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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-39266
HARBOR CUSTOM DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Washington | | 46-4827436 |
(State of organization) | | (I.R.S. Employer Identification No.) |
1201 Pacific Avenue, Suite 1200
Tacoma, Washington 98402
(Address of principal executive offices)
(253) 649-0636
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered. |
Common Stock | HCDI | The Nasdaq Stock Market LLC |
Series A Cumulative Convertible Preferred Stock | HCDIP | The Nasdaq Stock Market LLC |
Warrants | HCDIW | The Nasdaq Stock Market LLC |
Warrants | HCDIZ | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐ No
Indicate by check mark whether the registrant is a large-accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒ No
There are 14,376,372 shares of common stock outstanding as of November 9, 2022.
Table of Contents
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| Page |
| |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| |
| | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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| | |
PART I
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| (Unaudited) | | |
ASSETS | | | |
Cash | $ | 13,707,900 | | | $ | 25,629,200 | |
Restricted Cash | 597,600 | | | 597,600 | |
Accounts Receivable, net | 5,503,900 | | | 1,113,500 | |
Contract Assets, net | — | | | 2,167,200 | |
Notes Receivable, net | 9,754,200 | | | 2,000,000 | |
Prepaid Expense and Other Assets | 2,911,900 | | | 2,778,100 | |
Real Estate | 179,932,800 | | | 122,136,100 | |
Property, Plant and Equipment, net | 10,069,200 | | | 9,199,700 | |
Right of Use Assets | 2,323,400 | | | 3,429,700 | |
Deferred Tax Asset | 2,586,800 | | | 649,000 | |
TOTAL ASSETS | $ | 227,387,700 | | | $ | 169,700,100 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| | | |
LIABILITIES | | | |
Accounts Payable and Accrued Expenses | $ | 13,340,300 | | | $ | 10,662,800 | |
Dividends Payable | 634,700 | | | 670,900 | |
Contract Liabilities | 896,700 | | | — | |
Deferred Revenue | 63,900 | | | 44,800 | |
Note Payable - D&O Insurance | 537,500 | | | 903,800 | |
Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0.8 million and $0, respectively | 24,011,400 | | | — | |
Equipment Loans | 4,296,100 | | | 5,268,500 | |
Finance Leases | 188,000 | | | 543,400 | |
Construction Loans, net of Unamortized Debt Discount of $2.4 million and $4.4 million, respectively | 83,263,500 | | | 34,957,100 | |
Construction Loans - Related Party, net of Unamortized Debt Discount of $0.01 million and $1.1 million, respectively | 8,926,100 | | | 13,426,600 | |
Right of Use Liabilities | 3,168,000 | | | 3,484,400 | |
TOTAL LIABILITIES | 139,326,200 | | | 69,962,300 | |
| | | |
COMMITMENTS AND CONTINGENCIES - SEE NOTE 12 | | | |
| | | |
STOCKHOLDERS’ EQUITY | | | |
Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at September 30, 2022 and 4,016,955 issued and outstanding at December 31, 2021 | 62,912,100 | | | 66,507,500 | |
Common Stock, no par value per share, 50,000,000 shares authorized and 14,352,365 issued and outstanding at September 30, 2022 and 13,155,342 issued and outstanding at December 31, 2021 | 35,704,700 | | | 32,122,700 | |
Additional Paid In Capital | 1,224,600 | | | 752,700 | |
Retained Earnings (Accumulated Deficit) | (11,779,900) | | | 1,646,500 | |
Stockholders’ Equity | 88,061,500 | | | 101,029,400 | |
Non-Controlling Interest | — | | | (1,291,600) | |
TOTAL STOCKHOLDERS’ EQUITY | 88,061,500 | | | 99,737,800 | |
| | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 227,387,700 | | | $ | 169,700,100 | |
