UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A10-K

AMENDMENT NO. 1

For the fiscal year ended December 31, 20212023

OR

For the transition period from                 to                from__to

Commission file number 001-39266

Harbor Custom Development, Inc.

(Exact name of registrant as specified in its charter)

11505 Burnham Dr., 1201 Pacific Avenue, Suite 3011200

Gig HarborTacoma, Washington 9833298402

(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:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive o?cers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No No☒ ☒

The aggregate market value of voting stock held by non-affiliates of the Registrant on June 30, 2021,2023, based on the closing price of $3.24$3.02 for shares of the Registrant’s Class A common stock as reported by the Nasdaq Stock Market LLC, was approximately $39.85.0 million. Shares of common stock beneficially owned by each executive officer, director, and holder of more than 10% of our common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The registrant had outstanding 13,206,1652,686,431 shares of common stock as of March 21, 2022.28, 2024.

DOCUMENTS INCORPORATED BY REFERENCE

None.

EXPLANATORY NOTE

Throughout this Report, references to the “Company,” “HCDI,” “we,” “us,” and “our” refer to Harbor Custom Development, Inc. and its consolidated subsidiaries, unless the context requires otherwise.

As we previously reported in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on April 21, 2022, we restated our financial statements for the year-ended December 31, 2021 and quarter-ended September 30, 2021 in connection with diluted earnings per share (“Diluted EPS”) errors detected in applying certain accounting principles.

As discussed in further detail below in Part II - Item 9A. Controls and Procedures, our management has determined that a material weakness existed in internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The weakness identified is a misapplication of the calculation of weighted average shares outstanding for Diluted EPS.

Management has already undertaken steps to improve the system of evaluating and implementing the accounting standards that apply to our financial statements, including significantly enhancing our accounting team through the recent hirings of a Chief Financial Officer, Director of Accounting, Senior Manager of SEC Reporting, and Tax Manager. We are also providing additional training to our personnel and have engaged a nationally recognized third-party accounting firm with whom our management and accounting personnel can consult regarding the application of complex accounting transactions, including Diluted EPS.

As discussed in Note 1. Restatement to the audited financial statements for the fiscal years ended December 31, 2021 and 2020 included in this Amendment No. 1 to our Annual Report on Form 10-K/A (the “Amendment”), our previously filed financial statements for the periods described above have been restated to reflect the correction of Diluted EPS errors.

We are filing this Amendment No. 1 to amend and restate in its entirety our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 24, 2022 (the “Original 10-K”), including to file and discuss restated audited financial statements for the periods ended December 31, 2021 and December 31, 2020 in Part II – Item 8. Financial Statements and Supplementary Data. This Amendment No. 1 continues to speak as of the original filing date of the Original 10-K and, as such, does not reflect events that may have occurred subsequent to the original filing date.

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A10-K (“Annual Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this Annual Report are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects andprojects; our future construction, revenues, income, cost of sales, expenses, and capital spending.spending; and the effects of our filing of voluntary petitions under chapter 11 of the United States Bankruptcy Code (“Chapter 11”). Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal,” “foresee,” “likely,” “target,” “may,” “should,” “could,” or other words that convey the uncertainty of future events or outcomes. The

These forward-looking statements in this Annual Report speak onlyreflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this document,Annual Report and we disclaim any obligationare subject to update these statements unless required by law,risks and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events.uncertainties. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory, and other risks, contingencies, and uncertainties, most of which are difficult to predict and many of which are beyond our control. The following factors, among others, may causecontrol, including uncertainties related to our actual results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by these forward-looking statements:

These forward-looking statements reflect our management’s beliefs and views with respect to future events and are based on estimates and assumptions as of the date of this Annual Report and are subject to risks and uncertainties. Moreover, we operate in a very highly competitive and rapidly changing environment.Chapter 11 proceedings. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on forward-looking statements contained herein.

You should read this Annual Report and the documents that we reference and have filed as exhibits with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The forward-looking statements made in this Annual Report relate only to events as of the date on which such statements are made. We undertake no obligation to update any forward-looking statements after the date of this Annual Report or to conform such statements to actual results or revised expectations, except as required by law.

SUMMARY OF RISK FACTORS

The following factors, among others, may cause our actual results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by these forward-looking statements:

PART I

Throughout this Annual Report, references to the “Company,” “HCDI,” “we,” “us,” and “our” refer to Harbor Custom Development, Inc. and its consolidated subsidiaries, unless the context requires otherwise.

ITEM 1. BUSINESS

Our Company

Harbor Custom Development, Inc. is a real estate development company which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Plan (the “Proposed Plan”), subject to Bankruptcy Court approval.

For the years ended December 31, 2023, and December 31, 2022, our total revenues were $59.3 million and $55.4 million, respectively. As of December 31, 2023, and December 31, 2022, our backlogs of fully executed contracts for the sale of developed residential lots and single-family homes were $0.6 million and $8.4 million, respectively. Our fee build backlogs as of December 31, 2023, and December 31, 2022, were $0.02 million and $0.8 million, respectively.

In 2022, we had two entitled land sales and sold 33 developed lots and 27 homes. The two entitled land sales represented 14% of total revenue in 2022. The 33 developed lot sales represented 17% of total revenue in 2022. Our 2022 home sales represented 52% of total revenue, and home selling prices ranged from $0.7 million to $1.7 million.

In 2023, we had no entitled land sales and sold two multi-family properties, 56 developed lots, and six homes. The multi-family revenues represented 65% of total revenue in 2023. The developed lot sales represented 19% of total revenue in 2023. Our 2023 home sales represented 15% of total revenue, and home selling prices ranged from $1.0 million to $1.6 million.

As of March 28, 2024, we own or control 15 communities in Washington, Texas, California, and Florida, containing approximately 517 units or lots in various stages of development. (See Item 2. Properties) We have 15 single family homes, three multi-family apartments, 106 developed lots, and 13 land parcels. All single-family homes and developed lots are being offered for sale. The majority of land projects are offered for sale in existing condition. Several parcels in Semiahmoo are near the next stage of entitlements which we are working towards achieving. All multi-family apartments are substantially complete with lease up in progress. We have engaged a real estate brokerage and workout firm and an investment banking firm specializing in special situations, restructurings, bankruptcies, receiverships and Article 9 sales to sell our multi-family portfolio in Washington, which includes four of the 15 communities and 385 of the referenced 517 units or lots, as more further described below. We will continue to collect lease revenue from our multi-family properties until such communities have been sold.

While we have continued to generate revenue, these revenue streams have proved insufficient to cover our ongoing cash requirements. In addition, we faced several issues in our operations including: (1) cost overruns and construction delays on land development; (2) continuing challenges resulting from the Covid-19 Global Pandemic; (3) a shift in building strategy; (4) a decline in the real estate market leading to delayed sales at lower-than-expected prices; (5) delayed timelines and contractor issues that affected our ability to realize revenue on their expected timelines; and (6) debt service payment requirements to a revolving lender that strained our cash position and ability to meet our obligations to our stakeholders. These factors, among others, placed significant strain on cash flow and cash reserves, ultimately leading to filing for Chapter 11 protection as our management and board of directors determined that it was in the best interests of the Company and its stakeholders.

Chapter 11 Bankruptcy

On December 11, 2023 (the “Petition Date”), we and certain of our wholly owned subsidiaries, including Belfair Apartments, LLC; Pacific Ridge CMS, LLC; HCDI FL Condo LLC; HCDI Bridgeview LLC; HCDI Semiahmoo LLC; and Beacon Studio Farms LLC (collectively, the “Debtors”), filed a voluntary petition (the “Bankruptcy Petition”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Washington (such court, the “Bankruptcy Court” and such case, the “Chapter 11 Case”). We expect to continue to operate our business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To ensure our ability to continue operating in the ordinary course of business, we filed motions seeking customary “first-day” relief with the Bankruptcy Court, including, among other things, authority to use cash collateral, pay employee wages and benefits, and pay other vendors and suppliers in the ordinary course for all services provided after the Petition Date, limit certain Bankruptcy Court requirements for notice to equity security holders, sell real property in the ordinary course of business, and other motions, as appropriate. These motions remain subject to approval by the Bankruptcy Court.

On December 15, 2023, the Bankruptcy Court entered an Interim Order Approving Notification and Hearing Procedures for Certain Transfers of Common and Preferred Stock and Granting Related Relief (the “Order”). The Order is designed to establish certain procedures (the “Procedures”) to protect any potential value of our net operating loss carryforwards and other tax attributes (the “NOLs”). The Order establishes, among other things, the Procedures with respect to direct and indirect trading and transfers of our stock in order to protect any potential value of our NOLs for use in connection with the reorganization. As approved on an interim basis, the Procedures restrict transactions involving, and require notices of the holdings of and proposed transactions by, any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Shareholder. A “Substantial Shareholder” for purposes of the Procedures, is defined as any entity or individual that has Beneficial Ownership of at least (a) 5% of all issued and outstanding shares of common stock (being 2,686,431 shares as of March 28, 2024) or (b) 5% of all issued and outstanding shares of preferred stock (being 3,799,799 shares as of March 28, 2024). Any prohibited transfer of common or preferred stock in violation of the Procedures shall be null and void ab initio.

On February 2, 2024, our wholly owned subsidiary, Tanglewilde, LLC (included as a “Debtor”), also filed a Bankruptcy Petition for reorganization under Chapter 11 of the Bankruptcy Code. Tanglewilde, LLC has been added into our pending Chapter 11 Case.

On February 16, 2024, we issued a press release announcing our intention to file a Chapter 11 plan (the “Chapter 11 Plan”) with the Bankruptcy Court approximately in late February proposing the orderly wind down of our operations and the voluntary liquidation of all of our remaining assets, rather than a restructuring of our business. The proposed Chapter 11 Plan is subject to the approval of the Bankruptcy Court.

Further, we retained Keen-Summit Capital Partners LLC (“Keen”), a real estate brokerage and workout investment banking firm, to manage the sale of our multi-family real estate portfolio. The portfolio includes the Belfair View Apartments in Belfair, Washington; the Bridgeview Trail Apartments in Port Orchard, Washington; the Meadowscape Apartments in Olympia, Washington; and the Pacific Ridge Apartments in Tacoma, Washington. Any sale by Keen is subject to approval by the Bankruptcy Court.

On March 5, 2024, we filed a Joint Chapter 11 Plan which contains multiple proposals to handle the liquidation of our company (the “Proposed Plan”) and a related proposed disclosure statement with the Bankruptcy Court (“Disclosure Statement”). We can provide no assurance that the Proposed Plan will be accepted by creditors or shareholders, who may object to the Proposed Plan, or confirmed by the Bankruptcy Court (or, even if confirmed, that the Proposed Plan will become effective). We are authorized to solicit votes from our creditors and our shareholders for approval of the Proposed Plan. The Proposed Plan (and its consummation) remain subject to Bankruptcy Court approval and satisfaction of other conditions contained in the Proposed Plan. The Proposed Plan and Disclosure Statement describe, among other things, the material terms of the Proposed Plan; our corporate history, structure, and business overview; the events leading to the Chapter 11 Case; the proposed treatment of Claims and Interests (defined below) under the Proposed Plan; certain events that have occurred or are anticipated to occur during the Chapter 11 Case, and certain other aspects of the Proposed Plan. All distributions under the Proposed Plan would come from the Debtors’ cash on hand and other assets, which would generally be distributed, subject to the terms of the Proposed Plan, to classes of claims of creditors (“Claims”) and treatment of equity interests of shareholders (“Interests”) in order of their respective priorities under the Bankruptcy Code. The Disclosure Statement provides disclosures regarding the anticipated recoveries to holders of Claims and Interests pursuant to the Proposed Plan, including holders of our securities, which remain to be determined. No assurance can be made with respect to any distributions or recoveries with respect to Claims or Interests under the Proposed Plan.

Outstanding Debt

The filing of the Bankruptcy Petition constitutes an event of default under our outstanding indebtedness for borrowed money as of the petition date, including (collectively, the “Outstanding Indebtedness”):

The terms of the Outstanding Indebtedness provide that, as a result of the Bankruptcy Petition, the principal and interest under such Outstanding Indebtedness shall be immediately due and payable. Any efforts to enforce such payment obligations are automatically stayed as a result of the Bankruptcy Petition and the creditors’ rights of enforcement are subject to the Bankruptcy Code.

Nasdaq Delisting

On December 12, 2023, we received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that, following Nasdaq’s review of our press release related to the Bankruptcy Petition and other publicly available information, and in accordance with Listing Rules 5101, 5110(b) and IM-5101-1, Nasdaq determined that our securities will be delisted from Nasdaq. Trading of our common stock (HCDI), preferred stock (HCDIP), and two classes of warrants (HCDIW and HCDIZ) was suspended at the opening of trading on December 21, 2023.

Nasdaq based its determination upon concerns related to (i) our announcement that we filed for protection under Chapter 11 of the United States Bankruptcy Code and associated public interest concerns raised by such filing, (ii) the residual equity interest of the existing listed securities holders, and (iii) our ability to sustain compliance with all requirements for continued listing on Nasdaq. Nasdaq also noted that we no longer complied with Nasdaq’s audit committee requirements as set forth in Listing Rule 5605, which cure period to regain compliance was until the earlier of our next annual shareholders’ meeting or September 18, 2024. The Nasdaq notice also advised us of our right to request an appeal of the determination. We did not pursue such appeal.

On December 20, 2023, we received a notice from FINRA’s Department of Market Operations (the “FINRA Notice”) informing the Company that the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ were assigned to our common stock, preferred stock, and warrants, respectively, and that as of December 21, 2023, our aforementioned securities would be quoted and traded in the market for unlisted securities (i.e., the “over-the-counter market” or “OTC”). As a result, trading of such securities commenced on OTC Pink Current Information on December 21, 2023 under the trading symbols HCDIQ, HCDPQ, HCDWQ, and HCDZQ.

On February 15, 2024, Nasdaq filed a Form 25-NSE with the Commission which will remove all of our securities from listing and registration on Nasdaq.

Additional Information on the Chapter 11 Case

Court filings and information related to the bankruptcy can be found at https://cases.creditorinfo.com/hcdi. The documents and other information available via website or elsewhere are not part of this Annual Report and shall not be deemed incorporated herein.

Our Business

Harbor Custom Development, Inc. is a real estate development company which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Plan (the “Proposed Plan”), subject to Bankruptcy Court approval. The description of our business below is presented for historical purposes to cover the time periods discussed in this Report as well as our current operations under Chapter 11 proceedings.

Our business is involved in all aspects of the land development cycle, including land acquisition, entitlements, development, construction of project infrastructure, single and multi-family vertical construction, marketing, sales, and managementsales of various residential projects in Washington, California, Texas, and Florida.

As a land developer and builder of apartments, single-family homes, luxury homes, townhomes, condominiums and apartments,townhomes, our business strategy is to acquire and develop land strategically based on an understanding of population growth patterns, entitlement restrictions and land use evaluation, infrastructure development, and geo-economic forces. We endeavor to acquire land with scenic views or convenient access to freeways and public transportation to develop and sell residential lots, new home communities, townhomes, and multi-story condominium or apartment properties within a 20- to 60-minute commute of some of the nation’s fastest-growing metro employment corridors.

We are leading the real estate industry as the first national land developer and home builder accepting payment in the form of cryptocurrency for our properties.

