantly greater than may be anticipated which, could in turn result in the value of distributions to stakeholders being delayed, reduced, or eliminated entirely. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the ultimate results and total amount of claims against us. Moreover, a number of additional claims may be filed in the Chapter 11 Case. Such Clams may be substantial and may result in a greater amount of allowed Claims than estimated in the Disclosure Statement.
In addition, the SEC may determine that certain of our obligations are not dischargeable under the Bankruptcy Code; if the SEC brings and prevails in such non-dischargeability action, such obligations would remain even after the Effective Date of the Proposed Plan, which could impact recoveries to holders of Claims and Interests pursuant to the Proposed Plan.
If our SEC reporting obligations continue, our ability to meet these obligations timely or at all may be limited.
Our securities currently trade on the OTC Pink Current Information. We may be required to maintain our SEC reporting obligations to facilitate trading of our securities during the Chapter 11 Case. If we are unable to meet these obligations timely or at all, the amount of publicly available information concerning us and our securities may decrease substantially, which may limit the ability of our stockholders to sell their shares of our stock, and the liquidity and trading prices of our securities could be negatively impacted.
The amount of publicly-available information concerning us may decrease substantially if we are able to terminate our SEC reporting obligations in the near future, which may occur during the Chapter 11 Case.
We currently have fewer than 300 holders of record of our stock. Therefore, we may be eligible to suspend our reporting obligations to file periodic reports with the SEC under the Exchange Act, and may do so in the near future. To the extent these actions limit the amount of publicly available information concerning us and our securities, our ability to raise additional funds, the ability of our shareholders to sell their securities, and the liquidity and trading prices of our common shares could all be negatively impacted.
Operating in bankruptcy for a long period of time may extinguish our available assets, and would otherwise harm or eliminate recoveries to creditors and stockholders.
A long period of operations in the Chapter 11 Case under Bankruptcy Court protection would likely have a material adverse effect on our financial condition, liquidity, and ability to successfully complete the Chapter 11 Case and Proposed Plan. A prolonged period of operating under Bankruptcy Court protection may make it more difficult to retain management and other key personnel necessary to the success of our bankruptcy process and ability to realize further value from our remaining assets. We have a limited source of ongoing revenue. Attrition has required and may continue to require us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees.
So long as the Chapter 11 Case continues, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Case, including potentially the costs of litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly and adversely affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under the Proposed Plan. It is not possible to predict the potential litigation that we may become party to, nor the final resolution of such litigation. The impact of any such litigation on our current plans to complete the bankruptcy process, however, could be material.
Any delays in our Chapter 11 Case would increase the costs and risks associated with the bankruptcy process, and diminish the value, if any, that is available to our various stakeholders (including creditors and stockholders). Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business during the course of bankruptcy proceedings, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with bankruptcy proceedings, we cannot accurately predict or quantify the ultimate impact of events that could occur during any such proceedings. There can be no assurances that we will realize value from of our remaining assets in an orderly fashion, that we will otherwise realize any significant value for our remaining assets, or that our creditors or stockholders will receive any recovery from the Chapter 11 Case or any other bankruptcy proceedings.
Our securities have been delisted from Nasdaq and experience the risks of trading in an over-the-counter market.
On December 12, 2023, we received written notification from Nasdaq that they would suspend trading of our common stock, preferred stock, and warrants (formerly Nasdaq: HCDI, HCDIP, HCDIW, and HCDIZ) on December 21, 2023. Following, Nasdaq filed Form 25-NSE with the SEC on February 15, 2024 to delist such securities from Nasdaq.
As a result of the suspension and delisting, our common stock began trading on the OTC Pink Current Information under the symbols “HCDIQ,” “HCDPQ,” “HCDWQ,” and “HCDZQ” on December 21, 2023 and such market is currently the only trading market for our securities. We can provide no assurance that our securities will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our securities on this market, whether the trading volume of our securities will be sufficient to provide for an efficient trading market or whether quotes for our securities will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our securities. Furthermore, because of the limited market and generally low volume of trading in our securities, the price of our securities is likely to be volatile and more likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ perception of our securities, and announcements made by us or third parties with Interests in the Chapter 11 Case.
We currently remain subject to SEC reporting obligations. However, with the severely limited personnel and resources, remaining in compliance with such reporting obligations may be difficult and costly. No assurances can be made that we will remain in compliance with our reporting obligations, including as it relates to the required timelines for financial statements or other disclosures.
The Chapter 11 Case has caused our securities to decrease in value materially and may render our securities worthless.
We have a substantial amount of indebtedness that is senior to our existing securities. Recoveries in the Chapter 11 Case for holders of our securities, if any, will depend upon the realized value of our assets, and the outcome of the Proposed Plan, among other factors. If the Proposed Plan is approved by the Bankruptcy Court, then our common stock will be cancelled and its holders will not receive any recoveries and our Series A Preferred Stock will also be cancelled, along with any accrued dividends and its holders will receive new securities of the Company. Although we cannot predict whether the Proposed Plan will be approved by the Bankruptcy Court or how our securities will be treated under any Chapter 11 plan at this time, our stockholders may not receive a material, or any, recovery. Consequently, there is a significant risk that our securities will decrease in value materially or become worthless. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Case.
We consider the value of our stock to be highly speculative and strongly caution our equity holders that our stock likely has no value. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in our securities.
If we are successful in selling our assets, we will have no material operating activities remaining and no material source of income. The risk factors which follow are principally based on the risks inherent in operating and financing our business in a manner which included our current operations. It is presented for historical purposes to only cover the time periods discussed in this Report. The presentation of these risk factors is not meant to suggest that we expect to own and operate any of our current, or any other, operating business in the future.
Business and Industry Risks:
We are subject to demand fluctuations in the housing market and the homebuilding industry. The recent decline in demand in the housing market may continue or decline further. Any continuation in the recent decline in demand or any further decline in demand for our homes or in the homebuilding industry generally may materially and adversely affect our business, results of operations, and financial condition.
Demand for our homes is subject to fluctuations, often due to factors outside of our control. We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will grow, particularly if interest rates for mortgage loans, land costs, and construction costs continue to rise. Currently, we believe we are in a housing market downturn, since demand for our homes has decreased; our revenues and results of operations have been adversely affected; we have had significant inventory impairments and other write-offs; our gross margins have declined significantly from historical levels; and we incurred substantial losses from operations. Other factors that have impacted and may continue to impact the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various regions or industries around the world, tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals, changing consumer preferences, decreased consumer confidence, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, slower rates of population growth or population decline in our markets, Federal Reserve policy changes, and other factors, including those described elsewhere in this Report. At any particular time, we cannot accurately predict whether housing market conditions existing at that time will continue.
If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate, or if interest rates for mortgage loans continue to rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average sales price per home closed, cancellations of home purchase contracts and the amount of revenues or profits we generate, and such effect may be material.
Regional factors affecting the real estate industry in our current markets could materially and adversely affect us.
Our business and properties are located in Washington, California, Texas, and Florida. A prolonged economic downturn in one or more of these areas, or a particular industry that is fundamental to one or more of these areas could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Furthermore, if buyer demand for new homes in these markets decreases, home prices could decline, which would have a material adverse effect on our business.
Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; availability and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in particular; consumer spending; financial system and credit market stability; private party and government mortgage loan programs (including changes in FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices for available new or resale homes (including lender-owned homes); interest of financial institutions or other businesses in purchases; and real estate taxes. Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, prolonged periods of precipitation, droughts, and fires), other calamities and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business. If the homebuilding industry experiences a significant or sustained downturn, it would materially adversely affect our business and results of operations in future years. The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices because of market conditions. The potential difficulties described above could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.
Tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations.
Almost all of our customers finance their home purchases through lenders that provide mortgage financing. Mortgage interest rates have generally trended downward for the last several decades and reached historic lows in the prior year which has made the homes we sell more affordable. However, the interest rates have significantly jumped in the recent year. When mortgage interest rates increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted. Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers, which is expected to be impacted by continued regulatory changes and fluctuations in the risk appetites of lenders. The financial documentation, down payment amounts and income to debt ratio requirements are subject to change and could become more restrictive. The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and USDA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. If either the FHA or USDA raised their down payment requirements or lowered maximum loan amounts, our business could be materially affected. Increased lending volume and losses insured by the FHA have resulted in a reduction of the FHA insurance fund. The USDA rural development program provides for zero down payment and 100% financing for homebuyers in qualifying areas. If the USDA program was discontinued or if funding was decreased, then our business could be adversely affected. In addition, if the USDA changed its determination of areas that are eligible to qualify for the program, it could have an adverse effect on our business. In addition, changes in governmental regulation with respect to mortgage lenders could adversely affect demand for housing. The availability and affordability of mortgage loans, including mortgage interest rates for such loans, could also be adversely affected by a scaling back or termination of the federal government’s mortgage loan-related programs or policies. Because Fannie Mae-, Freddie Mac-, FHA-, USDA- and VA-backed mortgage loans have been an important factor in marketing and selling many of our homes, any limitations, or restrictions in the availability of, or higher consumer costs for, such government-backed financing could adversely affect our business, prospects, liquidity, financial condition, and results of operations. The elimination or curtailment of state bonds to assist homebuyers could materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations. In addition, certain current regulations impose, and future regulations may strengthen or impose new, standards and requirements relating to the origination, securitization, and servicing of residential consumer mortgage loans, which could further restrict the availability and affordability of mortgage loans and the demand for such loans by financial intermediaries and, as a result, adversely affect our home sales, financial condition, and results of operations. Further, if, due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations and/or regulatory restrictions related to certain regulations, laws or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our homebuyers, or increase the costs to borrowers to obtain such loans, the number of homes we close and our business, prospects, liquidity, financial condition and results of operations may be materially adversely affected. First-time homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers. These homebuyers are a key source of demand for our new homes. A limited availability of suitable mortgage financing may adversely affect the volume and sales price of our home sales.
Fluctuations in real estate values may require us to write-down the book value of our real estate assets.
The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
We may be required to take write-downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial condition, results of operations, and our stock price, which could cause you to lose some or all of your investment.
Factors outside of our business and outside of our control may arise. As a result of these factors, we may be forced to write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Further, unexpected risks may arise, and previously known risks may materialize in a manner not consistent with our risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. Accordingly, our securities could suffer a reduction in value.
Because real estate is illiquid, we may not be able to sell properties when in our best interest.
Sometimes, real estate may not be sold quickly. The capitalization rates at which properties may be sold could be higher than historic rates, thereby reducing our potential proceeds from sale. Consequently, we may not be able to alter our inventory promptly in response to changes in economic or other conditions. All of these factors reduce our ability to respond to changes in the performance of our inventory and could adversely affect our business, financial condition, and results of operations.
Inflation could adversely affect our business and financial results.
Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes, relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. During 2022, we experienced the fastest interest rate increase cycle since the 1980s. The Federal Reserve has already made an interest rate increase in 2023. Though they have forecasted they would cut rates, it is uncertain. They may also again raise interest rates to combat the effects of inflation. These interest rate increases have adversely impacted and could continue to adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.
Reduced numbers of home sales extend the time it takes us to recover land purchase and property development costs, negatively impacting profitability and our results of operations.
We incur many costs even before we begin to build homes in a community. Depending on the stage of development a land parcel is in when we acquire it, these may include costs of preparing land, financing, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs related to ownership of the land on which we plan to build homes. If the rate at which we sell and deliver homes slows, or if we delay the opening of new home communities, we may incur additional pre-construction costs and it may take longer for us to recover our costs, which could adversely affect our profitability and results of operations.
Development, redevelopment, and construction risks could affect our profitability.
We intend to continue to develop multi-family home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may expose us to the following risks, among others:
● we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities;
● occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;
● we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy or other required governmental or third party permits and authorizations, which could result in increased costs, or the delay or abandonment of opportunities;
● we may incur costs that exceed our original estimates due to increased material, labor or other costs;
● we may be unable to complete construction of a community on schedule or for the originally projected cost resulting in increased construction and financing costs;
● we may incur liabilities to third parties during the development process; and
● we may incur liability if our communities are not constructed in compliance with the accessibility provisions of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants and a requirement that we undertake structural modifications to remedy the noncompliance.
Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.
Each of our home sales may require an appraisal of the home value before closing. These appraisals are professional judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our business and results of operations.
Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of our real estate assets.
Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our properties, and may be adversely affected by the following risks:
● corporate restructurings and/or layoffs, and industry slowdowns;
● an oversupply of, or a reduced demand for, apartment homes;
● a decline in household formation or employment or lack of employment growth;
● the inability or unwillingness of residents to pay rent increases; and
● economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance.
Changes to population growth rates in certain of the markets in which we operate or plan to operate could affect the demand for homes in these regions.
Slower rates of population growth or population declines in our markets in Washington, California, Texas, Florida, or other key markets in the United States that we may decide to enter in the future, especially as compared to the high population growth rates in prior years, could affect the demand for housing, cause home prices in these markets to fall and adversely affect our plans for growth, business, financial condition, and operating results.
A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.
Building sites are inherently dangerous and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation and our relationships with relevant regulatory agencies, governmental authorities, and local communities, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
Development of properties entails a lengthy, uncertain, and costly entitlement process.
Approval to develop real property sometimes requires political support and generally entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and often requires discretionary action by local governments. Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. We incur substantial costs to comply with legal and regulatory requirements. An increase in legal and regulatory requirements may cause us to incur substantial additional costs, or in some cases cause us to determine that the property is not feasible for development. In addition, our competitors and residents may challenge our efforts to obtain entitlements and permits for the development of properties. The process to comply with these regulations is usually lengthy and costly, may not result in the approvals we seek and can be expected to materially affect our development activities.
We cannot make any assurances that our growth or expansion strategies will be successful or not expose us to additional risks.
We have expanded our business through selected investments in new geographic markets and by diversifying our products in certain markets. Investments in land, finished lots and home inventories can expose us to risks of economic loss and inventory impairments if housing conditions weaken or we are unsuccessful in implementing our growth strategies. We may develop communities in which we build homes, sell acreage home sites as a part of the development, and sell homes. We can give no assurance that we will be able to successfully identify, acquire, or implement these new strategies in the future. Accordingly, any such expansion could expose us to significant risks, beyond those associated with operating our existing business, including understanding and complying with the laws and regulations of new jurisdictions, diversion of our management’s attention from ongoing business concerns, and incurrence of unanticipated liabilities and expenses and may materially adversely affect our business, prospects, liquidity, financial condition, and results of operations.
The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to customers, it may materially and adversely affect our business and financial condition.
We operate in a very competitive environment that is characterized by competition from a number of other homebuilders and land developers in each geographical market in which we operate. There are relatively low barriers to entry into the homebuilding business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. If we are unable to compete effectively in our markets, our business could decline disproportionately to the businesses of our competitors and our financial condition could be materially and adversely affected. Increased competition could hurt our business by preventing us from acquiring attractive land parcels on which to build homes or making acquisitions more expensive, hindering our market share expansion and causing us to increase selling incentives and reduce prices. Additionally, an oversupply of homes available for sale or a discounting of home prices could materially and adversely affect pricing for homes in the markets in which we operate. We also compete with the resale, or “previously owned,” home market, the size of which may change significantly as a result of changes in the rate of home foreclosures, which is affected by changes in economic conditions both nationally and locally. We may be at a competitive disadvantage with regard to certain large national and regional homebuilding competitors whose operations are more geographically diversified, as these competitors may be better able to withstand any future regional downturn in the housing market. We compete directly with a number of large national and regional homebuilders that may have longer operating histories and greater financial and operational resources than we do, including a lower cost of capital. Many of these competitors also have longstanding relationships with subcontractors, local governments, and suppliers in the markets in which we operate or in which we may operate in the future. This may give our competitors an advantage in securing materials and labor at lower prices, marketing their products and allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our business.
Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.
Our current business involves the design, construction, and sale of properties in growing markets in Washington, California, Florida, and Texas. Because our operations are concentrated in these areas, a prolonged economic downturn affecting one or more of these areas, or affecting any sector of employment on which the residents of such area are dependent, could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Accordingly, our sales, results of operations, financial condition and business would be negatively impacted by a decline in the economy, the job sector, or the homebuilding industry in the regions in which our operations are concentrated. In addition, our ability to acquire land parcels for new homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, and other market conditions. If the supply of land parcels appropriate for development of homes is limited in our markets, or for any other reason, our ability to grow could be significantly limited, and the number of homes that we build, and sell could decline.
Any joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.
We may co-invest in the future with third parties through partnership, joint ventures, or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions, or block or delay necessary decisions. Our joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.
Natural disasters, severe weather and adverse geological conditions may increase costs, cause project delays, and reduce consumer demand for housing, all of which could materially and adversely affect us.
Our homebuilding and development operations are located in many areas that are subject to natural disasters, severe weather or adverse geological conditions. These include, but are not limited to, hurricanes, tornadoes, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence, earthquakes, and other natural disasters. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to our assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion. Furthermore, the occurrence of natural disasters, severe weather and other adverse geological conditions has increased in recent years due to climate change and may continue to increase in the future. Climate change may have the effect of making the risks described above occur more frequently and more severely, which could amplify the adverse impact on our business, prospects, liquidity, financial condition, and results of operations. There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with hurricanes, landslides, prolonged periods of precipitation, earthquakes and other weather-related and geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations.
If we are unable to develop or construct our properties successfully or within expected time-frames, our results of operations could be adversely affected.
It can take some time to generate revenue after we acquire land for developed lots, homes, and multi-family properties. Delays in the development and construction, including delays associated with subcontractors performing the development activities or entitlements, expose us to the risk of changes in market conditions for real estate. A decline in our ability to develop and market our real estate successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.
New and existing laws and regulations or other governmental actions may increase our expenses, limit our operations where we can purchase and build or delay completion of our projects.
We are subject to numerous local, state, federal and other statutes, ordinances, rules, and regulations concerning zoning, development, building design, construction, accessibility, anti-discrimination, and other matters, which, among other things, impose restrictive zoning and density requirements, the result of which is to limit our operations within the boundaries of a particular area. We may encounter issues with entitlement, not identify all entitlement requirements during the pre-development review of a project site, or encounter zoning changes that impact our operations. Projects for which we have not received land use and development entitlements, or approvals may be subjected to periodic delays, changes in use, less intensive development, or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements, or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development. As a result of any of these statutes, ordinances, rules or regulations, the timing of our home sales could be delayed, the number of our home sales could decline and/or our costs could increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
We are subject to environmental, health and safety laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can operate and delay completion of our projects.
We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules, and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements that apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the present and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and environmental conditions at adjoining or nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. In some instances, regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project. From time to time, the EPA and similar federal, state, or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties, among other sanctions, for failure to strictly comply with applicable environmental laws, including those applicable to control storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. Further, we expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.
Environmental laws and regulations relating to climate change and energy can have an adverse impact on our activities, operations, and profitability and on the availability and price of certain raw materials, such as lumber, steel, and concrete.
There is a growing concern from advocacy groups and the general public that the emissions of greenhouse gases and other human activities have caused, and will continue to cause, significant changes in weather patterns and temperatures and the frequency and severity of natural disasters. Government mandates, standards and regulations enacted in response to these projected climate change impacts and concerns could result in restrictions on land development in certain areas or increased energy, transportation, and raw material costs. As climate change concerns continue to grow, legislation, regulations, mandates, standards, and other requirements of this nature are expected to continue to be enacted and become costlier for us to comply with. Similarly, energy-related initiatives affect a wide variety of companies throughout the United States and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, these initiatives could have an adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade or similar energy-related regulations.
Increases in cancellations of agreements of sale could have an adverse effect on our business.
Our backlog reflects agreements of sale with our buyers for properties that have not yet been delivered. We typically receive a deposit from our buyers for each property, which is reflected in our backlog, and we generally have the right to retain the deposit if the buyer does not complete the purchase. In some situations, however, a buyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local law, an inability to obtain mortgage financing at prevailing interest rates (including financing arranged or provided by us), an inability to sell the current property, or our inability to complete and deliver the property within the specified time. If mortgage financing becomes less accessible, or if economic conditions deteriorate, buyers may cancel their agreements of sale with us, which could have an adverse effect on our business and results of operations.
Third-party lenders may not complete mortgage loan originations for our homebuyers in a timely manner or at all, which can lead to cancellations and a reduction in the backlog of orders, or significant delays in our closing homes sales and recognizing revenues from those homes.
Our buyers may obtain mortgage financing for their home purchases from any lender or other provider of their choice, including an unaffiliated lender. If, due to credit or consumer lending market conditions, regulatory requirements, or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our buyers, the number of homes that we deliver, and our consolidated financial statements may be materially and adversely affected. We can provide no assurance as to a lenders’ ability or willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Such inability or unwillingness may result in mortgage loan funding issues that slow deliveries of our homes or cause cancellations, which in each case may have a material adverse effect on our consolidated financial statements. In addition, recent changes to mortgage loan disclosure requirements to consumers may potentially delay lenders’ completion of the mortgage loan funding process for borrowers. Specifically, the Consumer Financial Protection Bureau has adopted a rule governing the content and timing of mortgage loan disclosures to borrowers, commonly known as TILA-RESPA Integrated Disclosures (“TRID”). Lender compliance with TRID could result in delays in loan closings and the delivery of homes that materially and adversely affect our financial results and operations.
Our business and results of operations are dependent on the availability, skill, and performance of subcontractors.
We engage subcontractors to perform the construction of our single and multifamily homes and, in many cases, to select and obtain the raw materials used in constructing our homes. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. In addition, as we expand into new markets, we typically must develop new relationships with subcontractors in such markets, and there can be no assurance that we will be able to do so in a cost-effective and timely manner, or at all. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Despite our quality control and jobsite safety efforts, we may discover from time to time that our subcontractors have engaged in improper construction or safety practices or have installed defective materials in our homes. When we discovered these issues, we utilized our subcontractors to repair the homes in accordance with our new home warranty and as required by law. We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.
We rely on third-party suppliers and long supply chains, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our ability to timely and efficiently access raw materials that meet our standards for quality could be adversely affected.
Our ability to identify and develop relationships with qualified suppliers who can satisfy our standards for quality and our need to access products and supplies in a timely and efficient manner is a significant challenge. We may be required to replace a supplier if their products do not meet our quality or safety standards. In addition, our suppliers could discontinue selling products at any time for reasons that may or may not be in our control or the suppliers’ control. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with a supplier providing similar products. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by credit market conditions, which could negatively impact our revenue and cost of products sold, at least until alternate sources of supply are arranged.
Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.
The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualified subcontractors and tradespeople and supplies of insulation, drywall, cement, steel, and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing, during periods following natural disasters that have a significant impact on existing residential structures or as a result of broader economic or geopolitical disruptions. It is uncertain whether these shortages will continue as is, improve or worsen. In addition, our activities in recently entered markets or those we may choose to enter in the future depends substantially on our ability to source labor and local materials on terms that are favorable to us. Our markets may exhibit a reduced level of skilled labor relative to increased homebuilding demand in these markets. In the event of shortages in labor or raw materials in such markets, local subcontractors, tradespeople, and suppliers may choose to allocate their resources to homebuilders with an established presence in the market and with whom they have longer-standing relationships. Furthermore, the cost of labor and raw materials may also increase during periods of shortage or high inflation. During the economic downturn in 2007 through 2012, a large number of qualified trade partners went out of business or otherwise exited the market into new fields. Price increases could cause delays in and increase our costs of home construction, which we may not be able to recover by raising home prices due to market demand and because the price for each home is typically set prior to its delivery pursuant to the agreement of sale with the homebuyer. In addition, the federal government has, at various times, imposed tariffs on a variety of imports from foreign countries and may impose additional tariffs in the future. Significant tariffs or other restrictions placed on raw materials that we use in our homebuilding operation, such as lumber or steel, could cause the cost of home construction to increase, which we may not be able to recover by raising home prices or which could slow our absorption due to being constrained by market demand. Labor and raw material shortages and price increases for labor and raw materials could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. We have experienced delays or increased costs for certain materials, such as cabinets, electrical components, and appliances, which has had a material adverse effect on our financial condition and results of operations. If the current state of the global supply chain continues, such delays or costs may continue to increase, which may further affect our business.