See accompanying notes to the condensed consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Sales | $ | 11,748,500 | | | $ | 18,010,600 | | | $ | 50,616,000 | | | $ | 46,017,200 | |
| | | | | | | |
Cost of Sales | 11,310,800 | | | 10,866,200 | | | 46,055,400 | | | 34,938,300 | |
| | | | | | | |
Gross Profit | 437,700 | | | 7,144,400 | | | 4,560,600 | | | 11,078,900 | |
| | | | | | | |
Operating Expenses | 4,523,800 | | | 3,322,100 | | | 12,017,200 | | | 7,639,700 | |
| | | | | | | |
Operating Income (Loss) | (4,086,100) | | | 3,822,300 | | | (7,456,600) | | | 3,439,200 | |
| | | | | | | |
Other Income (Expense) | | | | | | | |
Interest Expense | (565,800) | | | (115,100) | | | (1,046,800) | | | (298,500) | |
Interest Income | 163,900 | | | — | | | 378,900 | | | — | |
Loss on Sale of Equipment | (12,600) | | | — | | | (118,100) | | | (35,900) | |
Other Income | 18,000 | | | 1,200 | | | 26,200 | | | 123,800 | |
Total Other (Expense) | (396,500) | | | (113,900) | | | (759,800) | | | (210,600) | |
| | | | | | | |
Income (Loss) Before Income Tax | (4,482,600) | | | 3,708,400 | | | (8,216,400) | | | 3,228,600 | |
| | | | | | | |
Income Tax (Benefit) | (1,067,800) | | | — | | | (1,937,800) | | | — | |
| | | | | | | |
Net Income (Loss) | (3,414,800) | | | 3,708,400 | | | (6,278,600) | | | 3,228,600 | |
| | | | | | | |
Net Loss Attributable to Non-controlling interests | — | | | — | | | (600) | | | (1,700) | |
Preferred Dividends | (1,903,700) | | | (631,400) | | | (5,856,200) | | | (771,500) | |
| | | | | | | |
Net Income (Loss) Attributable to Common Stockholders | $ | (5,318,500) | | | $ | 3,077,000 | | | $ | (12,134,200) | | | $ | 2,458,800 | |
| | | | | | | |
Earnings (Loss) Per Share - Basic | $ | (0.37) | | | $ | 0.21 | | | $ | (0.88) | | | $ | 0.17 | |
Earnings (Loss) Per Share - Diluted | $ | (0.37) | | | $ | 0.17 | | | $ | (0.88) | | | $ | 0.17 | |
| | | | | | | |
Weighted Average Common Shares Outstanding - Basic | 14,350,899 | | | 14,898,594 | | | 13,862,865 | | | 14,350,143 | |
Weighted Average Common Shares Outstanding - Diluted | 14,350,899 | | | 22,063,584 | | | 13,862,865 | | | 14,522,663 | |
See accompanying notes to the condensed consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net Income (Loss) | $ | (6,278,600) | | | $ | 3,228,600 | |
Adjustments to reconcile net income (loss) to net cash from operating activities: | | | |
Depreciation | 1,022,200 | | | 783,500 | |
Amortization of right of use assets | 440,300 | | | 252,200 | |
Loss on sale of equipment | 119,800 | | | 35,900 | |
Provision for loss on contract | 421,400 | | | — | |
Impairment loss on notes and related interest receivable | 898,400 | | | — | |
Stock compensation | 473,800 | | | 416,100 | |
Forgiveness on PPP loan | — | | | (10,000) | |
Amortization of revolver issuance costs | 320,100 | | | — | |
Net change in assets and liabilities: | | | |
Accounts receivable | (4,390,400) | | | (26,600) | |
Contract assets | 2,167,200 | | | (4,762,400) | |
Notes receivable | (8,524,600) | | | — | |
Prepaid expenses and other assets | (261,700) | | | 820,300 | |
Real estate | (56,179,400) | | | (82,755,400) | |
Deferred tax asset | (1,937,800) | | | — | |
Accounts payable and accrued expenses | 2,677,600 | | | 3,175,800 | |
Contract liabilities | 475,300 | | | 390,900 | |
Deferred revenue | 19,100 | | | (874,600) | |
Payments on right of use liability, net of incentives | 349,600 | | | (241,600) | |
NET CASH USED IN OPERATING ACTIVITIES | (68,187,700) | | | (79,567,300) | |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Purchase of property and equipment | (1,808,000) | | | (378,100) | |
Proceeds on the sale of equipment | 194,400 | | | 69,500 | |
NET CASH USED IN INVESTING ACTIVITIES | (1,613,600) | | | (308,600) | |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Construction loans | 65,240,900 | | | 39,560,800 | |