Ourhave a portfolio of land, lots, home plans, and finishing options, coupled with a historic low inventory of residential andentitled multi-family housing in our principal geographic areas, provide an opportunity for us to increase revenue and overall market share.plats. In addition to our single-family residential projects, we plan to build, rent, and sellhold for sale townhomes condominiums, and apartments and anticipate commencement of land development and construction on tenseveral multi-family sites in Washington and Florida in 2022.Washington. (See “ItemItem 2. Properties.”) In an effort to strategically control the expanding needs of our corporate team, we signed a lease on October 5, 2021 for a new office space in Tacoma, Washington and expect to move our headquarters in the second quarter of 2022. This office space is designed with a hybrid workforce in mind and takes into account employment trends that arose after the COVID-19 global pandemic, specifically the increase in hybrid or remote employees.

Since 2015, we have grown quickly with increasing revenues each year of operation. For the years ended December 31, 2021 and December 31, 2020, our total revenues were $72.4 million and $50.4 million, respectively. As of December 31, 2021 and December 31, 2020, our backlogs of fully executed contracts for the sale of developed residential lots and single-family homes were $13.7 million and $9.1 million, respectively. Our fee build backlogs as of December 31, 2021 and December 31, 2020 were $10.0 million and $0, respectively.

It is customary for us to sign purchase and sale agreements that contain a due diligence period which allows us time, usually between 30 and 60 days, to evaluate the acquisition. At times, through our due diligence efforts, we find that a property is not suitable for purchase due to economic forces, zoning issues, or other matters. If we determine that a property is not suitable for our desired purposes, we terminate the purchase and sale agreement. After termination within the due diligence period, our earnest money is returned to us.

Our infrastructure development division efficiently constructs a diverse range of residential communities and improved lots in a cost-effective manner. We own and lease heavy equipment, which we utilize to build and develop residential subdivisions and multi-family communities. The equipment is primarily used for land clearing, site development, public and private road improvements, installation of wet utilities such as sewer, water, and storm sewer lines, in addition to construction of dry utility lines for power, gas, telephone, and cable service providers.

We are a general contractor and constructconstructed single-family homes, townhomes, condominiums, and apartments utilizing a base of employees in conjunction with third-party subcontractors.

As of March 21, 2022, we own or control 26 communities in Washington, Texas, California, and Florida, containing more than 2,700 lots in various stages of development.

Recently completed projects include the following:

Entitled Land, Developed Lot, and Home Sales

In 2021, we had three entitled land sales and sold 157 developed lots and 30 homes. The three entitled land sales represented 29% of total revenue in 2021. The 157 developed lot sales represented 37% of total revenue in 2021. Our 2021 home sales represented 24% of total revenue in 2021 and the selling prices for these homes ranged from $0.5 million to $0.8 million.

In 2020, we sold 104 developed lots and 76 homes. The 104 developed lot sales represented 25% of total revenue in 2020. Our 2020 single-family home selling prices ranged from $0.4 million to $0.8 million.

Strategy

Our strategy is driven by the following:

Offer Diversified Product Portfolio from Single to Multi-family Communities

Our expertise allows for a diversified product strategy that enables us to better serve a wide range of buyers, adapt quickly to changing market conditions, and optimize performance and returns while strategically reducing portfolio risk. We are equipped to build to the surrounding communities’ needs, including single family homes, townhomes, condominiums, and apartments. This flexible business model allows us to target a wide and diverse range of customers, from those looking at lower income housing options through condominiums and apartments, to those seeking entry-level through luxury single-family homes.

Provide Superior Quality and an Excellent Homeowner Experience

Our operating philosophy is to provide a positive and memorable experience to our homeowners. We seek to maximize customer satisfaction by offering beautiful homes built with quality materials and exceptional craftsmanship, thoughtfully designed floor plans, and located with a 20- to 60-minute commute from major metropolitan areas. We engineer our homes for energy-efficiency which reduces the homeowner’s environmental impact and energy costs. Our competitive edge in the selling process focuses on the home’s features, design, and premium locations with scenic views. Our goal is not just to build houses, but also to create desirable communities through superior design, location, and execution.

New home-buyers’ needs are met across multiple communities and price points by maintaining a substantial inventory of ready-to-build lots and designer home plans. From move-up buyers needing more space for their growing families or $1.5 million-plus luxury homes, our business model enables buyers to overcome the significant inventory shortage and pricing challenges in high-growth metropolitan markets.

Provide Diverse Products for Multi-family Living with Superior Quality

The significant appreciation in rental rates over the past year, combined with moderate capitalization rates and low inventory of rental housings in our target markets, have created a substantial opportunity to expand our product portfolio within the multi-family vertical space.

Our product agnostic building model provides us the flexibility to accommodate the current rapidly changing market conditions. We are equipped to build to the surrounding communities’ needs from, first-time homebuyers searching for a starter townhome, condominium, or apartment to institutional investors looking for large tracts of entitled land, developed lots, or multi-family apartment projects. This flexible business model provides us with a competitive advantage and differentiates us from our peers.

Our inventory of entitled multi-family communities located 20 to 60 minutes from major metropolitan employment corridors, coupled with a low inventory of rental and first-time residential housing in our principal geographic areas, currently provide an opportunity to increase revenue and overall market share.

Focus on Efficient Operations

We strive to control costs through a disciplined planning process. Detailed budgets are prepared for all cost categories. Budgets are closely monitored throughout the building process as we continue to revisit and update the budget on an ongoing basis. Many components are provided by subcontractors and significant effort is expended to assure that scopes of work are complete and inclusive. Contract variances and change orders are closely scrutinized for appropriateness. At the sale and closing of each home in a project, the estimated and final margins are compared and variances are identified and investigated to better control costs on future homes in the project. We believe our disciplined process of setting realistic budgets and expectations, monitoring, and evaluating them and making any necessary adjustments to correct deviations going forward enables us to prudently control our costs.

Strategic Partnerships/Cost Control

Our business model is flexible and facilitates partnering with companies that specialize in their local markets, including residential builders, general contractors, and land developers. By partnering with these specialists, our cost structure can be closely managed. Further, all internal shared services are centralized at our corporate office in Washington state. Centralized functions include purchasing, accounting, finance, operations, legal, human resources, transaction coordination, and permitting. Centralizing these important functions keeps our infrastructure costs under tight control.

Our Markets

Our business strategy is focused on the acquisition of land for development purposes and the design, construction, and sale ofWe own residential lots, single-family homes, townhomes, condominiums, and apartments in Washington, California, Florida, and Texas.

Our Products

We offer a diverse portfolio of finished lots, single-family homes and multi-family communities, including townhomes, condominiums, and apartments. Being product-agnostic providesprovided us great flexibility to maintain appropriate consumer product and price level diversification for theour specific markets we serve.markets. We focus on underserved consumer groups for each of our locations while attempting to diversify so thatas to not overly concentrate our land portfolio is not overly concentrated in any one area. Building at multiple price points enables us to quickly adjust to changing consumer and market demands quickly.demands. Buyer profiles are developed for each market, and our communities are designed with the specific needs of those buyers in mind.

Land Acquisition and Development Process

We execute anOur integrated business model is designed to monetize land during three distinct stages of the development cycle. As a result, risks may be mitigated by providing multiple exit points for our real estate assets.

We also provide services as fee build revenues to construct the required infrastructure so that houses can be developed on the lots.

Our acquisition process generally includes the following steps to reduce development and market cycle risk:steps:

Before purchasing large land tracts, we engage outside engineers and consultants to help review the proposed acquisition and assist with community and home design.

Home Building, Marketing, and Sales Process

Our philosophy is to providedevelop beautiful and practical living spaces for growing communities. Our strategy is to acquire land with scenic views or convenient access to freeways and public transportation to develop and sell residential lots, new home communities, and multi-story apartment properties within a positive, memorable experience20- to homeowners60-minute commute of the nation’s fastest-growing metro employment corridors.

Since our founding in 2014, we are dedicated to building quality homes with thoughtful design. Our floorplans support the modern family’s lifestyle by actively engaging them in the building process and by enhancing communication, knowledge, and satisfaction. Options are available to suit individual and family lifestyle needs. Home designs include features such asproviding flexible spaces, outdoor living, spaces, one-story homes, main-floor living andwith master bedroom suites on the first floor, master bedroom suitesand luxury finishes to appeal to universal design needs. Our homes are engineered for energy-efficiency which is aimed at reducingto reduce impact on the environment and loweringlower energy costs to our homebuyers.

Our multi-family construction offers comparable finishes to a new construction home, featuring quartz countertops, stainless steel kitchen appliances, in-unit washer and dryer, and premium flooring. The floorplans are designed to support the communities we serve, including but not limited to, studios, one bedroom with one bath, two bedrooms with two baths, and a loft feature. Many communities offer recreational buildings for tenants to gather with neighbors, and entertain their families.

We utilize strategic partnerships with local real estate brokers and property management companies who specialize in their local markets. We sell our homes, land, and apartments through independent real estate brokers. Salesbrokers and sales representatives and independent brokers assistwho assisted potential buyers by providing them with basic floor plans, price information, development and construction timetables, and property tours. We rent our multi-family properties through property management companies who assist potential renters by providing them with floor plans, pricing information, tours of model homes,the apartments, and the selection of options, if applicable. We, along with our design consultants, strive for superior design choices that coincide with the lifestyles of targeted homebuyers.screening and processing applications.

Our selling agents and brokers advertise directly to potential homebuyers through the internet and in newspapers and trade publications, as well as through marketing brochures and newsletters.

Construction may start when a customer has selected a lot, chosen a floor plan, and received preliminary mortgage approval. However, construction usually begins prior to that point in order to satisfy market demand for completed homes and to facilitate construction scheduling and/or cost savings. HomeThe home building revenues are recognized when home sales are finished, and closed, and title and possession are transferred to the buyer.

Our sales contracts typically require an earnest money deposit. Buyers are generally required to pay an additional deposit when they select options or upgrades for their homes. The amount of earnest money required varies between markets and communities but typically averages 2.5%averaged approximately 2% of the home’s total purchase price of the home.price. Most of our sales contracts stipulate that when homebuyers cancel their contracts with us, following a stipulatedspecified period of time, we have the right to retain their earnest money and option deposits. Our sales contracts may also include contingencies that permit homebuyers to cancel and receive a partial or full refund of their deposits if they cannot obtain mortgage financing at prevailing or specified interest rates within a specified time period or if they cannot sell an existing home. The length of time between the signing of a sales contract for a home and delivery of the homehouse to the buyer varies depending on customer preferences, permit approval, and construction cycles.closing schedules.

Customer Relations, Quality Control, and Warranty Programs

Our multi-family communities are constructed to satisfy market demand for available rental housing, and construction is generally facilitated when financing is secured. We pay particular attentionbegin renting the units once we have acquired occupancy permits with the intention to sell the product design process and carefully consider quality and choice of materials in order to reduce building deficiencies. The quality and workmanshipproject during construction or upon complete build-out of the subcontractors we employ are monitored with regular inspectionsproject and evaluations, seeking to ensure that all standards are met.

We maintain quality control and customer service staff whose role includes providing a positive experience for each customer throughout the pre-sale, sale, building, closing, and post-closing periods. These employees are also responsible for providing post-sale customer support. Our quality and service initiatives include providing customers with a comprehensive walk-through of their home prior to closing.

Warranty Programs

We provide each homeowner with product warranties covering workmanship and materials for one year from the time of closing and warranties covering structural systems for six years from the time of closing in connection with our general liability insurance policy. We believe our warranty program meets or exceeds terms customarily offered in the home building industry. The subcontractors who perform most of the actual construction also provide us with customary warranties on their workmanship.rental stabilization.

Materials

When constructing our projects, we use various materials and components. The typical build time for our single-family homes is sixnine to ten12 months, and for our multi-family communities is 1518 to 24 months, during which time materials are subject to price fluctuations. Such price fluctuations are caused by several factors, including seasonal variations in availability, international trade disputes and resulting tariffs, and increased demand for materials due to the improved market. The current state of the global supply chain has the potential to increase our cost on certain materials such as quartz slabs for countertops, finished hardware, lighting fixtures, appliances, and engineered hardwood used in residential flooring. While it has had a minimal effect on our sourcing of materials and supplier components thus far, the continuing global supply chain disruptions, and the ongoing COVID-19 pandemic could impact our sourcing needs in the future.

Our material suppliers are subcontractors that are licensed, bonded, and insured. Each subcontractor provides a bid for the materials and work required and is awarded a contract based on price, reputation, and ability to meet our time frames.

Our material suppliers provide us with credit terms for materials used in the construction of our projects. Credit terms typically range from a 30 to 60-day payment cycle following theirthe delivery or installation of a product or service.

COVID-19

On March 25, 2020, the Governor of Washington imposed a complete moratorium on construction of single-family low-risk construction in the State (the “Moratorium”). We had to cease construction operations on that date. The Moratorium was lifted on April 24, 2020, provided that safety measures were implemented, including the creation of a COVID-19 safety plan, exposure response procedure plan, and mandatory construction site safety meetings. We implemented the safety measures and re-started housing construction activities. The possibility remains that the Governor could impose new or additional requirements or restrict or completely halt construction again depending on the development of the COVID-19 infection rate.

We have not experienced any material sales contract cancellations due to the pandemic or otherwise. We have experienced minimal supply-chain issues with both cabinetry and appliances related to COVID-19. As of the date of this Annual Report, our projects are on-schedule and operations are not being materially impacted by the COVID-19 pandemic.

Seasonality

We experience seasonal variations in our quarterly operating results and capital requirements. We typically experienceexperienced the highest new home ordersale activity in the spring and summer, although this activity is also highly dependentdepends on the number of active selling communities, the timing of new community openings, and other market factors. Since it typically takes sixnine to ten12 months to construct a new home, we generally deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs, and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occursoccur during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

While the leasing side of multi-family communities can experience some seasonality during the winter holiday months, the construction side typically doesn’t show seasonality patterns. The building process typically takes 1518 to 24 months, depending on the size of the project, the site development scope, and other project or market factors.

Governmental Regulation and Environmental Matters

We are subject to numerous local, state, federal, and other statutes, ordinances, rules, and regulations concerning zoning, development, building design, construction, and similar matters which impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. Projects that are not entitled may be subject to periodic delays, changes in use, less intensive development, or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future.initiatives. Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development.

We are also subject to a variety of local, state, federal, and other statutes, ordinances, rules, and regulations concerning the environment. The particular environmental laws which apply to any given construction site varyvaried according to the site’s location, its environmental conditions, and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict homebuildingbuilding activity in environmentally sensitive regions or areas. From time to time, the Environmental Protection Agency (the “EPA”) and similar federal or state agencies review homebuilders’ compliance with environmental laws and may levy fines and penalties for failure to strictly comply with applicable environmental laws or impose additional requirements for future compliance as a result of past failures. Any such actions imposed on us may increase our costs. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials such as lumber.

Under various environmental laws, current or former owners of real estate, as well as certain other categories of parties, may be required to investigate and remediate hazardous or toxic substances or petroleum product releases and may be held liable to a governmental entity or to third parties for property damage and for investigation and remediation costs incurred by such parties in connection with the contamination. In addition, in those cases where an endangered species is involved, environmental rules and regulations can result in the elimination of development in identified environmentally sensitive areas. To date, we have never experienced a significant environmental issue.