New trade policies could make sourcing raw materials from foreign countries more difficult and more costly.
The federal government from time to time imposes new or increased tariffs or duties on an array of imported materials and goods that are used in connection with the construction and delivery of homes, including steel, aluminum, lumber, solar panels and washing machines, and has threatened to impose further tariffs, duties, or trade restrictions on imports. Foreign governments, including China, Russia, and the European Union, have responded by imposing or increasing tariffs, duties, or trade restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalating governmental actions that result in additional tariffs, duties or trade restrictions could cause disruptions or shortages in our supply chains, increase our construction costs or home-building costs generally or negatively impact the U.S., regional or local economies, and individually or in the aggregate, materially and adversely affect our financial results.
We may change our operational policies, investment guidelines, and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.
Our board of directors will determine our operational policies, investment guidelines, and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines, and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments, or pursuing different business or growth strategies than those contemplated in this Annual Report. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.
Our homes are constructed by employees of subcontractors and other third parties. We do not have the ability to control what these parties pay their employees or the rules they impose on their employees. However, various governmental agencies have taken actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors. Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition, and results of operations.
Our quarterly operating results fluctuate due to the seasonal nature of our business.
Our quarterly operating results generally fluctuate by season. We typically experience the highest new home order activity in the spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings, and other market factors. Since it typically takes nine to 12 months to construct a new home, we usually deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs, and related cash outflows have historically been highest in the second and third quarters and the majority of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.
Risks associated with our land and lot inventories could adversely affect our business or financial results.
Risks inherent in controlling, purchasing, holding, and developing land for new home construction are substantial. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases and the holding period increases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which could negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. Land development is a key part of our operations, and we develop land in most of our markets. The time and investment required for development may adversely impact our business. We have substantial real estate inventories that regularly remain on our balance sheet for significant periods of time prior to their sale, during which time we are exposed to the risk of adverse market developments. Our business model is based on building homes before a sales contract is executed and a customer deposit is received. Interest and other expenses are capitalized until sold. In the event there is a downturn in home sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all. Additionally, deteriorating market conditions could cause us to record significant inventory impairment charges. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business.
The long-term sustainability and growth in our home closings depends in part upon our ability to acquire land parcels suitable for residential projects at reasonable prices.
The long-term sustainability of our operations as well as future growth depends in large part on the price at which we are able to obtain suitable land parcels for development or homebuilding operation. Our ability to acquire land parcels for various residential projects may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, regulations that limit housing density, the ability to obtain building permits, environmental requirements and other market conditions and regulatory requirements. If suitable lots or land at reasonable prices become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased substantially, which could adversely impact us. As competition for suitable land increases, the cost of undeveloped lots and the cost of developing owned land could also rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to maintain or increase the number of our active communities, as well as to sustain and grow our revenues and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming and we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.
We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.
As a homebuilder and developer, we are subject to construction defect, product liability and home and other warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly. There can be no assurance that any developments we undertake will be free from defects once completed and any defects attributable to us may lead to significant contractual or other liabilities. We rely on subcontractors to perform the construction of our homes and, in some cases, to select and obtain building materials. Although we provide subcontractors with detailed specifications and perform quality control procedures, subcontractors may, in some cases, use improper construction processes or defective materials. Defective products used in the construction of our homes can result in the need to perform extensive repairs. The cost of performing such repairs, or litigation arising out of such issues, may be significant if we are unable to recover the costs from subcontractors, suppliers and/or insurers. Warranty and construction defect matters can also result in negative publicity, including on social media outlets, which could damage our reputation and negatively affect our ability to sell homes. We maintain, and require our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their work. While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our risk of loss from claims related to our land development and homebuilding activities, we cannot provide assurance that these insurance policies and indemnities will be adequate to address all our home and other warranty, product liability and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our business, financial condition or results of operations. Further, the coverage offered by, and the availability of, general liability insurance for completed operations and construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become costlier.
We may be unable to obtain suitable bonding for the development of our communities.
We provide performance bonds and letters of credit in the ordinary course of business to governmental authorities and others to ensure the completion of our projects or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities. We may also be required to provide performance bonds or letters of credit to secure our performance under various escrow agreements, financial guarantees, and other arrangements. If we are unable to obtain performance bonds or letters of credit when required or the cost or operational restrictions or conditions imposed by issuers to obtain them increases significantly, we may be significantly delayed in developing our communities or may incur significant additional expenses and, as a result, our financial condition and results of operations could be materially and adversely affected.
Financial and Liquidity Risks:
Our ability to operate and to respond to changing business and economic conditions depends on the availability of adequate capital. Failure to generate cash flow or obtain financing could have a material adverse effect on our financial condition and results of operation and could cast uncertainty on our ability to continue as a going concern.
The continued operation of our business and our ability to respond to changing business and economic conditions depend on the availability of adequate capital, which in turn depends on cash flow generated by our business and, if necessary, the availability of equity or debt capital. We also require sufficient cash flow to meet our obligations under our existing debt agreements. We cannot assure you that our cash flow from operations or cash available under our financing agreements will be sufficient to meet our needs. If we are unable to generate sufficient cash flows from operations in the future and if availability under our financing agreements is not sufficient or unavailable, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock which could negatively impact our ability to obtain stock-based financing. There can be no assurance that we will be successful in obtaining additional capital when and if needed. If we are unable to generate sufficient revenues, utilize existing financing facilities, or obtain new financing, we may have to delay, scale back, or terminate some of our proposed projects; liquidate assets at unfavorable prices; or not be able to continue operations and possibly seek bankruptcy protection. (See Note 1. To our Financial Statements, Nature of Operations and Summary of Significant Accounting Policies-Going Concern Uncertainty.) Notwithstanding the foregoing, all of our business and operations now require approval of the Bankruptcy Court.
The filing of the Chapter 11 Case constituted an event of default that accelerated substantially all of our obligations under all of our pre-petition debt instruments.
The filing of the Chapter 11 Case constituted an event of default that accelerated substantially all of our obligations under all of our pre-petition debt instruments. Some of our loan agreements contain financial covenants that we must meet over the course of the loan. There can be no guarantee that we will be able to meet these financial covenants at any given time. If any violations of such covenants are not cured within their applicable cure periods, a lender could declare a default. At the option of the lender, declaration of a default could require a restructuring of the loan with onerous requirements or the lender could declare all amounts due under the loan immediately due and payable, in which case we would be required to pay all amounts of outstanding principal and interest immediately (“Acceleration”). If an Acceleration was demanded by a lender, we may not have cash available to pay the entire amount of the Acceleration and would have to borrow funds at egregious terms, raise dilutive financing, sell assets, or take other adverse actions and there can be no assurance that we would be successful in accomplishing any such remedial measures to satisfy an Acceleration.
Difficulty in obtaining sufficient capital could result in an inability to acquire land or increased costs and delays in the completion of development projects, increase home construction costs or delay home construction entirely.
The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be constrained regionally or nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. Since the global recession in 2008, credit and capital markets have, from time to time, experienced unusual volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. Furthermore, any downgrade of our credit ratings or other negative rating actions by credit agencies may make it more difficult and costly for us to access capital. If we are not successful in obtaining sufficient funding for our planned capital and other expenditures or if we do not properly allocate our funding, we may be unable to acquire additional land for development and/or to construct new housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase contracts, we may incur contractual penalties, fees, and increased expenses from the write-off of due diligence and pre-acquisition costs. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.
Our access to additional third-party sources of financing will depend, in part, on:
● perception of our business during or following the Chapter 11 Case;
● general market conditions;
● the market’s perception of our growth potential;
● with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;
● our current debt levels;
● our current and expected future earnings;
● our cash flow; and
● the market price per share of our common stock.
The global credit and equity markets and the overall economy can be extremely volatile, which could have a number of adverse effects on our operations and capital requirements. For the past decade, the domestic financial markets have experienced a high degree of volatility, uncertainty and, during certain periods, tightening of liquidity in both the high yield debt and equity capital markets, resulting in certain periods where new capital has been both more difficult and more expensive to access. If we are unable to access the credit markets, we could be required to defer or eliminate important business strategies and growth opportunities in the future. In addition, if there is volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may increase collateral requirements or may charge us prohibitively high fees in order to obtain financing. Consequently, our ability to access the credit market in order to attract financing on reasonable terms may be adversely affected. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all. Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
We are largely dependent on our current cash balance and future cash flows from operations (which may not be positive) to enable us to service our indebtedness, to cover our operating expenses and/or to fund our other liquidity needs. Depending on the levels of our land purchases, we could generate positive or negative cash flow in future years. If the market conditions in the homebuilding industry deteriorate, our cash flows could be insufficient to fund our obligations and support land purchases, and if we cannot buy additional land, we would ultimately be unable to generate future revenues from the sale of houses. If our cash flows and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure our indebtedness. These alternative measures may not be successful or, if successful, made on desirable terms and may not permit us to meet our debt service obligations. If our available cash and capital resources are insufficient to meet our debt service and other obligations, we could face liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or the proceeds from the dispositions may not be permitted under the terms of our debt instruments to be used to service indebtedness or may not be adequate to meet any debt service obligations then due. For additional information about capital resources and liquidity. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.)
Our indebtedness could adversely affect our business, prospects, financial condition, or results of operations and prevent us from fulfilling our obligations under loan agreements.
We have a significant amount of indebtedness. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liabilities.) If we incur additional indebtedness, the risks related to our level of indebtedness could intensify. Specifically, an increased level of indebtedness could have negative ramifications, including but not limited to the following:
● making it more difficult for us to satisfy our obligations with respect to our indebtedness, including our loan agreements;
● limiting our ability to obtain additional financing to fund future working capital, capital expenditures, debt service requirements, execution of our business strategy or finance other general corporate requirements;
● requiring us to make non-strategic divestitures, particularly when the availability of financing in the capital markets is limited, which may adversely impact sales prices;
● requiring a substantial portion of our cash flow to be allocated to debt service payments instead of other business purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions, dividends and other general corporate purposes;
● increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates, particularly given that certain indebtedness bears interest at variable rates;
● limiting our ability to capitalize on business opportunities, reinvest in and develop properties and to react to competitive pressures and adverse changes in government regulations;
● placing us at a disadvantage compared to other, less leveraged competitors;
● limiting our ability or increasing the costs to refinance indebtedness resulting in an event of default if we fail to satisfy our obligations under our indebtedness, which default could result in all or part of our indebtedness becoming immediately due and payable and, in the case of our secured debt, could permit the lenders to foreclose on our assets securing such debt.
A breach of the covenants under any of the agreements governing our indebtedness could result in an event of default.
A default under any of the agreements governing our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under the applicable facility. Furthermore, if we were unable to repay the amounts due and payable under any secured indebtedness, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or the holders of our notes accelerate the repayment of our borrowings, we cannot assure that we would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:
● limited in how we conduct our business;
● unable to raise additional debt or equity financing to operate during general economic or business downturns; or
● unable to compete effectively or to take advantage of new business opportunities.
These restrictions may affect our ability to grow or continue our existing operations.
Our stock price is volatile and could decline.
The securities markets in general and our common stock in particular have experienced significant price and volume volatility. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions, but also to a change in sentiment in the market regarding our industry, operations, or business prospects. The price and volume volatility of our common stock may be affected by:
● our Chapter 11 Case;
● operating results that vary from the expectations of securities analysts and investors;
● factors influencing home purchases, such as higher interest rates and availability of home mortgage loans, credit criteria applicable to prospective borrowers, ability to sell existing residences and homebuyer sentiment in general;
● the operating and securities price performance of companies that investors consider comparable to us;
● announcements of strategic developments, acquisitions and other material events by us or our competitors; and
● changes in global financial markets and global economies and general market conditions, such as interest rates, commodity and equity prices and the value of financial assets.
Our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration is impacted by the price of our common stock. A low stock price may adversely impact our ability to reduce our financial leverage, as measured by the ratio of total debt to total capital. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.
We may not realize the value of our tax assets.
Certain provisions of the Internal Revenue Code could limit our ability to fully utilize certain tax assets due to a previous change in control, or if we were to experience a future change in control. If such an event were to occur, the cash flow benefits we might otherwise have received could be decreased.
Any limitation on, or reduction or elimination of tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.
While tax laws generally permit significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal and, in many cases, state taxable income, the ability to deduct mortgage interest expense and real estate taxes for federal income tax purposes is limited. The federal government or a state government may change its income tax laws by eliminating, limiting, or substantially reducing these income tax benefits without offsetting provisions, which may increase the after-tax cost of owning a new home for many of our potential homebuyers. Any such future changes may have an adverse effect on the homebuilding industry in general. For example, the loss or reduction of homeowner tax deductions could decrease the demand for new homes. Any such future changes could also have a material adverse impact on our business, prospects, liquidity, financial condition, and results of operations.
Federal income tax credits available to builders of certain energy efficient new homes may not be extended by future legislation.
On August 12, 2022, the U.S. Congress passed the Inflation Reduction Act of 2022, which President Biden signed into law on August 16, 2022. This Act extended the availability of Code Section 45L credit for energy efficient new homes (“federal energy efficient homes tax credits”), which provides a tax credit of $5,000 per qualifying home to eligible homebuilders and made such tax credits available for homes delivered through December 31, 2032. It is uncertain whether an extension or similar tax credit will be adopted in the future.
We may suffer uninsured losses or material losses in excess of insurance limits.
We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. Insurance against certain types of risks, such as terrorism, earthquakes, floods, or personal injury claims, may be unavailable, available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a large deductible or self-insurance retention amount. In addition, there can be no assurance that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles or self-insurance retention, we could sustain financial loss or lose capital invested in the affected property, as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may also be liable for any debt or other financial obligations related to the affected property.
Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.
Accounting rules and interpretations for certain aspects of our financial reporting are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as those related to asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.
If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, investors could lose confidence in our financial results, which could materially and adversely affect us.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could materially and adversely affect us. Please refer to Item 9A. CONTROLS AND PROCEDURES.
Organizational and Structural Risks:
Delisting our securities from Nasdaq limits investors’ abilities to make transactions in our securities and subject us to additional trading restrictions.
Our securities are quoted on an over-the-counter market. We now face significant material adverse consequences, including:
● a limited availability of market quotations for our securities;
●
reduced liquidity for our securities;
● our Common Stock is a “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
●
a limited amount of news and analyst coverage; and
● a decreased ability to issue additional securities or obtain additional financing in the future.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock, preferred stock, and public warrants are no longer listed on Nasdaq, they are no longer covered securities, and we are subject to regulation in each state in which we offer our securities.
The exercise of our warrants and conversion of our preferred stock will result in dilution to our stockholders.
We issued warrants to purchase shares of common stock and issued preferred stock that include an option for the holder to convert the shares into common stock. (See Note 18. Stockholders’ Equity.) The shares of common stock issued upon exercise of our warrants and conversion of our preferred stock will result in dilution to the then existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of such shares in the public market could adversely affect the market price of our common stock or public warrants.
We do not intend to pay dividends on our common stock and preferred stock for the foreseeable future.
Due to our illiquidity and the Chapter 11 Case, we do not intend to pay cash dividends on our common and preferred stock for the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of the Bankruptcy Court.
Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidation distributions, may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources by making offerings of debt securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock will have a preference on liquidating distributions and dividend payments, which could limit our ability to make a dividend distribution to the holders of our common stock.
General Risk Factors:
The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, which we refer to as the “JOBS Act.” As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of SOX, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) following the fifth anniversary of our IPO, (b) in which we have total annual gross revenue of at least $1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock and public warrants that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected to avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. As a result of our reliance on these exemptions or reduced disclosures, investors may not have access to certain information they deem important or may find our securities less attractive. This may result in a less active trading market for our securities and the price of our securities, including our common stock or public warrants may be more volatile.
Our business could be materially and adversely disrupted by an epidemic or pandemic or similar public threat, or fear of such an event, and the measures that federal, state, and local governments and other authorities implement to address it.
An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, along with any associated economic and social instability or distress, have a material adverse impact on our business, financial condition, results of operations, cash flows, strategies, or prospects.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power, acts of terrorism, political uncertainty or civil unrest may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, result in uninsured losses, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.
We are subject to litigation, arbitration, or other claims, which could materially and adversely affect us.
We are subject to litigation, and we may in the future be subject to enforcement actions, such as claims relating to our operations, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future, and legal proceedings may result in the award of substantial damages. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured or in excess of insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. Certain litigation or the resolution thereof may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.
Information system failures, interruptions, cyber incidents, or breaches in security could adversely affect us.
We rely on accounting, financial, operational, management and other information systems, including the Internet and third-party hosted services, to conduct our operations, store sensitive data, process financial information and results of operations for internal reporting purposes and comply with financial reporting, legal and tax requirements. Our information systems, and those of our vendors and service providers, are subject to damage or interruption from power outages, computer and telecommunication failures, computer viruses, security breaches, including malware and phishing, cyberattacks, natural disasters, usage errors by employees and other related risks. Any cyber incident or attack or other disruption or failure in these information systems, or other systems or infrastructure upon which they rely, could adversely affect our ability to conduct our business and could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Furthermore, any failure or security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, or a loss of confidence in our security measures, which could harm our business and could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Although we have implemented systems and processes intended to secure our information systems, there can be no assurance that our efforts to maintain the security and integrity of our information systems will be effective or that future attempted security breaches or disruptions would not be successful or damaging.
Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data security.
As part of our normal business activities, we collect and store certain information, including information specific to homebuyers, customers, employees, vendors, and suppliers. We may share some of this information with third parties who assist us with certain aspects of our business. Consumer personal privacy and data security have become significant issues and the subject of rapidly evolving regulation in the United States. Furthermore, federal, state, and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data privacy. Laws and regulations governing data privacy and the unauthorized disclosure of confidential information including recently implemented may significantly impact our business activities and require substantial compliance costs, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Any failure, or perceived failure, by us to adequately address privacy and data security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments, and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. If we are not able to adjust to changing laws, regulations and standards relating to privacy or data security, our business may be materially harmed. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws.
Failure to comply with laws and regulations may adversely affect us.
We are required to comply with laws and regulations governing many aspects of our business, such as land acquisition and development, home construction and sales, and employment practices. Despite our oversight, contractual protections, and other mitigation efforts, our employees or subcontractors could violate some of these laws or regulations, as a result of which we may incur fines, penalties, or other liabilities, which could be significant, and our reputation with governmental agencies, customers, vendors, or suppliers could be damaged.
Increasing attention to environmental, social, and governance matters may impact our business, financial results, or stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social, and governance (“ESG”) matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities, and other members of the investing community. These activities include increasing attention and demands for action related to climate change and promoting the use of energy saving building materials. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could also cause reputational harm to our business and could have a material adverse effect on us.
Negative publicity could adversely affect our reputation as well as our business, financial results, and stock price.
Our reputation and brand are critical to accomplish our business objectives. Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication, including social media outlets, websites, blogs, newsletters, and other digital platforms. Our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.
Changes in laws, regulations or rules, or a failure to comply with any laws, regulations, or rules, may adversely affect our business, investments, and results of operations.
We are subject to laws, regulations and rules enacted by national, regional, and local governments. In particular, we are required to comply with certain SEC, OTC, and other legal or regulatory requirements. Compliance with, and monitoring of, applicable laws, regulations and rules may be difficult, time consuming and costly. Those laws, regulations or rules and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments, and results of operations. In addition, a failure to comply with applicable laws, regulations, or rules, as interpreted and applied, could have a material adverse effect on our business and results of operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We leased several suites of office space at 11505 Burnham Dr., Gig Harbor, Washington under multiple lease agreements for 26 to 60 month periods with the leases ending in February 2023 through May 2023. During 2022, we terminated the leases for three suites and have the remaining leases for four suites as of December 31, 2022. Additionally, we lease office space at 1201 Pacific Avenue, Tacoma, Washington, for a 126-month period from the commencement date of February 2022 through July 2032.
We leased land where one of our field offices is located to store our heavy equipment and quarry materials such as dirt and rocks for sale to customers (9000 W. Werner Road, Bremerton, Washington). This land was under a lease initiated as of January 28, 2019 for a 24-month period and had been renewed annually through March 8, 2023, at which time the lease terminated.
The following table summarizes certain key metrics of the 15 communities that we own as of March 28, 2024:
Project Name
Location
Total Units
Unsold Units
Business Plan
Status
Bridgeview Trails
Washington
Sell Land
Owned
Horizon at Semiahmoo
Washington
Sell Land
Owned
Inverness
Washington
Sell Land
Owned
Meadowscape
Washington
Sell Apartments
Owned
Olympic Sunset Phase 1
Washington
Sell Apartments
Owned
Olympic Sunset Phase 2
Washington
Sell Land / Partially Constructed Buildings
Owned
Pacific Ridge
Washington
Sell Apartments
Owned
Steel Creek
Washington
Sell Lot
Owned
Darkhorse
California
Sell Lots
Owned
Punta Gorda
Florida
Sell Land
Owned
Cimarron Hills
Texas
Sell Homes
Owned
Creek’s Edge
Texas
Sell Homes
Owned
Flintrock Falls
Texas
Sell Home
Owned
Siena Creek
Texas
Sell Lots and Sell Homes
Owned
Stone House
Texas
Sell Land
Owned
Summit Rock
Texas
Sell Lots and Sell Homes
Owned
Total

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, or results of operation. However, we may from time to time after the date of this Annual Report become subject to claims and litigation arising in the ordinary course of business. One or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention, and may materially adversely affect our reputation, even if favorably resolved.
On December 11, 2023, we filed a voluntary petition (the “Bankruptcy Petition”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Washington (such court, the “Bankruptcy Court” and such case, the “Chapter 11 Case”). The Chapter 11 Case is being jointly administered under the caption In re Harbor Custom Development, Inc., et al., Case No. 23-42180-MJH.
Various claims have been made as part of the Chapter 11 Cases in amounts that are disputed and may be material, but are subject to the final determination of the Bankruptcy Court, the specific amounts of which cannot be determined at this time.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTC Markets under Pink Current Information tier (“OTC Pink”) under the symbol “HCDIQ.”
Our 8.0% Series A Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”) and warrants are quoted on the OTC Pink under the symbols “HCDPQ,” “HCDWQ,” and “HCDZQ,” respectively.
Dividends
Common Stock. We have not declared a dividend on our common stock, and we do not anticipate the payment of dividends in the near future due to the Chapter 11 Case. Any future determination to pay dividends will be at the discretion of the Bankruptcy Court.
Series A Preferred Stock. The holders of our Series A Preferred Stock are entitled to receive dividends at a rate of 8% per annum payable monthly in arrears. During the year ended December 31, 2023, we made one payment of accrued dividends of $0.6 million as of December 31, 2022, which were paid to the holders of the Series A Preferred Stock on January 20, 2023. On January 20, 2023, our Board of Directors voted to suspend the cash dividend on the Series A Preferred Stock as announced on a Current Report on Form 8-K on January 25, 2023.
On February 23, 2023, as part of the Amendment to our Loan Agreement with BankUnited, we agreed to pay $0.6 million to BankUnited each month, which otherwise would have been paid as a dividend to the holders of the Series A Preferred Stock. These dividends will accrue as a liability until paid or otherwise settled in the discretion of the Bankruptcy Court.
Number of Holders of Record
We have approximately 13 record holders of our common stock as of March 28, 2024 according to the records of our transfer agent. The number of our stockholders of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.
Our transfer agent is Mountain Share Transfer, Inc., 2030 Powers Ferry Rd. SE, Suite # 212, Atlanta, Georgia 30339. Their telephone number is (404) 474-3110.
