Harbor Custom Development, Inc. [HCDIP] Filings

10-Q 1 hcdi-20230930.htm 10-Q hcdi-20230930

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, 2023


☐			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 2,329,322 shares of common stock outstanding as of November 9, 2023.

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	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

PART II - OTHER INFORMATION		38

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	42

	Signatures	43

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 (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, 2023		December 31, 2022
	(Unaudited)
ASSETS
Cash	$	8,051,300	$	9,665,300
Restricted Cash	597,600		597,600
Accounts Receivable	184,100		1,707,000
Notes Receivable, net	1,060,000		4,525,300
Prepaid Expense and Other Assets	1,755,100		5,318,100
Real Estate	208,860,500		205,478,200
Property and Equipment, net	1,683,900		2,289,500
Right of Use Assets	1,788,500		1,926,100
Deferred Tax Asset, net	—		4,659,300
TOTAL ASSETS	$	223,981,000	$	236,166,400

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Accounts Payable and Accrued Expenses	$	7,527,900	$	14,090,700
Dividends Payable	5,711,100		634,700
Contract Liabilities	319,200		497,400
Deferred Revenue	49,200		52,000
Note Payable - Insurance	356,000		378,500
Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0 and $0.6 million, respectively	14,858,100		24,359,700
Equipment Loans	—		2,057,100
Finance Leases	—		154,500
Construction Loans, net of Unamortized Debt Discount of $1.2 million and $1.9 million, respectively	141,101,200		107,483,700
Construction Loans - Related Party, net of Unamortized Debt Discount of $0 and $0.1 million, respectively	—		8,122,800
Right of Use Liabilities	2,605,800		2,779,400
TOTAL LIABILITIES	172,528,500		160,610,500

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, 2023 and December 31, 2022	62,912,100		62,912,100
Common Stock, no par value per share, 50,000,000 shares authorized and 2,329,322 issued and outstanding at September 30, 2023 and 718,835 issued and outstanding at December 31, 2022	41,689,500		35,704,700
Additional Paid In Capital	4,401,600		1,266,300
Retained Earnings (Accumulated Deficit)	(57,550,700)		(24,327,200)
TOTAL STOCKHOLDERS’ EQUITY	51,452,500		75,555,900

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	223,981,000	$	236,166,400

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100, except for shares authorized and outstanding)

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,
	2023		2022		2023		2022

Sales	$	5,536,300	$	11,748,500	$	34,561,900	$	50,616,000

Cost of Sales	13,786,500		11,310,800		47,776,100		46,055,400

Gross Profit (Loss)	(8,250,200)		437,700		(13,214,200)		4,560,600

Operating Expenses	2,387,100		4,523,800		7,701,000		12,017,200

Operating Loss	(10,637,300)		(4,086,100)		(20,915,200)		(7,456,600)

Other Income (Expense)
Interest Expense	(420,700)		(565,800)		(2,158,400)		(1,046,800)
Interest Income	25,500		163,900		127,600		378,900
Loss on Sale of Equipment	(9,600)		(12,600)		(20,000)		(118,100)
Other Income	9,200		18,000		43,000		26,200
Total Other Expense	(395,600)		(396,500)		(2,007,800)		(759,800)

Loss Before Income Tax	(11,032,900)		(4,482,600)		(22,923,000)		(8,216,400)

Income Tax Expense (Benefit)	7,241,700		(1,067,800)		4,589,400		(1,937,800)

Net Loss	(18,274,600)		(3,414,800)		(27,512,400)		(6,278,600)

Net Loss Attributable to Non-controlling interests	—		—		—		(600)
Preferred Dividends	(1,903,700)		(1,903,700)		(5,711,100)		(5,856,200)

Net Loss Attributable to Common Stockholders	$	(20,178,300)	$	(5,318,500)	$	(33,223,500)	$	(12,134,200)

Loss Per Share - Basic	$	(7.51)	$	(7.41)	$	(19.60)	$	(17.51)
Loss Per Share - Diluted	$	(7.51)	$	(7.41)	$	(19.60)	$	(17.51)

Weighted Average Common Shares Outstanding - Basic	2,686,426		717,545		1,695,452		693,143
Weighted Average Common Shares Outstanding - Diluted	2,686,426		717,545		1,695,452		693,143