Competition and Market Factors

We face competition in the homebuilding industry, which is characterized by relatively low barriers to entry. Homebuilders compete for, among other things, home buyinghomebuying customers, desirable land parcels, financing, raw materials, and skilled labor. Increased competition may prevent us from acquiring attractive land parcels on which to build homes, apartments, townhomes, condominiums, or deliver finished lots, or make such acquisitions more expensive, hinder our market share expansion, or lead to pricing pressures that may adversely impact our margins and revenues. Competitors may independently develop land and construct housing units that are superior or substantially similar to our products and because they are or may be significantly larger, have a longer operating history, and have greater resources or lower cost of capital than us, may be able to compete more effectively in one or more of the markets in which we operate or plan to operate. We also compete with other homebuilders that have longer standingwith longer-standing relationships with subcontractors and suppliers in the markets in which we operate or plan to operate. If our Proposed Plan is approved, we will face competition for the sale of our assets.

Human Capital

We experienced a significant decrease in the number of our employees. As of March 21, 2022,28, 2023, we had 8041 full time employees and as of March 28, 2024, we had eight full-time employees; 41none of our employeeswhich are covered by a collective bargaining agreement.

Our human capital resources objectives include, as applicable, retaining, incentivizing and integrating our existing employees, advisors, and consultants. We do not plan to give additional equity in the future. The safety and well-beingprincipal purposes of our employees are important to us. We take guidance from the State of Washington regarding COVID-19 protocolsequity incentive plans in the workplace. Some employees that are ablelast two fiscal years were to perform their job functions remotely are working remotely. However, this may change if there are any other developments in state or local lawsattract, retain, and on a case-by-case basis.reward personnel through the granting of equity-based compensation awards.

Available Information

Our website address is www.harborcustomhomes.com.www.harborcustomdev.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other publicly filed documents, including all exhibits filed therewith, are available and may be accessed free of charge through the “Investor Relations”Investor Relations section of our website under the SEC Filings subsection, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC at www.sec.gov. Also available through the “Investor Relations”Investor Relations section of our website are reports filed by our directors and executive officers on Forms 3, 4, and 5, and amendments to those reports. Our website and included or linked information on theour website are not incorporated into this Annual Report. Resources for the Company’s creditors and equity interest holders can be found by visiting the website at https://cases.creditorinfo.com/hcdi, including court filings and other documents related to the Chapter 11 process. Aditi Paranjpye at Cairncross & Hempelmann, P.S. is serving as lead bankruptcy legal counsel to the Company.

ITEM 1A. RISK FACTORS

Our business, results of operations, and financial condition are subject to numerous risks and uncertainties. In connection with any investment decision with respect to our securities, you should carefully consider the following risk factors, as well as the other information contained in this report and our other filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Should any of these risks materialize, our business, results of operations, financial condition and future prospects could be negatively impacted, which in turn could affect the trading value of our securities. You should read these Risk Factors in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our consolidated financial statements and related notes in Item 8. Additionally, some statements herein constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”

Bankruptcy Related Risks:

As a result of the Chapter 11 Case, our historical financial information may not be indicative of our future performance.

We previously had contracts for sale on several properties. However, some of these contracts were cancelled as the offerors were not able to obtain financing on acceptable terms. Any additional offers that we received for our properties were substantially lower than our listing price whereby we would not generate a profitable exit at such prices. Due to these factors, along with cost overruns and construction delays, a decline in the real estate market, delayed timelines, and debt service payments, we determined it was in the best interests of our shareholders and creditors to take aggressive actions to cut costs and preserve cash, file the Chapter 11 Case, cease our real estate acquisition, development, and construction operations and cease any new projects.

Therefore, the nature of our current business activities is materially different than prior to filing the Chapter 11 Case on December 11, 2023. Furthermore, during the Chapter 11 Case, we expect our financial results to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, new claims that may be significant, and claims assessments significantly impact our consolidated financial statements.

The Bankruptcy Court established February 16, 2024 as the deadline by which parties were required to file proofs of claim in the Chapter 11 Case and June 10, 2024 for all governmental entities to file their proofs of claim. However, we cannot provide any assurances regarding what our total actual liabilities based on such claims will be. As a result, our historical financial performance, including information presented as of December 31, 2023, is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Case.

In particular, the amount and composition of our assets and liabilities will be significantly different as a result of the Chapter 11 Case, and the description of our operations, assets, liabilities, contingencies, liquidity and capital resources included in our periodic reports or in any filing we make with the Bankruptcy Court may not accurately reflect our such matters during the pendency of or following the Chapter 11 Case or the value of our remaining assets in light of the uncertainty of the estimates and assumptions used in the applicable reporting principles, and such values may be higher or lower as a result. A number of additional claims may be filed in the Chapter 11 Case which may be substantial and may result in a greater number of allowed Claims than estimated in the Disclosure Statement. In addition, we face uncertainty with respect to liabilities for potential future litigation and claims, as well as potential regulatory actions and government investigations and inquiries, for which we may incur significant legal costs and may be subject to significant uninsured losses that cannot yet be determined and may be significantly higher than any related accruals.

Further, if confirmation by the Bankruptcy Court of the Proposed Plan does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of Claims and Interests or upon the showing of cause, the Bankruptcy Court may convert the Chapter 11 Case to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

There is substantial doubt regarding our ability to continue as a going concern and our liquidity requirements during and following the pendency of the Chapter 11 Case and the adequacy of our capital resources are difficult to predict at this time.

We have concluded that there is substantial doubt regarding our ability to continue as a going concern. We face uncertainty regarding the adequacy of our liquidity and capital resources to be used during the Chapter 11 Case as well as to maintain our limited expected operations if and when we emerge from bankruptcy. Through the Chapter 11 Case, we plan to continue to sell our homes, lands, and lots in California and Texas, sell our multifamily properties through a sale and auction process, and then, following the effectiveness of the Proposed Plan, a Plan Administrator will continue to hold, market, and sell any remaining real property. We have ceased the majority of our land development and construction operations, but we plan to continue to lease our multi-family properties through the pendency of the auction and sale of such properties. We have not identified sources of material revenue, earnings, operations, or near term actionable opportunities following the Chapter 11 Case. We can give no assurances as to the outcome of any efforts to realize any value from our assets.

We have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Case and expect to continue to incur significant professional fees and costs throughout our Chapter 11 Case. In addition, we face uncertainty with respect to ongoing and potential future litigation and claims, as well as regulatory actions and government investigations and inquiries, for which we will continue to incur significant legal costs. Due to cessation of our construction and development operations, we may lack any material sources of revenue, our ability to obtain additional financing is highly unlikely, and our ongoing operations following the completion of the Chapter 11 Case are expected to be limited. There can be no assurances that cash on hand and our current capital resources will be sufficient to allow us to satisfy our obligations related to the Chapter 11 Case or the pending litigation, claims and investigations, and may negatively impact our ability to make any distribution and, if so, the amount of such distribution, to our creditors and shareholders.

Trading our securities is highly speculative and poses substantial risks.

Our post-bankruptcy capital structure has yet to be determined, and it is uncertain whether our Proposed Plan will be approved by the Bankruptcy Court. The Proposed Plan proposes that our common stock will be cancelled, released, extinguished, and discharged and will be of no further force or effect and that each holder of common stock will receive no recovery or distribution on account of their interests in the common stock. The Proposed Plan further contemplates that each holder of our Class A Preferred Stock shall be entitled to receive such holder’s pro rata share of 49% of the “Post-Effective Date New Interests,” which is defined as the common stock (or other equity interests) of the Company to be issued on or after the effectiveness of the Proposed Plan. Once the Proposed Plan is effective, all of the shares of our Class A Preferred Stock shall be cancelled, released, extinguished, and discharged and will be of no further force or effect, including any right a holder of a Class A Preferred Stock may assert for declared or undeclared dividends prior to the Petition Date.

Although we cannot predict how the Claims and Interests of holders in the Chapter 11 Case, including holders of our securities, will ultimately be resolved, any trading in our securities during the pendency of the Chapter 11 Case is highly speculative and poses substantial risks to purchasers of our securities. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Bankruptcy Chapter 11 Case.

In addition, on December 15, 2023, the Bankruptcy Court entered an Interim Order Approving Notification and Hearing Procedures for Certain Transfers of Common and Preferred Stock and Granting Related Relief (the “Trading Restriction Order”), which was designed to enable us to protect any potential value of our NOLs. The Trading Restriction Order restrict transactions involving any person or group of persons that is or, as a result of such a transaction, would become, a Substantial Shareholder of our common stock or Class A Preferred Stock (i.e., would beneficially own, directly or indirectly, (a) 5% of all issued and outstanding shares of common stock (being 2,686,431 shares as of March 28, 2024) or (b) 5% of all issued and outstanding shares of preferred stock (being 3,799,799 shares as of March 28, 2024).

During the Chapter 11 Case, the value that may be available to our various stakeholders, including our creditors and shareholders, is uncertain and our ability to generate value for shareholders, if any, will be subject to the risks and uncertainties associated with bankruptcy proceedings, including, among others, those described elsewhere in this and subsequent filings that we make with the SEC. Accordingly, we urge extreme caution with respect to existing and future investments in our securities.

We are subject to the risks and uncertainties associated with the Chapter 11 Case.

Since filing the Chapter 11 Case, we have operated our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Code. As a consequence of filing the Chapter 11 Case, we have been and will continue to be subject to the risks and uncertainties associated with bankruptcy. These risks include, but are not limited to, the following:

Because of the risks and uncertainties associated with a voluntary filing for relief under Chapter 11 of the Bankruptcy Code and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during the Chapter 11 Case may have on ultimate recovery for our creditors and shareholders.

We may not be able to obtain confirmation of the Proposed Plan, or any amended or subsequent plan.

We may not receive the acceptances from holders of Claims and Interests entitled to vote on the Proposed Plan required to confirm the Proposed Plan. In the event that votes with respect to Claims in the classes entitled to vote are received in number and amount sufficient to enable the Bankruptcy Court to confirm the Proposed Plan, we intend to seek confirmation of the Proposed Plan by the Bankruptcy Court. However, if the requisite acceptances are not received, we may not be able to obtain confirmation of the Proposed Plan. Even if the requisite acceptances of the Proposed Plan are received, the Bankruptcy Court might not confirm the Proposed Plan if the Bankruptcy Court finds that any of the statutory requirements for confirmation under section 1129 of the Bankruptcy Code have not been met.

Moreover, certain holders of Claims or Interests may object to confirmation of the Proposed Plan, including on the basis that our proposed classification and treatment of Claims and Interests under the Proposed Plan does not comply with the Bankruptcy Code. There can be no assurance that such objections (if any) will be resolved or that the Bankruptcy Court will overrule such objections and confirm the Proposed Plan.

Even if the Proposed Plan or another plan of reorganization is confirmed by the Bankruptcy Court, it may not become effective because it is subject to the satisfaction of certain conditions (some of which are beyond our control) and is otherwise subject to the risks and uncertainties set forth in the Disclosure Statement, which shareholders are encouraged to read in its entirety. There can be no assurance that such conditions will be satisfied and, therefore, that a plan of reorganization will become effective and that we will emerge from the Chapter 11 Case as contemplated by a plan of reorganization. Further, the Proposed Plan was developed based on various assumptions regarding our potential sale of our assets, amounts of our liabilities, and the involvement of numerous parties, which assumptions may prove to be incorrect and could render the Proposed Plan unsuccessful and any payments thereunder may differ from estimates. If the transactions contemplated by the Proposed Plan are not completed, it may become necessary to amend the Proposed Plan. The terms of any such amendment are uncertain and could result in material additional expense and result in material delays to the Chapter 11 Case. As a result, there can be no assurance as to what the state of our business would be following the Chapter 11 Case.

Any Chapter 11 plan that we may implement will likely be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, or adverse market conditions persist or worsen, our plan may be unsuccessful in its execution.

The Proposed Plan or any other Chapter 11 plan that we may implement will affect both our capital structure and the ownership, structure and operation of our remaining business and will likely reflect assumptions and analyses based on our experience and perception of historical trends, current conditions, and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to the ability to substantially change our capital structure; the ability to sell our assets; and the overall strength and stability of general economic conditions.

In addition, the Proposed Plan may rely upon financial projections, including with respect to revenues, operating expenses, capital expenditures, debt service and cash flow. Financial forecasts are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal, because they may involve fundamental changes in the nature of our capital structure. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan we may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business.

The Proposed Plan may not be approved by the creditors or confirmed by the Bankruptcy Court and we may have to amend the Proposed Plan.

The Proposed Plan is subject to vote by various classes of creditors and to confirmation by the Bankruptcy Court. There is no assurance that the Proposed Plan will be accepted by the requisite number of creditors or confirmed by the Court. Further, the effectiveness of the Proposed Plan is subject to the sale of certain of our multi-family properties. There is a risk that such properties will not be sold and the Proposed Plan does not become effective. In the event that any of the aforementioned occur, we may have to amend the Proposed Plan the terms of which may be less favorable to the holders of Claims and Interests under our current Proposed Plan.

In the event we are not able to obtain confirmation of the Proposed Plan, it may be necessary to pursue bankruptcy protection under Chapter 7 of the Bankruptcy Code for all or a part of our business.

If confirmation by the Bankruptcy Court of the Proposed Plan under Chapter 11 does not occur, or if the Bankruptcy Court otherwise finds that it would be in the best interest of holders of Claims and Interests or upon the showing of cause, the Bankruptcy Court may convert our Chapter 11 Case to cases under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. Although the value, if any, that would be available to any of our various stakeholders (including creditors and stockholders) would be uncertain in any bankruptcy proceeding, we believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our stakeholders than those we might obtain under Chapter 11 primarily because of the likelihood that the remaining assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty except for liabilities subject to compromise and not subject to compromise.

We depend on a few highly skilled key employees to navigate the Chapter 11 Case and contribute to our ability to realize future value of our remaining assets, and if we are unable to retain, manage, and appropriately compensate them, the outcome of the Chapter 11 Case and ability to realize value from our remaining assets could be adversely affected.

Our ability to successfully consummate the Proposed Plan and realize the value of our remaining assets is based on continued service of our senior management team and other key employees, and on our ability to continue to motivate and appropriately compensate key employees. Some of our employees may be subject to claims and risks of litigation for which indemnification may be uncertain. We may not be able to retain the services of our key employees, who work for us on an at-will basis, in the future.

We have experienced significant voluntary resignations among our employees prior to and following the Chapter 11 Case. As a result of our ongoing reductions in force, we are operating with a severe shortage of personnel and may not be able to conduct even limited operations to implement the Proposed Plan. We have experienced a reduction in our workforce from 41 employees in March 2023 to eight employees in March 2024. We only have two outstanding employment agreements, one with Ms. Crocker, our Chief Restructuring Officer and one with Mr. Habersetzer, our Interim Chief Executive Officer and Interim President. All other employees are at-will employees.

We have already scaled back our information technology systems, and have terminated our IT Director. We have hired a third-party IT service provider to assist with the responsibilities previously conducted by the former IT Director. Though we do not anticipate collecting or storing any significant confidential information related to customers, employees, or vendors, we may be at increased risk of disruptions, cyberattacks or security breaches.

The attrition we have already experienced, and expect to continue to experience, causes us to rely on fewer employees, and in some cases these employees are less experienced which puts at greater risk our ability to execute our plans. Attrition has caused, and may continue to cause, us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees. If our key employees fail to work effectively and to execute our plans, the Chapter 11 Case, including our efforts to realize value from our remaining assets could be prolonged or adversely affected.

We expect to further reduce and streamline our operations in connection with the Chapter 11 Case.

In connection with the Chapter 11 Case, we expect to take measures to further streamline our operations and reduce our general and administrative expenses during the course of the Chapter 11 Case.