Repurchase of Equity Securities
On May 10, 2022, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $5.0 million worth of shares of common stock. As part of the Amendment to the Loan Agreement with BankUnited, we agreed that we will not repurchase any of our currently outstanding securities. Therefore, the stock repurchase program was terminated.
Restricted Stock Plan
We did not acquire any shares of our common stock during the fourth quarter 2023 as a result of the surrender of shares by our employees to satisfy tax withholding obligations in connection with the vesting of restricted shares of common stock awarded under our 2020 Restricted Stock Plan.
Reverse Stock Split
We filed Articles of Amendment to our Articles of Incorporation to effect a reverse split of our outstanding shares of common stock at a ratio of 1-for-20 (the “Reverse Stock Split”) with the Washington Secretary of State on March 1, 2023 and the Reverse Stock Split was effected on the Nasdaq Capital Market on March 6, 2023.
As a result of the Reverse Stock Split, every 20 shares of common stock either issued and outstanding immediately prior to the effective time was, automatically and without any action on the part of the respective holders thereof, combined and converted into one share of common stock. The Reverse Stock Split also applied to common stock issuable upon the exercise of our outstanding warrants, outstanding stock options, unvested restricted stock awards, stock and stock option plans, and upon the conversion of our Series A Preferred Stock. The Reverse Stock Split did not affect the par value of our common stock or the shares of common stock we are authorized to issue under our Articles of Incorporation, as amended. No fractional shares were issued in connection with the Reverse Stock Split. Fractional shares which would otherwise result from the Reverse Stock Split were rounded up to the nearest whole share. All share and per share amounts of common stock presented in this Annual Report on Form 10-K have been retroactively adjusted to reflect the 1-for-20 Reverse Stock Split.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Harbor Custom Development, Inc. is a real estate development company, which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Liquidation Plan, subject to Bankruptcy Court approval.
We were involved in all aspects of the land development cycle, including land acquisition, entitlements, development, construction of project infrastructure, home and apartment building construction, marketing, and sales of various residential projects in Western Washington’s Puget Sound region; Sacramento, California; Austin, Texas; and Punta Gorda, Florida.
As of December 31, 2023, we own or control 15 communities in Washington, Texas, California, and Florida, containing approximately 539 lots or units in various stages of development.
Results of Operations
The following table sets forth the summary statements of operations for the years ended December 31, 2023 and 2022. For information on the year ended December 31, 2021, refer to Part II, Item 7 of our 2022 Annual Report on Form 10-K/A.
Sales $ 59,256,700 $ 55,414,300
Cost of sales 110,691,900 55,866,800
Gross loss (51,435,200 ) (452,500 )
Operating expenses 9,754,200 16,237,700
Other expense, net of other income 2,447,800 4,690,200
Bankruptcy expense 392,500 -
Income tax expense (benefit) 4,589,400 (4,458,200 )
Net loss $ (68,619,100 ) $ (16,922,200 )
Sales
Our sales increased by 6.9% to $59.3 million for the year ended December 31, 2023 as compared to $55.4 million for the year ended December 31, 2022. This increase was primarily due to increases in multi-family revenue of $38.1 million and the sale of developed lots of $1.5 million, which were partially offset by decreases in home sales of $19.6 million, fee build revenue of $8.2 million and the sale of entitled land of $7.9 million. The increase in multi-family revenue was mainly due to closing of Wyndstone apartments and Mills Crossing townhomes in the current year. The decreases in home and entitled land sales were mainly due to a decrease in number of home closed in Texas and non-recurrence of a large entitled land sales in Washington. The fee build revenue continued to decrease as the fee build projects have been substantially completed.
Gross Loss
Our overall gross loss for the year ended December 31, 2023 increased to $(51.4) million compared to $(0.5) million for the year ended December 31, 2022. Gross loss was (86.8)% for the year ended December 31, 2023 compared to (0.8)% for the same period last year. The increase in gross loss was primarily due to increases in multi-family gross loss of $18.7 million, entitled land gross loss of $18.6 million, developed lots gross loss of $10.0 million, and home gross loss of $9.6 million, which was partially offset by a decrease in fee build gross loss of $4.4 million. The 86.0% increase in gross loss was primarily driven by impairment charges in the current year. The decrease was also partly due to interest expense incurred to finance the multi-family rental properties and non-recurrence of high margin land and home sales. Such decrease was partially offset by gross loss due to cost overruns with fee build projects in 2022 that did not recur in 2023.
Operating Expenses
Our operating expenses decreased by 39.9% to $9.8 million for the year ended December 31, 2023, as compared to $16.2 million for the year ended December 31, 2022. The decrease in operating expenses was primarily attributable to our focused reduction in general and administrative costs. Compensation costs of $2.0 million, bad debt expense of $2.0 million, depreciation of $1.1 million, insurance expense of $0.6 million, professional fees of $0.5 million, and right of use expense of $0.4 million were the largest contributors to the cost savings. These decreases were partially offset by an increase in cancelled projects costs of $0.6 million related to Grandis Pond and Firecrest cancellations in 2023 as compared to the Westry Village cancellation in 2022.
Other Expense
Other expense decreased for the year ended December 31, 2023 to $2.4 million as compared to $4.7 million for the year ended December 31, 2022. The decrease in other expense was primarily due to a $3.3 million loss incurred in the prior year from selling a significant portion of machinery and equipment which was primarily used for fee build and quarry projects. This decrease was partially offset by increase in interest expense from a revolving line of credit and decrease in interest income from notes receivables.
Bankruptcy Expenses
Bankruptcy expenses increased for the year ended December 31, 2023 to $0.4 million as compared to $0 for the year ended December 31, 2022. They were primarily related to the salary of Chief Restructuring Officer and professional fees incurred on the bankruptcy filing in the current year.
Net Loss
Our net loss increased by 305.5% to $(68.6) million for the year ended December 31, 2023 as compared to $(16.9) million for the year ended December 31, 2022. The increase in net loss was primarily attributable to an increase in gross loss as explained above.
Liquidity and Capital Resources
Overview
Our principal uses of capital were operating expenses, land purchases, land development, single and multi-family construction, the payment of routine liabilities, payments on construction loans and related party construction loans, financing fees for the revolving line of credit and construction loans, and repurchase of company equity securities. We used funds generated by operations and available borrowings to meet our short-term working capital requirements.
As a result of our significant debt of $140.3 million maturing over the next 12 months as of December 31, 2023, a net loss of $68.6 million for the year ended December 31, 2023, the real estate and construction industries experiencing declining market conditions, lack of financing capabilities, along with the cessation of our major business activities, lack of any additional sources of revenue, as well as the risks and uncertainties related to our ability to successfully complete the Chapter 11 Case, including our ability to realize value from our assets; our ability to develop, negotiate, confirm, and consummate the Proposed Plan, after which our ongoing operations are expected to be limited; the effects of disruption from the Chapter 11 Case; and the costs of the Chapter 11 Case, substantial doubt exists regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of our consolidated financial statements.
Due to the failed purchase contracts for some of our properties, the lack of suitable revenue-generating offers for our properties, and our limited ability to raise sufficient capital in the current market environment, we determined it was in the best interests of our stakeholders to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Case and cease our major business activities.
On December 11, 2023, we voluntarily initiated the Chapter 11 Case in the Bankruptcy Court. Since filing the Chapter 11 Case, we have operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our Chapter 11 petitions, the Bankruptcy Court granted certain relief enabling us to conduct our business activities in the ordinary course.
Our liquidity and ability to continue as a Chapter 11 Case is dependent upon, among other things: (i) our ability to develop, confirm and consummate the Proposed Plan or other alternative liquidating transaction, (ii) the outcome of the Company’s efforts to realize value, of any, from its remaining assets, and (iii) the cost, duration and outcome of the Chapter 11 Case.
We have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Case and expect to continue to incur significant professional fees and costs The Bankruptcy Court established February 16, 2024, as the deadline by which parties are required to file proofs of claim in the Chapter 11 Case and June 10, 2024 for all governmental entities to file their proofs of claim. We cannot provide any assurances regarding what the Company’s total actual liabilities based on such claims will be.
We have engaged Keen in order to sell our multi-family properties. Any sale by Keen is subject to the approval of the Bankruptcy Court.
Real Estate Assets
The value of our real estate assets has decreased to $156.7 million as of December 31, 2023 from $205.5 million as of December 31, 2022. This decrease was primarily due to impairment charges and large multi-family sales, partially offset by development and construction activities for houses and apartments.
Liabilities
Liabilities slightly decreased to $158.3 million as of December 31, 2023 from $160.6 million as of December 31, 2022. This decrease was primarily attributable to the following:
1. Construction loans, net of related party loans increased by $9.7 million to fund the development of land and construction of houses, townhomes, and apartments;
2. Dividend payable increased by $7.0 million due to a suspension of preferred dividends starting in January 2023;
3. Revolving line of credit decreased by $10.2 million due to continued paydown pursuant to the amended loan terms, effective February 2023;
4. Accounts payable and accrued expenses decreased by $6.1 million, primarily driven by decrease in real estate spending; and
5. Equipment loan decreased by $2.1 million due to the sale of machinery and equipment related to fee build and quarry projects.
Unrestricted Cash Balance
As of December 31, 2023, our cash balance was $3.6 million compared to $9.7 million as of December 31, 2022.
Operating Activities
Net cash used in operating activities for the year ended December 31, 2023 was $8.2 million as compared to net cash used of $93.9 million for the year ended December 31, 2022. The decrease in cash used was primarily attributable to a decrease in real estate spending of $87.6 million, increase in impairment loss on real estate of $45.2 million, increase in deferred tax asset change of $8.7 million, increase in note receivable change of $7.3 million, and increase in prepaid and other assets change of $5.9 million, partially offset by an increase in net loss of $51.7 million, and a decrease in accounts payable and accrued expenses of $9.5 million.
Investing Activities
Net cash provided in investing activities for the year ended December 31, 2023 was $0.2 million as compared to $2.5 million for the year ended December 31, 2022. The decrease was primarily due to a decrease in proceeds from the sale of equipment of $4.9 million, which was offset by a decrease in cash used for property and equipment. During the year ended December 31, 2023, there was no purchase of fixed assets as compared to $2.6 million was used for the furniture, fixtures, and leasehold improvements of the new corporate office and purchase of equipment for the year ended December 31, 2022.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2023 was $1.8 million as compared to $75.4 million for the year ended December 31, 2022. This decrease was primarily caused by a decrease in cash provided by the revolving line of credit of $25.0 million, an increase in payments on the revolving line of credit of $10.8 million, a decrease in cash provided by construction loans net of payments of $54.6 million, and a decrease in related party construction loans, net of payments of $2.7 million. This decrease was partially offset by an increase in cash provided from the public offering of $8.9 million, and a decrease in cash used for preferred dividends of $7.2 million.
Debtor-in Possession
In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to certain motions and applications intended to limit the disruption of the bankruptcy proceedings on our operations (the First Day Motions) and other motions filed with the Bankruptcy Court, the Bankruptcy Court has authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, pay employee wages and benefits, settle certain de minimis disputes, and pay vendors and suppliers in the ordinary course for all goods and services.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
Inflation
Our operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices. Please refer to “Item 1A. Risk Factors” for further details on industry and economic risks.
Critical Accounting Policies
Our consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk, and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 1 of our consolidated financial statements.
Implications of Being an Emerging Growth Company
We are an “emerging growth company” as defined in the JOBS Act and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include:
● a requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in a public offering registration statement;
● an exemption to provide fewer than five years of selected financial data in a public offering registration statement;
● an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act (“SOX”) in the assessment of the emerging growth company’s internal control over financial reporting;
● an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; and
● an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit partner rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer.
We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of this election, the information that we provide in this Annual Report may be different than the information you may receive from other public companies in which you hold equity interests.
We will cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of our initial public offering (December 31, 2025), (ii) the first fiscal year after our annual gross revenues are $1.235 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We borrow from lenders using financial instruments such as term loans, notes payable, and a revolving credit facility. We utilize both fixed and variable interest rates in these financing operations. Interest incurred from our term loans and notes payables is calculated primarily using a fixed rate, whereas interest incurred from our revolving credit facility is calculated using a variable rate.
We are exposed to market risks related to fluctuations in interest rates on our outstanding revolving line of credit and our construction loans relating to the Meadowscape and Bridgeview. The interest rate for our variable rate indebtedness as of December 31, 2023 was equal to the daily simple secured overnight financing rate (SOFR) plus an applicable margin of 4.75% for the line of credit, equal to the SOFR one month rate plus an applicable margin of 7.25% for the Meadowscape construction loan, and equal to the variable prime rate plus an applicable margin of 4.38% for the Bridgeview construction loan.
At December 31, 2023, the daily SOFR was 5.38%, one month SOFR was 5.34%. The variable prime rate was 8.50%. A hypothetical 100 basis point increase in the interest rate on our variable rate indebtedness would increase our annual interest cost by approximately $0.1 million for the line of credit and $0.4 million for the two construction loans, respectively. Based on this, we do not believe that the future interest rate risks related to our existing indebtedness will have a material adverse impact on our financial position, results of operations, or liquidity.
At December 31, 2023, we had outstanding fixed-rate borrowings net of debt discount and financing fees of approximately $87.1 million and outstanding variable-rate borrowings net of debt discount and financing fees of approximately $52.9 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm [PCAOB Number 089]
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Harbor Custom Development, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Harbor Custom Development, Inc. (Debtor In Possession) (the Company) as of December 31, 2023 and 2022, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has experienced recurring losses from operations, has substantial debt maturing over the next 12 months and has filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code on December 11, 2023. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Rosenberg Rich Baker Berman, P.A.
We have served as the Company’s auditor since 2019.
Somerset, New Jersey
March 29, 2024
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
As of December 31, 2023 and 2022
December 31, 2023 December 31, 2022
ASSETS
Cash $ 3,574,500 $ 9,665,300
Restricted Cash 597,600 597,600
Accounts Receivable, net 279,800 1,707,000
Note Receivable, net 950,000 4,525,300
Prepaid Expense and Other Assets 1,250,900 5,318,100
Real Estate 156,738,400 205,478,200
Property and Equipment, net 1,610,500 2,289,500
Right of Use Assets 1,749,200 1,926,100
Deferred Tax Asset, net - 4,659,300
TOTAL ASSETS $ 166,750,900 $ 236,166,400
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Accounts Payable and Accrued Expenses $ 5,945,900 $ 14,090,700
Dividends Payable - 634,700
Contract Liabilities 25,300 497,400
Deferred Revenue 49,900 52,000
Note Payable - Insurance 529,300 378,500
Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0 and $0.6 million respectively 14,178,700 24,359,700
Equipment Loans - 2,057,100
Finance Leases - 154,500
Construction Loans, net of Unamortized Debt Discount of $0.8 million and $1.9 million respectively 125,322,300 107,483,700
Construction Loans - Related Parties, net of Unamortized Debt Discount of $0 and $0.1 million respectively - 8,122,800
Right of Use Liabilities - 2,779,400
Total Liabilities Not Subject to Compromise $ 146,051,400 $ 160,610,500
Liabilities Subject to Compromise 12,221,500 -
TOTAL LIABILITIES $ 158,272,900 $ 160,610,500
COMMITMENTS AND CONTINGENCIES - SEE NOTE 14 - -
STOCKHOLDERS’ EQUITY
Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at December 31, 2023 and December 31, 2022 $ 62,912,100 $ 62,912,100
Common Stock, no par value per share, 50,000,000 shares authorized and 2,686,431 issued and outstanding at December 31, 2023 and 718,835 issued and outstanding at December 31, 2022 43,030,200 35,704,700
Additional Paid In Capital 3,096,800 1,266,300
Accumulated Deficit (100,561,100 ) (24,327,200 )
TOTAL STOCKHOLDERS’ EQUITY 8,478,000 75,555,900
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 166,750,900 $ 236,166,400
See accompanying notes to the consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2023 and 2022
Sales $ 59,256,700 $ 55,414,300
Cost of Sales 110,691,900 55,866,800
Gross Loss (51,435,200 ) (452,500 )
Operating Expenses 9,754,200 16,237,700
Operating Loss (61,189,400 ) (16,690,200 )
Other Income (Expense)
Interest Expense (2,602,600 ) (1,760,000 )
Interest Income 151,000 465,600
Loss on Sale of Equipment (47,700 ) (3,433,800 )
Other Income 51,500 38,000
Total Other Expense (2,447,800 ) (4,690,200 )
Bankruptcy Expense 392,500 -
Loss Before Income Tax (64,029,700 ) (21,380,400 )
Income Tax Expense (Benefit) 4,589,400 (4,458,200 )
Net Loss (68,619,100 ) (16,922,200 )
Net Loss Attributable to Non-controlling interests - (500 )
Preferred Dividends (7,614,800 ) (7,759,900 )
Net Loss Attributable to Common Stockholders $ (76,233,900 ) $ (24,681,600 )
Loss Per Share - Basic $ (39.19 ) $ (35.29 )
Loss Per Share - Diluted $ (39.19 ) $ (35.29 )
Weighted Average Common Shares Outstanding - Basic 1,945,233 699,490
Weighted Average Common Shares Outstanding - Diluted 1,945,233 699,490
See accompanying notes to the consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
For the Periods January 1, 2022 through December 31, 2023
Shares
Issued
No Par
Shares
Issued
No Par
Paid in
Capital
(Accumulated
Deficit)
Equity
(Deficit)
Controlling
Interest
Equity
(Deficit)
Common Stock Preferred Stock Additional Retained Earnings Stockholders’ Non- Total
Shares
Issued
No Par
Shares
Issued
No Par
Paid in
Capital
(Accumulated
Deficit)
Equity
(Deficit)
Controlling
Interest
Equity
(Deficit)
Balance, January 1, 2022 657,767 $ 32,122,700 4,016,955 $ 66,507,500 $ 752,700 $ 1,646,500 $ 101,029,400 $ (1,291,600 ) $ 99,737,800
Exercise of stock options 1,081 10,500
(1,900 )
8,600
8,600
Stock Compensation Expense 5,293
515,500
515,500
515,500
Dissolution of Non-Controlling Interest
(1,292,100 ) (1,292,100 ) 1,292,100 -
Preferred Stock Dividends
(7,759,900 ) (7,759,900 )
(7,759,900 )
Repurchase of Stock (12,597 ) (437,700 )
(437,700 )
(437,700 )
Conversion of Preferred Stock 60,326 3,595,400 (217,156 ) (3,595,400 )
-
-
Exercise of Warrants 6,965 413,800
413,800
413,800
Net Loss
(16,921,700 ) (16,921,700 ) (500 ) (16,922,200 )
Balance, December 31, 2022 718,835 $ 35,704,700 3,799,799 $ 62,912,100 $ 1,266,300 $ (24,327,200 ) $ 75,555,900 $ - $ 75,555,900
Balance
718,835 $ 35,704,700 3,799,799 $ 62,912,100 $ 1,266,300 $ (24,327,200 ) $ 75,555,900 $ - $ 75,555,900
Stock Compensation Expense 3,285
- - 218,100
218,100 - 218,100
Preferred Stock Dividends
(7,614,800 ) (7,614,800 )
(7,614,800 )
Public Offering - Common Stock 160,500 602,600
602,600
602,600
Public Offering - Pre-funded Warrants and Common Warrants
- - 8,335,300
8,335,300 - 8,335,300
Exercise of Pre-funded Warrants 1,790,718 6,722,900
(6,722,900 )
-
-
Round Up of Shares from Reverse Stock Split 13,093
- -
- - -
Net Loss
(68,619,100 ) (68,619,100 )
(68,619,100 )
Balance, December 31, 2023 2,686,431 $ 43,030,200 3,799,799 $ 62,912,100 $ 3,096,800 $ (100,561,100 ) $ 8,478,000 $ - $ 8,478,000
Balance 2,686,431 $ 43,030,200 3,799,799 $ 62,912,100 $ 3,096,800 $ (100,561,100 ) $ 8,478,000 $ - $ 8,478,000
See accompanying notes to the consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2023 and 2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (68,619,100 ) $ (16,922,200 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 333,500 1,407,400
Amortization of right of use assets 176,900 542,800
Loss on sale of equipment 47,700 3,433,800
Provision for loss on contract 153,400 159,100
Impairment loss on real estate 48,825,700 3,602,600
Impairment loss on note receivable - 1,200,000
Stock compensation 218,100 515,500
Amortization of revolver issuance costs 640,300 457,400
Net change in assets and liabilities:
Accounts receivable 1,427,200 (593,500 )
Contract assets - 2,167,200
Notes receivable 3,575,300 (3,725,300 )
Prepaid expenses and other assets 4,413,300 (1,499,900 )
Real estate 2,937,900 (84,637,700 )
Deferred tax asset 4,659,300 (4,010,300 )
Accounts payable and accrued expenses (6,093,000 ) 3,428,100
Contract liabilities (625,500 ) 338,300
Deferred revenue (2,100 ) 7,200
Payments on right of use liability, net of incentives (224,600 ) 255,800
NET CASH USED IN OPERATING ACTIVITIES (8,155,700 ) (93,873,700 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment - (2,646,400 )
Proceeds on the sale of equipment 218,100 5,113,300
NET CASH PROVIDED BY INVESTING ACTIVITIES 218,100 2,466,900
CASH FLOWS FROM FINANCING ACTIVITIES
Construction loans 65,836,600 89,559,300
Payments on construction loans (48,578,300 ) (17,115,900 )
Financing fees construction loans (1,864,000 ) (2,470,200 )
Related party construction loans (8,177,300 ) 8,669,900
Payments on related party construction loans (75,000 ) (14,071,800 )
Financing fees related party construction loans - (105,400 )
Revolving line of credit loan - 25,000,000
Payments on revolving line of credit loan (10,821,300 ) -
Financing fees revolving line of credit loan - (1,097,700 )
Payments on note payable - insurance (645,300 ) (1,115,500 )
Payments on equipment loans (2,057,100 ) (3,894,200 )
Payments on financing leases (74,800 ) (104,100 )
Preferred dividends (634,700 ) (7,796,100 )
Repurchase of common stock - (437,700 )
Proceeds from common stock offering 602,600 -
Proceeds from pre-funded and common warrants offering 8,335,400 -
Proceeds from exercise of stock options - 8,600
Proceeds from exercise of warrants - 413,700
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,846,800 75,442,900
NET DECREASE IN CASH AND RESTRICTED CASH (6,090,800 ) (15,963,900 )
CASH AND RESTRICTED CASH AT BEGINNING OF YEAR 10,262,900 26,226,800
CASH AND RESTRICTED CASH AT END OF YEAR $ 4,172,100 $ 10,262,900
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 14,760,300 $ 8,635,600
Bankruptcy items - Professional fees and employee compensation paid $ 261,000 $ -
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Termination of right of use leases $ - $ 346,900
Amortization of debt discount capitalized $ 3,023,800 $ 2,307,000
Promissory notes issued for earnest money $ 300,000 $ 450,000
Cancellation of promissory note for earnest money $ 750,000 $ -
Financing of insurance $ 796,200 $ 590,100
Conversion of finance lease to equipment loan $ - $ 394,800
Termination of finance leases $ 79,700 $ -
Financing of fixed assets additions $ - $ 110,000
Dividends declared but not paid $ 7,614,800 $ 634,600
Conversion of preferred to common stock $ - $ 3,595,400
Exercise of Pre-funded warrants $ 6,723,000 $ -
See accompanying notes to the consolidated financial statements.
(Amounts rounded to the nearest $100)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company’s principal business activity involves acquiring raw land and developed lots for the purpose of building and selling single family and multi-family dwellings in Washington, California, Texas, and Florida.
On August 1, 2019, the Company changed its name from Harbor Custom Homes, Inc. to Harbor Custom Development, Inc.