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100, except for Loss per Share and Outstanding Share information)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(27,512,400)	$	(6,278,600)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation	260,100		1,022,200
Amortization of right of use assets	137,600		440,300
Loss on sale of equipment	20,000		119,800
Provision for loss on contract	100,500		421,400
Impairment loss on notes and related interest receivable	—		898,400
Impairment loss on real estate	12,829,000		—
Stock compensation	182,200		473,800
Amortization of revolver issuance costs	640,300		320,100
Net change in assets and liabilities:
Accounts receivable	1,522,900		(4,390,400)
Contract assets	—		2,167,200
Notes receivable	3,465,300		(8,524,600)
Prepaid expenses and other assets	3,855,600		328,400
Real estate	(13,894,100)		(56,179,400)
Deferred tax asset	4,659,300		(1,937,800)
Accounts payable and accrued expenses	(6,562,800)		2,677,600
Contract liabilities	(278,600)		475,300
Deferred revenue	(2,700)		19,100
Payments on right of use liability, net of incentives	(173,600)		349,600
NET CASH USED IN OPERATING ACTIVITIES	(20,751,400)		(67,597,600)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	—		(1,808,000)
Proceeds on the sale of equipment	245,800		194,400
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	245,800		(1,613,600)

CASH FLOWS FROM FINANCING ACTIVITIES
Construction loans	61,953,600		65,240,900
Payments on construction loans	(28,810,500)		(16,080,500)
Financing fees construction loans	(1,563,400)		(2,304,000)
Related party construction loans	—		8,576,500
Payments on related party construction loans	(8,177,300)		(13,220,500)
Financing fees related party construction loans	(75,000)		(23,600)
Revolving line of credit loan	—		24,788,900
Payments on revolving line of credit loan	(10,141,900)		—
Financing fees revolving line of credit loan	—		(1,097,700)
Payments on note payable - insurance	(465,300)		(956,400)
Payments on equipment loans	(2,057,100)		(1,655,300)
Payments on financing leases	(74,800)		(70,700)
Preferred dividends	(634,700)		(5,892,400)
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 common warrants	—		413,800
NET CASH PROVIDED BY FINANCING ACTIVITIES	18,891,600		57,289,900

NET DECREASE IN CASH AND RESTRICTED CASH	(1,614,000)		(11,921,300)



CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD	10,262,900		26,226,800

CASH AND RESTRICTED CASH AT END OF PERIOD	$	8,648,900	$	14,305,500

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	12,239,000	$	5,350,400

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Amortization of debt discount capitalized	$	2,317,300	$	1,617,300
Promissory note issued for earnest money	$	300,000	$	—
Cancellation of promissory note for earnest money	$	450,000	$	—
Financing of insurance	$	442,900	$	590,100
Financing of fixed assets additions	$	—	$	110,000
Conversion of finance lease to equipment loan	$	—	$	394,800
Termination of leases	$	79,700	$	52,100
Dividends declared but not paid	$	5,711,100	$	634,600
Conversion of preferred to common stock	$	—	$	3,595,400
Exercise of pre-funded warrants	$	5,382,300	$	—

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

(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, 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

Preferred Stock Dividends									(2,012,500)		(2,012,500)				(2,012,500)
Exercise of Stock Options	1,081	10,500					(1,900)				8,600				8,600
Stock Compensation Expense	3,011						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	661,859	$	32,133,200	4,016,955	$	66,507,500	$	993,200	$	(12,300)	$	99,621,600	$	—	$	99,621,600

Preferred Stock Dividends									(1,940,000)		(1,940,000)				(1,940,000)
Stock Compensation Expense	875						112,300				112,300				112,300
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
Share Repurchase	(12,597)	(437,700)									(437,700)				(437,700)
Net Loss									(4,509,100)		(4,509,100)				(4,509,100)

Balance, June 30, 2022	717,428	$	35,704,700	3,799,799	$	62,912,100	$	1,105,500	$	(6,461,400)	$	93,260,900	$	—	$	93,260,900

Preferred Stock Dividends									(1,903,700)		(1,903,700)				(1,903,700)
Stock Compensation Expense	191						119,100				119,100				119,100
Net Loss									(3,414,800)		(3,414,800)				(3,414,800)

Balance, September 30, 2022	717,619	$	35,704,700	3,799,799	$	62,912,100	$	1,224,600	$	(11,779,900)	$	88,061,500	$	—	$	88,061,500