We also anticipate further reducing our workforce and restructuring, reducing, eliminating, or outsourcing certain management services, as necessary to manage our limited operations. It is difficult to predict what, if any, errors or delays might occur as the result of changes in controls or a reduced workforce. While we expect our operations to remain limited, implementing these measures may adversely impact our operations and increase liability exposure and our susceptibility to other risks inherent to operating our business with significantly limited resources and personnel.

The Chapter 11 Case limits the flexibility of our management team in running our business.

While we operate our business as debtors-in-possession under supervision by the Bankruptcy Court, we are required to obtain the approval of the Bankruptcy Court prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, possible negotiations with other parties-in-interest, and one or more hearings. The other parties-in interest may be heard at any Bankruptcy Court hearing and may raise objections with respect to these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to us.

We face risks and uncertainties related to potential future litigation and claims, as well as regulatory actions and government investigations and inquiries, for which we may incur significant legal costs and may be subject to losses.

We may in the future be subject to, or become a party to, litigation, claims, regulatory actions, and government investigations and inquiries, as we may be subject to claims by customers, suppliers, vendors, contractors, government agencies, stockholders, or other parties regarding our properties, developments, advertising, securities, warranties, contract, and corporate matter disputes, and employee claims against us. We have potential indemnification obligations with respect to the current and former directors named in the above-referenced actions, which obligations may or may not be covered by our applicable directors’ and officers’ insurance.

In the event we become subject to such litigation, it may divert our financial and management resources that would otherwise be used to benefit our operations, increase our insurance costs, and cause reputational harm. We would expect to incur significant legal expenses in defending any such claims.

While we currently carry commercial general liability, excess liability, builder’s risk, pollution, employment, fiduciary crime and legal, cyber security and directors’ and officers’ insurance policies, coverage amounts are limited. In the future, we may not maintain any insurance coverage at all or may reduce coverage due to lack of funding or insurers being unwilling to provide coverage at all, or at a substantially higher cost. In some cases, our insurance policies may expire and if we are not able to obtain replacement coverage, could have a material adverse effect on our operations if there were to be a material loss. Additionally, the policies that we do have may include significant deductibles and exclusions, and we cannot be certain that our insurance coverage will be applicable to or sufficient to cover all current and future claims against us. We may also seek to reduce or eliminate our insurance coverage or certain policies in the future.

We may not be able to realize value from our assets.

Under the Proposed Plan, we intend to continue to sell some of our properties in the ordinary course, and submit our multi-family properties to a sale and auction process. The remaining properties are intended to be sold by our Plan Administrator following the effectiveness of the Proposed Plan. In the event that all of our properties are sold, as a result, the assets that we would continue to hold that are of the type that were previously used in our operations are minimal. We cannot provide assurances as to the value of our other assets. Given general economic and market conditions, we can provide no assurance that we will be able to successfully complete any dispositions of our remaining assets, the timing or proceeds and other terms of any such transactions, and any ability to realize value from the NOLs.

The failure to realize value from our assets or to generate sufficient proceeds therefrom to sustain our Chapter 11 Case and post-emergence activities may have a material impact on the ultimate recovery for stakeholders, including creditors. As mentioned above, it is uncertain whether holders of our equity securities will recover any portion of their investments.

The amount of claims allowed could significantly exceed our estimates.

The Bankruptcy Court established February 16, 2024 as the general bar date for all creditors (except governmental entities) to file their proof of claim or interest, and June 10, 2024 as the bar date for all governmental entities. There can be no assurance regarding the amount of claims allowed for distributions under the Proposed Plan or that such claims will not be significantly greater than may be anticipated which, could in turn result in the value of distributions to stakeholders being delayed, reduced, or eliminated entirely. Inevitably, some assumptions will not materialize, and unanticipated events and circumstances may affect the ultimate results and total amount of claims against us. Moreover, a number of additional claims may be filed in the Chapter 11 Case. Such Clams may be substantial and may result in a greater amount of allowed Claims than estimated in the Disclosure Statement.

In addition, the SEC may determine that certain of our obligations are not dischargeable under the Bankruptcy Code; if the SEC brings and prevails in such non-dischargeability action, such obligations would remain even after the Effective Date of the Proposed Plan, which could impact recoveries to holders of Claims and Interests pursuant to the Proposed Plan.

If our SEC reporting obligations continue, our ability to meet these obligations timely or at all may be limited.

Our securities currently trade on the OTC Pink Current Information. We may be required to maintain our SEC reporting obligations to facilitate trading of our securities during the Chapter 11 Case. If we are unable to meet these obligations timely or at all, the amount of publicly available information concerning us and our securities may decrease substantially, which may limit the ability of our stockholders to sell their shares of our stock, and the liquidity and trading prices of our securities could be negatively impacted.

The amount of publicly-available information concerning us may decrease substantially if we are able to terminate our SEC reporting obligations in the near future, which may occur during the Chapter 11 Case.

We currently have fewer than 300 holders of record of our stock. Therefore, we may be eligible to suspend our reporting obligations to file periodic reports with the SEC under the Exchange Act, and may do so in the near future. To the extent these actions limit the amount of publicly available information concerning us and our securities, our ability to raise additional funds, the ability of our shareholders to sell their securities, and the liquidity and trading prices of our common shares could all be negatively impacted.

Operating in bankruptcy for a long period of time may extinguish our available assets, and would otherwise harm or eliminate recoveries to creditors and stockholders.

A long period of operations in the Chapter 11 Case under Bankruptcy Court protection would likely have a material adverse effect on our financial condition, liquidity, and ability to successfully complete the Chapter 11 Case and Proposed Plan. A prolonged period of operating under Bankruptcy Court protection may make it more difficult to retain management and other key personnel necessary to the success of our bankruptcy process and ability to realize further value from our remaining assets. We have a limited source of ongoing revenue. Attrition has required and may continue to require us to engage third parties to perform the work. Such third parties are likely to be more costly and less efficient than if we were to be able to use our own employees.

So long as the Chapter 11 Case continues, we will be required to incur substantial costs for professional fees and other expenses associated with the administration of the Chapter 11 Case, including potentially the costs of litigation. In general, litigation can be expensive and time consuming to bring or defend against. Such litigation could result in settlements or damages that could significantly and adversely affect our financial results. It is also possible that certain parties will commence litigation with respect to the treatment of their claims under the Proposed Plan. It is not possible to predict the potential litigation that we may become party to, nor the final resolution of such litigation. The impact of any such litigation on our current plans to complete the bankruptcy process, however, could be material.

Any delays in our Chapter 11 Case would increase the costs and risks associated with the bankruptcy process, and diminish the value, if any, that is available to our various stakeholders (including creditors and stockholders). Also, we need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business during the course of bankruptcy proceedings, which may limit our ability to respond timely to certain events or take advantage of certain opportunities. Because of the risks and uncertainties associated with bankruptcy proceedings, we cannot accurately predict or quantify the ultimate impact of events that could occur during any such proceedings. There can be no assurances that we will realize value from of our remaining assets in an orderly fashion, that we will otherwise realize any significant value for our remaining assets, or that our creditors or stockholders will receive any recovery from the Chapter 11 Case or any other bankruptcy proceedings.

Our securities have been delisted from Nasdaq and experience the risks of trading in an over-the-counter market.

On December 12, 2023, we received written notification from Nasdaq that they would suspend trading of our common stock, preferred stock, and warrants (formerly Nasdaq: HCDI, HCDIP, HCDIW, and HCDIZ) on December 21, 2023. Following, Nasdaq filed Form 25-NSE with the SEC on February 15, 2024 to delist such securities from Nasdaq.

As a result of the suspension and delisting, our common stock began trading on the OTC Pink Current Information under the symbols “HCDIQ,” “HCDPQ,” “HCDWQ,” and “HCDZQ” on December 21, 2023 and such market is currently the only trading market for our securities. We can provide no assurance that our securities will continue to trade on this market, whether broker-dealers will continue to provide public quotes of our securities on this market, whether the trading volume of our securities will be sufficient to provide for an efficient trading market or whether quotes for our securities will continue on this market in the future, which could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our securities. Furthermore, because of the limited market and generally low volume of trading in our securities, the price of our securities is likely to be volatile and more likely to be affected by broad market fluctuations, general market conditions, changes in the markets’ perception of our securities, and announcements made by us or third parties with Interests in the Chapter 11 Case.

We currently remain subject to SEC reporting obligations. However, with the severely limited personnel and resources, remaining in compliance with such reporting obligations may be difficult and costly. No assurances can be made that we will remain in compliance with our reporting obligations, including as it relates to the required timelines for financial statements or other disclosures.

The Chapter 11 Case has caused our securities to decrease in value materially and may render our securities worthless.

We have a substantial amount of indebtedness that is senior to our existing securities. Recoveries in the Chapter 11 Case for holders of our securities, if any, will depend upon the realized value of our assets, and the outcome of the Proposed Plan, among other factors. If the Proposed Plan is approved by the Bankruptcy Court, then our common stock will be cancelled and its holders will not receive any recoveries and our Series A Preferred Stock will also be cancelled, along with any accrued dividends and its holders will receive new securities of the Company. Although we cannot predict whether the Proposed Plan will be approved by the Bankruptcy Court or how our securities will be treated under any Chapter 11 plan at this time, our stockholders may not receive a material, or any, recovery. Consequently, there is a significant risk that our securities will decrease in value materially or become worthless. Trading prices for our securities may bear little or no relationship to the actual recovery, if any, by holders of our securities in the Chapter 11 Case.

We consider the value of our stock to be highly speculative and strongly caution our equity holders that our stock likely has no value. Accordingly, we urge that appropriate caution be exercised with respect to existing and future investments in our securities.

If we are successful in selling our assets, we will have no material operating activities remaining and no material source of income. The risk factors which follow are principally based on the risks inherent in operating and financing our business in a manner which included our current operations. It is presented for historical purposes to only cover the time periods discussed in this Report. The presentation of these risk factors is not meant to suggest that we expect to own and operate any of our current, or any other, operating business in the future.

Business and Industry Risks:

We are subject to demand fluctuations in the housing market and the homebuilding industry. The recent decline in demand in the housing market may not continue to grow ator decline further. Any continuation in the same rate, or may decline, and anyrecent decline in demand or any further decline in demand for our marketshomes or forin the homebuilding industry generally may materially and adversely affect our business, results of operations, and financial condition.

Demand for our homes is subject to fluctuations, often due to factors outside of our control. We cannot predict whether and to what extent the housing markets in the geographic areas in which we operate will continue to grow, particularly if interest rates for mortgage loans, land costs, and construction costs continue to rise. Currently, we believe we are in a housing market downturn, since demand for our homes has decreased; our revenues and results of operations have been adversely affected; we have had significant inventory impairments and other write-offs; our gross margins have declined significantly from historical levels; and we incurred substantial losses from operations. Other factors that mighthave impacted and may continue to impact growth in the homebuilding industry include uncertainty in domestic and international financial, credit and consumer lending markets amid slow economic growth or recessionary conditions in various regions or industries around the world, including as a result of the COVID-19 pandemic, tight lending standards and practices for mortgage loans that limit consumers’ ability to qualify for mortgage financing to purchase a home, including increased minimum credit score requirements, credit risk/mortgage loan insurance premiums and/or other fees and required down payment amounts, higher home prices, more conservative appraisals, changing consumer preferences, decreased consumer confidence, higher loan-to-value ratios and extensive buyer income and asset documentation requirements, changes to mortgage regulations, slower rates of population growth or population decline in our markets, or Federal Reserve policy changes. Given thesechanges, and other factors, including those described elsewhere in this Report. At any particular time, we can provide no assurance that the presentcannot accurately predict whether housing market conditions existing at that time will continue to be strong, whether overall or in our markets. continue.

If there is limited economic growth, declines in employment and consumer income, changes in consumer behavior, including as a result of the COVID-19 pandemic, and/or tightening of mortgage lending standards, practices and regulation in the geographic areas in which we operate, or if interest rates for mortgage loans or home pricescontinue to rise, there could likely be a corresponding adverse effect on our business, prospects, liquidity, financial condition and results of operations, including, but not limited to, the number of homes we sell, our average sales price per home closed, cancellations of home purchase contracts and the amount of revenues or profits we generate, and such effect may be material.

Regional factors affecting the homebuildingreal estate industry in our current markets could materially and adversely affect us.

Our business strategy is focused on the acquisition of suitable land and the design, construction, and sale of residential housingproperties are located in Washington, California, Texas, and Florida. A prolonged economic downturn in the future in one or more of these areas, or a particular industry that is fundamental to one or more of these areas could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. If adverse conditions in these markets develop in the future, it could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Furthermore, if buyer demand for new homes in these markets decreases, home prices could decline, which would have a material adverse effect on our business.

Our industry is cyclical and adverse changes in general and local economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

Our business can be substantially affected by adverse changes in general economic or business conditions that are outside of our control, including changes in short-term and long-term interest rates; employment levels and job and personal income growth; housing demand from population growth, household formation and other demographic changes, among other factors; availability and pricing of mortgage financing for homebuyers; consumer confidence generally and the confidence of potential homebuyers in particular; consumer spending; financial system and credit market stability; private party and government mortgage loan programs (including changes in FHA, USDA, VA, Fannie Mae and Freddie Mac conforming mortgage loan limits, credit risk/mortgage loan insurance premiums and/or other fees, down payment requirements and underwriting standards), and federal and state regulation, oversight and legal action regarding lending, appraisal, foreclosure and short sale practices; federal and state personal income tax rates and provisions, including provisions for the deduction of mortgage loan interest payments, real estate taxes and other expenses; supply of and prices for available new or resale homes (including lender-owned homes); interest of financial institutions or other businesses in purchases; and real estate taxes. Adverse changes in these conditions may affect our business nationally or may be more prevalent or concentrated in particular submarkets in which we operate. Inclement weather, natural disasters (such as earthquakes, hurricanes, tornadoes, floods, prolonged periods of precipitation, droughts, and fires), other calamities and other environmental conditions can delay the delivery of our homes and/or increase our costs. Civil unrest or acts of terrorism can also have a negative effect on our business. If the homebuilding industry experiences a significant or sustained downturn, it would materially adversely affect our business and results of operations in future years. The potential difficulties described above can cause demand and prices for our homes to fall or cause us to take longer and incur more costs to develop the land and build our homes. We may not be able to recover these increased costs by raising prices because of market conditions. The potential difficulties described above could also lead some homebuyers to cancel or refuse to honor their home purchase contracts altogether.

Tightening of mortgage lending standards and mortgage financing requirements, untimely or incomplete mortgage loan originations for our homebuyers and rising mortgage interest rates could adversely affect the availability of mortgage loans for potential purchasers of our homes and thereby materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations.