Payments on construction loans | (16,080,500) | | | (10,092,500) | |
Financing fees construction loans | (2,304,000) | | | (1,476,900) | |
Related party construction loans | 8,576,500 | | | 15,500,000 | |
Payments on related party construction loans | (13,220,500) | | | (9,197,200) | |
Financing fees related party construction loans | (23,600) | | | (1,983,900) | |
Revolving line of credit loan, net of payments | 24,788,900 | | | — | |
Financing fees revolving line of credit loan | (1,097,700) | | | — | |
Note payable D&O insurance | 590,100 | | | — | |
Payments on note payable D&O insurance | (956,400) | | | (867,600) | |
Payments on equipment loans | (1,655,300) | | | (1,430,500) | |
Payments on financing leases | (70,700) | | | (289,000) | |
Payments on PPP loan | — | | | (9,300) | |
Net proceeds from issuance of common stock | — | | | 25,101,000 | |
Net proceeds from issuance of preferred stock | — | | | 28,661,000 | |
Preferred dividends | (5,892,400) | | | (560,900) | |
Repurchase of common stock | (437,700) | | | — | |
Proceeds from exercise of stock options | 8,600 | | | 18,000 | |
Proceeds from exercise of warrants | 413,800 | | | — | |
Deferred offering cost | — | | | (68,300) | |
| | | | | | | | | | | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 57,880,000 | | | 82,864,700 | |
| | | |
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH | (11,921,300) | | | 2,988,800 | |
| | | |
CASH AND RESTRICTED CASH AT BEGINNING OF YEAR | 26,226,800 | | | 2,396,500 | |
| | | |
CASH AND RESTRICTED CASH AT END OF PERIOD | $ | 14,305,500 | | | $ | 5,385,300 | |
| | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | |
Interest paid | $ | 5,350,400 | | | $ | 2,165,300 | |
| | | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES | | | |
Termination of leases | $ | 52,100 | | | $ | — | |
Amortization of debt discount capitalized | $ | 1,617,300 | | | $ | 2,338,000 | |
Financing of fixed assets additions | $ | 110,000 | | | $ | 1,566,800 | |
Conversion of finance lease to equipment loan | $ | 394,800 | | | $ | — | |
Cancellation of finance leases | $ | — | | | $ | 99,100 | |
New right of use obligations | $ | — | | | $ | 166,800 | |
Conversion of preferred to common stock | $ | 3,595,400 | | | $ | — | |
Dividends declared but not paid | $ | 634,600 | | | $ | 210,600 | |
See accompanying notes to the condensed consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Preferred Stock | | Additional Paid in Capital | | Retained Earnings (Accumulated Deficit) | | Stockholders' Equity (Deficit) | | Non-Controlling Interest | | Total Equity (Deficit) |
| Shares Issued | | No Par | | Shares Issued | | No Par | | | | | |
| | | | | | | | | | | | | | | | | |
Balance, January 1, 2021 | 5,636,548 | | | $ | 11,956,900 | | | — | | | $ | — | | | $ | 234,800 | | | $ | (4,487,100) | | | $ | 7,704,600 | | | $ | (1,289,900) | | | $ | 6,414,700 | |
| | | | | | | | | | | | | | | | | |
Net Proceeds from Issuance of Common Stock | 9,200,000 | | | 25,101,000 | | | | | | | | | | | 25,101,000 | | | | | 25,101,000 | |
Exercise of Stock Options | 45,046 | | | | | | | | | 18,000 | | | | | 18,000 | | | | | 18,000 | |
Stock Compensation Expense | 8,500 | | | | | | | | | 115,100 | | | | | 115,100 | | | | | 115,100 | |
Net Income (Loss) | | | | | | | | | | | (1,549,800) | | | (1,549,800) | | | 600 | | | (1,549,200) | |
| | | | | | | | | | | | | | | | | |
Balance, March 31, 2021 | 14,890,094 | | | $ | 37,057,900 | | | — | | | $ | — | | | $ | 367,900 | | | $ | (6,036,900) | | | $ | 31,388,900 | | | $ | (1,289,300) | | | $ | 30,099,600 | |
| | | | | | | | | | | | | | | | | |