The Company became an effective filer with the SEC and started trading on The Nasdaq Stock Market LLC (“Nasdaq”) on August 28, 2020.
Nasdaq determined that the Company’s securities will be delisted from Nasdaq on December 12, 2023. Trading of the Company’s common stock (HCDI), preferred stock (HCDIP), and two classes of warrants (HCDIW and HCDIZ) was suspended at the opening of trading on December 21, 2023.
On December 20, 2023, the Company received a notice from FINRA’s Department of Market Operations (the “FINRA Notice”) informing the Company that the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ were assigned to its common stock, preferred stock, and warrants, respectively, and that as of December 21, 2023, the aforementioned securities would be quoted and traded in the market for unlisted securities (i.e., the “over-the-counter market”). As a result, trading of such securities commenced on OTC Pink Current Information on December 21, 2023 under the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ.
On December 11, 2023 (the “Petition Date”), Harbor Custom Development, Inc. and certain of its wholly owned subsidiaries, including Belfair Apartments, LLC; Pacific Ridge CMS, LLC; HCDI FL Condo LLC; HCDI Bridgeview LLC; HCDI Semiahmoo LLC; and Beacon Studio Farms LLC (collectively, the “Debtors”), filed a voluntary petition (the “Bankruptcy Petition”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Washington (such court, the “Bankruptcy Court” and such case, the “Chapter 11 Case”). The Chapter 11 Case is being jointly administered under the caption In re Harbor Custom Development, Inc., et al., Case No. 23-42180-MJH.
Principles of Consolidation
The consolidated financial statements include the following subsidiaries of Harbor Custom Development, Inc. as of the reporting period ending dates as follow:
SCHEDULE OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SUBSIDIARIES
Attributable Interest
Names Dates of Formation December 31,
December 31,
Saylor View Estates, LLC* March 30, 2014 N/A N/A
Belfair Apartments, LLC December 3, 2019 100 % 100 %
Pacific Ridge CMS, LLC May 24, 2021 100 % 100 %
Tanglewilde, LLC June 25, 2021 100 % 100 %
HCDI FL CONDO LLC July 30, 2021 100 % 100 %
HCDI Mira, LLC** August 31, 2021 N/A 100 %
HCDI, Bridgeview LLC October 28, 2021 100 % 100 %
HCDI Wyndstone, LLC September 15, 2021 100 % 100 %
HCDI Semiahmoo, LLC December 17, 2021 100 % 100 %
Mills Crossing, LLC*** July 21, 2022 100 % 100 %
Broadmoor Ventures, LLC*** August 24, 2022 100 % 100 %
GPB Holdings LLC*** October 29, 2022 100 % 100 %
Winding Lane Estate LLC*** November 30, 2022 100 % 100 %
Beacon Studio Farms LLC March 20, 2023 100 % N/A
* Saylor View Estates, LLC was voluntarily dissolved with the State of Washington as of January 20, 2022.
** HCDI Mira, LLC was voluntarily dissolved with the State of Washington as of May 1, 2023.
*** These subsidiaries no longer have any activities and not in use as they were either sold or cancelled during 2023.
As of December 31, 2023 and December 31, 2022, the aggregate non-controlling interest was $0.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Harbor Custom Development, Inc and, its wholly owned subsidiaries, and are presented using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany accounts and transactions have been eliminated in consolidation. References to the “ASC” hereafter refer to the Accounting Standards Codification established by the Financial Accounting Standards Board (“FASB”) as the source of authoritative U.S. GAAP.
All numbers in the financial statements are rounded to the nearest $100, except for Earnings (Loss) per Share (“EPS”) data, and numbers in the notes to the financial statements are rounded to the nearest million.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Use of Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
For the year ended December 31, 2023, the Company generated a net loss of $68.6 million and negative cash flows from operations of $8.2 million. The Company has an unrestricted cash balance of $3.6 million with substantial debt of $140.3 million maturing over the next 12 months as of December 31, 2023. The real estate and construction industries experiencing declining market conditions, lack of financing capabilities, along with the cessation of our major business activities, lack of any additional sources of revenue, as well as the risks and uncertainties related to our ability to successfully complete the Chapter 11 Case, including our ability to realize value from our assets; our ability to develop, negotiate, confirm, and consummate the Proposed Plan, after which our ongoing operations are expected to be limited; the effects of disruption from the Chapter 11 Case; and the costs of the Chapter 11 Case, substantial doubt exists regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of our consolidated financial statements.
Debtor-in Possession
In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to certain motions and applications intended to limit the disruption of the bankruptcy proceedings on our operations (the First Day Motions) and other motions filed with the Bankruptcy Court, the Bankruptcy Court has authorized the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, pay employee wages and benefits, settle certain de minimis disputes and pay vendors and suppliers in the ordinary course for all goods and services.
Reorganization
Effective on December 11, 2023, the Company began to apply the provisions of ASC 852, Reorganizations (“ASC 852”), which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of certain financial statement line items. ASC 852 requires that the financial statements for periods including and after the filing of the Chapter 11 Case distinguish transactions and events that are directly associated with the reorganization from the
ongoing operations of the business.
Expenses (including professional fees), realized gains and losses, and provisions for losses that can be directly associated with the reorganization must be reported separately as Bankruptcy items in the consolidated statements of operations beginning December 11, 2023, the date of filing of the Chapter 11 Case. For the year ended December 31, 2023, Bankruptcy expense consisted of legal and professional fees and employee compensation costs directly attributable to bankruptcy.
Liabilities that may be affected by the Plan must be classified as liabilities subject to compromise at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the Plan or negotiations with creditors. The amounts currently classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of secured status of certain claims, the values of any collateral securing such claims, or other events. Any resulting changes in classification will be reflected in subsequent financial statements. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the Plan, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise. (See Note 12. Liabilities Subject to Compromise.)
As a result of the filing of the Chapter 11 Case on December 11, 2023, the classification of pre-petition indebtedness is generally subject to compromise pursuant to the Plan. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ businesses and assets. Among other things, the Bankruptcy Court authorized the Debtors’ to pay certain pre-petition claims relating to employee wages and benefits, taxes and critical vendors. The Debtors are paying and intend to pay undisputed post-petition liabilities in the ordinary course of business. In addition, the Debtors may reject certain pre-petition executory contracts and unexpired leases with respect to their operations with the approval of the Bankruptcy Court. Any damages resulting from the rejection of executory contracts and unexpired leases are treated as general unsecured claims.
Stock-Based Compensation
Effective November 19, 2018, the Company’s Board of Directors and stockholders approved and adopted the 2018 Incentive and Non-Statutory Stock Option Plan (the “2018 Plan”). The 2018 Plan allows the Administrator (as defined in the 2018 Plan), currently the Board of Directors, to determine the issuance of incentive stock options and non-qualified stock options to eligible employees and outside directors and consultants of the Company. The Company reserved 33,784 shares of common stock for issuance under the 2018 Plan. On June 1, 2022, the stockholders of the Company voted to approve an amendment to the 2018 Plan to increase, by 100,000, the authorized number of shares of common stock reserved for issuance as options under the 2018 Plan.
Effective December 3, 2020, the Company’s Board of Directors and stockholders approved and adopted the 2020 Restricted Stock Plan (the “2020 Plan”). The 2020 Plan allows the Administrator, currently the Compensation Committee, to determine the issuance of restricted stock to eligible officers, directors, and key employees. The Company reserved 35,000 shares of common stock for issuance under the 2020 Plan. On June 1, 2022, the stockholders of the Company voted to approve an amendment to the 2020 Plan to increase, by 100,000, the authorized number of shares of common stock available for awards under the 2020 Plan.
The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 718, “Compensation - Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee and non-employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
The Company recognizes all forms of share-based payments, including stock option grants, warrants and restricted stock grants, at their fair value on the grant date.
Options and warrants are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment. The grants are amortized on a straight-line basis over the requisite service periods, which are generally the vesting period. The Company accounts for forfeitures of stock options as they occur. When forfeitures occur, the unvested portion of the previously recognized compensation cost is reversed in the period of the forfeiture.
Stock-based compensation expenses are included in operating expenses in the consolidated statements of operations.
For the years ended December 31, 2023 and 2022 when computing fair value of share-based payments, the Company has considered the following range of assumptions:
SCHEDULE OF COMPUTING FAIR VALUE OF SHARE-BASED PAYMENTS
December 31, 2023 December 31, 2022
Risk-free interest rate 4.30 % 1.73%-3.54%
Exercise price $ 3.73 $22.40-$60.00
Expected life of grants in years 6.38 3.93-6.51
Expected volatility of underlying stock 43.50 % 42.34%-48.13%
Dividends - -
The expected term is computed using the “simplified method” as permitted under the provisions of FASB ASC Topic 718-10-S99. The Company uses the simplified method to calculate the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The share price is the closing price on the date of grant. Expected volatility is based on the historical stock price volatility of comparable companies’ common stock as the stock does not have sufficient historical trading activity. Risk free interest rates were obtained from U.S. Treasury rates for the applicable expected terms.
Repurchase of Equity Securities
Share repurchases are recorded to common stock at the value of the cash consideration paid, as the Company’s common stock has no par value. These shares were being repurchased for the purpose of constructive retirement. (See Note 18. Stockholders’ Equity.)
Reverse Stock Split
On March 6, 2023, the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”) on the Nasdaq Capital Market. Accordingly, all share and per share data included in these consolidated financial statements and notes thereto have been adjusted retroactively to reflect the impact of the Reverse Stock Split.
Public Offering
On May 18, 2023, the Company closed on a public offering of 160,500 shares of common stock, 1,790,718 pre-funded warrants, and 1,951,218 common warrants for net proceeds of $8.9 million. In addition, upon closing of this public offering, the Company issued to the placement agent 117,073 warrants to purchase shares of common stock.
The pre-funded warrants and common warrants were evaluated in accordance with FASB ASC Topics 480, Distinguishing Liabilities from Equity and 815, Derivatives and Hedging. The Company assessed whether the pre-funded warrants and common warrants are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are mandatorily redeemable, embody obligations to repurchase shares or issue a variable number of shares, are exercisable without any contingent provisions, permit the holders to receive a fixed number of shares of common stock upon exercise, are indexed to the Company’s common stock, and are settled in shares. Based on this assessment, the pre-funded warrants and common warrants were classified as a component of permanent stockholders’ equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The Company values these equity instruments at issuance and allocated net proceeds from the sale proportionately to the common stock, the pre-funded warrants, and the common warrants. Of the net proceeds, $0.6 million was allocated to common stock, $6.7 million was allocated to pre-funded warrants, $1.6 million was allocated to common warrants, and $0.1 million was allocated to the placement agent warrants.
The common warrants and placement agent warrants were valued using a Black-Scholes pricing model. When computing the fair value of these warrants, the Company used 3.94% as the risk free interest rate, an exercise price of $5.00 or $6.41, an expected life of 2.5 years, and expected volatility of 37.83% as assumptions in the model. (See Note 18. Stockholders’ Equity.)
Earnings (Loss) Per Share (“EPS”)
EPS is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to topic 260-10-45 of the FASB ASC. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common stock and the denominator may have to adjust to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued during the period to reflect the potential dilution that could occur from shares of common stock issuable through a contingent shares issuance arrangement, stock options, warrants, RSUs, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, warrants, and RSUs, and the if-converted method is used for convertible preferred stock as prescribed in FASB ASC Topic 260. Because of the net loss for the year ended December 31, 2023, the impact of including these in the computation of diluted EPS was anti-dilutive.
In accordance with FASB ASC Topic 260-10-45, pre-funded warrants have been included in the weighted average common shares outstanding number for the purpose of calculating EPS.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss attributable to common stockholders per share of common stock for the years ended December 31, 2023 and 2022.
SCHEDULE OF COMPUTATION BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER SHARE OF COMMON STOCK
Year Ended
December 31, 2023
Year Ended
December 31, 2022
Numerator:
Net loss attributable to common stockholders $ (76,233,900 ) $ (24,681,600 )
Effect of dilutive securities: - -
Diluted net loss $ (76,233,900 ) $ (24,681,600 )
Denominator:
Weighted average common shares outstanding - basic 1,945,233 699,490
Dilutive securities (a):
Restricted Stock Awards - -
Options - -
Warrants - -
Convertible Preferred Stock - -
Dilutive securities - -
Weighted average common shares outstanding and assumed conversion - diluted 1,945,233 699,490
Basic net loss per common share $ (39.19 ) $ (35.29 )
Diluted net loss per common share $ (39.19 ) $ (35.29 )
(a) - Outstanding anti-dilutive securities excluded:
Unvested restricted stock awards 1,167 12,000
Stock options 98,459 37,546
Warrants to purchase common stock (20:1) (1) 18,447,564 18,447,564
Warrants to purchase common stock (1:1) (2) 2,068,291 -
Convertible preferred stock (3) 3,799,799 3,799,799
Warrants to purchase convertible preferred stock (3) 12,000 12,000
Outstanding anti-dilutive securities excluded 12,000 12,000
(1) The number of outstanding warrants, issued prior to the reverse stock split on March 6, 2023, did not change or split pursuant to the reverse stock split, but the number of shares of common stock issuable upon exercise of these warrants was adjusted based on a 1 to 0.05 ratio.
(2) The number of outstanding warrants issued after the reverse stock split on March 6, 2023 are exercisable for shares of common stock on a 1 to 1 ratio.
(3) Preferred stock and warrants to purchase convertible preferred stock are convertible into common stock on a 0.2778 to 1 ratio.
Fair Value of Financial Instruments
For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments.
Cash and Cash Equivalents
The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2023 and December 31, 2022.
Accounts Receivable
Accounts receivables are reported at the amount the Company expects to collect from outstanding balances. The Company provides for an allowance for credit losses based upon a review of the outstanding accounts receivable, historical collection information, and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The allowance for credit losses was $0.1 million and $0 as of December 31, 2023 and December 31, 2022, respectively.
Notes Receivable
Notes receivables are recorded at amounts due to the Company according to the contractual terms of the loan agreement. The Company’s notes receivables are for the sale of real estate properties or financing the development of the properties prior to acquisition and are each secured by the underlying improved real estate properties.
The Company reviews notes receivable for credit losses whenever events or circumstances indicate that the note may not be fully recoverable. Credit losses are present when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Under ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments, the allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The credit losses are measured based on the estimated uncollectible amount less the fair value of the underlying collateral. Credit loss is recognized with an allowance against the note receivable with a corresponding charge to bad debt expense under operating expenses. The allowance for credit losses is written down when the remaining note amount is collected in full. There was no valuation allowance as of December 31, 2023. The allowance for credit losses was $1.2 million for notes receivable as of December 31, 2022. (See Note 3. Notes Receivable.)
In March 2022, the Company entered into a promissory note with Rocklin Winding Lane 22, LLC for $4.8 million (“the note”) for the sale of developed lots. In the third quarter of 2022, Rocklin Winding Lane 22, LLC defaulted on the note due to a missed interest payment on June 30, 2022. As a result, the Company issued a letter of default in August 2022 and began foreclosure proceedings on the underlying real estate asset in October 2022. In the third quarter of 2022, the Company recorded a valuation allowance against the note and related bad debt expense within operating expenses of $0.8 million. In the fourth quarter of 2022, the Company foreclosed on the underlying property and took ownership of the property, which was recorded for a fair value of $5.1 million at the time of repossession. Pursuant to the subordination agreement, the underlying real estate asset had a $1.0 million senior loan to a third party that was taken over by the Company upon the foreclosure of the property.
Property and Equipment and Depreciation
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repair charges are expensed as incurred. Depreciation is computed by the straight-line method (after considering their respective estimated residual values) over the estimated useful lives:
SCHEDULE OF PROPERTY AND EQUIPMENT ESTIMATED USEFUL LIVES
Construction Equipment 5-10 years
Leasehold Improvements The lesser of 10 years or the remaining life of the lease
Furniture and Fixtures years
Computers years
Vehicles years
Real Estate Assets
Real estate assets are recorded at cost, except when real estate assets are acquired that meet the definition of a business combination in accordance with FASB ASC Topic 805, “Business Combinations,” where acquired assets are recorded at fair value. Interest, property taxes, insurance, and other incremental costs (including salaries) directly related to a project are capitalized during the construction period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and ends when the asset construction is completed and ready for rental or when the asset is sold, depending on the asset and the intended use. The capitalized costs are recorded as part of the asset to which they relate and are expensed as part of the rental costs or when the underlying asset is sold.
The Company capitalized interest from related party borrowings of $0.4 million and $1.1 million for the years ended December 31, 2023 and 2022, respectively. The Company capitalized interest from third-party borrowings of $9.8 million and $5.7 million for the years ended December 31, 2023 and 2022, respectively.
A property is classified as “held for sale” when all of the following criteria for a plan of sale have been met:
(1) Management, having the authority to approve the action, commits to a plan to sell the property;
(2) The property is available for immediate sale in its present condition, subject only to terms that are usual and customary;
(3) An active program to locate a buyer and other actions required to complete the plan to sell have been initiated;
(4) The sale of the property is probable and is expected to be completed within one year of the contract date;
(5) The property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
(6) Actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
In addition to the annual assessment of potential triggering events in accordance with FASB ASC Topic 360, the Company applies a fair value-based impairment test to the net book value of assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment loss may have occurred.
As of December 31, 2023, the Company recorded impairment charges of $14.1 million for entitled land and $5.4 million for homes. The Company recorded developed lot impairment of $10.1 million and $1.2 million and multi-family impairment of $19.3 million and $2.4 million as of December 31, 2023 and 2022, respectively. These charges are included in the real estate balance as presented in Note 5. Real Estate. The Company did not identify any other real estate that qualified for an impairment charge.
Revenue and Cost Recognition
FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers.
In accordance with ASC 606, revenue is recognized when a customer obtains control of the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. The provision of ASC 606 includes a five-step process by which the Company determines revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which the Company expects to be entitled in exchange for those goods or services.
ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, performance obligations are satisfied.
A detailed breakdown of the five-step process for revenue recognitions is as follows:
Homes, Developed Lots, and Entitled Land
1. Identify the contract with a customer.
The Company signs an agreement with a buyer to purchase the parcel of entitled land, developed lots that have completed infrastructure, or completed homes.
2. Identify the performance obligations in the contract.
Performance obligations of the Company include delivering entitled land, developed lots, and completed homes to the customer, which are required to meet certain specifications outlined in the contract.
3. Determine the transaction price.
The transaction price is fixed and specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.
4. Allocation of the transaction price to performance obligations in the contract.
The parcel, lots, and homes are separate performance obligations for which the specific price is in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenue when title is transferred. The Company does not have any further material performance obligations once title is transferred.
Fee Build
1. Identify the contract with a customer.
The Company signs an agreement with a customer to construct the required infrastructure so that houses can be developed on the lots.
2. Identify the performance obligations in the contract.
Performance obligations of the Company include delivering developed lots which are required to meet certain specifications that are outlined in the contract.
3. Determine the transaction price.
The transaction price is fixed and specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.
4. Allocation of the transaction price to performance obligations in the contract.
The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:
1. The customer’s written approval of the scope of the change order;
2. Current contract language that indicates clear and enforceable entitlement relating to the change order;
3. Separate documentation for the change order costs that are identifiable and reasonable; and
4. The Company’s experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated.
Once the Company receives a contract, it generates a budget of projected costs for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.
If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e., design, engineering, procurement of material, etc.) should not be recognized as the Company does not have control of the good/service provided. When the estimate on a contract indicates a loss or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current contract asset in the Company’s balance sheet. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract would be reflected as a current contract liability in the Company’s balance sheet. (See Note 20. Uncompleted Contracts.)
Revenues from contracts with customers are summarized by category as follows for the years ended December 31, 2023 and 2022:
SCHEDULE OF REVENUE FROM CONTRACTS WITH CUSTOMERS AND BASED ON THE TIMING OF SATISFACTION OF PERFORMANCE OBLIGATIONS
Year Ended Year Ended
December 31, 2023 December 31, 2022
Homes $ 9,104,000 $ 28,670,000
Developed Lots 11,033,500 9,510,000
Entitled Land - 7,880,000
Fee Build 877,800 9,124,000
Multi-family 38,241,400 175,900
Construction Materials - 54,400
Total Revenue $ 59,256,700 $ 55,414,300
The following table disaggregates the Company’s revenue based on the timing of satisfaction of performance obligations for the years ended December 31, 2023 and 2022:
Year Ended Year Ended
December 31, 2023 December 31, 2022
Performance obligations satisfied at a point in time $ 58,378,900 $ 46,290,300
Performance obligations satisfied over time 877,800 9,124,000
Total Revenue $ 59,256,700 $ 55,414,300
Rental Income
Rental income attributable to residential leases has been evaluated under FASB ASC Topic 842, Leases. Rental income is recorded when due from residents and recognized monthly as it was earned. Residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. Leases entered into between a resident and a property for the rental of an apartment unit are generally six months to one year, and typically renewed on a month-to-month basis after the initial term.
Rental income is included as a part of sales on the statement of operations and within the multi-family segment presented in Note 19. Segments. Rental income was $3.5 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively.
Security deposits related to the residential apartment leases are maintained in a checking account, separate from the Company’s operating account, in accordance with Washington State laws. These security deposits are recorded within cash and customer deposit liabilities within accounts payable and accrued expenses.
Cost of Sales
Land acquisition costs are typically allocated to each lot based on the size of the lot in relation to the size of the total project or market value in relation to total purchase price. Development costs and capitalized interest are allocated to lots sold based on the same criteria.
Fee build costs are charged to cost of sales as incurred. See the revenue recognition criteria above.
Costs relating to the handling of recycled construction materials and converting items into usable construction materials for resale are charged to cost of sales as incurred.
Rental expenses, relating to multi-family rental revenue, are charged to cost of sales as incurred.
Advertising
Advertising expenses, which are expensed as incurred and included in operating expenses, were $0.3 million and $0.4 million for the years ended December 31, 2023 and 2022.
Leases
The Company’s leases consist of leaseholds on office space. The Company determines if an arrangement contains a lease at inception as defined by ASC 842. In order to meet the definition of a lease under ASC 842, the contractual arrangement must convey to us the right to control the use of an identifiable asset for a period of time in exchange for consideration. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company is a lessor for its residential apartment leases during the development and until the property is sold. The lease agreement is evaluated to determine the accounting treatment as a finance or operating lease in accordance with the ASC 842 lease standard. Rental income attributable to residential leases is recorded when due from residents and recognized monthly as it was earned. Residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. Leases entered into between a resident and a property for the rental of an apartment unit are generally 6 months to a year, and typically renewed on a month-to-month basis after the initial term.
Income Taxes
Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss, credit carryforwards, and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. Management applies the criteria established under FASB ASC Topic 740, Income Taxes, to determine whether any valuation allowances are needed each year.
The Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. There are no uncertain tax positions as of December 31, 2023 and December 31, 2022.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes a 15% Corporate Alternative Minimum Tax (“Corporate AMT”) for tax years beginning after December 31, 2022. The Company does not expect the Corporate AMT to have a material impact on its consolidated financial statements. Additionally, the IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations. The excise tax is imposed on the value of the net stock repurchased or treated as repurchased. The new law will apply to stock repurchases occurring after December 31, 2022. The IRA also extended the federal tax credit for building new energy-efficient homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modifies and increases it starting in 2023. The federal tax credits in 2022 reflected the impact of the extension under the IRA.
Recent Accounting Pronouncements
On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Pursuant to ASU No. 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022 for small reporting companies, non-SEC filers, and all other companies. The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.
On March 12, 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients that are retained through the end of the hedging relationship. In December 2022, ASU 2022-06 was issued which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2020-04 and ASU 2022-06 did not have a material impact on the Company’s consolidated financial statements.