Almost all of our customers finance their home purchases through lenders that provide mortgage financing. Mortgage interest rates have generally trended downward for the last several decades and reached historic lows in the past 18 months,prior year which has made the homes we sell more affordable. However, we cannot predict whether mortgagethe interest rates will continue to fall, remain low or rise. Ifhave significantly jumped in the recent year. When mortgage interest rates increase, the ability of prospective homebuyers to finance home purchases may be adversely affected, and, as a result, our operating results may be significantly negatively impacted. Our homebuilding activities are dependent upon the availability of mortgage financing to homebuyers, which is expected to be impacted by continued regulatory changes and fluctuations in the risk appetites of lenders. The financial documentation, down payment amounts and income to debt ratio requirements are subject to change and could become more restrictive. The federal government has a significant role in supporting mortgage lending through its conservatorship of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), both of which purchase or insure mortgage loans and mortgage loan-backed securities, and its insurance of mortgage loans through or in connection with the Federal Housing Administration (“FHA”), the Veterans Administration (“VA”) and the U.S. Department of Agriculture (“USDA”). FHA and USDA backing of mortgage loans has been particularly important to the mortgage finance industry and to our business. If either the FHA or USDA raised their down payment requirements or lowered maximum loan amounts, our business could be materially affected. Increased lending volume and losses insured by the FHA have resulted in a reduction of the FHA insurance fund. The USDA rural development program provides for zero down payment and 100% financing for homebuyers in qualifying areas. If the USDA program was discontinued or if funding was decreased, then our business could be adversely affected. In addition, if the USDA changed its determination of areas that are eligible to qualify for the program, it could have an adverse effect on our business. In addition, changes in governmental regulation with respect to mortgage lenders could adversely affect demand for housing. The availability and affordability of mortgage loans, including mortgage interest rates for such loans, could also be adversely affected by a scaling back or termination of the federal government’s mortgage loan-related programs or policies. Because Fannie Mae-, Freddie Mac-, FHA-, USDA- and VA-backed mortgage loans have been an important factor in marketing and selling many of our homes, any limitations, or restrictions in the availability of, or higher consumer costs for, such government-backed financing could adversely affect our business, prospects, liquidity, financial condition, and results of operations. The elimination or curtailment of state bonds to assist homebuyers could materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations. In addition, certain current regulations impose, and future regulations may strengthen or impose new, standards and requirements relating to the origination, securitization, and servicing of residential consumer mortgage loans, which could further restrict the availability and affordability of mortgage loans and the demand for such loans by financial intermediaries and, as a result, adversely affect our home sales, financial condition, and results of operations. Further, if, due to credit or consumer lending market conditions, reduced liquidity, increased risk retention or minimum capital level obligations and/or regulatory restrictions related to certain regulations, laws or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our homebuyers, or increase the costs to borrowers to obtain such loans, the number of homes we close and our business, prospects, liquidity, financial condition and results of operations may be materially adversely affected. First-time homebuyers are generally more affected by the availability of mortgage financing than other potential homebuyers. These homebuyers are a key source of demand for our new homes. A limited availability of suitable mortgage financing may adversely affect the volume and sales price of our home sales.

Fluctuations in real estate values may require us to write-down the book value of our real estate assets.

The homebuilding and land development industries are subject to significant variability and fluctuations in real estate values. As a result, we may be required to write-down the book value of our real estate assets in accordance with GAAP, and some of those write-downs could be material. Any material write-downs of assets could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

We may be required to take write-downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial condition, results of operations, and our stock price, which could cause you to lose some or all of your investment.

Factors outside of our business and outside of our control may arise. As a result of these factors, we may be forced to write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Further, unexpected risks may arise, and previously known risks may materialize in a manner not consistent with our risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about us or our securities. Accordingly, our securities could suffer a reduction in value.

Because real estate is illiquid, we may not be able to sell properties when in our best interest.

Sometimes, real estate may not be sold quickly. The capitalization rates at which properties may be sold could be higher than historic rates, thereby reducing our potential proceeds from sale. Consequently, we may not be able to alter our inventory promptly in response to changes in economic or other conditions. All of these factors reduce our ability to respond to changes in the performance of our inventory and could adversely affect our business, financial condition, and results of operations.

Inflation could adversely affect our business and financial results.

Inflation could adversely affect our business and financial results by increasing the costs of land, raw materials and labor needed to operate our business. If our markets have an oversupply of homes, relative to demand, we may be unable to offset any such increases in costs with corresponding higher sales prices for our homes. InflationDuring 2022, we experienced the fastest interest rate increase cycle since the 1980s. The Federal Reserve has already made an interest rate increase in 2023. Though they have forecasted they would cut rates, it is uncertain. They may also accompany higheragain raise interest rates whichto combat the effects of inflation. These interest rate increases have adversely impacted and could continue to adversely impact potential customers’ ability to obtain financing on favorable terms, thereby further decreasing demand. If we are unable to raise the prices of our homes to offset the increasing costs of our operations, our margins could decrease. Furthermore, if we need to lower the price of our homes to meet demand, the value of our land inventory may decrease. Inflation may also raise our costs of capital and decrease our purchasing power, making it more difficult to maintain sufficient funds to operate our business.

Reduced numbers of home sales extend the time it takes us to recover land purchase and property development costs, negatively impacting profitability and our results of operations.

We incur many costs even before we begin to build homes in a community. Depending on the stage of development a land parcel is in when we acquire it, these may include costs of preparing land, financing, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs related to ownership of the land on which we plan to build homes. If the rate at which we sell and deliver homes slows, or if we delay the opening of new home communities, we may incur additional pre-construction costs and it may take longer for us to recover our costs, which could adversely affect our profitability and results of operations.

Development, redevelopment, and construction risks could affect our profitability.

We intend to continue to develop multi-family home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may expose us to the following risks, among others:

Difficulties with appraisal valuations in relation to the proposed sales price of our homes could force us to reduce the price of our homes for sale.

Each of our home sales may require an appraisal of the home value before closing. These appraisals are professional judgments of the market value of the property and are based on a variety of market factors. If our internal valuations of the market and pricing do not line up with the appraisal valuations and appraisals are not at or near the agreed upon sales price, we may be forced to reduce the sales price of the home to complete the sale. These appraisal issues could have a material adverse effect on our business and results of operations.

Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of our real estate assets.

Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our properties, and may be adversely affected by the following risks:

Changes to population growth rates in certain of the markets in which we operate or plan to operate could affect the demand for homes in these regions.

Slower rates of population growth or population declines in our markets in Washington, California, Texas, Florida, or other key markets in the United States that we may decide to enter in the future, especially as compared to the high population growth rates in prior years, could affect the demand for housing, cause home prices in these markets to fall and adversely affect our plans for growth, business, financial condition, and operating results. Furthermore, while we have recently observed an increase in our business as a result of people moving to the suburbs during the COVID-19 pandemic, we cannot assure you that this trend will continue or not reverse.

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage.

Building sites are inherently dangerous and operating in the homebuilding and land development industry poses certain inherent health and safety risks. Due to health and safety regulatory requirements and the number of projects we work on, health and safety performance is critical to the success of all areas of our business. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements or litigation, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation and our relationships with relevant regulatory agencies, governmental authorities, and local communities, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

Development of properties entails a lengthy, uncertain, and costly entitlement process.

Approval to develop real property sometimes requires political support and generally entails an extensive entitlement process involving multiple and overlapping regulatory jurisdictions and often requires discretionary action by local governments. Real estate projects must generally comply with local land development regulations and may need to comply with state and federal regulations. We incur substantial costs to comply with legal and regulatory requirements. An increase in legal and regulatory requirements may cause us to incur substantial additional costs, or in some cases cause us to determine that the property is not feasible for development. In addition, our competitors and residents may challenge our efforts to obtain entitlements and permits for the development of properties. The process to comply with these regulations is usually lengthy and costly, may not result in the approvals we seek and can be expected to materially affect our development activities.

We cannot make any assurances that our growth or expansion strategies will be successful or not expose us to additional risks.

We have expanded our business through selected investments in new geographic markets and by diversifying our products in certain markets. Investments in land, finished lots and home inventories can expose us to risks of economic loss and inventory impairments if housing conditions weaken or we are unsuccessful in implementing our growth strategies. We may develop communities in which we build homes, sell acreage home sites as a part of the development, and sell homes. We can give no assurance that we will be able to successfully identify, acquire, or implement these new strategies in the future. Accordingly, any such expansion could expose us to significant risks, beyond those associated with operating our existing business, including understanding and complying with the laws and regulations of new jurisdictions, diversion of our management’s attention from ongoing business concerns, and incurrence of unanticipated liabilities and expenses and may materially adversely affect our business, prospects, liquidity, financial condition, and results of operations.

The homebuilding industry is highly competitive and, if our competitors are more successful or offer better value to customers, it may materially and adversely affect our business and financial condition.

We operate in a very competitive environment that is characterized by competition from a number of other homebuilders and land developers in each geographical market in which we operate. There are relatively low barriers to entry into the homebuilding business. We compete with numerous large national and regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, homebuyers, desirable land parcels, financing, raw materials and skilled management and labor resources. If we are unable to compete effectively in our markets, our business could decline disproportionately to the businesses of our competitors and our financial condition could be materially and adversely affected. Increased competition could hurt our business by preventing us from acquiring attractive land parcels on which to build homes or making acquisitions more expensive, hindering our market share expansion and causing us to increase selling incentives and reduce prices. Additionally, an oversupply of homes available for sale or a discounting of home prices could materially and adversely affect pricing for homes in the markets in which we operate. We also compete with the resale, or “previously owned,” home market, the size of which may change significantly as a result of changes in the rate of home foreclosures, which is affected by changes in economic conditions both nationally and locally. We may be at a competitive disadvantage with regard to certain large national and regional homebuilding competitors whose operations are more geographically diversified, as these competitors may be better able to withstand any future regional downturn in the housing market. We compete directly with a number of large national and regional homebuilders that may have longer operating histories and greater financial and operational resources than we do, including a lower cost of capital. Many of these competitors also have longstanding relationships with subcontractors, local governments, and suppliers in the markets in which we operate or in which we may operate in the future. This may give our competitors an advantage in securing materials and labor at lower prices, marketing their products and allowing their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market share and limit our ability to expand our business.

Our geographic concentration could materially and adversely affect us if the homebuilding industry in our current markets should experience a decline.

Our current business involves the design, construction, and sale of homesproperties in growing markets in Washington, California, Florida, and Texas. Because our operations are concentrated in these areas, a prolonged economic downturn affecting one or more of these areas, or affecting any sector of employment on which the residents of such area are dependent, could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Accordingly, our sales, results of operations, financial condition and business would be negatively impacted by a decline in the economy, the job sector, or the homebuilding industry in the regions in which our operations are concentrated. In addition, our ability to acquire land parcels for new homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, and other market conditions. If the supply of land parcels appropriate for development of homes is limited in our markets, or for any other reason, our ability to grow could be significantly limited, and the number of homes that we build, and sell could decline.

Any joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of our joint venture partners and disputes between us and our joint venture partners.

We may co-invest in the future with third parties through partnership, joint ventures, or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a land acquisition and/or a development. In this event, we would not be in a position to exercise sole decision-making authority regarding the acquisition and/or development, and our investment may be illiquid due to our lack of control. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third-party not involved, including the possibility that our joint venture partners might become bankrupt, fail to fund their share of required capital contributions, make poor business decisions, or block or delay necessary decisions. Our joint venture partners may have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor our joint venture partners would have full control over the land acquisition or development. Disputes between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. In addition, we may in certain circumstances be liable for the actions of our joint venture partners.

Natural disasters, severe weather and adverse geological conditions may increase costs, cause project delays, and reduce consumer demand for housing, all of which could materially and adversely affect us.

Our homebuilding and development operations are located in many areas that are subject to natural disasters, severe weather or adverse geological conditions. These include, but are not limited to, hurricanes, tornadoes, droughts, floods, brushfires, wildfires, prolonged periods of precipitation, landslides, soil subsidence, earthquakes, and other natural disasters. The occurrence of any of these events could damage our land parcels and projects, cause delays in completion of our projects, reduce consumer demand for housing, and cause shortages and price increases in labor or raw materials, any of which could affect our sales and profitability. In addition to directly damaging our land or projects, many of these natural events could damage roads and highways providing access to our assets or affect the desirability of our land or projects, thereby adversely affecting our ability to market homes or sell land in those areas and possibly increasing the costs of homebuilding completion. Furthermore, the occurrence of natural disasters, severe weather and other adverse geological conditions has increased in recent years due to climate change and may continue to increase in the future. Climate change may have the effect of making the risks described above occur more frequently and more severely, which could amplify the adverse impact on our business, prospects, liquidity, financial condition, and results of operations. There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with hurricanes, landslides, prolonged periods of precipitation, earthquakes and other weather-related and geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations.

If we are unable to develop or construct our properties successfully or within expected time-frames, our results of operations could be adversely affected.

It can take some time to generate revenue after we acquire land for developed lots, homes, and homes.multi-family properties. Delays in the development and construction, including delays associated with subcontractors performing the development activities or entitlements, expose us to the risk of changes in market conditions for real estate. A decline in our ability to develop and market our real estate successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and to meet our working capital requirements.

New and existing laws and regulations or other governmental actions may increase our expenses, limit our operations where we can purchase and build or delay completion of our projects.

We are subject to numerous local, state, federal and other statutes, ordinances, rules, and regulations concerning zoning, development, building design, construction, accessibility, anti-discrimination, and other matters, which, among other things, impose restrictive zoning and density requirements, the result of which is to limit our operations within the boundaries of a particular area. We may encounter issues with entitlement, not identify all entitlement requirements during the pre-development review of a project site, or encounter zoning changes that impact our operations. Projects for which we have not received land use and development entitlements, or approvals may be subjected to periodic delays, changes in use, less intensive development, or elimination of development in certain specific areas due to government regulations. We may also be subject to periodic delays or may be precluded entirely from developing in certain communities due to building moratoriums or zoning changes. Such moratoriums generally relate to insufficient water supplies, sewage facilities, delays in utility hook-ups, or inadequate road capacity within specific market areas or subdivisions. Local governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction. Projects for which we have received land use and development entitlements, or approvals may still require a variety of other governmental approvals and permits during the development process and can also be impacted adversely by unforeseen health, safety, and welfare issues, which can further delay these projects or prevent their development. As a result of any of these statutes, ordinances, rules or regulations, the timing of our home sales could be delayed, the number of our home sales could decline and/or our costs could increase, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

We are subject to environmental, health and safety laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can operate and delay completion of our projects.

We are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules, and regulations concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular environmental requirements that apply to any given site vary according to multiple factors, including the site’s location, its environmental conditions, the present and former uses of the site, the presence or absence of endangered plants or animals or sensitive habitats, and environmental conditions at adjoining or nearby properties. We may not identify all of these concerns during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development. In some instances, regulators from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project, and the resulting delays or additional costs can be material for a given project. From time to time, the EPA and similar federal, state, or local agencies review land developers’ and homebuilders’ compliance with environmental laws and may levy fines and penalties, among other sanctions, for failure to strictly comply with applicable environmental laws, including those applicable to control storm water discharges during construction, or impose additional requirements for future compliance as a result of past failures. Any such actions taken with respect to us may increase our costs and result in project delays. Further, we expect that increasingly stringent requirements will be imposed on land developers and homebuilders in the future. We cannot assure you that environmental, health and safety laws will not change or become more stringent in the future in a manner that could have a material adverse effect on our business.

Environmental laws and regulations relating to climate change and energy can have an adverse impact on our activities, operations, and profitability and on the availability and price of certain raw materials, such as lumber, steel, and concrete.