Balance, January 1, 2023	718,835	$	35,704,700	3,799,799	$	62,912,100	$	1,266,300	$	(24,327,200)	$	75,555,900	$	—	$	75,555,900

Preferred Stock Dividends									(1,903,700)		(1,903,700)				(1,903,700)
Stock Compensation Expense	317						83,400				83,400				83,400
Round Up of Shares from Reverse Stock Split	13,093										—				—
Net Loss									(4,861,800)		(4,861,800)				(4,861,800)

Balance, March 31, 2023	732,245	$	35,704,700	3,799,799	$	62,912,100	$	1,349,700	$	(31,092,700)	$	68,873,800	$	—	$	68,873,800

Preferred Stock Dividends									(1,903,700)		(1,903,700)				(1,903,700)
Stock Compensation Expense	2,941						75,300				75,300				75,300
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	906,609	3,403,700					(3,403,700)				—				—
Net Loss									(4,376,000)		(4,376,000)				(4,376,000)

Balance, June 30, 2023	1,802,295	$	39,711,000	3,799,799	$	62,912,100	$	6,356,600	$	(37,372,400)	$	71,607,300	$	—	$	71,607,300

Preferred Stock Dividends									(1,903,700)		(1,903,700)				(1,903,700)
Stock Compensation Expense	27						23,500				23,500				23,500
Exercise of Pre-funded Warrants	527,000	1,978,500					(1,978,500)				—				—
Net Loss									(18,274,600)		(18,274,600)				(18,274,600)

Balance, September 30, 2023	2,329,322	$	41,689,500	3,799,799	$	62,912,100	$	4,401,600	$	(57,550,700)	$	51,452,500	$	—	$	51,452,500

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100, except for numbers related to Shares Issued)

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.

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 date, as follows:


Names	Dates of Formation	Attributable Interest
		September 30, 2023		December 31, 2022
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		N/A
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 April 26, 2023.

As of September 30, 2023 and December 31, 2022, the aggregate non-controlling interest was $0 and $0, respectively.

Basis of Presentation

The unaudited condensed 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 for the fiscal year ended December 31, 2022. 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 numbers related to Shares Issued and Earnings (Loss) per Share (“EPS”) data, and numbers in the notes to the financial statements are rounded to the nearest million, where appropriate.

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 financial statements have been prepared assuming that the Company will continue as a going concern.

Under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 205-40, the Company’s management has the responsibility to evaluate whether conditions and/or events raise substantial doubt about the Company’s ability to meet its financial obligations as they become due within one year after the date that the financial statements are issued. As required by this standard, the evaluation shall initially not take into consideration the potential mitigating effects of the Company’s plans that have not been fully implemented as of the date the financial statements are issued.

Regarding the first step of this assessment, the Company concluded that under the standards of ASC 205-40, the following conditions raised substantial doubt about the Company’s ability to continue as a going concern: during the year ended December 31, 2022, the Company failed to maintain compliance with certain financial covenants within its loan agreements requiring loan amendment or covenant waivers; it has no borrowing availability under its revolving credit facility; it has significant debt of $116.7 million maturing over the next 12 months as of September 30, 2023; it had significant uses of cash flows from operations over the past two years; it had a $16.9 million net loss during the year ended December 31, 2022, an $18.3 million net loss for the third quarter of 2023, and a net loss of $27.5 million for the nine months ended September 30, 2023; and the real estate and construction industries are experiencing declining market conditions which have negatively impacted property valuations as well as financing capabilities and terms.

In performing the second step of this assessment, management is required to evaluate whether the Company’s plans to mitigate the conditions above alleviate the substantial doubt about the Company's ability to meet its obligations as they become due within one year after the date that the financial statements are issued.

The Company has undertaken and completed the following plans and actions to improve its available cash balances, liquidity, and cash generated from operations:

•executed an Amendment to the Revolver Loan Agreement with BankUnited to alleviate the breach of financial covenants and the bank’s ability to call the loan;

•closed $1.0 million in sales after September 30, 2023 and has $21.7 million under contract as of November 9, 2023 with significant additional assets that are held for sale;

•has construction loans in place which enables the Company to continue construction;

•met its equity requirement for its Pacific Ridge, Wyndstone, Meadowscape, and Belfair Phase 1 projects, which enables the Company to fund the projects without additional out of pocket costs;

•substantially completed its fee build contracts;

•shut down its quarry operations, eliminated most of its full time employees in its horizontal infrastructure division, and sold a significant majority of its heavy construction equipment, all of which were directly or indirectly associated with significant net loss generating activities during the year ended December 31, 2022 and the three months ended March 31, 2023; and

•raised net proceeds of $8.9 million from a public offering in May 2023.