On May 3, 2021, the FASB released ASU No. 2021-04, Compensation - Earning Per Share (Topic 260), Debt - Modifications and Extinguishments (subtopic 470-50), Compensation - Stock Compensation (Topic 718), Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example warrants) that remain equity classified after modification or exchange. The standard is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-04 on January 1, 2022, however the adoption did not have an impact on the Company’s consolidated financial statements.
In July 2023, the FASB released ASU No. 2023-03, Presentation of Financial Statements (Topic 205), Income Statement-Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation-Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280-General Revision of Regulation S-X: Income or Loss Applicable to Common Stock (SEC Update). The FASB issued this update to describe and clarify the amendments as listed above. The Company assessed the amendments related to this update, specifically for Topics 205, 505 and 718 and noted that ASU No. 2023-03 does not have an impact on the Company’s consolidated financial statements.
In July 2023, the SEC adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. Regulation S-K Item 6 disclosure requirements under this rule will be effective for the Company in the fourth quarter of 2023. Incident disclosure requirements in Form 8-K will be effective for the Company on June 15, 2024. The Company has adopted this rule and included the required disclosure within Item 1C. CYBERSECURITY. The Company is still evaluating and addressing the incident disclosure requirements effective June 15, 2024.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures which requires, among other things, the following: (i) enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker and included in a segment’s reported measure of profit or loss; (ii) disclosure of the amount and description of the composition of other segment items, as defined in ASU 2023-07, by reportable segment; and (iii) reporting the disclosures about each reportable segment’s profit or loss and assets on an annual and interim basis. The provisions of ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024; early adoption is permitted. The Company is currently evaluating the impact of ASU 2023-07 on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09 (“ASU 2023-09”), Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires, among other things, entities to disclose additional information with respect to the effective tax rate reconciliation and to disclose the disaggregation by jurisdiction of income tax expense and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of ASU 2023-09 on the Company’s consolidated financial statements.
Impairment of Property and Equipment
The Company reviews fixed assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is present when the sum of estimated undiscounted future cash flow expected to result from use of the assets is less than carrying value. If impairment is present, the carrying value of the impaired asset is reduced to its fair value. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. As of December 31, 2023 and December 31, 2022, there were no impairment losses recognized for fixed assets.
2. CONCENTRATIONS
Cash Concentrations
The Company maintains cash balances at various financial institutions. These balances are secured by the Federal Deposit Insurance Corporation. These balances generally exceed the federal insurance limits. Uninsured cash balances were $2.6 million and $8.1 million as of December 31, 2023 and December 31, 2022, respectively.
Revenue Concentrations
Homes
For the year ended December 31, 2023, six individual customers represented more than 10% of our home revenue for the year end December 31, 2023. There were no concentrations in relation to the homes revenue segment for the year ended December 31, 2022.
Developed Lots
For the year ended December 31, 2023, two customers each represented 11% and 10% of the developed lots revenue, respectively. For the year ended December 31, 2022, two customers each represented 59% and 25% of the developed lots revenue, respectively.
Entitled Land
For the year ended December 31, 2023, there were no concentrations in relation to the entitled land segment.. For the year ended December 31, 2022, two customers each represented 57% and 43% of the entitled land revenue, respectively.
Fee Build
One customer represented 100% of fee build revenue for the years ended December 31, 2023 and 2022.
Multi-Family
For the year ended December 31, 2023, two customers represented 54% and 37% of the multi-family revenue. There were no concentrations in relation to the multi-family revenue segment for the year ended December 31, 2022.
3. NOTES RECEIVABLE
The outstanding balance of notes receivable amounted to $1.0 million and $4.5 million at December 31, 2023 and December 31, 2022, respectively. These notes arose as financing by the Company for the sale of real estate properties or financing the development of the properties prior to acquisition and are secured by the underlying improved real estate properties. The remaining note accrues interest at an annual rate of 9% and all payments of principal and interest are due in full on December 20, 2024. Interest income was $0.2 million and $0.5 million for the years ended December 31, 2023 and 2022, respectively. The accrued interest income receivable was $0.2 million and $0.2 million as of the year ended December 31, 2023 and 2022, respectively.
In March 2022, the Company and Noffke Horizon View, LLC entered into a promissory note with a payment in full due on March 31, 2023 of $3.3 million (“the note”) for the sale of land. In March 2023, Noffke Horizon View, LLC notified the Company that they were unable to pay this amount in full by the due date and the Company agreed to settle the note for a reduced amount totaling $2.1 million. The Company recorded a valuation allowance against the note receivable as of December 31, 2022 and the reduced note amount was fully collected during the quarter ended March 31, 2023.
The details of notes receivables, net of valuation allowance are as follows:
SCHEDULE OF NOTES RECEIVABLES, NET OF VALUATION ALLOWANCE
December 31, 2023 December 31, 2022
Broadmoor Commons LLC $ - $ 1,000,300
Modern Homestead LLC 950,000 1,445,000
Noffke Horizon View, LLC - 2,080,000
Total Notes Receivable, Net $ 950,000 $ 4,525,300
4. PROPERTY AND EQUIPMENT
Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
December 31, 2023 December 31, 2022
Machinery and Equipment $ 44,000 $ 505,300
Vehicles - 26,200
Furniture and Fixtures 692,100 695,600
Leasehold Improvements 1,467,100 1,524,000
Total Fixed Assets 2,203,200 2,751,100
Less Accumulated Depreciation (592,700 ) (461,600 )
Fixed Assets, Net $ 1,610,500 $ 2,289,500
Depreciation expense was $0.3 million and $1.4 million for the years ended December 31, 2023 and 2022, respectively.
5. REAL ESTATE
Real Estate consisted of the following components:
SCHEDULE OF REAL ESTATE
December 31, 2023 December 31, 2022
Land Held for Development $ 31,410,100 $ 47,166,700
Construction in Progress 96,205,900 123,927,300
Held for Sale 29,122,400 34,384,200
Total Real Estate $ 156,738,400 $ 205,478,200
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued liabilities consisted of the following:
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
December 31, 2023 December 31, 2022
Trade Accounts Payable $ 6,599,600 $ 11,472,100
Retainage Payable 65,500 1,130,300
Accrued Compensation, Bonuses, and Benefits 143,200 384,700
Accrued Quarry Reclamation Costs 10,000 76,200
Other Accruals 1,179,500 1,027,400
Pre-petition Liabilities Subject to Compromise (2,051,900 ) -
Total Accounts Payable and Accrued Expenses Not Subject to Compromise $ 5,945,900 $ 14,090,700
7. REVOLVING LINE OF CREDIT
On March 7, 2022, the Company entered into a senior secured revolving credit facility (“the credit facility”) with BankUnited, N.A. (the “Lender”) for $25.0 million. The credit facility has a two year term, with a maturity date of March 7, 2024. The unpaid principal bears interest at a fluctuating rate of interest per annum equal to the daily simple secured overnight financing rate (SOFR) plus the applicable margin of 4.75%. The credit facility is used to fund the Company’s general working capital needs and interest is expensed as incurred. For the year ended December 31, 2022, the Company capitalized debt issuance costs of $1.1 million, respectively. These costs are recorded as debt discount and amortized ratably over the life of the loan. The credit facility is collateralized by all of the Company’s assets wherein the Lender is granted a junior priority interest in all collateralized Company assets that Lender has previously identified as a permitted lien or other encumbrance that the Company regularly incurs through its ordinary course of business; in all other Company assets, Lender maintains a first priority security interest. In connection with the Company’s Chapter 11 proceedings, the nature, validity, extent, and priority of Lender’s liens are currently disputed. The credit facility also contains specific financial covenants. As of December 31, 2022, the Company was not in compliance with the minimum interest coverage ratio requirement and consolidated liquidity covenant.
On February 23, 2023, the Company entered into an amended loan agreement (the “Amendment”) with the Lender, whereby the Lender agreed to waive its right to accelerate and declare all of the debt immediately due and owing, based upon the previously disclosed non-compliance with financial covenants resulting in technical default under the loan agreement. Further, the Lender waived the requirement that the Company comply with certain financial covenants through maturity of the debt. These concessions were made as a result of the Company granting the Lender second mortgage positions for certain properties owned by the Company, as well as transferring to the Lender membership certificates pledging certain properties as collateral. Additionally, the Company agreed to make principal reduction payments including paying the Lender $0.6 million on the 20th of every month which otherwise would have been paid to preferred shareholders as a dividend on the preferred stock, and pay to the Lender 25% of all net cash proceeds from asset sales, public offerings of any class of stock or debt, private equity recaptures, or any capital raise. The Company also agreed that it will not close on the purchase of any new projects without the Lender’s express written consent and will not repurchase any of its outstanding securities. The aforementioned payments will continue to be made until the earlier of March 7, 2024 or until the loan has been paid in full. On November 20, 2023, the Company suspended making payments.
The Company evaluated the Amendment in accordance with ASC 470-50, Debt - Modifications and Extinguishments and applied the borrowing capacity model as it relates to a revolving debt arrangement. Under the Amendment, the Lender is no longer committed and has no further lending obligations to the Company, which reduced the borrowing capacity of available credit to $0. The Company determined that this modification is considered a partial extinguishment and expensed the remaining unamortized debt discount of $0.5 million within interest expense for the year ended December 31, 2023.
The filing of the Bankruptcy Petition constituted an event of default under the loan agreement dated March 7, 2022 and the Amendment to the Loan Agreement, dated February 22, 2023. The interest accrues at the default rate from December 2023, which rate floats at the contract rate plus 3%, until the debt is paid in full. As of December 31, 2023, the Company accrued $0.03 million of default interests as incurred. The Company cannot reasonably estimate as of December 31, 2023 whether the default interest will be paid or not.
Interest expense was $2.5 million and $1.6 million for the years ended December 31, 2023 and 2022, respectively.
As of December 31, 2023 and December 31, 2022, the revolving line of credit loan balance was $14.2 million and $25.0 million and the unamortized debt discount balance was $0 and $0.6 million, respectively.
8. EQUIPMENT LOANS
Equipment loans consists of the following:
SCHEDULE OF EQUIPMENT LOANS
December 31, 2023 December 31, 2022
Various notes payable to banks and financial institutions with interest rates varying from 0.00% to 13.89%, collateralized by equipment with monthly payments ranging from $400 to $10,500: $ - $ 2,057,100
Book value of collateralized equipment: $ - $ 11,800
There were no future equipment loan maturities as of December 31, 2023.
Interest expense was $0.001 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively.
9. CONSTRUCTION LOANS
The Company has various construction loans with private individuals and finance companies. The loans are collateralized by specific construction projects. Most loans are generally on one to two year terms but will be extended or refinanced if the project is not completed within one to two years and will be due upon the completion of the project.
The loans have interest ranging from 7.99% to 13.00%. The commencement of the Chapter 11 Case constituted an event of default under most of the Company’s debt agreements. The interests at the default rates are ranging from 13.55% to 24.00%. The interest accrues at the default rate from the event of default until the debt is paid in full. As of December 31, 2023, the Company accrued $0.8 million of default interests as incurred. The Company cannot reasonably estimate as of December 31, 2023, whether the default interests will be paid or not. Interest expense and amortization of debt discount are capitalized when incurred and expensed as cost of goods sold when the corresponding property is sold or expensed as incurred when the property is substantially complete.
The loan balances related to third party lenders as of December 31, 2023 and December 31, 2022 were $126.2 million and $109.4 million, respectively. The unamortized debt discounts related to these construction loans as of December 31, 2023 and December 31, 2022 were $0.8 million and $1.9 million, respectively. The book value of collateralized real estate as of December 31, 2023 and December 31, 2022 was $156.7 million and $193.1 million, respectively.
10. LETTER OF CREDIT
The Company has a letter of credit agreement with WaFd Bank of $0.6 million. The letter of credit expires February 1, 2032. The interest rate of the letter of credit is Prime plus 1%. The letter of credit was established for the purpose of collateralizing the Company’s new Tacoma office lease obligations with the landlord which is the beneficiary of the letter of credit.
11. NOTE PAYABLE - INSURANCE
The Company purchased Directors & Officers (D&O) insurance on August 28, 2023 for $0.4 million. A down payment of $0.03 million was made and the remaining balance was financed over 11 months. The interest rate on the loan is 7.90%. The Company purchased D&O insurance on August 28, 2022 for $0.6 million. A down payment of $0.1 million was made and the remaining balance was financed over 11 months. The interest rate on the loan is 4.75%. The loan balance as of December 31, 2023 and December 31, 2022 was $0.2 million and $0.4 million, respectively.
The Company also obtained financing on General Liability insurance for $0.5 million effective October 1, 2023. A down payment of $0.1 million was made and the remaining balance was financed over 10 months. The interest rate on the loan is $8.95% and the remaining balance as of December 31, 2023 was $0.3 million.
12. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise as part of the Chapter 11 Case consisted of the following:
SCHEDULE OF LIABILITIES SUBJECT TO COMPROMISE
December 31, 2023
Pre-petition Accounts Payable and Accrued Expenses $ 2,051,900
Dividends Payable 7,614,800
Right of Use Liabilities 2,554,800
Pre-petition Liabilities Subject to Compromise $ 12,221,500
These amounts represent the Company’s current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Case and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. Determination of the value at which liabilities will ultimately be settled cannot be made until the Plan becomes effective. The Company will continue to evaluate and adjust the amount and classification of its pre-petition liabilities. Such adjustments may be material. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of Liabilities subject to compromise may change.
13. DEFINED CONTRIBUTION PLAN
Effective January 1, 2016, the Company established a 401(k) plan for qualifying employees; employee contributions are voluntary. Company contributions to the plan for the years ended December 31, 2023 and 2022 were $0.1 million and $0.1 million, respectively.
14. COMMITMENTS AND CONTINGENCIES
From time to time the Company is subject to compliance audits by federal, state, and local authorities relating to a variety of regulations including wage and hour laws, taxes, and workers’ compensation. There are no significant or pending litigation or regulatory proceedings known at this time other than the uncertainty with the results of the Chapter 11 proceedings.
15. RELATED PARTY TRANSACTIONS
Notes Payable
The Company entered into construction loans with Sound Equity, LLC of which Robb Kenyon, a former director and minority shareholder, is a partner. These loans were originated between April 2019 and June 2021; the loans generally have a 12 to 24 month maturity, including those that have been extended. The interest rates range between 7.99% and 11.00%. As of December 31, 2023, and December 31, 2022, the outstanding loan balances were $0 and $8.2 million, respectively. For the years ended December 31, 2023 and 2022, the Company capitalized loan fees of $0.1 million and $0.1 million, respectively. These fees are recorded as debt discount and amortized over the life of the loan. The amortization is capitalized to real estate. As of December 31, 2023 and December 31, 2022, there were $0 and $0.1 million of remaining unamortized debt discounts, respectively. The interest is capitalized to real estate as incurred and will be expensed to cost of goods sold when the property is sold. During the years ended December 31, 2023 and 2022, the Company incurred interest of $0.4 million and $1.1 million, respectively.
Robb Kenyon resigned as a director of the Company on July 8, 2021.
Due to Related Party
The Company previously utilized a quarry to process waste materials from the completion of raw land into sellable/buildable lots. The materials produced by the quarry and sold by the Company to others were subject to a 25% commission payable to SGRE, LLC, which is 100% owned by the Company’s former Chief Executive Officer and President. The commission expense was recorded in operating expenses. On December 31, 2023 and December 31, 2022, the commission payable was $0 and $0, respectively. For the years ended December 31, 2023 and 2022, the commission expense was $0 and $0.04 million, respectively. The Company has completed its quarry operations and no longer incurs any commission expenses.
Rental Expense
The Company previously entered into property management agreements with Olympic Management Company (“OMC”), which was owned and operated by a family member related to the Company’s former Chief Executive Officer and President. OMC served as a managing agent for leasing and managing the Company’s Mills Crossing, Belfair View, Pacific Ridge, and Wyndstone multi-family properties. The Company paid management fees to OMC, which consisted of service fees of up to $3,000 per month and $500 for each lease of a vacant apartment unit. The Company also reimbursed the payroll, benefits, and other employment costs relating to an office manager, leasing consultant, and maintenance staff employed by OMC for their time incurred in the operations of the property. For the years ended December 31, 2023 and 2022, the management fees and payroll and benefits incurred and recorded as rental expense within cost of sales were $0.3 million and $0.04 million, respectively. The Company terminated the agreements with OMC and transitioned to a third party property management company, effective June 7, 2023 for leasing and managing the Company’s Belfair, Pacific Ridge, and Wyndstone multi-family properties. Mills Crossing was managed by OMC until it was sold on June 16, 2023.
16. LEASES
The Company determines if an arrangement contains a lease at inception. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company’s leases consist of leaseholds on office space, machinery, and equipment. The Company utilized a portfolio approach in determining the discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and the Company’s estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company also considered its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating the incremental borrowing rates.
The lease term includes options to extend the lease when it is reasonably certain that the Company will exercise that option. These operating leases contain renewal options for periods ranging from three to five years that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options are included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The Company recognizes variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
The components of lease expense were as follows:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
Year Ended Year Ended
December 31, 2023 December 31, 2022
Finance leases expense
Depreciation of assets $ 8,900 $ 76,000
Interest on lease liabilities 2,000 17,700
Operating lease expense 286,800 677,400
Total net lease cost $ 297,700 $ 771,100
Supplemental balance sheet information related to leases was as follows:
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO LEASES
December 31, 2023 December 31, 2022
Operating leases:
Operating lease ROU assets $ 1,749,200 $ 1,926,100
Total ROU Liabilities $ 2,554,800 $ 2,779,400
Finance leases:
Property and equipment, at cost $ - $ 178,800
Less: Accumulated depreciation - 79,100
Property and equipment, net $ - $ 99,700
Total Finance lease liabilities $ - $ 154,500
Supplemental cash flow and other information related to leases was as follows:
SCHEDULE OF CASH FLOW AND OTHER INFORMATION RELATED TO LEASES
Year Ended Year Ended
December 31, 2023 December 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases - lease payments $ (224,600 ) $ (358,100 )
Operating cash flows from operating leases - lease incentives - 613,900
Financing cash flows from finance leases - lease payments (74,800 ) (104,100 )
Assets obtained in exchange for lease liabilities:
Operating leases $ - $ -
Finance leases - 110,000
Weighted average remaining lease term (in years):
Operating leases 8.25 9.2
Finance leases - 0.9
Weighted average discount rate:
Operating leases 4.0 % 4.0 %
Finance leases - 7.5 %
The minimum lease payments under the terms of the operating leases are as follows for the years ended December 31:
SCHEDULE OF MINIMUM LEASE PAYMENTS UNDER THE TERMS OF OPERATING LEASES
Operating Leases
$ 316,300
325,700
335,400
345,500
355,800
Thereafter 1,365,900
Total lease payments $ 3,044,600
Less amount of discount/interest (489,800 )
Operating leases $ 2,554,800
17. INCOME TAX
The components of net deferred tax assets and liabilities at December 31, 2023 and 2022 are set forth below:
SCHEDULE OF COMPONENTS OF NET DEFERRED TAX ASSETS AND LIABILITIES
December 31, 2023 December 31, 2022
Deferred tax assets:
Federal NOL carryforwards $ 6,790,800 $ 1,905,900
UNICAP 783,700 1,865,900
Lease liability 561,400 586,300
Stock based compensation 7,400 15,400
Investments -
Impairment loss on note receivable and real estate and loss provision on fee build contracts 10,388,700 1,046,700
Sec. 163(j) interest deduction carryforwards 823,100 273,100
Tax Credits 72,000 72,000
Charitable Contribution Carryover 2,000 -
Bad Debt Expense 263,700 -
Advanced Rent Payments 11,000 -
Total assets $ 19,703,800 $ 5,765,500
Deferred tax liabilities:
Property and equipment $ 290,200 $ 480,200
Right of use assets 538,000 553,800
Sec. 481(a) adjustments 37,600 72,200
Total liabilities $ 865,800 $ 1,106,200
Subtotal deferred tax assets $ 18,838,000 $ 4,659,300
Valuation allowance (18,838,000 ) -
Net deferred tax assets $ - $ 4,659,300
The Company is required to establish a valuation allowance for any portion of the deferred tax asset that the Company concludes is more likely than not to be unrealizable. The Company’s assessment considered all evidence, both positive and negative, including the nature, frequency, and severity of any current and cumulative losses, taxable income in carry back years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. As of December 31, 2023, the Company determined that it was not more likely than not that the Company’s deferred tax assets would be realized and therefore recorded a valuation allowance of $15.8 million. As of December 31, 2022, the Company had no valuation allowance recorded against the deferred tax assets.
The Company has approximately $30.9 million and $13.0 million of federal net operating losses (“NOL”) for the years ended December 31, 2023 and December 31, 2022, respectively. Section 382 of the Internal Revenue Code limits the utilization of NOL carryforwards following a change of control. Based on our analysis under Section 382, the Company is subjected to such restrictions for the years ended December 31, 2023 and December 31, 2022. The Company has not utilized the NOL carryforwards for the years ended December 31, 2023 and 2022. This will be updated pending finalization of the analysis and the filing of the 2023 tax return. These NOLs will not expire and will remain available for future periods, but are limited to 80% of taxable income, due to the Tax Cuts and Jobs Act, passed in 2017.
The components of income tax expense (benefit) and the effective tax rates for the years ended December 31, 2023 and 2022 are as follows:
SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
Year Ended Year Ended
December 31, 2023 December 31, 2022
Current:
Federal $ (107,500 ) $ (456,300 )
State 28,700 8,400
Total Current (78,800 ) (447,900 )
Deferred:
Federal (13,335,700 ) (3,989,100 )
State (834,100 ) (21,200 )
Total Deferred (14,169,800 ) (4,010,300 )
Valuation Allowance 18,838,000 -
Total Income Tax Expense (Benefit) $ 4,589,400 $ (4,458,200 )
The expected tax rate differs from the U.S. Federal statutory rate as follows:
SCHEDULE OF EXPECTED TAX RATE
US federal statutory rate 21.0 % 21.0 %
Change in federal valuation allowance (29.4 )% - %
Accrual to return changes and other adjustments to deferred balances (0.1 )% (0.5 )%
Tax credits 0.1 % 0.3 %
Incentive stock options - % (0.1 )%
State taxes 1.2 % 0.1 %
Change in tax rate - % 0.1 %
Other - % - %
Effective Tax Rate (7.2 )% 20.9 %
The Company has not recorded any uncertain tax positions for any tax year and treats accrued interest and penalties on income tax liabilities as income tax expense for the years ended December 31, 2023 and 2022.
The Company files an income tax return in the U.S. and is subject to examination by the IRS for the tax years 2019, 2020, 2021 and 2022.
18. STOCKHOLDERS’ EQUITY
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, at no par value per share. At December 31, 2023, the Company had 2,686,431 shares of common stock issued and outstanding and 718,835 shares of common stock issued and outstanding as of December 31, 2022.
Each share of common stock has one vote per share for all purposes. Common stock does not provide any preemptive, subscription, or conversion rights and there are no redemption or sinking fund provisions or rights. Common stockholders are not entitled to cumulative voting for purposes of electing members to the Board of Directors.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, no par value per share. As of December 31, 2023 and 2022, the Company had 3,799,399 shares of Series A Cumulative Convertible Preferred Stock (“Series A Preferred Shares”) issued and outstanding. The holders of the Series A Preferred Shares are entitled to receive dividends at $2.00 per share per annum which are paid monthly in arrears starting June 30, 2021. Beginning on June 9, 2024, the Company may, at its option, redeem the Series A Preferred Shares, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to but not including the date of redemption. To the extent declared by the Board of Directors, dividends will be payable not later than 20 days after the end of each calendar month. Dividends on the Series A Preferred Shares will accumulate whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, and whether or not such dividends are declared by the Board of Directors.
Conversion at Option of Holder. Each Series A Preferred Share, together with accrued but unpaid dividends, is convertible into 0.2778 shares of common stock (subject to adjustment) at any time at the option of the holder.