There is a growing concern from advocacy groups and the general public that the emissions of greenhouse gases and other human activities have caused, and will continue to cause, significant changes in weather patterns and temperatures and the frequency and severity of natural disasters. Government mandates, standards and regulations enacted in response to these projected climate change impacts and concerns could result in restrictions on land development in certain areas or increased energy, transportation, and raw material costs. On January 20, 2021, President Biden signed an instrument that will lead to the United States’ reentry into the Paris Agreement, which requires countries to review and “represent a progression” in their intended nationally determined contributions, which set greenhouse gas emission reduction goals, every five years. We anticipate that a variety of new legislation may be enacted or considered for enactment at the federal, state, and local levels relating to climate change and energy, including in response to the United States’ reentry into the Paris Agreement. This legislation could relate to, for example, matters such as greenhouse gas emissions control and building and other codes that impose energy efficiency standards or require energy saving construction materials. New building or other code requirements that impose stricter energy efficiency standards or requirements for building materials could significantly increase our cost to construct homes. As climate change concerns continue to grow, legislation, regulations, mandates, standards, and other requirements of this nature are expected to continue to be enacted and become costlier for us to comply with. Similarly, energy-related initiatives affect a wide variety of companies throughout the United States and because our operations are heavily dependent on significant amounts of raw materials, such as lumber, steel, and concrete, these initiatives could have an adverse impact on our operations and profitability to the extent the manufacturers and suppliers of our materials are burdened with expensive cap and trade or similar energy-related regulations.

Our business could be materially and adversely disrupted by an epidemic or pandemic (such as the continuing COVID-19 pandemic), or similar public threat, or fear of such an event, and the measures that federal, state, and local governments and other authorities implement to address it.

An epidemic, pandemic or similar serious public health issue, and the measures undertaken by governmental authorities to address it, could significantly disrupt or prevent us from operating our business in the ordinary course for an extended period, and thereby, along with any associated economic and social instability or distress, have a material adverse impact on our business, financial condition, results of operations, cash flows, strategies, or prospects. We experienced some disruptions to our business operations during the continuing COVID-19 pandemic, including a brief cessation of construction in March 2020 and some temporary closures of our office for a limited period of time. The ultimate impacts of COVID-19 and related mitigation efforts will depend on future developments, including, but not limited to, the duration and geographic spread of COVID-19; the impact of government actions designed to prevent the spread of COVID-19; the availability and timely distribution of effective treatments and vaccines; actions taken by customers, subcontractors, suppliers and other third parties; workforce availability; and the timing and extent to which normal economic and operating conditions resume. Our business could also be negatively impacted over the medium-to-longer term if the disruptions related to COVID-19 decrease consumer confidence generally or with respect to purchasing a home; cause civil unrest; negatively impact mortgage availability or the federal government’s mortgage loan-related programs or policies; delay mortgage originations; tighten mortgage lending standards; or precipitate a prolonged economic downturn or an extended rise in unemployment or tempering of wage growth, any of which could lower demand for our products; negatively impact general consumer interest in purchasing a home compared to choosing other housing alternatives; impair our ability to sell and build homes in a typical manner or at all, generate revenues and cash flows or access our Credit Agreement (as defined herein) or the capital or lending markets (or significantly increase the costs of doing so), as may be necessary to sustain our business; increase the costs or decrease the supply of building materials or the financial viability or availability of subcontractors, including as a result of infections or medically necessary or recommended self-quarantining, or governmental mandates to direct production activities to support public health efforts; and result in our recognizing charges in future periods, which may be material, for real estate impairments or land option contract abandonments, or both, related to our current real estate assets. The inherent uncertainty surrounding COVID-19, due in part to changing governmental directives, public health challenges and progress and market reactions thereto, also makes it more challenging for our management to estimate the future performance of our business and develop strategies to generate growth or achieve our objectives. Should the adverse impacts described above (or others that are currently unknown) occur, whether individually or collectively, we would expect to experience, among other things, decreases in our net orders, homes closed, average sales prices per home closed, revenues and profitability, and such impacts could be material to our business, financial condition, results of operations, cash flows, strategies or prospects in future quarters. In addition, if the U.S. experiences another surge of COVID-19 cases and the public health effort related thereto intensifies to such an extent that we cannot operate in most or all of our markets, we could generate few or no orders and deliver few, if any, homes during the applicable period, which could be prolonged. Along with a potential increase in cancellations of home purchase contracts, if prolonged government restrictions on our business and our customers return in response to increases in COVID-19 cases, or if there is an extended economic recession, we could be unable to produce revenues and cash flows sufficient to conduct our business; meet the terms of our covenants and other requirements under the loan agreements, and/or mortgages and land contracts due to land sellers and other loans; or service our outstanding indebtedness. Such a circumstance could, among other things, exhaust our available liquidity and ability to access liquidity sources or trigger an acceleration to pay a significant portion or all of our then-outstanding debt obligations, which we may be unable to do.

Acts of war or terrorism may seriously harm our business.

Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power, acts of terrorism, political uncertainty or civil unrest may cause disruption to the U.S. economy, or the local economies of the markets in which we operate, cause shortages of building materials, increase costs associated with obtaining building materials, result in building code changes that could increase costs of construction, result in uninsured losses, affect job growth and consumer confidence, or cause economic changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our business, prospects, liquidity, financial condition and results of operations.

The war in Ukraine may adversely affect our business, financial condition, and results of operation.

The war in Ukraine could have an impact on the overall stock market as well as impact the costs and availability of construction materials. Additionally, it may have an impact on the demand of homebuyers and other negative impacts that are unforeseen.

Increases in cancellations of agreements of sale could have an adverse effect on our business.

Our backlog reflects agreements of sale with our homebuyersbuyers for homesproperties that have not yet been delivered. We typically receive a deposit from our homebuyersbuyers for each home,property, which is reflected in our backlog, and we generally have the right to retain the deposit if the homebuyerbuyer does not complete the purchase. In some situations, however, a homebuyerbuyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local law, an inability to obtain mortgage financing at prevailing interest rates (including financing arranged or provided by us), an inability to sell the current home,property, or our inability to complete and deliver the new homeproperty within the specified time. If mortgage financing becomes less accessible, or if economic conditions deteriorate, homebuyersbuyers may cancel their agreements of sale with us, which could have an adverse effect on our business and results of operations.

Third-party lenders may not complete mortgage loan originations for our homebuyers in a timely manner or at all, which can lead to cancellations and a reduction in the backlog of orders, or significant delays in our closing homes sales and recognizing revenues from those homes.

Our buyers may obtain mortgage financing for their home purchases from any lender or other provider of their choice, including an unaffiliated lender. If, due to credit or consumer lending market conditions, regulatory requirements, or other factors or business decisions, these lenders refuse or are unable to provide mortgage loans to our buyers, the number of homes that we deliver, and our consolidated financial statements may be materially and adversely affected. We can provide no assurance as to a lenders’ ability or willingness to complete, in a timely fashion or at all, the mortgage loan originations they start for our homebuyers. Such inability or unwillingness may result in mortgage loan funding issues that slow deliveries of our homes or cause cancellations, which in each case may have a material adverse effect on our consolidated financial statements. In addition, recent changes to mortgage loan disclosure requirements to consumers may potentially delay lenders’ completion of the mortgage loan funding process for borrowers. Specifically, the Consumer Financial Protection Bureau has adopted a rule governing the content and timing of mortgage loan disclosures to borrowers, commonly known as TILA-RESPA Integrated Disclosures (“TRID”). Lender compliance with TRID could result in delays in loan closings and the delivery of homes that materially and adversely affect our financial results and operations.

Our business and results of operations are dependent on the availability, skill, and performance of subcontractors.

We engage subcontractors to perform the construction of our single and multifamily homes and, in many cases, to select and obtain the raw materials used in constructing our homes. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. In addition, as we expand into new markets, we typically must develop new relationships with subcontractors in such markets, and there can be no assurance that we will be able to do so in a cost-effective and timely manner, or at all. The inability to contract with skilled subcontractors at reasonable rates on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Despite our quality control and jobsite safety efforts, we may discover from time to time that our subcontractors have engaged in improper construction or safety practices or have installed defective materials in our homes. When we discoverdiscovered these issues, we utilizeutilized our subcontractors to repair the homes in accordance with our new home warranty and as required by law. The adverse costs of satisfying our warranty and other legal obligations in these instances may be significant and we may be unable to recover the costs of warranty-related repairs from subcontractors, suppliers, and insurers, which could have a material adverse impact on our business, prospects, liquidity, financial condition, and results of operations. We may also suffer reputational damage from the actions of subcontractors, which are beyond our control.

We rely on third-party suppliers and long supply chains, and if we fail to identify and develop relationships with a sufficient number of qualified suppliers, or if there is a significant interruption in our supply chains, our ability to timely and efficiently access raw materials that meet our standards for quality could be adversely affected.

Our ability to identify and develop relationships with qualified suppliers who can satisfy our standards for quality and our need to access products and supplies in a timely and efficient manner is a significant challenge. We may be required to replace a supplier if their products do not meet our quality or safety standards. In addition, our suppliers could discontinue selling products at any time for reasons that may or may not be in our control or the suppliers’ control. Our operating results and inventory levels could suffer if we are unable to promptly replace a supplier who is unwilling or unable to satisfy our requirements with a supplier providing similar products. Our suppliers’ ability to deliver products may also be affected by financing constraints caused by credit market conditions, which could negatively impact our revenue and cost of products sold, at least until alternate sources of supply are arranged.

Labor and raw material shortages and price fluctuations could delay or increase the cost of home construction, which could materially and adversely affect us.

The residential construction industry experiences labor and raw material shortages from time to time, including shortages in qualified subcontractors and tradespeople and supplies of insulation, drywall, cement, steel, and lumber. These labor and raw material shortages can be more severe during periods of strong demand for housing, during periods following natural disasters that have a significant impact on existing residential structures or as a result of broader economic or geopolitical disruptions. It is uncertain whether these shortages will continue as is, improve or worsen. In addition, our activities in recently entered markets or those we may choose to enter in the future depends substantially on our ability to source labor and local materials on terms that are favorable to us. Our markets may exhibit a reduced level of skilled labor relative to increased homebuilding demand in these markets. In the event of shortages in labor or raw materials in such markets, local subcontractors, tradespeople, and suppliers may choose to allocate their resources to homebuilders with an established presence in the market and with whom they have longer-standing relationships. Furthermore, the cost of labor and raw materials may also increase during periods of shortage or high inflation. During the economic downturn in 2007 through 2011,2012, a large number of qualified trade partners went out of business or otherwise exited the market into new fields. Price increases could cause delays in and increase our costs of home construction, which we may not be able to recover by raising home prices due to market demand and because the price for each home is typically set prior to its delivery pursuant to the agreement of sale with the homebuyer. In addition, the federal government has, at various times, imposed tariffs on a variety of imports from foreign countries and may impose additional tariffs in the future. Significant tariffs or other restrictions placed on raw materials that we use in our homebuilding operation, such as lumber or steel, could cause the cost of home construction to increase, which we may not be able to recover by raising home prices or which could slow our absorption due to being constrained by market demand. Labor and raw material shortages and price increases for labor and raw materials could cause delays in and increase our costs of home construction, which in turn could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. We have experienced delays or increased costs for certain materials, such as cabinets, electrical components, and appliances, which has had a material adverse effect on our financial condition and results of operations. If the current state of the global supply chain continues, such delays or costs may continue to increase, which may further affect our business.

New trade policies could make sourcing raw materials from foreign countries more difficult and more costly.

The federal government has recently imposedfrom time to time imposes new or increased tariffs or duties on an array of imported materials and goods that are used in connection with the construction and delivery of homes, including steel, aluminum, lumber, solar panels and washing machines, and has threatened to impose further tariffs, duties, or trade restrictions on imports. Foreign governments, including China, Russia, and the European Union, have responded by imposing or increasing tariffs, duties, or trade restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalating governmental actions that result in additional tariffs, duties or trade restrictions could cause disruptions or shortages in our supply chains, increase our construction costs or home-building costs generally or negatively impact the U.S., regional or local economies, and individually or in the aggregate, materially and adversely affect our financial results.

We may change our operational policies, investment guidelines, and our business and growth strategies without stockholder consent, which may subject us to different and more significant risks in the future.

Our board of directors will determine our operational policies, investment guidelines, and our business and growth strategies. Our board of directors may make changes to, or approve transactions that deviate from, those policies, guidelines, and strategies without a vote of, or notice to, our stockholders. This could result in us conducting operational matters, making investments, or pursuing different business or growth strategies than those contemplated in this Annual Report. Under any of these circumstances, we may expose ourselves to different and more significant risks in the future, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

We could be adversely affected by efforts to impose joint employer liability on us for labor law violations committed by our subcontractors.

Our homes are constructed by employees of subcontractors and other third parties. We do not have the ability to control what these parties pay their employees or the rules they impose on their employees. However, various governmental agencies have taken actions to hold parties like us responsible for violations of wage and hour laws and other labor laws by subcontractors. Governmental rulings that hold us responsible for labor practices by our subcontractors could create substantial exposures for us under our subcontractor relationships, which could have a material adverse impact on our business, prospects, liquidity, financial condition, and results of operations.

Our quarterly operating results fluctuate due to the seasonal nature of our business.

Our quarterly operating results generally fluctuate by season. We typically experience the highest new home order activity in the spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings, and other market factors. Since it typically takes sixnine to ten12 months to construct a new home, we usually deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Because of this seasonality, home starts, construction costs, and related cash outflows have historically been highest in the second and third quarters and the majority of cash receipts from home deliveries occurs during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.

Risks associated with our land and lot inventories could adversely affect our business or financial results.

Risks inherent in controlling, purchasing, holding, and developing land for new home construction are substantial. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases and the holding period increases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. In certain circumstances, a grant of entitlements or development agreement with respect to a particular parcel of land may include restrictions on the transfer of such entitlements to a buyer of such land, which could negatively impact the price of such entitled land by restricting our ability to sell it for its full entitled value. In addition, inventory carrying costs can be significant and can result in reduced margins or losses in a poorly performing community or market. Developing land and constructing homes takes a significant amount of time and requires a substantial cash investment. Land development is a key part of our operations, and we develop land in most of our markets. The time and investment required for development may adversely impact our business. We have substantial real estate inventories that regularly remain on our balance sheet for significant periods of time prior to their sale, during which time we are exposed to the risk of adverse market developments. Our business model is based on building homes before a sales contract is executed and a customer deposit is received. Interest and other expenses are capitalized until sold. In the event there is a downturn in home sales in our markets, our inventory of completed homes could increase, leading to additional financing costs and lower margins, which could have a material adverse effect on our financial results and operations. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all. Additionally, deteriorating market conditions could cause us to record significant inventory impairment charges. The recording of a significant inventory impairment could negatively affect our reported earnings per share and negatively impact the market perception of our business.

The long-term sustainability and growth in our home closings depends in part upon our ability to acquire land parcels suitable for residential projects at reasonable prices.

The long-term sustainability of our operations as well as future growth depends in large part on the price at which we are able to obtain suitable land parcels for development or homebuilding operation. Our ability to acquire land parcels for various residential projects may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, regulations that limit housing density, the ability to obtain building permits, environmental requirements and other market conditions and regulatory requirements. If suitable lots or land at reasonable prices become less available, the number of homes we may be able to build and sell could be reduced, and the cost of land could be increased substantially, which could adversely impact us. As competition for suitable land increases, the cost of undeveloped lots and the cost of developing owned land could also rise and the availability of suitable land at acceptable prices may decline, which could adversely impact us. The availability of suitable land assets could also affect the success of our land acquisition strategy, which may impact our ability to maintain or increase the number of our active communities, as well as to sustain and grow our revenues and margins, and achieve or maintain profitability. Additionally, developing undeveloped land is capital intensive and time consuming and we may develop land based upon forecasts and assumptions that prove to be inaccurate, resulting in projects that are not economically viable.

We are subject to warranty and liability claims arising in the ordinary course of business that can be significant.