Additionally, the Company’s future plans include: raising additional funds through the sales of real estate assets; obtaining new debt financing and/or refinancing existing debt; pulling cash out of one or more of its multi-family properties by obtaining a project level equity partner; and/or raising capital in the private or public equity or debt markets. The future viability of the Company is dependent on its ability to raise additional funds to finance its operations and/or restructure or

refinance its existing debt obligations. The Company’s inability to raise additional funds as and when needed and/or restructure or refinance its debt obligations will have a negative impact on its financial condition and ability to continue operations. There can be no assurance that these future plans will be achieved or additional financing will be available on terms acceptable to the Company or at all.

The accompanying condensed 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.

Stock-Based Compensation

Effective November 19, 2018, the Company’s Board of Directors and stockholders approved and adopted the 2018 Incentive and Nonstatutory Stock Option Plan (the “2018 Plan”). The 2018 Plan allows the Administrator (as defined in the 2018 Plan), currently the Compensation Committee, 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 has 133,784 shares of common stock reserved for issuance 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 has 135,000 shares of common stock reserved for issuance under the 2020 Plan.

The Company accounts for stock-based compensation in accordance with FASB 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 periods. 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, 2023 and 2022 when computing fair value of share-based awards, the Company has considered the following range of assumptions:


	September 30, 2023	September 30, 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 15. 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 condensed consolidated financial statements and notes thereto have been adjusted retroactively to reflect the impact of the Reverse Stock Split.

2023 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 15. 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 ASC 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 three and nine months ended September 30, 2023, the impact of including these in our 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 three and nine months ended September 30, 2023 and 2022.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss attributable to common stockholders	$	(20,178,300)	$	(5,318,500)	$	(33,223,500)	$	(12,134,200)
Effect of dilutive securities:	—		—		—		—

Diluted net loss	$	(20,178,300)	$	(5,318,500)	$	(33,223,500)	$	(12,134,200)

Denominator:
Weighted average common shares outstanding - basic (b)	2,686,426		717,545		1,695,452		693,143
Dilutive securities (a):
Restricted Stock Awards	—		—		—		—
Options	—		—		—		—
Warrants	—		—		—		—
Convertible Preferred Stock	—		—		—		—

Weighted average common shares outstanding and assumed conversion – diluted	2,686,426		717,545		1,695,452		693,143

Basic net earnings (loss) per common share	$	(7.51)	$	(7.41)	$	(19.60)	$	(17.51)

Diluted net earnings (loss) per common share	$	(7.51)	$	(7.41)	$	(19.60)	$	(17.51)

(a) - Outstanding anti-dilutive securities excluded:
Unvested restricted stock awards	1,167		13,730		1,167		13,730
Stock options	106,922		40,047		106,922		40,047
Warrants to purchase common stock (20:1) (1)	18,447,564		18,447,564		18,447,564		18,447,564
Warrants to purchase common stock (1:1) (2)	2,068,291		—		2,068,291		—
Convertible preferred stock (3)	3,799,799		3,799,799		3,799,799		3,799,799
Warrants to purchase convertible preferred stock (3)	12,000		12,000		12,000		12,000

(b) - Outstanding shares of Pre-funded warrants included in the weighted average outstanding shares
Pre-funded warrants	357,109		—		357,109		—

(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 September 30, 2023 and December 31, 2022.

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 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 as of September 30, 2023 and December 31, 2022.

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 is written down when the remaining note amount is collected in full. There was no valuation allowance as of September 30, 2023. The valuation allowance 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:


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 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 (refund) from related party borrowings of $(0.1) million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively. The Company capitalized interest from related party borrowings of $0.4 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively. The Company capitalized interest from third-party borrowings of $2.0 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively. The Company capitalized interest from third-party borrowings of $8.1 million and $3.4 million for the nine months ended September 30, 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.

