Harbor Custom Development, Inc. [HCDIP] Filings

10-Q 1 hcdi-20220930.htm 10-Q hcdi-20220930

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


☐			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


		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Interim Condensed Consolidated Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II - OTHER INFORMATION		32

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	33

SIGNATURES		34

PART I

ITEM 1. FINANCIAL STATEMENTS

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


			Page
Condensed Consolidated Balance Sheets (Unaudited)			2
Condensed Consolidated Statements of Operations (Unaudited)			3
Condensed Consolidated Statements of Cash Flows (Unaudited)			4
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			7

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	$

Harbor Custom Development, Inc. [HCDIP] Filings
Harbor Custom Development, Inc. [HCDI] Filings
Harbor Custom Development, Inc. [HCDIW] Filings
Harbor Custom Development, Inc. [HCDIZ] Filings
10-Q	[2022-11-14]
10-Q	[2022-08-15]
10-Q	[2022-05-12]
10-K	[2022-03-24]
10-Q	[2021-11-15]
S-1	[2021-09-10]
10-Q	[2021-08-16]
10-Q	[2021-05-17]
S-1	[2021-04-14]
10-K	[2021-03-31]
S-1	[2021-01-07]
10-Q	[2020-11-16]
S-1	[2020-03-31]

Harbor Custom Development, Inc. [HCDIP] Filings

Harbor Custom Development, Inc. [HCDI] Filings

Harbor Custom Development, Inc. [HCDIW] Filings

Harbor Custom Development, Inc. [HCDIZ] Filings