As a homebuilder and developer, we are subject to construction defect, product liability and home and other warranty claims, including moisture intrusion and related claims, arising in the ordinary course of business. These claims are common to the homebuilding industry and can be costly. There can be no assurance that any developments we undertake will be free from defects once completed and any defects attributable to us may lead to significant contractual or other liabilities. We rely on subcontractors to perform the construction of our homes and, in some cases, to select and obtain building materials. Although we provide subcontractors with detailed specifications and perform quality control procedures, subcontractors may, in some cases, use improper construction processes or defective materials. Defective products used in the construction of our homes can result in the need to perform extensive repairs. The cost of performing such repairs, or litigation arising out of such issues, may be significant if we are unable to recover the costs from subcontractors, suppliers and/or insurers. Warranty and construction defect matters can also result in negative publicity, including on social media outlets, which could damage our reputation and negatively affect our ability to sell homes. We maintain, and require our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance and generally seek to require our subcontractors to indemnify us for liabilities arising from their work. While these insurance policies, subject to deductibles and other coverage limits, and indemnities protect us against a portion of our risk of loss from claims related to our land development and homebuilding activities, we cannot provide assurance that these insurance policies and indemnities will be adequate to address all our home and other warranty, product liability and construction defect claims in the future, or that any potential inadequacies will not have an adverse effect on our business, financial condition or results of operations. Further, the coverage offered by, and the availability of, general liability insurance for completed operations and construction defects are currently limited and costly. We cannot provide assurance that coverage will not be further restricted, increasing our risks and financial exposure to claims, and/or become costlier.

We may be unable to obtain suitable bonding for the development of our communities.

We provide performance bonds and letters of credit in the ordinary course of business to governmental authorities and others to ensure the completion of our projects or in support of obligations to build community improvements such as roads, sewers, water systems and other utilities. We may also be required to provide performance bonds or letters of credit to secure our performance under various escrow agreements, financial guarantees, and other arrangements. If we are unable to obtain performance bonds or letters of credit when required or the cost or operational restrictions or conditions imposed by issuers to obtain them increases significantly, we may be significantly delayed in developing our communities or may incur significant additional expenses and, as a result, our financial condition and results of operations could be materially and adversely affected.

Financial and Liquidity Risks:

Our ability to operate and to respond to changing business and economic conditions depends on the availability of adequate capital. Failure to generate cash flow or obtain financing could have a material adverse effect on our financial condition and results of operation and could cast uncertainty on our ability to continue as a going concern.

The continued operation of our business and our ability to respond to changing business and economic conditions depend on the availability of adequate capital, which in turn depends on cash flow generated by our business and, if necessary, the availability of equity or debt capital. We also require sufficient cash flow to meet our obligations under our existing debt agreements. We cannot assure you that our cash flow from operations or cash available under our financing agreements will be sufficient to meet our needs. If we are unable to generate sufficient cash flows from operations in the future and if availability under our financing agreements is not sufficient or unavailable, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock which could negatively impact our ability to obtain stock-based financing. There can be no assurance that we will be successful in obtaining additional capital when and if needed. If we are unable to generate sufficient revenues, utilize existing financing facilities, or obtain new financing, we may have to delay, scale back, or terminate some of our proposed projects; liquidate assets at unfavorable prices; or not be able to continue operations and possibly seek bankruptcy protection. (See Note 1. To our Financial Statements, Nature of Operations and Summary of Significant Accounting Policies—Going Concern Uncertainty.) Notwithstanding the foregoing, all of our business and operations now require approval of the Bankruptcy Court.

The filing of the Chapter 11 Case constituted an event of default that accelerated substantially all of our obligations under all of our pre-petition debt instruments.

The filing of the Chapter 11 Case constituted an event of default that accelerated substantially all of our obligations under all of our pre-petition debt instruments. Some of our loan agreements contain financial covenants that we must meet over the course of the loan. There can be no guarantee that we will be able to meet these financial covenants at any given time. If any violations of such covenants are not cured within their applicable cure periods, a lender could declare a default. At the option of the lender, declaration of a default could require a restructuring of the loan with onerous requirements or the lender could declare all amounts due under the loan immediately due and payable, in which case we would be required to pay all amounts of outstanding principal and interest immediately (“Acceleration”). If an Acceleration was demanded by a lender, we may not have cash available to pay the entire amount of the Acceleration and would have to borrow funds at egregious terms, raise dilutive financing, sell assets, or take other adverse actions and there can be no assurance that we would be successful in accomplishing any such remedial measures to satisfy an Acceleration.

Difficulty in obtaining sufficient capital could result in an inability to acquire land or increased costs and delays in the completion of development projects, increase home construction costs or delay home construction entirely.

The homebuilding and land development industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. In addition, if housing markets are not favorable or permitting or development takes longer than anticipated, we may be required to hold our investments in land for extended periods of time. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be constrained regionally or nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. Since the global recession in 2008, credit and capital markets have, from time to time, experienced unusual volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. Furthermore, any downgrade of our credit ratings or other negative rating actions by credit agencies may make it more difficult and costly for us to access capital. If we are not successful in obtaining sufficient funding for our planned capital and other expenditures or if we do not properly allocate our funding, we may be unable to acquire additional land for development and/or to construct new housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our purchase contracts, we may incur contractual penalties, fees, and increased expenses from the write-off of due diligence and pre-acquisition costs. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

Access to financing sources may not be available on favorable terms, or at all, especially in light of current market conditions, which could adversely affect our ability to maximize our returns.

Our access to additional third-party sources of financing will depend, in part, on:

The global credit and equity markets and the overall economy can be extremely volatile, which could have a number of adverse effects on our operations and capital requirements. For the past decade, the domestic financial markets have experienced a high degree of volatility, uncertainty and, during certain periods, tightening of liquidity in both the high yield debt and equity capital markets, resulting in certain periods where new capital has been both more difficult and more expensive to access. If we are unable to access the credit markets, we could be required to defer or eliminate important business strategies and growth opportunities in the future. In addition, if there is volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may increase collateral requirements or may charge us prohibitively high fees in order to obtain financing. Consequently, our ability to access the credit market in order to attract financing on reasonable terms may be adversely affected. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all. Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

Our sources of liquidity are limited and may not be sufficient to meet our needs.

We are largely dependent on our current cash balance and future cash flows from operations (which may not be positive) to enable us to service our indebtedness, to cover our operating expenses and/or to fund our other liquidity needs. Depending on the levels of our land purchases, we could generate positive or negative cash flow in future years. If the current improved market conditions in the homebuilding industry do not continue over the next several years,deteriorate, our cash flows could be insufficient to fund our obligations and support land purchases, and if we cannot buy additional land, we would ultimately be unable to generate future revenues from the sale of houses. If our cash flows and capital resources are insufficient to fund our debt service obligations or we are unable to refinance our indebtedness, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital, or restructure our indebtedness. These alternative measures may not be successful or, if successful, made on desirable terms and may not permit us to meet our debt service obligations. If our available cash and capital resources are insufficient to meet our debt service and other obligations, we could face liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or the proceeds from the dispositions may not be permitted under the terms of our debt instruments to be used to service indebtedness or may not be adequate to meet any debt service obligations then due. For additional information about capital resources and liquidity, seeliquidity. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.)

Our indebtedness could adversely affect our business, prospects, financial condition, or results of operations and prevent us from fulfilling our obligations under loan agreements.

We have a significant amount of indebtednessindebtedness. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources).Resources—Liabilities.) If we incur additional indebtedness, the risks related to our level of indebtedness could intensify. Specifically, an increased level of indebtedness could have important consequences, including: making it more difficult for usnegative ramifications, including but not limited to satisfy our obligations with respect to our indebtedness, including our loan agreements-limiting our ability to obtain additional financing to fund future working capital, capital expenditures, debt service requirements, execution of our business strategy or finance other general corporate requirements-requiring us to make non-strategic divestitures, particularly when the availability of financing in the capital markets is limited, which may adversely impact sales prices-requiring a substantial portion of our cash flow to be allocated to debt service payments instead of other business purposes, thereby reducing the amount of cash flow available for working capital, capital expenditures, acquisitions, dividends and other general corporate purposes-increasing our vulnerability to general adverse economic and industry conditions, including increases in interest rates, particularly given that certain indebtedness bears interest at variable rates-limiting our ability to capitalize on business opportunities, reinvest in and develop properties and to react to competitive pressures and adverse changes in government regulations-placing us at a disadvantage compared to other, less leveraged competitors-limiting our ability, or increasing the costs, to refinance indebtedness-resulting in an event of default if we fail to satisfy our obligations under our indebtedness, which default could result in all or part of our indebtedness becoming immediately due and payable and, in the case of our secured debt, could permit the lenders to foreclose on our assets securing such debt.following:

A breach of the covenants under any of the agreements governing our indebtedness could result in an event of default.

A default under any of the agreements governing our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under the applicable facility. Furthermore, if we were unable to repay the amounts due and payable under any secured indebtedness, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or the holders of our notes accelerate the repayment of our borrowings, we cannot assure that we would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:

These restrictions may affect our ability to grow or continue our existing operations.

Our stock price is volatile and could decline.

The securities markets in general and our common stock in particular have experienced significant price and volume volatility. The market price and volume of our common stock may continue to experience significant fluctuations due not only to general stock market conditions, but also to a change in sentiment in the market regarding our industry, operations, or business prospects. The price and volume volatility of our common stock may be affected by:

Our ability to raise funds through the issuance of equity or otherwise use our common stock as consideration is impacted by the price of our common stock. A low stock price may adversely impact our ability to reduce our financial leverage, as measured by the ratio of total debt to total capital. Continued high levels of leverage or significant increases may adversely affect our credit ratings and make it more difficult for us to access additional capital. These factors may limit our ability to implement our operating and growth plans.

We may not realize the value of our tax assets.

Certain provisions of the Internal Revenue Code could limit our ability to fully utilize certain tax assets due to a previous change in control, or if we were to experience a future change in control. If such an event were to occur, the cash flow benefits we might otherwise have received could be decreased.

Any limitation on, or reduction or elimination of tax benefits associated with homeownership would have an adverse effect upon the demand for homes, which could be material to our business.

While tax laws generally permit significant expenses associated with homeownership, primarily mortgage interest expense and real estate taxes, to be deducted for the purpose of calculating an individual’s federal and, in many cases, state taxable income, the ability to deduct mortgage interest expense and real estate taxes for federal income tax purposes is limited. The federal government or a state government may change its income tax laws by eliminating, limiting, or substantially reducing these income tax benefits without offsetting provisions, which may increase the after-tax cost of owning a new home for many of our potential homebuyers. Any such future changes may have an adverse effect on the homebuilding industry in general. For example, the loss or reduction of homeowner tax deductions could decrease the demand for new homes. Any such future changes could also have a material adverse impact on our business, prospects, liquidity, financial condition, and results of operations.

Federal income tax credits available to builders of certain energy efficient new homes may not be extended by future legislation.

On December 21, 2020,August 12, 2022, the U.S. Congress passed the Taxpayer Certainty and Disaster Tax ReliefInflation Reduction Act of 2020,2022, which former President TrumpBiden signed into law on December 27, 2020.August 16, 2022. This Act extended the availability of Code Section 45L credit for energy efficient new homes (“federal energy efficient homes tax credits”), which provides a tax credit of $2,000$5,000 per qualifying home to eligible homebuilders and made such tax credits available for homes delivered through December 31, 2021.2032. It is uncertain whether an extension or similar tax credit will be adopted in the future.

We may suffer uninsured losses or material losses in excess of insurance limits.

We could suffer physical damage to property and liabilities resulting in losses that may not be fully recoverable by insurance. Insurance against certain types of risks, such as terrorism, earthquakes, floods, or personal injury claims, may be unavailable, available in amounts that are less than the full market value or replacement cost of investment or underlying assets or subject to a large deductible or self-insurance retention amount. In addition, there can be no assurance that certain types of risks that are currently insurable will continue to be insurable on an economically feasible basis. Should an uninsured loss or a loss in excess of insured limits occur or be subject to deductibles or self-insurance retention, we could sustain financial loss or lose capital invested in the affected property, as well as anticipated future income from that property. Furthermore, we could be liable to repair damage or meet liabilities caused by risks that are uninsured or subject to deductibles. We may also be liable for any debt or other financial obligations related to the affected property.

Changes in accounting rules, assumptions and/or judgments could materially and adversely affect us.

Accounting rules and interpretations for certain aspects of our financial reporting are highly complex and involve significant assumptions and judgment. These complexities could lead to a delay in the preparation and dissemination of our financial statements. Furthermore, changes in accounting rules and interpretations or in our accounting assumptions and/or judgments, such as those related to asset impairments, could significantly impact our financial statements. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements. Any of these circumstances could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

If we fail to implement and maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, investors could lose confidence in our financial results, which could materially and adversely affect us.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in maintaining adequate internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, all of which could materially and adversely affect us. Please refer to Item 9A. CONTROLS AND PROCEDURES.

Organizational and Structural Risks:

Our performance may be negatively impacted by loss of key management personnelDelisting our securities from Nasdaq limits investors’ abilities to make transactions in our securities and other experienced employees.subject us to additional trading restrictions.

Our success dependssecurities are quoted on an over-the-counter market. We now face significant material adverse consequences, including:

The National Securities Markets Improvement Act of 1996, which is a significant degree uponfederal statute, prevents or preempts the contributionsstates from regulating the sale of certain key management personnel, including, but not limitedsecurities, which are referred to Sterling Griffin,as “covered securities.” Because our Chief Executive Officercommon stock, preferred stock, and Chairmanpublic warrants are no longer listed on Nasdaq, they are no longer covered securities, and we are subject to regulation in each state in which we offer our securities.

The exercise of our board of directors. Although we have entered into an employment agreement with Mr. Griffin, there is no guarantee that he will remain employed by us. Our ability to retain our key management personnel or to attract suitable replacements should any memberswarrants and conversion of our management team leave is dependentpreferred stock will result in dilution to our stockholders.

We issued warrants to purchase shares of common stock and issued preferred stock that include an option for the holder to convert the shares into common stock. (See Note 18. Stockholders’ Equity.) The shares of common stock issued upon exercise of our warrants and conversion of our preferred stock will result in dilution to the then existing holders of common stock and increase the number of shares eligible for resale in the public market. Sales of such shares in the public market could adversely affect the market price of our common stock or public warrants.

We do not intend to pay dividends on our common stock and preferred stock for the competitive natureforeseeable future.

Due to our illiquidity and the Chapter 11 Case, we do not intend to pay cash dividends on our common and preferred stock for the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of the employment market. The lossBankruptcy Court.

Future offerings of services from key management personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition, and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained key man life insurance thatdebt securities, which would provide us with proceeds in the event of the death or disability of any of our key management personnel. Experienced employees in the homebuilding, land acquisition, development, and construction industries are fundamentalrank senior to our ability to generate, obtaincommon stock upon our bankruptcy or liquidation, and manage opportunities. In particular, local knowledge and relationships are criticalfuture offerings of equity securities that may be senior to our ability to source attractive land acquisition opportunities. Experienced employees working incommon stock for the homebuilding, developmentpurposes of dividend and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy, or otherwise,liquidation distributions, may adversely affect the standardsmarket price of our service and may have an adverse impact on our business, prospects, liquidity, financial condition, and results of operations.common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock will have a preference on liquidating distributions and dividend payments, which could limit our ability to make a dividend distribution to the holders of our common stock.

General Risk Factors:

The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.