The real estate assets classified as held for sale were $164.9 million and $34.4 million as of September 30, 2023 and December 31, 2022, respectively.

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.

The Company recorded impairment charges of $2.5 million relating to the Wyndstone apartments, $1.0 million relating to the Darkhorse lots, $1.5 million relating to the Summit Rock lots and homes, $0.8 million relating to the Cimarron Hills homes, $0.4 million relating to Sienna Creek homes, $0.2 million relating to Trails of HSB lots, and $0.1 million relating to a Flintrock Falls home for the three months ended September 30, 2023. For the nine months ended September 30, 2023, the Company recorded impairment charges of $3.9 million relating to the Darkhorse lots, $3.2 million relating to the Pacific Ridge apartments, $2.5 million relating to the Wyndstone apartments, $1.5 million relating to the Summit Rock lots and homes, $0.8 million relating to the Cimarron Hills homes, $0.4 million relating to Sienna Creek homes, $0.2 million relating to a Bunker Ranch home, $0.2 million relating to Trails of HSB lots, and $0.1 million relating to a Flintrock Falls home. No impairment charges were recorded for the comparable periods in 2022. For the year ended December 31, 2022, the Company recorded impairment charges of $1.2 million and $2.4 million relating to the Winding Lane lots and Pacific Ridge apartments, respectively. These charges are recorded in cost of sales and real estate as presented in Note 5. 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 17. Uncompleted Contracts.)

Revenues from contracts with customers are summarized by category as follows for the three and nine months ended September 30, 2023 and 2022:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Homes	$	117,900	$	4,693,900	$	8,816,600	$	25,758,100
Developed Lots	4,231,000		—		8,571,300		9,080,000
Entitled Land	—		3,400,000		—		7,880,000
Multi-family	1,078,700		27,200		16,535,200		27,200
Fee Build	108,700		3,623,500		638,800		7,825,300
Construction Materials	—		3,900		—		45,400
Total Revenue	$	5,536,300	$	11,748,500	$	34,561,900	$	50,616,000

Disaggregation of Revenue from Contracts with Customers:

The following table disaggregates the Company’s revenue based on the timing of satisfaction of performance obligations for the three and nine months ended September 30, 2023 and 2022:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Performance obligations satisfied at a point in time	$	5,427,600	$	8,125,000	$	33,923,100	$	42,790,700
Performance obligations satisfied over time	108,700		3,623,500		638,800		7,825,300
Total Revenue	$	5,536,300	$	11,748,500	$	34,561,900	$	50,616,000

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 16. Segments. Rental income was $1.1 million and $0.03 million for the three months ended September 30, 2023 and 2022, respectively. Rental income was $2.3 million and $0.03 million for the nine months ended September 30, 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 our 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 $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. Advertising expenses were $0.3 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively.

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 calculated the effective tax rate for the nine months ended September 30, 2023 and 2022 based on the actual effective tax rate for the year-to-date period.

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 September 30, 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 condensed 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 condensed 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 condensed 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 condensed 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 condensed 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 us in the fourth quarter of 2023. Incident disclosure

requirements in Form 8-K will be effective for us on June 15, 2024. We are still evaluating for any impact on our financial statement disclosures from the adoption of this final rule.

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 September 30, 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 $6.4 million and $8.1 million as of September 30, 2023 and December 31, 2022, respectively.

Revenue Concentrations

Homes

For the three months ended September 30, 2023, there were no concentrations in relation to home revenue. For the three months ended September 30, 2022, three customers each represented 32%, 33%, and 34% of the home revenue.

For the nine months ended September 30, 2023, six customers each represented 19%, 18%, 18%, 17%, 16%, and 11% of the home revenue. There were no concentrations in relation to the homes revenue segment for the nine months ended September 30, 2022.

Developed Lots

For the three months ended September 30, 2023, two customers each represented 22% and 11% of the developed lots revenue. There were no concentrations in relation to the developed lots revenue segment for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, two customers represented 13% and 12% of the developed lots revenue. For the nine months ended September 30, 2022, two customers each represented 62% and 26% of the developed lots revenue segment.

Entitled Land

For the three months ended September 30, 2023 there were no concentrations in relation to entitled land revenue. For the three months ended September 30, 2022 one customer represented 100% of the entitled land revenue.