Net Proceeds from Issuance of Preferred Stock | | | | | 1,260,555 | | | 28,661,000 | | | | | | | 28,661,000 | | | | | 28,661,000 | |
Preferred Dividends | | | | | | | | | | | (140,100) | | | (140,100) | | | | | (140,100) | |
Stock Compensation Expense | 8,500 | | | | | | | | | 115,800 | | | | | 115,800 | | | | | 115,800 | |
Net Income (Loss) | | | | | | | | | | | 1,071,700 | | | 1,071,700 | | | (2,300) | | | 1,069,400 | |
| | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 | 14,898,594 | | | $ | 37,057,900 | | | 1,260,555 | | | $ | 28,661,000 | | | $ | 483,700 | | | $ | (5,105,300) | | | $ | 61,097,300 | | | $ | (1,291,600) | | | $ | 59,805,700 | |
| | | | | | | | | | | | | | | | | |
Preferred Dividends | | | | | | | | | | | (631,400) | | | (631,400) | | | | | (631,400) | |
Stock Compensation Expense | 23,500 | | | | | | | | | 185,200 | | | | | 185,200 | | | | | 185,200 | |
Net Income (Loss) | | | | | | | | | | | 3,708,400 | | | 3,708,400 | | | | | 3,708,400 | |
| | | | | | | | | | | | | | | | | |
Balance, September 30, 2021 | 14,922,094 | | | $ | 37,057,900 | | | 1,260,555 | | | $ | 28,661,000 | | | $ | 668,900 | | | $ | (2,028,300) | | | $ | 64,359,500 | | | $ | (1,291,600) | | | $ | 63,067,900 | |
| | | | | | | | | | | | | | | | | |
Balance, January 1, 2022 | 13,155,342 | | | $ | 32,122,700 | | | 4,016,955 | | | $ | 66,507,500 | | | $ | 752,700 | | | $ | 1,646,500 | | | $ | 101,029,400 | | | $ | (1,291,600) | | | $ | 99,737,800 | |
| | | | | | | | | | | | | | | | | |
Preferred Dividends | | | | | | | | | | | (2,012,500) | | | (2,012,500) | | | | | (2,012,500) | |
Exercise of Stock Options | 21,623 | | | 10,500 | | | | | | | (1,900) | | | | | 8,600 | | | | | 8,600 | |
Stock Compensation Expense | 60,214 | | | | | | | | | 242,400 | | | | | 242,400 | | | | | 242,400 | |
Dissolution of Non-Controlling Interest | | | | | | | | | | | (1,292,100) | | | (1,292,100) | | | 1,292,100 | | | — | |
Net Income (Loss) | | | | | | | | | | | 1,645,800 | | | 1,645,800 | | | (500) | | | 1,645,300 | |
| | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 | 13,237,179 | | | $ | 32,133,200 | | | 4,016,955 | | | $ | 66,507,500 | | | $ | 993,200 | | | $ | (12,300) | | | $ | 99,621,600 | | | $ | — | | | $ | 99,621,600 | |
| | | | | | | | | | | | | | | | | |
Preferred Dividends | | | | | | | | | | | (1,940,000) | | | (1,940,000) | | | | | (1,940,000) | |
Stock Compensation Expense | 17,500 | | | | | | | | | 112,300 | | | | | 112,300 | | | | | 112,300 | |
Conversion of Preferred stock | 1,206,515 | | | 3,595,400 | | | (217,156) | | | (3,595,400) | | | | | | | — | | | | | — | |
Exercise of Warrants | 139,295 | | | 413,800 | | | | | | | | | | | 413,800 | | | | | 413,800 | |
Share Repurchase | (251,934) | | | (437,700) | | | | | | | | | | | (437,700) | | | | | (437,700) | |
Net Loss | | | | | | | | | | | (4,509,100) | | | (4,509,100) | | | | | (4,509,100) | |
| | | | | | | | | | | | | | | | | |
Balance, June 30, 2022 | 14,348,555 | | | $ | 35,704,700 | | | 3,799,799 | | | $ | 62,912,100 | | | $ | 1,105,500 | | | $ | (6,461,400) | | | $ | 93,260,900 | | | $ | — | | | $ | 93,260,900 | |
| | | | | | | | | | | | | | | | | |
Preferred Dividends | | | | | | | | | | | (1,903,700) | | | (1,903,700) | | | | | (1,903,700) | |
Stock Compensation Expense | 3,810 | | | | | | | | | 119,100 | | | | | 119,100 | | | | | 119,100 | |
Net Loss | | | | | | | | | | | (3,414,800) | | | (3,414,800) | | | | | (3,414,800) | |
| | | | | | | | | | | | | | | | | |
Balance, September 30, 2022 | 14,352,365 | | | $ | 35,704,700 | | | 3,799,799 | | | $ | 62,912,100 | | | $ | 1,224,600 | | | $ | (11,779,900) | | | $ | 88,061,500 | | | $ | — | | | $ | 88,061,500 | |
See accompanying notes to the condensed consolidated financial statements.