Dividends
Preferred Stock. The holders of the Series A Preferred Shares are entitled to receive dividends in the amount of $2.00 per share, which is equivalent to 8% of the $25.00 liquidation preference per share. The Company has accrued dividends of $7.6 million as of December 31, 2023. The Company had accrued dividends of $0.6 million as of December 31, 2022 which were paid to the shareholders on January 20, 2023.
Common Stock. The declaration of any future cash dividends is at the discretion of the board of directors and depends upon the Company’s earnings, if any, capital requirements and financial position, general economic conditions, and other pertinent conditions. It is the Company’s present intention not to pay any cash dividends on the Company’s common stock in the foreseeable future, but rather to reinvest earnings, if any, in business operations.
Public Offering
On May 16, 2023, the Company entered into securities purchase agreements (the “Purchase Agreements”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell to the Investors in a public offering (the “Offering”) (i) 160,500 shares (the “Shares”) of common stock of the Company, no par value, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 1,790,718 shares of common stock and (iii) warrants to purchase up to 1,951,218 shares of common stock (the “Warrants”) at a combined public offering price of $5.125 per share of common stock and accompanying Warrant or $5.1249 per Pre-Funded Warrant and accompanying Warrant. On May 18, 2023, the Company closed on the Offering. The net proceeds after deducting Offering costs were $8.9 million. In addition, upon the closing the Offering, the Company issued to the placement agent warrants to purchase 117,073 shares of common stock with an exercise price of $6.41 per share of common stock for a term of five years beginning on May 18, 2023, all of which vested immediately upon closing. The net proceeds allocated to each of these instruments were $0.6 million for common stock, $6.7 million for Pre-Funded Warrants, $1.6 million for Warrants, and $0.1 million for placement agent warrants.
Reverse Stock Split
On February 17, 2023, the Company held a special meeting of stockholders at which the stockholders approved a proposal to effect a reverse split of its issued and outstanding shares of common stock at a ratio of between 1-for-3 and 1-for-25 (the “Reverse Stock Split”), such ratio to be selected at the sole discretion of the Company’s Board without further stockholder action.
On February 27, 2023, the Board of Directors approved the implementation of the Reverse Stock Split at a ratio of 1-for-20 shares of the common stock. The Company filed Articles of Amendment to Articles of Incorporation for the Reverse Stock Split with the Washington Secretary of State on March 1, 2023 and the Reverse Stock Split was effected on the Nasdaq Capital Market on March 6, 2023.
As a result of the Reverse Stock Split, every 20 shares of common stock either issued or outstanding immediately prior to the effective time was, automatically and without any action on the part of the respective holders thereof, combined and converted into one share of common stock. The Reverse Stock Split also applied to common stock issuable upon the exercise of the Company’s outstanding warrants, outstanding stock options, unvested restricted stock awards, stock and stock option plans, and upon the conversion of the Series A Preferred Stock. The Reverse Stock Split did not affect the par value of common stock or the shares of common stock authorized to issue under the Articles of Incorporation, as amended. No fractional shares were issued in connection with the Reverse Stock Split. Fractional shares which would otherwise result from the Reverse Stock Split were rounded up to the nearest whole share.
Repurchase of Equity Securities
On May 10, 2022, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $5.0 million worth of shares of common stock beginning May 10, 2022. The amount of the repurchase program represented approximately 15% of the outstanding shares of the Company’s common stock valued at the closing price on May 10, 2022. During the nine months ended December 31, 2023, the Company did not repurchase any shares of common stock. During the year ended December 31, 2022, the Company repurchased 12,597 shares of common stock under this repurchase program at an average price of $35.23 per share for a total of approximately $0.4 million.
As a part of the amended loan agreement reached with BankUnited, N.A. on February 23, 2023, the Company agreed that it will not repurchase any of its currently outstanding securities.
(A) Options
The following is a summary of the Company’s option activity:
SCHEDULE OF STOCK OPTION ACTIVITY
Options Weighted Average
Exercise Price
Outstanding - January 1, 2022 23,163 $ 56.43
Exercisable - January 1, 2022 17,186 $ 55.47
Granted 19,600 $ 23.79
Exercised (1,081 ) $ 8.00
Forfeited/Cancelled (4,135 ) $ 34.48
Outstanding - December 31, 2022 37,546 $ 41.51
Exercisable - December 31, 2022 19,696 $ 55.55
Granted 140,000 $ 3.73
Exercised - $ -
Forfeited/Cancelled (79,087 ) $ 8.97
Outstanding - December 31, 2023 98,459 $ 13.93
Exercisable - December 31, 2023 17,543 $ 54.67
SCHEDULE OF STOCK OPTION OUTSTANDING AND EXERCISABLE
Options Outstanding Options Exercisable
Exercise Price Number
Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise Price
$ 3.73 - $130.00 98,459 9.00 $ 13.93 17,543 $ 54.67
During the year ended December 31, 2023, 140,000 options were issued to officers of the Company. These options have an exercise price of $3.73 per share and a term of ten years. One half of these options will vest upon the filing of the Company’s Form 10-K for the year ended December 31, 2024 with the U.S. Securities and Exchange Commission, with the remainder to vest in equal proportions upon the first and second anniversary of said filing. The options have an aggregated fair value of approximately $0.3 million that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 1 under Stock-Based Compensation.
During the year ended December 31, 2022, the Company issued 19,600 options to employees. The options have an exercise price between $22.40 and $41.80 per share, a term of ten years, and vest over one or three years. The options have an aggregated fair value of approximately $0.2 million that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above and in Note 1 under Stock-Based Compensation.
During the year ended December 31, 2023, the Company had no options exercised by employees and former employees. During the year ended December 31, 2022, the Company had 1,081 options exercised by former employees. These options were exercised at $8.00 per share for a total of $0.01 million.
The Company recognized share-based compensation net of forfeitures related to options of $0.1 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively.
On December 31, 2023, unrecognized share-based compensation was $0.2 million.
The intrinsic value for outstanding and exercisable options as of December 31, 2023 and 2022 was $0 and $0, respectively.
(B) Warrants
The following is a summary of the Company’s common stock warrant activity, for warrants that are exercisable at a 20 to 1 ratio to common stock:
SCHEDULE OF COMMON STOCK WARRANT ACTIVITY
Warrants* Weighted Average
Exercise Price
Outstanding - January 1, 2022 18,486,859 $ 3.46
Exercisable - January 1, 2022 18,486,859 $ 3.46
Granted 100,000 $ 3.00
Exercised (139,295 ) $ 2.97
Forfeited/Cancelled - $ -
Outstanding - December 31, 2022 18,447,564 $ 3.47
Exercisable - December 31, 2022 18,380,897 $ 3.47
Granted - $ -
Exercised - $ -
Forfeited/Cancelled - $ -
Outstanding - December 31, 2023 18,447,564 $ 3.47
Exercisable - December 31, 2023 18,414,231 $ 3.47
* As a result of the Reverse Stock Split, each warrant now entitles the holder to purchase one-twentieth (0.05) of one share of common stock.
SCHEDULE OF WARRANT OUTSTANDING AND EXERCISABLE
Warrants Outstanding Warrants Exercisable
Exercise Price Number
Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise Price
$ 0.40 - $7.50 18,447,564 2.68 $ 3.47 18,414,231 $ 3.47
During the year ended December 31, 2023, the Company did not issue any warrants with a 20 to 1 ratio. During the year ended December 31, 2022, the Company issued 100,000 warrants to purchase 5,000 shares of common stock in connection with investor relation services being performed. The warrants have an exercise price of $3.00 per warrant, a term of five years, and vest over three years. The fair value of these warrants is $0.1 million as of December 31, 2022.
The intrinsic value for outstanding and exercisable warrants as of December 31, 2023 and 2022 was $0 and $0, respectively.
The following is a summary of the Company’s common stock warrant activity, for warrants that are exercisable at a 1 to 1 ratio to common stock:
Warrants Weighted Average
Exercise Price
Outstanding - January 1, 2023 - $ -
Exercisable - January 1, 2023 - $ -
Granted 2,068,291 $ 5.08
Exercised - $ -
Forfeited/Cancelled - $ -
Outstanding - December 31, 2023 2,068,291 $ 5.08
Exercisable - December 31, 2023 2,068,291 $ 5.08
Warrants Outstanding Warrants Exercisable
Exercise Price Number
Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
Number Exercisable Weighted
Average
Exercise Price
$ 5.00 - $6.41 2,068,291 4.38 $ 5.08 2,068,291 $ 5.08
During the year ended December 31, 2023, the Company issued 2,068,291 warrants in connection with the Offering. The warrants have an exercise price between $5.00 and $6.41 per warrant, a term of five years, and vested immediately. The fair value of these warrants was $1.8 million before the net proceed allocations.
The intrinsic value for outstanding and exercisable warrants as of December 31, 2023 was $0.
The following is a summary of the Company’s preferred stock warrant activity:
Warrants Weighted Average
Exercise Price
Outstanding - January 1, 2022 12,000 $ 24.97
Exercisable - January 1, 2022 12,000 $ 24.97
Granted - $ -
Exercised - $ -
Forfeited/Cancelled - $ -
Outstanding - December 31, 2022 12,000 $ 24.97
Exercisable - December 31, 2022 12,000 $ 24.97
Granted - $ -
Exercised - $ -
Forfeited/Cancelled - $ -
Outstanding - December 31, 2023 12,000 $ 24.97
Exercisable - December 31, 2023 12,000 $ 24.97
Warrants Outstanding Warrants Exercisable
Exercise Price Number Outstanding Weighted
Average Remaining Contractual
Life
(in years)
Weighted
Average
Exercise Price
Number Exercisable Weighted
Average
Exercise Price
$ 24.97 12,000 2.44 $ 24.97 12,000 $ 24.97
During the years ended December 31, 2023 and 2022, the Company did not issue any preferred warrants.
The intrinsic value for outstanding and exercisable preferred warrants as of December 31, 2023 and 2022 was $0.
(C) Pre-Funded Warrants
The following is a summary of the Pre-Funded Warrant activity:
Pre-Funded
Warrants
Weighted Average
Exercise Price
Outstanding - January 1, 2023 - $ -
Exercisable - January 1, 2023 - $ -
Granted 1,790,718 $ 0.0001
Exercised (1,790,718 ) $ 0.0001
Forfeited/Cancelled - $ -
Outstanding - December 31, 2023 - $ -
Exercisable - December 31, 2023 - $ -
During the year ended December 31, 2023, the Company issued Pre-Funded Warrants to purchase 1,790,718 shares of common stock in connection with the Offering. The Pre-Funded Warrants have an exercise price of $0.0001 per Pre-Funded Warrant, and are exercisable at any time after their original issuance at the option of the holder, subject to certain restrictions. The fair value of these Pre-Funded Warrants was $7.6 million before the net proceed allocations.
During the year ended December 31, 2023, all Pre-Funded Warrants were exercised for 1,790,718 shares of common stock.
(D) Restricted Stock Plan
The following is a summary of the Company’s restricted stock activity:
SCHEDULE OF RESTRICTED STOCK ACTIVITY
Restricted Stock Weighted Average
Fair Value
Non Vested Balance - January 1, 2022 7,250 $ 49.02
Granted 11,555 $ 39.16
Vested 6,805 $ 50.87
Forfeited/Cancelled - $ -
Non Vested Balance - December 31, 2022 12,000 $ 38.48
Granted - $ -
Vested 3,834 $ 38.78
Forfeited/Cancelled 6,999 $ 38.70
Non Vested Balance - December 31, 2023 1,167 $ 36.20
The Company periodically grants restricted stock awards to the Board of Directors and certain employees pursuant to the 2020 Plan. These typically are awarded by the Compensation Committee at one time and from time to time, to vest over one to three years, unless otherwise determined by the Compensation Committee.
The Company recognized $0.1 million and $0.4 million of share-based compensation during the years ended December 31, 2023 and 2022, respectively.
On December 31, 2023, there was $0.03 million of unrecognized compensation related to non-vested restricted stock.
19. SEGMENTS
In accordance with FASB ASC Topic 280, Segment Reporting, an operating segment is defined as a component of an enterprise for which discrete financial information is available and reviewed regularly by the chief operating decision maker (“CODM”), or decision making group, to evaluate performance and make operating decisions.
The Company identified its CODM group as its two executive officers, the interim Chief Executive Officer and Chief Accounting Officer. In determining the reportable segments, the CODM group considers similar economics and characteristics including product types, construction processes, customer type, regulatory environments, and underlying demand and supply.
The Company’s business is organized into five material reportable segments which aggregate 100% of revenue for the year ended December 31, 2023:
1) Homes;
2) Developed lots;
3) Entitled land;
4) Multi-family; and
5) Fee Build.
The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements. The following represents revenue, cost of goods sold, and gross profit (loss) information for the Company’s reportable segments for the years ended December 31, 2023 and 2022.
SCHEDULE OF REVENUE FROM SEGMENT REPORTING INFORMATION
Year Ended
December 31, 2023
Year Ended
December 31, 2022
Revenue by segment
Homes $ 9,104,000 $ 28,670,000
Developed lots 11,033,500 9,510,000
Entitled land - 7,880,000
Multi-family 38,241,400 175,900
Fee Build 877,800 9,124,000
Other - 54,400
Total Sales $ 59,256,700 $ 55,414,300
Cost of goods sold by segment
Homes $ 14,061,900 $ 24,027,100
Developed lots 21,325,400 9,797,700
Entitled land 14,817,500 4,060,200
Multi-family 59,337,300 2,564,400
Fee Build 942,600 13,597,500
Other 207,200 1,819,900
Total Cost of Sales $ 110,691,900 $ 55,866,800
Gross profit (loss) by segment
Homes $ (4,957,900 ) $ 4,642,900
Developed lots (10,291,900 ) (287,700 )
Entitled land (14,817,500 ) 3,819,800
Multi-family (21,095,900 ) (2,388,500 )
Fee Build (64,800 ) (4,473,500 )
Other (207,200 ) (1,765,500 )
Total Gross Profit (Loss) $ (51,435,200 ) $ (452,500 )
The following represents total assets for the Company’s reportable segments at December 31, 2023 and December 31, 2022:
SCHEDULE OF TOTAL ASSETS FOR THE COMPANY’S REPORTABLE SEGMENTS
December 31, 2023 December 31, 2022
Homes $ 18,786,400 $ 29,880,500
Developed lots 15,789,800 43,469,900
Entitled land 26,126,600 9,499,600
Multi-family 98,167,300 131,485,900
Fee Build 22,100 1,703,200
Unallocated (Shared) 7,858,700 20,127,300
Total Assets $ 166,750,900 $ 236,166,400
20. UNCOMPLETED CONTRACTS
Costs, estimated earnings and billings on uncompleted contracts are summarized as follows at December 31, 2023 and December 31, 2022:
SCHEDULE OF COSTS ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
December 31, 2023 December 31, 2022
Costs incurred on uncompleted contracts $ 20,525,800 $ 19,429,800
Estimated loss (3,702,800 ) (3,495,100 )
Costs and estimated earnings on uncompleted contracts 16,823,000 15,934,700
Billings to date 16,842,700 16,273,000
Costs and estimated earnings in excess of billings on uncompleted contracts - -
Billings in excess of costs and estimated earnings on uncompleted contracts (19,700 ) (338,300 )
Provision for loss on contract (5,600 ) (159,100 )
Contract Liabilities, net $ (25,300 ) $ (497,400 )
At December 31, 2023, the contract liability was $0.03 million as compared to $0.5 million at December 31, 2022. The uncollected billings were $0.02 million and $1.7 million as of December 31, 2023 and December 31, 2022, respectively.
21. CONDENSED COMBINED DEBTOR-IN-POSSESSION FINANCIAL INFORMATION (UNADUITED)
The financial statements included in this Note represent the Condensed Combined Financial Statements of the Debtors only, which include Harbor Custom Development, Inc. and most of its wholly-owned subsidiaries, except for its Tanglewilde, LLC, HCDI Wyndstone, LLC, and other subsidiaries either sold or cancelled during the year. These statements reflect the results of operations, financial position and cash flows of the combined Debtors, including certain amounts and activities between Debtors and Non-Debtor subsidiaries of the Company that are eliminated in the Consolidated Financial Statements.
CONDENSED COMBINED BALANCE SHEETS (Unaudited)
Amounts rounded to the nearest $100
SCHEDULE OF CONDENSED COMBINED FINANCIAL STATEMENTS
December 31, 2023
ASSETS
Cash $ 3,263,800
Restricted Cash 597,600
Accounts Receivable, net 279,800
Notes Receivable, net 950,000
Prepaid Expense and Other Assets 1,193,800
Real Estate 112,680,200
Property and Equipment, net 1,610,500
Right of Use Assets 1,749,200
Deferred Tax Asset, net -
Intercompany balance due from non-debtor subsidiaries 16,574,400
TOTAL ASSETS $ 138,899,300
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Accounts Payable and Accrued Expenses $ 3,976,900
Contract Liabilities 25,300
Deferred Revenue 29,600
Note Payable - Insurance 529,300
Revolving Line of Credit Loan 14,178,700
Construction Loans 91,913,600
Liabilities not subject to compromise $ 110,653,400
Liabilities subject to compromise 12,221,500
TOTAL LIABILITIES $ 122,874,900
STOCKHOLDERS’ EQUITY
Preferred Stock $ 62,912,100
Common Stock 43,030,200
Additional Paid In Capital 3,096,800
Accumulated Deficit (93,014,700 )
TOTAL STOCKHOLDERS’ EQUITY 16,024,400
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 138,899,300
CONDENSED COMBINED STATEMENTS OF OPERATIONS (Unaudited)
Amounts rounded to the nearest $100
Year Ended
December 31, 2023
Sales $ 23,061,600
Cost of Sales 70,402,700
Gross Loss (47,341,100 )
Operating Expenses 8,976,300
Operating Loss (56,317,400 )
Other Income (Expense)
Interest Expense (2,602,600 )
Interest Income 151,000
Management fee income from subsidiary 687,900
Equity income of non-debtor subsidiaries, net 1,118,000
Loss on Sale of Equipment (47,700 )
Other Income 51,600
Total Other Expense (641,800 )
Bankruptcy Expense 392,500
Loss Before Income Tax $ (57,351,700 )
Income Tax Expense (Benefit) 4,589,400
Net Loss $ (61,941,100 )
Preferred Dividends (7,614,800 )
Net Loss Attributable to Common Stockholders $ (69,555,900 )
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
Amounts rounded to the nearest $100
Year Ended
December 31, 2023
OPERATING ACTIVITIES
Net Loss $ (61,941,100 )
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation 333,500
Amortization of right of use assets 176,900
Loss on sale of equipment 47,700
Provision for loss on contract 153,400
Impairment loss on real estate 44,758,000
Stock compensation 218,100
Amortization of revolver issuance costs 640,300
Net change in assets and liabilities:
Accounts receivable 1,427,200
Notes receivable 3,575,300
Prepaid expenses and other assets 4,468,200
Real estate (9,741,000 )
Deferred tax asset 4,659,300
Accounts payable and accrued expenses (3,994,700 )
Contract Liabilities (625,500 )
Deferred revenue (22,400 )
Payments on right of use liability, net of incentives (224,600 )
NET CASH USED IN OPERATING ACTIVITIES (16,091,400 )
INVESTING ACTIVITIES
Proceeds on the sale of equipment 218,100
NET CASH PROVIDED BY INVESTING ACTIVITIES 218,100
FINANCING ACTIVITIES
Construction loans 44,050,100
Payments on construction loans (31,363,300 )
Financing fees construction loans (1,804,000 )
Payments on related party construction loans (677,300 )
Payments on revolving line of credit loan (10,821,300 )
Payments on note payable - insurance (645,300 )
Payments on equipment loans (2,057,100 )
Payments on financing leases (74,800 )
Preferred dividends (634,700 )
Proceeds from common stock offering 602,600
Proceeds from pre-funded and common warrants offering 8,335,400
Intercompany transfers from non-debtor subsidiaries 7,669,800
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,580,100
NET DECREASE IN CASH AND RESTRICTED CASH (3,293,200 )
CASH AND RESTRICTED CASH AT BEGINNING OF YEAR 7,154,600
CASH AND RESTRICTED CASH AT END OF PERIOD $ 3,861,400
22. SUBSEQUENT EVENTS
The Company received a notice of default for Meadowscape construction loan from Buchanan Mortgage Holdings, LLC dated January 23, 2024. The default rate which shall be the lessor of (a) the maximum per annum rate of interest allowed by applicable legal requirements, and (b) six percent (6%) per annum in excess of the Interest Rate. The Company owes the principal amount of $34,048,901 as of February 2, 2024.
On February 2, 2024, the Company’s wholly owned subsidiary, Tanglewilde, LLC (included as a “Debtor”), also filed a Bankruptcy Petition for reorganization under Chapter 11 of the Bankruptcy Code. Tanglewilde, LLC was added into the Company’s pending Chapter 11 Case. The Chapter 11 Case is being jointly administered under the caption In re Harbor Custom Development, Inc., et al., Case No. 23-42180-MJH.
On March 5, 2024, the Board of Directors approved a joint plan of liquidation and/or reorganization to sell in an orderly manner all of the real estate assets of the Company and establish new equity interests of the Company, subject to Court approval (the “Proposed Plan”).

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
No events occurred requiring disclosure under Item 304 of Regulation S-K.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of our Interim Chief Executive Officer and Interim President (Principal Executive Officer) and Chief Accounting Officer (Principal Financial and Accounting Officer) performed an evaluation (the “Evaluation”) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report. Based on that Evaluation, our Principal Executive Officer and our Principal Financial and Accounting Officer have concluded that, because of the deficiencies in our internal control over financial reporting described below, our disclosure controls and procedures as defined in Rule 13a-15(e) were not effective in ensuring that information required to be included in our periodic filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported to management to allow timely decisions regarding required disclosures because of the significant deficiencies which, in the aggregate, constitute a material weakness, as described below.
Notwithstanding management’s assessment that our internal control over financial reporting as of December 31, 2023, was ineffective and the material weaknesses described below, we are not aware that such deficiencies have resulted in the issuance of any material errors or omissions in our consolidated financial statements contained in this Annual Report on Form 10-K for the year ended December 31, 2023 or related disclosures.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2023. Our internal control over financial reporting is a process under the supervision of our Interim Chief Executive Officer and President and Chief Accounting Officer (our principal executive and principal financial and accounting officers, respectively), and effected by our Board of Directors, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).
Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of the Company’s management and Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management, including our Interim Chief Executive Officer and President and Chief Accounting Officer, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework in Internal Control - Integrated Framework issued by the 2013 Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under such framework, management determined that our internal control over financial reporting was ineffective as of December 31, 2023. The ineffectiveness of our internal control over financial reporting was due to a lack of segregation of duties due to a decrease in personnel and resources, which we have identified as a material weakness. A material weakness is a deficiency or a combination of control deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Notwithstanding our identification of this omission as a material weakness, it had no impact on the consolidated financial statements contained in the Annual Report.
This Annual Report does not include an attestation report from our independent registered public accounting firm regarding internal control over financial reporting as this management’s report is not subject to attestation by our independent registered public accounting firm due to an exemption established by rules of the SEC for emerging growth companies as defined in the JOBS Act.
Changes in Internal Control over Financial Reporting
Due to the significant reduction in our employees, we no longer have effective internal control for the segregation of duties so that no one individual handles a transaction from inception to completion. We previously had a full staff of eight persons working on our financial reporting, which has now been reduced to two persons. As of the date of issuance, we had one employee in the accounting department. Currently, there are not enough resources and accounting personnel to permit an adequate segregation of duties in all respects and thus a material weakness in our internal control exists. The Company is developing more controls to mitigate segregation of duties issues.