For the nine months ended September 30, 2023, there were no concentrations in relation to entitled land revenue. For the nine months ended September 30, 2022, two customers represented 57% and 43% of the entitled land revenue.

Fee Build

One customer represented 100% of fee build revenue for the three and nine months ended September 30, 2023 and 2022.

Multi-Family

For the three months ended September 30, 2023, there were no concentrations in relation to the multi-family revenue. For the nine months ended September 30, 2023, one customer represented 86% of the multi-family revenue. There were no concentrations in relation to the multi-family revenue segment for the three and nine months ended September 30, 2022.

3. NOTES RECEIVABLE

The outstanding balance of notes receivable amounted to $1.1 million and $4.5 million at September 30, 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 $0.03 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. Interest income was $0.1 million and $0.4 million for the nine months ended September 30, 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 a valuation allowance are as follows:


	September 30, 2023		December 31, 2022
Broadmoor Commons LLC	$	—	$	1,000,300
Modern Homestead LLC	1,060,000		1,445,000
Noffke Horizon View, LLC	—		2,080,000
Total Notes Receivable, Net	$	1,060,000	$	4,525,300

4. PROPERTY AND EQUIPMENT

Property and equipment stated at cost, less accumulated depreciation, and amortization, consisted of the following:


	September 30, 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	(519,300)		(461,600)
Fixed Assets, Net	$	1,683,900	$	2,289,500

Depreciation expense was $0.1 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively.

Depreciation expense was $0.3 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

5. REAL ESTATE

Real Estate consisted of the following components:


	September 30, 2023		December 31, 2022
Land Held for Development	$	22,756,900	$	47,166,700
Construction in Progress	21,173,000		123,927,300
Held for Sale	164,930,600		34,384,200
Total Real Estate	$	208,860,500	$	205,478,200

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued liabilities consisted of the following:


	September 30, 2023		December 31, 2022
Trade Accounts Payable	$	6,211,400	$	11,472,100
Accrued Compensation, Bonuses, and Benefits	145,000		384,700
Accrued Quarry Reclamation Costs	39,400		76,200
Retainage Payable	153,900		1,130,300
Other Accrued Expenses	978,200		1,027,400
Total Accounts Payable and Accrued Expenses	$	7,527,900	$	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 had an initial two year term, with a maturity date of March 7, 2024. The unpaid principal bore 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 was used to fund the Company’s general working capital needs and interest is expensed as incurred. 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. The credit facility also contained 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 and perfecting the Lender’s security interest in the pledged LLCs. 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.

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 nine months ended September 30, 2023.

Interest expense was $0.4 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively. Interest expense was $2.1 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.

As of September 30, 2023 and December 31, 2022, the revolving line of credit loan balance was $14.9 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:


	September 30, 2023		December 31, 2022
Various notes payable to banks and financial institutions with interest rates varying from 0% 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 September 30, 2023.

Interest expense was $0 and $0.04 million for the three months ended September 30, 2023 and 2022, respectively.

Interest expense was $0.001 million and $0.1 million for the nine months ended September 30, 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%. Interest expense and amortization of debt discount are capitalized when incurred and expensed as cost of goods sold when the corresponding property is sold. The loan balances related to third party lenders as of September 30, 2023 and December 31, 2022 were $142.3 million and $109.4 million, respectively. The unamortized debt discounts related to these construction loans as of September 30, 2023 and December 31, 2022 were $1.2 million and $1.9 million, respectively. The book value of collateralized real estate as of September 30, 2023 and December 31, 2022 was $208.9 million and $193.1 million, respectively.

10. LETTER OF CREDIT

The Company entered into a letter of credit agreement with WaFd Bank of $0.6 million on August 10, 2021. The letter of credit expires February 1, 2032. The interest rate of the letter of credit is Prime plus 1%. The letter of credit has been 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. (See Note 1. Restricted Cash.)

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 Directors & Officers (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 September 30, 2023 and December 31, 2022 was $0.3 million and $0.4 million, respectively.

12. 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.

On April 21, 2022, the Company entered into a purchase and sale agreement for the purchase of 4.81 acres in Port Orchard, Washington for $2.7 million. Closing is expected to take place in Q4 2023.

On April 21, 2023, the Company entered into a purchase and sale agreement for the purchase of 5.15 acres in Arlington, Washington. The purchase price, which is to be determined, will be $12 per usable land square foot but not less than a total of $1.8 million. Closing is expected to take place in Q4 2024.