(Amounts rounded to the nearest $100)
HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES
D/B/A HARBOR CUSTOM HOMES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. It utilizes its heavy equipment resources to develop an inventory of developed lots and provide development infrastructure construction, on a contract basis, for other home builders.
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.
Principles of Consolidation
The condensed consolidated financial statements include the following subsidiaries of Harbor Custom Development, Inc. as of the reporting period ending dates as follow:
| | | | | | | | | | | | | | | | | | | | |
Names | | Dates of Formation | | Attributable Interest |
| | | | September 30, 2022 | | December 31, 2021 |
Saylor View Estates, LLC* | | March 30, 2014 | | N/A | | 51 | % |
Harbor Materials, LLC** | | July 5, 2018 | | 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 | | 100 | % | | 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 | % | | N/A |
Broadmoor Ventures, LLC | | August 24, 2022 | | 100 | % | | N/A |
*Saylor View Estates, LLC was voluntarily dissolved with the State of Washington as of January 20, 2022.
**Harbor Materials, LLC was voluntarily dissolved with the State of Washington as of January 29, 2021.
As of September 30, 2022 and December 31, 2021, the aggregate non-controlling interest was $0 and $(1.3) million, respectively.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2021. The accompanying unaudited condensed consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.
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.
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 675,676 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 2,000,000, 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 700,000 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 2,000,000, 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 is 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 condensed consolidated statement of operations.
For the nine months ended September 30, 2022 and 2021 when computing fair value of share-based payments, the Company has considered the following range of assumptions:
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Risk-free interest rate | 1.73% - 3.54% | | 0.23% - 1.11% |
Exercise price | $1.12 - $3.00 | | $2.76 - $5.00 |
Expected life of grants in years | 3.93 - 6.51 | | 2.50 - 6.50 |
Expected volatility of underlying stock | 42.34% - 48.13% | | 42.63% - 56.13% |
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 public trading price at the time 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 periods.
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 are being repurchased for the purpose of constructive retirement. See Note 15. Stockholder's Equity for additional information on the share repurchase program.
Earnings (Loss) Per Share
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.
The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per share of common stock for the three and nine months ended September 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net income (loss) attributable to common stockholders | $ | (5,318,500) | | | $ | 3,077,000 | | | $ | (12,134,200) | | | $ | 2,458,800 | |
Effect of dilutive securities: | — | | | 631,400 | | | — | | | — | |
| | | | | | | |
Diluted net income (loss) | $ | (5,318,500) | | | $ | 3,708,400 | | | $ | (12,134,200) | | | $ | 2,458,800 | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding - basic | 14,350,899 | | 14,898,594 | | | 13,862,865 | | | 14,350,143 | |
Dilutive securities (a): | | | | | | | |
Restricted Stock Awards | — | | — | | — | | | 288 | |
Options | — | | 141,987 | | — | | | 152,565 | |
Warrants | — | | 19,359 | | — | | | 19,667 | |
Convertible Preferred Stock | — | | | 7,003,644 | | — | | | — | |
| | | | | | | |
Weighted average common shares outstanding and assumed conversion – diluted | 14,350,899 | | 22,063,584 | | | 13,862,865 | | | 14,522,663 | |
| | | | | | | |
Basic net earnings (loss) per common share | $ | (0.37) | | | $ | 0.21 | | | $ | (0.88) | | | $ | 0.17 | |
| | | | | | | |
Diluted net earnings (loss) per common share | $ | (0.37) | | | $ | 0.17 | | | $ | (0.88) | | | $ | 0.17 | |
| | | | | | | |
(a) - Outstanding anti-dilutive securities excluded: | | | | | | | |
Unvested restricted stock awards | 274,583 | | 62,500 | | 274,583 | | | 62,500 | |
Stock options | 800,925 | | 298,333 | | 800,925 | | | 298,333 | |
Warrants to purchase common stock | 18,447,564 | | 4,664,335 | | 18,447,564 | | | 4,664,335 | |
Convertible preferred stock* | 3,799,799 | | — | | | 3,799,799 | | | 1,260,555 | |
Warrants to purchase convertible preferred stock* | 12,000 | | 12,000 | | 12,000 | | | 12,000 | |
*Preferred stock and warrants to purchase convertible preferred stock are convertible into common stock on a 5.556 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 September 30, 2022 and December 31, 2021.