Other than as described above, there has been no other change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
Our board of directors consists of four directors, all of whom are independent directors. Our directors will serve for one-year terms and until their successors are duly elected and qualified. There is no cumulative voting in the election of directors. Consequently, at each annual meeting, the successors to each of our seven directors will be elected by a plurality of the votes cast at that meeting.
Set forth below are the names, ages and positions of our current and former directors and executive officers for the year ended December 31, 2023.
Current Officers and Directors:
Name
Age
Position with the Company
Jeffrey B. Habersetzer
Interim Chief Execuitve Officer and Interim President, Chief Operating Officer, General Counsel (Principal Executive Officer)
Yoshi Niino
Chief Accounting Officer (Principal Financial and Accounting Officer)
Shelly Crocker
Chief Restructuring Officer
Dennis Wong
Independent Director
Karen Bryant
Lead Independent Director
Chris Corr
Independent Director
David Chandler
Independent Director
Former Officers and Directors:
Name
Age
Former position with the Company
Sterling Griffin
Former Chief Executive Officer, President, and Chairman of our Board of Directors
Lance Brown
Former Chief Financial Officer
Richard Schmidtke
Former Director
Larry Swets
Former Director
Wally Walker
Former Director
Biographical Information
The following is a summary of certain biographical information concerning our former and current directors and executive officers.
Jeffrey B. Habersetzer. Jeffrey B. Habersetzer serves as our Interim Chief Executive Officer, Interim President, Chief Operating Officer and General Counsel. Mr. Habersetzer has ten years of experience in real estate, contracts, and corporate governance. Prior to joining Harbor, Mr. Habersetzer owned a legal practice specializing in real estate, corporate law, multi-family leasing and acquisitions. Mr. Habersetzer holds a Bachelor’s degree from the University of Washington, and a law degree and a Master’s in Business Administration from Seattle University, graduating Cum Laude in both programs simultaneously. Mr. Habersetzer has been a licensed attorney in the state of Washington since 2017.
Yoshi Niino. Mr. Niino joined our company in February 2022 as our Director of Accounting, and currently serves as our Chief Accounting Officer and is the Principal Financial and Accounting Officer. Previously to joining Harbor, Mr. Niino served as Senior Internal Audit Manager for Weyerhaeuser (NYSE: WY). Mr. Niino was also previously an Audit Manager at Deloitte. Mr. Niino is a Certified Public Accountant and graduated from the University of Washington with a B.A. in Economics and Business Administration, Accounting.
Shelly Crocker. Ms. Crocker was appointed as our Chief Restructuring Officer on November 14, 2023. For the past ten years, Ms. Crocker operated Shelly Crocker LLC as a Seattle business consultant for both profit and nonprofit businesses. She regularly conducts strategic planning processes and provides interim leadership to organizations in transition or seeking strategic direction. She frequently serves as a restructuring professional, helping manage at-risk companies and building on her prior career as a restructuring attorney. She holds a Bachelor of Arts in Philosophy and History and a Master of Arts in Philosophy from the University of Washington and a Juris Doctorate from the University of Minnesota. Ms. Crocker is licensed to practice law in the state of Washington.
Dennis A. Wong. Dennis Wong has been an Independent Director on our board of directors and Chair of our Audit Committee since October 2020. Since 2005, Mr. Wong is the owner of and a consultant with Insurance Resolution Group, a consulting firm focused on providing strategic advisory services to the insurance and financial services sector. From 1997 to 2005, Mr. Wong worked in a variety of corporate roles with Kemper Insurance Companies, a leading national insurance provider, including as Chief Financial Officer of its international operations. From 1991 to 1997, Mr. Wong worked as a public accountant with KPMG LLP, where he specialized in accounting and operational advisory services for the insurance industry. From 2015 through 2021, he served as an independent member of the Board of Directors for FG Financial Group, Inc. (Nasdaq: FGF) (formerly 1347 Property Insurance Holdings, Inc.). Mr. Wong obtained a Bachelor of Arts degree in Economics with an Accountancy Cognate from the University of Illinois. Mr. Wong is a Certified Public Accountant.
Karen Bryant. Ms. Bryant has been an Independent Director on our board of directors since June 2021. In December 2022, Ms. Bryant was appointed Lead Independent Director for Harbor. For 25 years, Karen Bryant has run high-profile organizations, navigating complex internal and external dynamics while driving business growth and operational excellence. Ms. Bryant has been at the helm of women’s professional basketball for over 18 years. In January 2023, Ms. Bryant was appointed to the role of Chief Administrative Officer and General Manager of the Los Angeles Sparks. Previously, she served as General Manager of the Seattle Reign and then, ultimately, as President and CEO of the Seattle Storm from 2008 through 2014. Under her leadership, the Seattle Storm won two WNBA Championships, set multiple attendance and revenue records, and established itself as one of the WNBA’s premier franchises. In 2014, Ms. Bryant started and led a management consulting firm until one of her clients, Atavus Sports, appointed her CEO in 2016. With Atavus, Ms. Bryant led a three-year process of market research, competitive analysis, customer discovery, product development, and sales. In Fall 2019, Atavus was acquired by a private equity firm in a successful exit. After a successful 13-year run as CEO for two organizations, Ms. Bryant returned to her management consulting firm in March 2020. Ms. Bryant also serves as an Executive Coach to business leaders and entrepreneurs and is well-recognized for leading high-performing teams. Ms. Bryant’s recognition includes Seattle Sports Commission Executive of the Year, Sports Business Journal Gamechanger, Puget Sound Business Journal Woman of Influence, Greater Seattle Business Association Businessperson of the Year Finalist, and Girl Scouts of Western Washington Woman of Distinction. Ms. Bryant was a scholarship athlete at Seattle University and the University of Washington, where she graduated in 1991 with a Bachelor of Arts degree in Communication.
Chris Corr. Mr. Corr has been an Independent Director on our board of directors since September 2021. Mr. Corr is a shareholder and Executive Vice President of Kidder Mathews, the largest independent commercial real estate firm on the West Coast. Mr. Corr specializes in selling and leasing office and industrial properties in South King County, Washington. Since joining Kidder Mathews in 1986, Mr. Corr has managed over two million square feet of real estate as a property manager, assisted in the development and leasing of real estate throughout the region, and, over the past 30+ years, completed over several thousand commercial sale and lease transactions. In 2001, Mr. Corr won the Washington Chapter Society of Industrial and Office Realtors (SIOR) Broker of the Year award. He is frequently quoted in and writes for both the Puget Sound Business Journal and Daily Journal of Commerce. Mr. Corr has also spoken on real estate trends at the NAIOP Commercial Real Estate Development Association Forecast Breakfast. Mr. Corr graduated with honors from the University of Washington, earning his Bachelor of Science in building construction and Bachelor of Arts in business administration. He is a former member of the Seattle University Board of Regents and Kidder Mathews Board of Directors. In his spare time, Mr. Corr is a member of and served as membership chair for both the Seattle Tennis Club and Broadmoor Golf Club.
David Chandler. Mr. Chandler was elected as an Independent Director on our Board of Directors in July 2023. Mr. Chandler is a senior financial executive with over 35 years in finance, strategic planning and business management, merger & acquisitions, investor relations and accounting. From December 2016 through March 2018, he was Chief Financial Officer of Atavus, an early-stage sports analytics company where he was responsible for investor and board relations, fund-raising, strategic planning and budgeting, accounting, and human resources. Mr. Chandler earned a B.A. in Business Administration and a B.A. in German Language and Literature from the University of Washington where he graduated Cum Laude in December 1981.
Sterling Griffin. Sterling Griffin previously served as our Chief Executive Officer, President, and Chairperson of the Board of Directors. He resigned from all positions on July 12, 2023. Mr. Griffin began his career at James S. Griffin Co. in January 1985 as a principal and Vice President of Marketing. Beginning in June 1989, Mr. Griffin co-founded several businesses over a 12-year period, while actively self-employed as a real estate broker, investor, and developer. In January 2012, he became the Chief Operating Officer for Hudson Homes LLC. In 2014, Mr. Griffin founded Harbor Custom Development, Inc. Mr. Griffin is a lifelong Washington resident who graduated from Colorado College with a B.A. in History in 1984.
Lance Brown. Mr. Brown previously served as our Chief Financial Officer. He resigned on July 21, 2023. Prior to joining Harbor, Mr. Brown was Vice President and Chief Accounting Officer at Select Interior Concepts (NASDAQ: SIC), where he was responsible for Finance, Accounting, SEC Reporting, and Tax. Mr. Brown started his career in public accounting at PricewaterhouseCoopers. He holds a Bachelor of Business Administration degree from the University of Georgia and a Master of Accountancy from Auburn University. Mr. Brown is a Certified Public Accountant.
Richard Schmidtke. Richard Schmidtke was Director on our board of directors from October 2018 through July 2023. Mr. Schmidtke is the founder of Schmidtke & Associates, PLLC, a full-service accounting company he founded in August 2008. Mr. Schmidtke has 30 years of public accounting experience. He was a Trustee and Board Member of Tacoma Goodwill Foundation, past president of the Tacoma Goodwill, Trustee of the Tacoma Art Museum, board member of the Tacoma Community Redevelopment Authority Board, and Tacoma Lawn and Tennis Club. Mr. Schmidtke graduated from the University of Washington with a BA in Economics.
Larry Swets. Larry Swets was an Independent Director on our board of directors from February 2020 through November 1, 2023. Mr. Swets founded Itasca Financial LLC in 2005 and has served as its managing member since inception. In August 2018, Mr. Swets also founded and is the President of Itasca Golf Managers, Inc.. Mr. Swets has served as the Chief Executive Officer of FG Financial Group, Inc. (Nasdaq: FGF) (formerly 1347 Property Insurance Holdings, Inc.) since November 2020, after having served as Interim CEO from June 2020 to November 2020. Mr. Swets has also served as Senior Advisor to Aldel Financial Inc. (NYSE: ADF) since March 2021, and as Chief Executive Officer of FG New America Acquisition II Corp. since February 2021. Mr. Swets is a member of the board of directors of FG Financial Group, Inc. (Nasdaq: FGF) since November 2013; GreenFirst Forest Products Inc. (TSXV: GFP) since June 2016; Ballantyne Strong, Inc. (NYSE American: BTN) since October 2021; Insurance Income Strategies Ltd. since October 2017; Alexian Brothers Foundation since March 2018; and Unbounded Media Corporation since June 2019. Mr. Swets earned a Master’s Degree in Finance from DePaul University in 1999 and a Bachelor’s Degree from Valparaiso University in 1997. He is a member of the Young Presidents’ Organization and holds the Chartered Financial Analyst (CFA) designation.
Walter (“Wally”) Walker. Wally Walker was an Independent Director on our board of directors from October 2020 through September 18, 2023. Mr. Walker served as a Vice President in Goldman, Sachs & Co.’s Private Client Services group from 1987 through 1994. In April 1994, Mr. Walker formed Walker Capital, Inc.. In September 1994, Mr. Walker became President and General Manager of the Seattle SuperSonics and the Seattle Storm, and in addition to being an owner, served as Chief Executive Officer and President of the teams until their sale in 2006. In late 2007, he formed Hana Road Capital LLC, where he remains as its owner and Chief Investment Officer. Mr. Walker graduated from the University of Virginia in 1976 as an Academic All-American with a BA in psychology. He received his Masters of Business Administration from Stanford University Graduate School of Business in 1987. He was conferred as a Chartered Financial Analyst in 1992. He served on the Board of Visitors, at the University of Virginia from 1997 through 2001. Since 2005, Mr. Walker has been a member of the Advisory Council of Stone Arch Capital, a Minneapolis based private equity firm. Mr. Walker also serves as an independent trustee at Smead Capital Management, a Seattle based mutual fund. In 2018, he joined the Governing Council of the Miller Center of Public Affairs, at The University of Virginia.
Family Relationships
There are no family relationships between any of our directors or executive officers.
Involvement in Certain Legal Proceedings
During the past five years, none of our officers, directors, promoters, or control persons has been a party to or executive officer of an entity that has filed any bankruptcy petitions. During the past five years, none of our officers, directors, promoters, or control persons have been convicted or been a named subject of any pending criminal proceedings. During the past five years, none of our officers, directors, promoters, or control persons has been held to have violated any state or Federal Securities laws or any Federal commodities law or otherwise have been subject to any order, judgment, or decree not subsequently reversed, suspended, or vacated permanently enjoining such officer, director promoters, or control persons from the activities enumerated in Regulation S-K Item 4.01(f)(3).
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires that our officers, directors, and persons who own more than 10% of our common stock file reports of ownership and changes in ownership with the SEC. Based solely on our review of the SEC’s EDGAR database, copies of such forms received by us, or written representations from certain reporting persons, we believe that during the fiscal year ended December 31, 2023, the following delinquencies have occurred:
None.
Code of Business Conduct and Ethics
We adopted a written code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal financial and accounting officer, controller, or persons performing similar functions and agents and representatives, including consultants. A copy of the code of business conduct and ethics is available on our website at www.harborcustomdev.com. We intend to disclose future amendments to such code, or any waivers of its requirements, applicable to any principal executive officer, principal financial and accounting officer, controller, or persons performing similar functions or our directors on our website identified above. The inclusion of our website address in this Annual Report does not include or incorporate by reference the information on our website into this Annual Report.
Board Diversity
The following is our Board Diversity Matrix as of March 28, 2024:
Board Diversity Matrix
Total Number of Directors
Part I: Gender Identity Female Male
Directors
Number of Directors who Identify in Any of the Categories Below:
Asian (other than South Asian)
White
LGBTQ+
Audit Committee and Audit Committee Financial Expert
We have a separately designated Audit Committee consisting of Dennis Wong and David Chandler, both of whom are independent directors and qualify as financial experts.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
On March 6, 2023, we effected a 1-for-20 reverse stock split of our issued and outstanding shares of common stock (the “Reverse Stock Split”). All share and per share data included below have been adjusted retroactively to reflect the impact of the Reverse Stock Split.
Summary Compensation Table
The following is a summary of the elements of our compensation arrangements paid to our executive officers for fiscal years 2023 and 2022.
Name and Principal Position Year Salary
($)
Stock
Awards
($)
Option
Awards
($)
All Other
Compensation
($)
Total
($)
Jeffrey Habersetzer 290,874 - 140,330 (2) 29,745 (3) 460,949
Interim Chief Executive Officer and President(1) 379,639 130,184 (4) - 33,640 (3) 543,463
Yoshi Niino, 187,617 (5) - - 7,022 (3) 194,639
Chief Accounting Officer 157,619 (5) - 13,409 (6) 3,779 (3) 174,807
Shelly Crocker, 80,833 (7) - - 679 (3) 81,512
Chief Restructuring Officer - - - - -
Sterling Griffin 290,874 (8) - - 149,345 (13) 440,219
Former Chief Executive Officer and President 707,140 247,834 (9) - 127,770 (14) 1,082,744
Lance Brown 177,350 (10) - 121,619 (11) 21,027 (3) 319,996
Former Chief Financial Officer 376,633 74,489 (12) - 80,808 (3) 531,930
(1) Mr. Habersetzer was appointed as Interim Chief Executive Officer and Interim President on July 12, 2023.
(2) On June 13, 2023, Mr. Habersetzer was granted an option to purchase 75,000 shares of common stock pursuant to our 2018 Equity Incentive Plan with an exercise price of $3.73. One half of these options will vest upon the filing of this Annual Report, with the remainder to vest in equal proportions upon the first and second anniversary of said filing.
(3) Includes cell phone allowance, 401K matching, health insurance payments, and/or commuting expenses.
(4) On January 10, 2022 Mr. Habersetzer was granted 1,410 RSUs pursuant to our 2020 Restricted Stock Plan, whereby all RSUs vested immediately on January 10, 2022. The grant date fair value of the RSU Award was $47.40. On May 26, 2022, Mr. Habersetzer was granted 1,750 RSUs pursuant to our 2020 Restricted Stock Plan, whereby 1/3 of the RSUs vest on the anniversary date each year, beginning on May 26, 2023. The grant date fair value of the RSU Award was $36.20.
(5) Mr. Niino was promoted to Chief Accounting Officer on July 12, 2023. In 2022 and prior to his appointment as Chief Accounting Officer in 2023, Mr. Niino’s role was Director of Accounting.
(6) On September 1, 2022, Mr. Niino was granted options to purchase 1,250 shares of common stock pursuant to our 2018 Equity Incentive Plan, that vest in monthly equal installments over three years with an exercise price of $22.40.
(7) Ms. Crocker was appointed as Chief Restructuring Officer on November 14, 2023.
(8) Mr. Griffin resigned from all positions on July 12, 2023.
(9) On January 10, 2022, Mr. Griffin was granted 1,410 RSUs pursuant to our 2020 Restricted Stock Plan, whereby all RSUs vested immediately on January 10, 2022. The grant date fair value of the RSU Award was $47.40. On May 26, 2022, Mr. Griffin was granted 5,000 RSUs pursuant to our 2020 Restricted Stock Plan, whereby 1/3 of the RSUs vest on the anniversary date each year, beginning on May 26, 2023. The grant date fair value of the RSU Award was $36.20.
(10) Mr. Brown resigned as Chief Financial Officer on July 21, 2023.
(11) On June 13, 2023, Mr. Brown was granted an option to purchase 65,000 shares of common stock pursuant to our 2018 Equity Incentive Plan with an exercise price of $3.73. One half of these options will vest upon the filing of this Annual Report, with the remainder to vest in equal proportions upon the first and second anniversary of said filing.
(12) On January 10, 2022, Mr. Brown was granted 235 RSUs pursuant to our 2020 Restricted Stock Plan, whereby all RSUs vested immediately on January 10, 2022. The grant date fair value of the RSU Award was $47.40. On May 26, 2022, Mr. Brown was granted 1,750 RSUs pursuant to our 2020 Restricted Stock Plan, whereby 1/3 of the RSUs vest on the anniversary date each year, beginning on May 26, 2023. The grant date fair value of the RSU Award was $36.20.
(13) Includes cell phone allowance, 401K matching, health insurance payments and strategic advisor fees.
(14) Includes commuting expenses, 401K matching, health insurance payments, director compensation, and commissions earned by SGRE, LLC.
We believe that the primary goal of executive compensation is to align the interests of our executive officers with those of our shareholders in a way that allows us to attract and retain the best executive talent. Additionally, in order to ensure our executive officers are compensated within the current industry ranges for their respective duties we engaged a national, independent, professional employee consulting firm to evaluate and provide an assessment and recommendations for executive compensation in 2022.
The compensation incentives designed to further these goals take the form of annual cash compensation and equity awards, as well as long-term cash and/or equity incentives measured by Company and/or individual performance targets to be established by our Compensation Committee. In addition, our Compensation Committee may determine to make equity-based awards to new executive officers in order to attract talented professionals to serve us.
Annual Base Salary. Base salary is designed to compensate our named executive officers at a fixed level of compensation that serves as a retention tool throughout the executive’s career. In determining base salaries, our Compensation Committee considers each executive’s role and responsibility, unique skills, future potential with us, salary levels for similar positions in our market, and internal pay equity.
Option Plan. Certain executives were issued options pursuant to our 2018 Equity Incentive Plan. We plan to continue to offer option awards to executives, in the discretion of the board of directors, considering the executive’s role and other compensation.
Stock Award plan. Certain executives were issued restricted stock units (“RSUs”) pursuant to our 2020 Restricted Stock Plan.
Outstanding Equity Awards at Year End
The following table sets forth information regarding outstanding stock options held by our executive officers as of December 31, 2023:
Name and Principal Position Grant Date Number of
Securities
Underlying
Options
Vesting
Commencement
Date
Exercise
Price per
share
Expiration
Date
Jeffrey Habersetzer, 12/19/2019 12/19/2019 (1)
$ 7.99 12/19/2029
Chief Operating Officer 9/1/2020 1,000 9/1/2020 (2)
$ 130.00 9/1/2030
6/28/2021 5,000 6/28/2021 (3)
$ 65.00 6/28/2031
6/13/2023 75,000 6/13/2023 (4)
$ 3.73 6/13/2033
Yoshi Niino,
Chief Accounting Officer 9/1/2022 1,250 9/1/2022 (5)
$ 22.40 9/1/2032
(1) One thirty-sixth of the shares subject to this option vest each month beginning on December 19, 2010.
(2) Equal installments of 83 stock options vest on the last day of each calendar month, beginning on September 30, 2020.
(3) Equal installments of 208 stock options vest on the last day of each calendar month, beginning on June 28, 2021.
(4) One half of these options will vest upon the filing of this Annual Report, with the remainder to vest in equal proportions upon the first and second anniversary of said filing.
(5) One third of the shares subject to this option vest each year beginning September 1, 2023.
The following table sets forth information regarding RSUs held by our executive officers as of December 31, 2023:
Name and Principal Position Grant Date
Number of
RSUs
Granted
Fair
Value of
Stock
Award
Vesting
Commencement
Date
Number of
Unvested
RSUs
Fair
Value of
Unvested
RSUs
Jeffrey Habersetzer 1/10/2022 1,410 $ 66,834 1/10/2022 (1)
- $ -
Interim Chief Executive Officer and President 5/26/2022 1,750 $ 63,350 5/26/2023 (2)
1,167 $ 42,333
(1) All RSUs vested immediately on January 10, 2022. The grant date fair value of the RSU Award was $47.40.
(2) One third of the RSUs vest on the anniversary date each year, beginning on May 26, 2023. The grant date fair value of the RSU Award was $36.20.
Other Elements of Compensation
401(k) Plan. We offer all of our non-union employees, including executives, a 401k safe harbor nonelective contribution, where employer contributions equal to 3% of employee compensation are contributed.
Health/Welfare Plans. We have a health care, dental, and vision plan available to all employees, including our executives, who become eligible on the first day of the month following the commencement of their employment.
PTO Plan. Executives may take PTO at any time, at their own reasonable discretion.
Other Benefits. Executives are provided with car allowance or reimbursement of commuting and cell phone expenses.
Employment Agreements with our Former and Current Named Executive Officers
Employment Agreement with Jeff Habersetzer
We entered into an employment agreement with Mr. Habersetzer on May 26, 2022 for his role as our Chief Operating Officer. This employment agreement is for a term of three years with automatic one-year renewals unless either party gives notice of termination at least 90 days prior to the expiration of its initial term or any renewal term. Mr. Habersetzer is entitled to an annual salary of $280,000, discretionary bonuses in the discretion of the Compensation Committee, participation in all benefit plans, and reimbursement of business expenses including related travel expenses. In the event of our termination of Mr. Habersetzer without cause, Mr. Habersetzer is entitled to his unreimbursed business expenses, 100% of his annual base salary plus 50% of his target annual bonus as severance. Additionally, all outstanding restricted stock units and other previously granted awards that would have vested within 12 months of the date of termination shall become fully vested. Mr. Habersetzer’s compensation arrangements did not change when he assumed the role of Interim Chief Executive Officer and Interim President.
Employment Agreement with Shelly Crocker
We entered into an employment agreement with Ms. Crocker in November 2023 for her role as Chief Restructuring Officer. Her employment is at will. Ms. Crocker is entitled to compensation of $50,000 per month, until such time as the Company determines that Ms. Crocker is only needed on a part time basis, and at such time, her compensation shall be $500 per hour. Ms. Crocker is entitled to all benefits and programs that are generally available to senior executives of the Company. We have agreed to maintain a D&O policy and an employment practices liability insurance policy.
Employment Agreement with Sterling Griffin
We entered into an employment agreement with Mr. Griffin on May 26, 2022 for his role as our Chief Executive Officer. The employment agreement was for a term of three years with automatic one-year renewals unless either party gives notice of termination at least 90 days prior to the expiration of its initial term or any renewal term. Mr. Griffin was entitled to an annual salary of $510,000, discretionary bonuses in the discretion of the Compensation Committee, participation in all benefit plans, and reimbursement of business expenses including related travel expenses. Mr. Griffin resigned from all positions on July 12, 2023.