On May 4, 2023, the Company entered into a purchase and sale agreement for the purchase of 5.24 acres in Arlington, Washington. The purchase price, which is to be determined, will be $12 per usable land square foot but not less than a total of $1.9 million. Closing is expected to take place in Q4 2024.

On May 4, 2023, the Company entered into a purchase and sale agreement for the purchase of 6.38 acres in Arlington, Washington. The purchase price, which is to be determined, will be $12 per usable land square foot but not less than a total of $1.9 million. Closing is expected to take place in Q4 2024.

13. 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 September 30, 2023, and December 31, 2022, the outstanding loan balances were $0 and $8.2 million, respectively. For the three months ended September 30, 2023 and 2022, the Company capitalized loan fees of $0 and $0.01 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company capitalized loan fees of $0.1 million and $0.02 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 September 30, 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 three months ended September 30, 2023 and 2022, the Company incurred interest (refund) of $(0.1) million and $0.3 million, respectively. During the nine months ended September 30, 2023 and 2022, the Company incurred interest of $0.4 million and $0.9 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 September 30, 2023 and December 31, 2022, the commission payable was $0 and $0, respectively. The commission expense for the three months ended September 30, 2023 and 2022, was $0 and $0.01 million, respectively. For the nine months ended September 30, 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 three months ended September 30, 2023 and 2022, the management fees and payroll and benefits incurred and recorded as rental expense within cost of sales were $0 and $0, respectively. The management fees and payroll and benefits incurred and recorded for the nine months ended September 30, 2023 and 2022 were $0.3 million and $0, 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.

14. INCOME TAX

The Company’s effective tax rate for the nine months ended September 30, 2023 was 20.0% tax expense, compared to a benefit of 23.6% for the nine months ended September 30, 2022. The Company calculated the effective tax rate for the nine months ended September 30, 2023 and 2022 based on the actual effective tax rate for the year-to-date period. The increase in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily driven by the full valuation allowance recorded against the deferred tax assets.

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 September 30, 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 $9.7 million. As of December 31, 2022, the Company had no valuation allowance recorded against the deferred tax assets.

15. STOCKHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, no par value per share. At September 30, 2023, the Company has 2,329,322 shares of common stock issued and outstanding.

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 September 30, 2023, the Company has 3,799,799 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 per annum, which is equivalent to 8% of the $25.00 liquidation preference per share. The Company has accrued dividends of $5.7 million as of September 30, 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.

On January 20, 2023, the 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 the Loan Agreement with BankUnited, the Company agreed to pay $0.6 million to BankUnited each month.

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.

2023 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. 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 September 30, 2023, the Company did not repurchase any shares of common stock.

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:


	Options	Weighted Average Exercise Price
Outstanding – January 1, 2023	37,546	$	41.51
Exercisable – January 1, 2023	19,696	$	55.55
Granted	140,000	$	3.73
Exercised	—	$	—
Forfeited/Cancelled	(70,624)	$	5.03
Outstanding – September 30, 2023	106,922	$	16.14
Exercisable – September 30, 2023	24,672	$	52.01


	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	106,922	8.90	$	16.14	24,672	$	52.01

During the nine months ended September 30, 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 next Form 10-K 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 nine months ended September 30, 2022, the Company issued 19,600 options to employees. These 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 in Note 1 under Stock-Based Compensation.

During the nine months ended September 30, 2023, the Company had no option exercised by former employees. During the nine months ended September 30, 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 $0.01 million and $0.02 million for the three months ended September 30, 2023 and 2022, respectively. The Company recognized share-based compensation net of forfeitures related to options of $0.1 million and $0.1 million for the nine months ended September 30, 2023 and 2022, respectively.

On September 30, 2023, unrecognized share-based compensation was $0.2 million.

The intrinsic value for outstanding and exercisable options as of September 30, 2023 was $0. The intrinsic value for outstanding and exercisable options as of September 30, 2022 was $0.1 million and $0.1 million.

(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:


	Warrants*	Weighted Average Exercise Price
Outstanding – January 1, 2023	18,447,564	$

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	[2023-11-14]
10-Q	[2023-08-14]
10-Q	[2023-05-15]
S-1	[2023-05-01]
10-K	[2023-03-31]
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