Restricted Cash
On August 10, 2021, the Company entered into a Letter of Credit (“LOC”) agreement with WaFd Bank in the amount of $0.6 million. The Company signed a lease on October 5, 2021 for a new office space. The landlord of the property, University Street Properties I, LLC, is the beneficiary of the LOC. The amount of funds that cover this LOC were moved by WaFd Bank to a controlled account on August 13, 2021. (See Note 10. Letter of Credit.)
Accounts Receivable
Accounts receivables are reported at the amount the Company expects to collect from outstanding balances. The Company provides for an allowance for doubtful accounts 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 doubtful accounts was $0 as of September 30, 2022 and December 31, 2021.
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 impairment whenever events or circumstances indicate that the note may not be fully recoverable. Impairment is 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. If management determines an amount to be uncollectible, impairment is measured based on the estimated uncollectible amount less the fair value of the underlying collateral. Impairment is recognized with a valuation allowance against the note receivable with a corresponding charge to bad debt expense under operating expenses. The valuation allowance was $0.8 million for notes receivable and $0.1 million for related interest receivables as of September 30, 2022. No impairment loss was recognized as of December 31, 2021. (See Note 3. Notes Receivable.)
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:
| | | | | |
Construction Equipment | 5-10 years |
Leasehold Improvements | The lesser of 10 years or the remaining life of the lease |
Furniture and Fixtures | 5 years |
Computers | 3 years |
Vehicles | 10 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 constructed is completed. The capitalized costs are recorded as part of the asset to which they relate and are expensed when the underlying asset is sold.
The Company capitalized interest from related party borrowings of $0.3 million and $0.2 million for the three months ended September 30, 2022 and 2021, respectively. The Company capitalized interest from related party borrowings of $0.9 million and $0.6 million for the nine months ended September 30, 2022 and 2021, respectively. The Company capitalized interest from third-party borrowings of $1.5 million and $0.3 million for the three months ended September 30, 2022 and 2021, respectively. The Company capitalized interest from third-party borrowings of $3.4 million and $0.8 million for the nine months ended September 30, 2022 and 2021, 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 September 30, 2022 and December 31, 2021, the Company did not identify any triggering events that would require further investigation under ASC 360.
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 17. Uncompleted Contracts.)
Revenues from contracts with customers are summarized by category as follows for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Homes | $ | 4,693,900 | | | $ | 3,762,000 | | | $ | 25,758,100 | | | $ | 13,947,900 | |
Developed Lots | — | | | 770,000 | | | 9,080,000 | | | 7,770,000 | |
Entitled Land | 3,400,000 | | | 10,440,000 | | | 7,880,000 | | | 19,750,000 | |
Fee Build | 3,623,500 | | | 2,871,300 | | | 7,825,300 | | | 4,219,500 | |
Multifamily | 27,200 | | | — | | | 27,200 | | | — | |
Construction Materials | 3,900 | | | 167,300 | | | 45,400 | | | 329,800 | |
Total Revenue | $ | 11,748,500 | | | $ | 18,010,600 | | | $ | 50,616,000 | | | $ | |