Following his resignation, we entered into a Strategic Advisor Agreement with Mr. Griffin effective as of July 12, 2023 where he was entitled to monthly compensation of $27,777. He was also eligible to receive certain performance based fees contingent on certain projects closing on or before December 31, 2023.
Employment Agreement with Lance Brown
On November 1, 2021, we entered into an employment agreement with Lance Brown to serve as our Chief Financial Officer, reporting to our Chief Executive Officer. The employment agreement was for a term of three years. Mr. Brown was entitled to an annual salary of $280,000. In addition, Mr. Brown received a one-time sign on bonus of $75,000, which was paid on January 14, 2022 and was granted 5,000 shares of common stock pursuant to our 2020 Restricted Stock Plan. Mr. Brown resigned from all positions on July 21, 2023.
Director Compensation
The following table sets forth information regarding the compensation earned for service on our board of directors in 2023. We reimburse all directors for their reasonable out of pocket expenses incurred in connection with the performance of their duties as directors, including without limitation, travel expenses in connection with their attendance in-person at board and committee meetings. There were no RSUs or stock options granted to our directors in 2023.
Director Name Cash
Sterling Griffin (1) $ -
Richard Schmidtke (2) $ 15,000
Larry Swets (3) $ 25,000
Dennis Wong $ 56,086
Wally Walker (4) $ 20,000
Karen Bryant $ 50,000
Chris Corr $ 35,000
David Chandler (5) $ 19,113
(1) Mr. Griffin resigned as a Director in July 2023.
(2) Mr. Schmidtke did not stand for re-election during our annual shareholders meeting in July 2023.
(3) Mr. Mr. Swets resigned as a Director in September 2023.
(4) Mr. Walker resigned as a Director in July 2023.
(5) Mr. Chandler joined the Board of Directors in July 2023.
Equity Incentive Plan
On November 12, 2018, we adopted the 2018 Equity Incentive Plan which provides for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), to our employees and the employees of any subsidiary corporation, and for the grant of non-statutory stock options to non-employees, including directors and other service providers.
Authorized shares. A total of 133,784 shares of our common stock has been reserved for issuance pursuant to the exercise of options issued from the 2018 Equity Incentive Plan.
Plan administration. Our board of directors administers our 2018 Equity Incentive Plan.
Stock options. Stock options may be granted under our 2018 Equity Incentive Plan. The exercise price of options granted under our 2018 Equity Incentive Plan must at least be equal to the fair market value of our common stock on the date of grant. The term of an incentive stock option may not exceed ten years, except that with respect to any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed five years and the exercise price must equal at least 110% of the fair market value on the grant date. The administrator will determine the methods of payment of the exercise price of an option, which may include cash, shares, or other property acceptable to the administrator, as well as other types of consideration permitted by applicable law. After the termination of service of an employee, director, or consultant, he or she may exercise his or her option for the period of time stated in his or her option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for 12 months. In all other cases, the option will generally remain exercisable for three months following the termination of service. However, in no event may an option be exercised later than the expiration of its term. Subject to the provisions of our 2018 Equity Incentive Plan, the administrator determines the other terms of options.
Options granted. As of December 31, 2023 pursuant to our 2018 Equity Incentive Plan, we have issued 101,793 options to purchase shares of our common stock to our employees, officers, and directors.
Non-transferability of awards. Unless the administrator provides otherwise, our 2018 Equity Incentive Plan generally does not allow for the transfer of awards and only the recipient of an award may exercise an award during his or her lifetime.
Certain adjustments. In the event of certain changes in our capitalization, to prevent diminution or enlargement of the benefits or potential benefits available under our 2018 Equity Incentive Plan, the administrator will adjust the number and class of shares that may be delivered under our 2018 Equity Incentive Plan and/or the number, class and price of shares covered by each outstanding award and the numerical share limits set forth in our 2018 Equity Incentive Plan. In the event of our proposed liquidation or dissolution, the administrator will notify participants as soon as practicable and all awards will terminate immediately prior to the consummation of such proposed transaction.
Merger or change in control
Our 2018 Equity Incentive Plan provides that in the event of a merger or change in control, as defined under the 2018 Equity Incentive Plan, each outstanding award will be treated as the administrator determines, except that if a successor corporation or its parent or subsidiary does not assume or substitute an equivalent award for any outstanding award, then such award will fully vest, all restrictions on the shares subject to such award will lapse, all performance goals or other vesting criteria applicable to the shares subject to such award will be deemed achieved at 100% of target levels, and all of the shares subject to such award will become fully exercisable, if applicable, for a specified period prior to the transaction. The award will then terminate upon the expiration of the specified period of time.
Amendment, termination. The administrator has the authority to amend, suspend, or terminate the 2018 Equity Incentive Plan provided such action will not impair the existing rights of any participant. Our 2018 Equity Incentive Plan will automatically terminate in 2028, unless we terminate it sooner.
Restricted Stock Plan
Purpose of the 2020 Restricted Stock Plan. The 2020 Restricted Stock Plan is intended to provide incentives which will attract, retain, motivate, and reward officers, directors, and key employees of us or any of our Affiliates (“Participants”), by providing them opportunities to acquire shares of our common stock (“Awards”).
Stock Subject to the Plan. The aggregate number of shares of common stock that may be subject to Awards granted under the 2020 Restricted Stock Plan is 135,000 shares of common stock. If any shares of common stock are forfeited, retained by us as payment of tax withholding obligations with respect to an Award, or surrendered to us to satisfy tax withholding obligations, such shares will be added back to the shares available for Awards. The 2020 Restricted Stock Plan contains certain adjustment provisions relating to stock dividends, stock splits, and the like.
Administration of the 2020 Restricted Stock Plan. The 2020 Restricted Stock Plan is administered by the Compensation Committee of the board of directors. The Compensation Committee has the full power and authority to grant Awards to the persons eligible to receive such Awards and to determine the amount, type, terms, and conditions of each such Award.
Eligibility. Participants consist of such officers, directors, and key employees of us or any of our Affiliates as the Compensation Committee, in its sole discretion, determines to be significantly responsible for our success and future growth and profitability and whom the Compensation Committee may designate from time to time to receive Awards under the 2020 Restricted Stock Plan.
Types of Awards. Stock Awards and Performance Awards may, as determined by the Compensation Committee, in its discretion, constitute Performance-Based Awards.
Stock Awards
The Compensation Committee is authorized to grant Stock Awards and will, in its sole discretion, determine the recipients and the number of shares of common stock underlying each Stock Award. Each Stock Award will be subject to such terms and conditions consistent with the 2020 Restricted Stock Plan as determined by the Compensation Committee and as set forth in an Award agreement, including, without limitation, restrictions on the sale or other disposition of such shares and our right to reacquire such shares for no consideration upon termination of the Participant’s employment or membership on the board, as applicable, within specified periods.
Performance Awards
The Compensation Committee is authorized to grant Performance Awards and will, in its sole discretion, determine the recipients and the number of shares of common stock that may be subject to each Performance Award. Each Performance Award will be subject to such terms and conditions consistent with the 2020 Restricted Stock Plan as determined by the Compensation Committee and as set forth in an Award agreement. The Compensation Committee will set performance targets at its discretion which, depending on the extent to which they are met, will determine the number of Performance Awards that will be paid out to the Participants and may attach to such Performance Awards one or more restrictions. Performance targets may be based upon, without limitation, Company-wide, divisional, and/or individual performance.
The Compensation Committee has the authority to adjust performance targets. The Compensation Committee also has the authority to permit a Participant to elect to defer the receipt of any Performance Award, subject to the 2020 Restricted Stock Plan.
Performance-Based Awards
Certain Stock Awards and Performance Awards granted under the 2020 Restricted Stock Plan and the compensation attributable to such Awards are intended to (i) qualify as Performance-Based Awards or (ii) be otherwise exempt from the deduction limitation imposed by Section 162(m) of the Code. The Compensation Committee determines whether Stock Awards and Performance Awards granted under the 2020 Restricted Stock Plan qualify as Performance-Based Awards. The Compensation Committee will establish in writing the performance goals, the vesting period, the performance targets, and any other terms and conditions of the Award in its sole discretion.
Vesting. Awards granted to Participants under the 2020 Restricted Stock Plan may be subject to a vesting period, unless otherwise determined by the Compensation Committee.
If we have a Change in Control, all unvested Awards granted under the 2020 Restricted Stock Plan will become fully vested immediately upon the occurrence of the Change in Control and such vested Awards will be paid out or settled, as applicable, within 60 days upon the occurrence of the Change in Control, subject to requirements of applicable laws and regulations.
Subject to the discretion of the Compensation Committee, if a Participant’s employment or membership on the board is terminated due to death or Disability, then all unvested and/or unearned Awards will be forfeited as of such date.
Section 409A of the Code
Awards under the 2020 Restricted Stock Plan are intended either to be exempt from the rules of Section 409A of the Code or to satisfy those rules and shall be construed accordingly. However, we will not be liable to any Participant or other holder of an Award with respect to any Award-related adverse tax consequences arising under Section 409A or other provision of the Code.
Transferability. Each Award granted under the 2020 Restricted Stock Plan will not be transferable other than by a will or the laws of decent and distribution or as otherwise decided by the Compensation Committee.
Fair Market Value. For purposes of the 2020 Restricted Stock Plan, “Fair Market Value” means, as of any given date, the closing price of a share of common stock on Nasdaq or such other public trading market on which shares of common stock are listed or quoted on that date.
Withholding. All payments or distributions of Awards made pursuant to the 2020 Restricted Stock Plan will be net of any amounts required to be withheld pursuant to applicable federal, state, and local tax withholding requirements.
Amendments. Our board or the Compensation Committee may amend the 2020 Restricted Stock Plan from time to time or suspend or terminate it at any time. However, no amendment will be made, without approval of our shareholders to (i) increase the total number of shares which may be issued under the 2020 Restricted Stock Plan; (ii) modify the requirements as to eligibility for Awards under the 2020 Restricted Stock Plan; or (iii) otherwise materially amend the 2020 Restricted Stock Plan.
Term of the 2020 Restricted Stock Plan. The 2020 Restricted Stock Plan will terminate on the seventh anniversary of its Effective Date.
Outstanding Awards. As of December 31, 2023, there were 15,255 Awards issued under the 2020 Restricted Stock Plan.
Rule 10b5-1 Sales Plan
Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they would contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or executive officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers also may buy or sell additional shares outside a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to compliance with the terms of our policy on insider trading and communications with the public. Our directors and executive officers may not establish any such plan prior to the expiration of certain lock-up agreements.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
We filed Articles of Amendment to our Articles of Incorporation for a 1-for-20 Reverse Stock Split with the Washington Secretary of State on March 1, 2023 and the Reverse Stock Split was effected on the Nasdaq Capital Market on March 6, 2023. All share and per share data included below have been adjusted retroactively to reflect the impact of the Reverse Stock Split.
The following table sets forth information as of December 31, 2023 regarding shares of common stock that may be issued under our equity compensation plans, consisting of our 2018 Equity Incentive Plan and our 2020 Restricted Stock Plan. We do not have any non-stockholder approved equity compensation plans.
Plan Category Number of securities to be issued upon exercise of outstanding options, warrants, and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(a) (b) (c)
Equity compensation plans approved by security holders 99,626 (1) $ 13.93 151,736 (2)
Equity compensation plans not approved by security holders -
-
Total 99,626
151,736
(1) Includes 98,459 outstanding options under the 2018 Equity Incentive Plan and 1,167 unvested RSUs under the 2020 Restricted Stock Plan.
(2) Includes 31,991 options remaining under the 2018 Equity Incentive Plan and 119,745 RSUs remaining under the 2020 Restricted Stock Plan.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of our common stock as of March 28, 2024 by:
● each director;
● each named executive officer;
● all of our directors and executive officers as a group; and
● each person known by us to be the beneficial owner of 5% or more of our outstanding common stock.
The percentage ownership information is based on 2,686,431 shares of our common stock outstanding.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options and warrants that are either immediately exercisable or exercisable on or before the date which is 60 days after the date of this document. The rules also include restricted stock units that are vested over 60 days after the date of this document. These shares are deemed to be outstanding and beneficially owned by the person holding those options, warrants, or restrict stock units the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Amount and Nature of Beneficial Ownership
Name and Address of Beneficial Owner(8) Number of
Shares of
Common Stock
Percentage of
Class
Directors and Named Executive Officers:
Jeffrey Habersetzer, Interim Chief Executive Officer, Interim President, Chief Operating Officer 46,281 (1) 1.7 %
Yoshi Niino, Chief Accounting Officer 417 (2) *
Shelly Crocker, Chief Restructuring Officer - *
Dennis Wong, Director 2,842 (3) *
Karen Bryant, Director *
Chris Corr, Director *
David Chandler, Director - *
All directors and executive officers as a group (nine persons) 51,038 1.9 %
*Less than 1.0%
(1) Includes options to purchase 43,951 shares of common stock and 583 restricted stock units.
(2) Includes options to purchase 417 shares of common stock.
(3) Includes options to purchase 1,000 shares of common stock.
(8) Unless otherwise indicated, the address of each beneficial owner is 1201 Pacific Avenue, Suite 1200, Tacoma, Washington 98402.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Refer to Note 15. Related Party Transactions in the Notes to Consolidated Financial Statements (Part II, Item 8) for disclosure on related party transactions, which is incorporated by reference herein.
Policies and Procedures for Transactions with Related Persons
All related party transactions are voted upon and approved by the disinterested board of directors. The Audit Committee of the board of directors is responsible for evaluating each related party transaction and making a recommendation to the disinterested members of the board of directors as to whether the transaction at issue is fair, reasonable, and within our policy and whether it should be ratified and approved. The Audit Committee, in making its recommendation, will consider various factors, including the benefit of the transaction to us, the terms of the transaction and whether they are at arm’s-length and in the ordinary course of our business, the direct or indirect nature of the related person’s interest in the transaction, the size and expected term of the transaction, and other facts and circumstances that bear on the materiality of the related party transaction under applicable law and listing standards. The Audit Committee will review, at least annually, a summary of our transactions with our directors and officers and with firms that employ our directors, as well as any other related person transactions.
Director Independence
We currently have four members on our board of directors, all of whom are independent directors. We use Nasdaq’s definition of “independence” to make this determination. Nasdaq provides that an “independent director” is a person other than an executive officer or employee of the company or any other individual having a relationship with which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The rules provide that a director cannot be considered independent if:
● the director is, or at any time during the past three years was, one of our employees;
● the director who accepted or who has a Family Member who accepted any compensation from us in excess of $120,000 during any period of 12 consecutive months within the three years preceding the determination of independence (subject to certain exemptions, including, among other things, compensation for board or board committee service);
● the director who is a Family Member of an individual who is, or at any time during the past three years was, employed as one of our Executive Officers;
● the director who is, or has a Family Member who is, a partner in, or a controlling Shareholder or an Executive Officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more (subject to certain exemptions); or
● the director who is, or has a Family Member who is, employed as an Executive Officer of another entity where at any time during the past three years any of our Executive Officers served on the Compensation Committee of such other entity; or
● the director who is, or has a Family Member who is, a current partner of an outside auditor, or was a partner or employee of an outside auditor who worked on our audit at any time during any of the past three years.
Under such definitions, our board of directors has undertaken a review of the independence of each director and will review the independence of any new directors based on information provided by each director concerning his background, employment, and affiliations, in order to make a determination of independence. Our board of directors has determined that there are four independent directors on our board of directors.
Role of our Board of Directors in Risk Oversight
One of the key functions of our board of directors is informed oversight of our risk management process. We have formed supporting committees, including the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee, each of which supports the Board of Directors by addressing risks specific to its respective areas of oversight. In particular, our Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management takes to monitor and control these exposures, including guidelines and policies to govern the process by which risk assessment and management is undertaken. The Audit Committee also monitors compliance with legal and regulatory requirements, in addition to oversight of the performance of our internal audit function. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking. Our Nominating and Corporate Governance Committee provides oversight and monitors the effectiveness of our corporate governance. The full Board of Directors oversees risk management.
Lead Independent Director
Karen Bryant currently serves as our board’s lead independent director. The lead independent director has the following duties and powers:
● serving as the liaison between the independent members of the board and the chair;
● presiding at all board meetings at which the chair is not present, including executive sessions and meetings of non-management directors and/or independent directors;
● approving the agendas for board meetings and the meeting schedule to assure that there is sufficient time for discussion of all agenda items;
● reviewing information to be sent to the board;
● reviewing with the chair whether there are major risks which the board should focus upon at such meetings;
● facilitating communication among the independent directors and with the chair;
● directing the chief executive officer or corporate secretary to call a special meeting of the board or of the independent members of the board;
● consulting and communicating directly with major stockholders, when requested by management and when it is appropriate to do so; and
● performing such other duties as may from time to time be delegated to the lead independent director by the board.
Committees of our Board of Directors
We have an audit committee, compensation committee, and nominating and corporate governance committee. In addition to these required committees, we have utilized a Special Pricing Committee associated with our equity raises. We intend to comply with the requirements of Rule 10A-3 of the Exchange within the required timeframe.
All of the members of our audit committee are “independent directors” who are “financially literate” as defined under the Nasdaq listing standards. The Nasdaq listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement, and cash flow statement.
As of the fiscal year ended December 31, 2023, our Audit Committee is composed of Dennis Wong and David Chandler. Our board of directors has affirmatively determined that all of the members of the Audit Committee meet the definition of “independent director” for purposes of serving on an Audit Committee under Rule 10A-3.
We have established a written charter for our Audit Committee, in which we set forth the duties of the Audit Committee, which among other matters include:
● oversight of our financial reporting, auditing, and internal control activities, the integrity and audits of our financial statements, and our compliance with legal and regulatory requirements;
● oversight of the performance of our internal audit function and independent auditors;
● our overall risk exposure and management;
● the annual review and assessment of the adequacy of the Audit Committee charter and the performance of the Audit Committee;
● the evaluation of the qualifications, performance, and independence of our internal audit function and independent auditors;
● the appointment, retention, and termination of our independent auditors and determine the compensation of our independent auditors;
● the review with the independent auditors of the plans and results of the audit engagement;
● the sole authority to approve in advance all audit and non-audit services by our independent auditors, the scope and terms thereof, and the fees therefor; and
● meeting at least quarterly with our executive officers, internal audit staff, and our independent auditors in separate executive sessions.
A copy of the Audit Committee charter is available on our website at www.harborcustomdev.com.
The members of our Nominating and Corporate Governance Committee are Dennis Wong and Karen Bryant. The members of our Compensation Committee are Chris Corr and David Chandler. We have also established charters for each of our Nominating Committee and Compensation Committee.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Rosenberg Rich Baker Berman, P.A. (RRBB) an independent registered public accounting firm, audited the financial statements and performed quarterly reviews of the company for 2023 and has been selected to do so for 2024.
Audit Fees
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the annual audit of our financial statements and review of financial statements included in our quarterly reports and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
For the Fiscal Year Ended
Audit Fees $ 167,001 (1) $ 165,200 (1)
Audit Related Fees 14,960 (2) 4,450 (2)
Tax Fees - -
All Other Fees - -
Total $ 181,961 $ 169,650
(1) Audit fees for 2023 and 2022 include fees for professional services rendered by RRBB for the audit of our consolidated financial statements included in our Annual Report on Form 10-K, and review of our condensed consolidated financial statements included in our Quarterly Reports on Form 10-Q.
(2) Audit-related fees for 2023 include fees related to consents and comfort letters for our public offering documents and 2022 include fees related to consents.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
Our Audit Committee pre-approves all audit and permissible non-audit services. These services may include audit services, audit-related services, tax services, and other services. Our Audit Committee approves these services on a case-by-case basis.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS
Exhibit No.
Description
Form
Exhibit
Filing Date
Filed
Herewith
3.1
Certificate of Conversion and Articles of Incorporation of the Registrant dated October 1, 2018
S-1
3.1
03/31/2020
3.2
Articles of Amendment of Articles of Incorporation of the Registrant dated December 7, 2018
S-1
3.2
03/31/2020
3.3
Articles of Amendment of Articles of Incorporation of the Registrant dated August 1, 2019
S-1
3.3
03/31/2020
3.4
2nd Amended and Restated Bylaws of the Registrant, dated January 15, 2020
S-1
3.4
03/31/2020
3.5
Articles of Amendment of Articles of Incorporation of the Registrant, dated April 16, 2020
S-1
3.5
04/28/2020
3.6
Articles of Amendment of Articles of Incorporation of the Registrant, dated March 1, 2023
8-K
3.1
03/03/2023
4.1
2018 Incentive and Non-Statutory Stock Option Plan, dated November 19, 2018
S-1
4.1
03/31/2020
4.2
2020 Restricted Stock Plan, dated October 13, 2020
10-Q
10.1
11/16/2020
4.3
Certificate of Designation of 8.0% Series A Cumulative Convertible Preferred Stock, dated June 8, 2021
8-K
3.1
06/10/2021
4.4
Warrant Agency Agreement between the Registrant and Mountain Share Transfer, Inc., dated June 11, 2021
8-K
4.1
06/14/2021
4.5
Certificate of Amendment of Certificate of Designation of 8.0% Series A Cumulative Convertible Preferred Stock, dated August 13, 2021
S-1
3.7
09/10/2021
4.6
Warrant Agency Agreement between the Registrant and Mountain Share Transfer, Inc., dated October 7, 2021
8-K
4.1
10/08/2021
4.7
Description of Capital Stock
10-K
4.7
03/31/2023
10.1
Director Agreement between the Registrant and Richard Schmidtke, dated October 17, 2018
S-1
10.4
03/31/2020
10.2
Independent Director Agreement with Larry Swets, dated March 22, 2020
S-1
10.11
03/31/2020
10.3
SoundEquity, Inc. Loan Package, dated November 13, 2019
S-1
10.12
04/28/2020
10.4
Indemnification Agreement with Larry Swets, dated June 1, 2020
S-1
10.17
06/19/2020
10.5
Lease Agreement with Burnham Partners LLC, dated February 18, 2021
10-K
10.22
03/31/2021
10.6
SoundEquity, Inc. Loan Package, dated October 4-5, 2021
10-K
10.25
03/31/2021
10.7
Promissory Note with Sound Capital Loans, LLC, dated January 22, 2021
10-K
10.26
03/31/2021
10.8
Lease Agreement with University Street Properties I, LLC, dated July 27, 2021
10-K
10.13
03/24/2022
10.9
Offer of Employment to Lance Brown dated November 1, 2021.
10-K
10.14
03/24/2022
10.10
Loan Agreement with BankUnited, N.A., dated March 7, 2022
8-K
1.1
03/10/2022
10.11
Security Agreement with BankUnited, N.A., dated March 7, 2022
8-K
1.2
03/10/2022
10.12
Revolving Line of Credit Promissory Note with BankUnited, N.A, dated March 7, 2022
8-K
1.3
03/10/2022
10.15
Employment Agreement with Sterling Griffin, dated May 26, 2022
10-K
10.15
03/31/2023
10.16
Employment Agreement with Jeffrey Habersetzer, dated May 26, 2022
10-K
10.16
03/31/2023
10.17
Amended Loan Agreement with BankUnited N.A., dated February 22, 2023
10-K
10.17
03/31/2023
10.18
Form of Director Indemnification Agreement
10-Q
10.2
11/14/2023
10.19
Employment Agreement with Shelly Crocker
10-Q
10.1
11/14/2023
10.20
Letter Agreement, dated May 11, 2023, between Harbor Custom Development, Inc. and Sterling Griffin
8-K
10.1
05/11/2023
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.1
X
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
X
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.1
X
.INS
XBRL Instance Document
101. SCH
XBRL Taxonomy Extension Schema Document
101. CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF
XBRL Taxonomy Extension definition Linkbase Document
101. LAB
XBRL Taxonomy Extension Label Linkbase Document
101. PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)