We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, which we refer to as the “JOBS Act.” As such, we take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies for as long as we continue to be an emerging growth company, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of SOX, (ii) the exemptions from say-on-pay, say-on-frequency and say-on-golden parachute voting requirements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. As a result, our stockholders may not have access to certain information they deem important. We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year (a) following the fifth anniversary of our IPO, (b) in which we have total annual gross revenue of at least $1.07$1.235 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock and public warrants that is held by non-affiliates exceeds $700 million as of the last business day of our prior second fiscal quarter, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected to avail ourselves of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. As a result of our reliance on these exemptions or reduced disclosures, investors may not have access to certain information they deem important or may find our securities less attractive. This may result in a less active trading market for our securities and the price of our securities, including our common stock or public warrants may be more volatile.

Nasdaq may delist our securities from trading on its exchange whichOur business could limit investors’ abilitybe materially and adversely disrupted by an epidemic or pandemic or similar public threat, or fear of such an event, and the measures that federal, state, and local governments and other authorities implement to make transactions in our securities and subject us to additional trading restrictions.address it.

Our common stock, preferred stock,An epidemic, pandemic or similar serious public health issue, and public warrants are listed on the Nasdaq stock exchange. There is no guarantee that these securities will remain listed on Nasdaq. There can be no assurance that these securities will continuemeasures undertaken by governmental authorities to be listed on Nasdaqaddress it, could significantly disrupt or prevent us from operating our business in the future. In order to continue listing our securities on Nasdaq, we must maintain certain financial, distributionordinary course for an extended period, and share price levels. In general, we must maintainthereby, along with any associated economic and social instability or distress, have a minimum number of holders of our securities. If Nasdaq delists any of our securities from trading on its exchange and we are not able to list our securities on another national securities exchange, we expect our securities could be quoted on an over-the-counter market. If this were to occur, we could face significant material adverse consequences, including:

The National Securities Markets Improvement Actimpact on our business, financial condition, results of 1996, which is a federal statute, preventsoperations, cash flows, strategies, or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because the common stock, preferred stock, and public warrants are listed on Nasdaq, they will be covered securities. However, if we are no longer listed on Nasdaq, our securities would not be covered securities, and we would be subject to regulation in each state in which we offer our securities.prospects.

The exerciseActs of war or terrorism may seriously harm our warrants and conversion of our preferred stock will result in dilution to our stockholders.business.

We issued warrantsActs of war, any outbreak or escalation of hostilities between the United States and any foreign power, acts of terrorism, political uncertainty or civil unrest may cause disruption to purchase sharesthe U.S. economy, or the local economies of common stock and issued preferred stock that include an option for the holder to convert the shares into common stock. (See Note 18. Stockholders’ Equity.) The sharesmarkets in which we operate, cause shortages of common stock issued upon exercise of our warrants and conversion of our preferred stock willbuilding materials, increase costs associated with obtaining building materials, result in dilution to the then existing holdersbuilding code changes that could increase costs of common stockconstruction, result in uninsured losses, affect job growth and increase the numberconsumer confidence, or cause economic changes that we cannot anticipate, all of shares eligiblewhich could reduce demand for resale in the public market. Sales of such shares in the public market couldour homes and adversely affect the market price of our common stock or public warrants.

We do not intend to pay dividends on our common stock for the foreseeable future.

We currently intend to retain our future earnings to finance the development and expansion ofimpact our business, and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends on our common stock will be at the discretion of our board of directors and will depend on ourprospects, liquidity, financial condition and results of operations, capital requirements, restrictions contained in any financing instruments, applicable legal requirements, and such other factors as our board of directors deems relevant. Accordingly, stockholders may need to sell their shares of our common stock to realize a return on investment and may not be able to sell shares at or above the price paid for them.operations.

Future offerings of debt securities, which would rank senior to our common stock upon our bankruptcy or liquidation, and future offerings of equity securities that may be senior to our common stock for the purposes of dividend and liquidation distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt securities or additional offerings of equity securities. Upon bankruptcy or liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock will have a preference on liquidating distributions and dividend payments, which could limit our ability to make a dividend distribution to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control. As a result, we cannot predict or estimate the amount, timing or nature of our future offerings, and purchasers of our common stock in this offering bear the risk of our future offerings reducing the market price of our common stock and diluting their ownership interest in our company.

General Risks:

We are subject to litigation, arbitration, or other claims, which could materially and adversely affect us.

We are subject to litigation, and we may in the future be subject to enforcement actions, such as claims relating to our operations, securities offerings and otherwise in the ordinary course of business. Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which are not, or cannot be, insured against. We cannot be certain of the ultimate outcomes of any claims that may arise in the future, and legal proceedings may result in the award of substantial damages. Resolution of these types of matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured or in excess of insured levels, could adversely impact our earnings and cash flows, thereby materially and adversely affecting us. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. Certain litigation or the resolution thereof may affect the availability or cost of some of our insurance coverage, which could materially and adversely impact us, expose us to increased risks that would be uninsured, and materially and adversely impact our ability to attract directors and officers.

Information system failures, interruptions, cyber incidents, or breaches in security could adversely affect us.

We rely on accounting, financial, operational, management and other information systems, including the Internet and third-party hosted services, to conduct our operations, store sensitive data, process financial information and results of operations for internal reporting purposes and comply with financial reporting, legal and tax requirements. Our information systems, and those of our vendors and service providers, are subject to damage or interruption from power outages, computer and telecommunication failures, computer viruses, security breaches, including malware and phishing, cyberattacks, natural disasters, usage errors by employees and other related risks. Any cyber incident or attack or other disruption or failure in these information systems, or other systems or infrastructure upon which they rely, could adversely affect our ability to conduct our business and could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Furthermore, any failure or security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, or a loss of confidence in our security measures, which could harm our business and could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Although we have implemented systems and processes intended to secure our information systems, there can be no assurance that our efforts to maintain the security and integrity of our information systems will be effective or that future attempted security breaches or disruptions would not be successful or damaging.

Our business is subject to complex and evolving U.S. laws and regulations regarding privacy and data security.

As part of our normal business activities, we collect and store certain information, including information specific to homebuyers, customers, employees, vendors, and suppliers. We may share some of this information with third parties who assist us with certain aspects of our business. Consumer personal privacy and data security have become significant issues and the subject of rapidly evolving regulation in the United States. Furthermore, federal, state, and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data privacy. Laws and regulations governing data privacy and the unauthorized disclosure of confidential information including recently implemented may significantly impact our business activities and require substantial compliance costs, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Any failure, or perceived failure, by us to adequately address privacy and data security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies could result in proceedings or actions against us by governmental entities or others, subject us to significant fines, penalties, judgments, and negative publicity, require us to change our business practices, increase the costs and complexity of compliance, and adversely affect our business. If we are not able to adjust to changing laws, regulations and standards relating to privacy or data security, our business may be materially harmed. As noted above, we are also subject to the possibility of cyber incidents or attacks, which themselves may result in a violation of these laws.

Failure to comply with laws and regulations may adversely affect us.

We are required to comply with laws and regulations governing many aspects of our business, such as land acquisition and development, home construction and sales, and employment practices. Despite our oversight, contractual protections, and other mitigation efforts, our employees or subcontractors could violate some of these laws or regulations, as a result of which we may incur fines, penalties, or other liabilities, which could be significant, and our reputation with governmental agencies, customers, vendors, or suppliers could be damaged.

Increasing attention to environmental, social, and governance matters may impact our business, financial results, or stock price.

In recent years, increasing attention has been given to corporate activities related to environmental, social, and governance (“ESG”) matters in public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment advisers, public pension funds, universities, and other members of the investing community. These activities include increasing attention and demands for action related to climate change and promoting the use of energy saving building materials. A failure to comply with investor or customer expectations and standards, which are evolving, or if we are perceived to not have responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, could also cause reputational harm to our business and could have a material adverse effect on us.

Negative publicity could adversely affect our reputation as well as our business, financial results, and stock price.

Our reputation and brand are critical to accomplish our success.business objectives. Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. The speed at which negative publicity can be disseminated has increased dramatically with the capabilities of electronic communication, including social media outlets, websites, blogs, newsletters, and other digital platforms. Our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to this rapidly changing media environment. Adverse publicity or negative commentary from any media outlets could damage our reputation and reduce the demand for our homes, which would adversely affect our business.

Changes in laws, regulations or rules, or a failure to comply with any laws, regulations, or rules, may adversely affect our business, investments, and results of operations.

We are subject to laws, regulations and rules enacted by national, regional, and local governments and Nasdaq.governments. In particular, we are required to comply with certain SEC, NasdaqOTC, and other legal or regulatory requirements. Compliance with, and monitoring of, applicable laws, regulations and rules may be difficult, time consuming and costly. Those laws, regulations or rules and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments, and results of operations. In addition, a failure to comply with applicable laws, regulations, or rules, as interpreted and applied, could have a material adverse effect on our business and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 1C. CYBERSECURITY.

We appreciate the importance of preventing, assessing, identifying, and managing material risks associated with cybersecurity threats. In the ordinary course of our business, we collect and store certain confidential information about our employees, contractors, vendors, and suppliers. Consequently, we have established processes for managing material risks posed by cybersecurity threats.

Risk Management and Strategy

We have established information security practices to provide effective security controls to protect the privacy and confidentiality of our information. Where appropriate, these processes and policies are integrated into our overall risk management systems and processes.

To address cybersecurity risks and strengthen our defenses against potential threats, we employ a set of various measures. This involves staying up to date on emerging data protection laws and promptly adjusting our processes to ensure compliance. Our network is protected by regularly monitored firewalls with intrusion and malware protection. Our employees have also undergone training in customer data handling and usage requirements, proper internet usage, and secure email and social media training. Employees are encouraged to report all suspicious emails or communications to management. Regular phishing email simulations further enhance employee awareness and resilience against cyber threats. Alongside regularly updated endpoint protection provided by TrendMicro, Inc., multiple layers of redundancy are implemented through Microsoft365 and Datto, Inc., ensuring all company and employee data is safe from deletion, either accidental or deliberate.

Our processes also include assessing cybersecurity threat risks associated with our use of third-party service providers in the normal course of business, including those who have access to our customer and employee data or our systems. Additionally, we assess cybersecurity considerations in the selection and oversight of our third-party service providers, including due diligence on the third parties that have access to our systems and facilities that house systems and data.

We have not experienced any material computer data security breaches as a result of a compromise of our information systems and we are not aware and have not had a significant cybersecurity breach or attack that had a material impact on our business or operating results to date.

Protecting our information from cyber threats remains a persistent priority, and we are committed to identifying and assessing emerging risks related to data protection and cybersecurity. This commitment extends to our internal operations and our collaborations with third-party service providers.

Governance

Our Board of Directors is aware of the critical nature of managing risks associated with cybersecurity threats. Our Board of Directors has delegated to the Audit Committee the responsibility to oversee our cybersecurity efforts and cyber related risks. The Audit Committee, which is comprised of entirely independent directors, oversees risk assessment, training programs, significant threat changes, and vulnerabilities as well as the effectiveness of any information security practices.

Although none of the members of the Audit Committee have any work experience, degree, or certifications related to information security or cybersecurity, the Audit Committee is often guided by IT professionals on cybersecurity related issues. Periodically, the Audit Committee receives an overview from IT professionals on our cybersecurity threat risk management and strategy processes, including potential impact on our company, the efforts of management to manage the risks that are identified, and our disaster recovery preparations. IT professionals provide updates to inform and educate our Audit Committee and Board of Directors on current trends of cybersecurity threats, emerging trends, and best practices.

Our cybersecurity risk management and strategy processes, as highlighted above, were led by our IT director. Our IT director had over 20 of experience in managing information security, developing cybersecurity strategy, and implementing cybersecurity programs. The IT director monitored the prevention, mitigation, detection, and remediation of cybersecurity incidents through their management of the cybersecurity risk management and strategy processes described above. Subsequent to the year-ended December 31, 2023, our IT Director no longer works for the Company, effective February 14, 2024. We have hired a third-party IT service provider to assist with the responsibilities previously conducted by the former IT Director.

ITEM 2. PROPERTIES

We leaseleased several suites of office space at 11505 Burnham Dr., Gig Harbor, Washington under multiple lease agreements for 26 to 60 month periods with the leases ending in February 2023 through May 2023. During 2022, we terminated the leases for three suites and have the remaining leases for four suites as of December 31, 2022. Additionally, we signed a lease for a new office space (1201at 1201 Pacific Avenue, Tacoma, Washington) under a lease initiated as of October 5, 2021Washington, for a 126-month period from October 1, 2021 to March 31,the commencement date of February 2022 through July 2032.

Furthermore, we leaseWe leased land where one of our field offices is located to store our heavy equipment and quarry materials such as dirt and rocks for sale to customers (9000 W. Werner Road, Bremerton, Washington). This land was under a lease initiated as of January 28, 2019 for a 24-month period and hashad been renewed annually through March 8, 2023.2023, at which time the lease terminated.

The following table summarizes certain key metrics of the residential properties15 communities that we own or control as of March 21, 2022:28, 2024:

ITEM 3. LEGAL PROCEEDINGS

We are not party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, or results of operation. However, we may from time to time after the date of this Annual Report become subject to claims and litigation arising in the ordinary course of business. One or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which such claim or litigation is resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention, and may materially adversely affect our reputation, even if favorably resolved.

On December 11, 2023, we filed a voluntary petition (the “Bankruptcy Petition”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Western District of Washington (such court, the “Bankruptcy Court” and such case, the “Chapter 11 Case”). The Chapter 11 Case is being jointly administered under the caption In re Harbor Custom Development, Inc., et al., Case No. 23-42180-MJH.

Various claims have been made as part of the Chapter 11 Cases in amounts that are disputed and may be material, but are subject to the final determination of the Bankruptcy Court, the specific amounts of which cannot be determined at this time.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is tradedquoted on the Nasdaq Capital MarketOTC Markets under Pink Current Information tier (“Nasdaq”OTC Pink”) under the symbol “HCDI.“HCDIQ.”

Our preferred stock8.0% Series A Cumulative Convertible Preferred Stock (the “Series A Preferred Stock”) and warrants are tradedquoted on the Nasdaq Capital Market (“Nasdaq”)OTC Pink under the symbols “HCDIP,“HCDPQ,” “HCDIW,“HCDWQ,” and “HCDIZ,“HCDZQ,” respectively.

Dividends

Common Stock. We have not declared a dividend on our common stock, and we do not anticipate the payment of dividends in the near future as we intenddue to reinvest profits to grow our business.the Chapter 11 Case. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, and such other factors as our board of directors deems relevant in its sole discretion.the Bankruptcy Court.

Series A Preferred Stock. The holders of theour Series A Preferred SharesStock are entitled to receive dividends at a rate of 8% per annum payable monthly in arrears. During the year ended December 31, 2021,2023, we paid dividends on our preferred stockmade one payment of $2.1 million and accrued dividends of $0.7$0.6 million as of December 31, 2021,2022, which were paid to the shareholdersholders of the Series A Preferred Stock on January 11, 2022.20, 2023. On January 20, 2023, our Board of Directors voted to suspend the cash dividend on the Series A Preferred Stock as announced on a Current Report on Form 8-K on January 25, 2023.

On February 23, 2023, as part of the Amendment to our Loan Agreement with BankUnited, we agreed to pay $0.6 million to BankUnited each month, which otherwise would have been paid as a dividend to the holders of the Series A Preferred Stock. These dividends will accrue as a liability until paid or otherwise settled in the discretion of the Bankruptcy Court.

Number of Holders of Record

We have approximately six13 record holders of our common stock as of March 21, 202228, 2024 according to the records of our transfer agent. The number of our stockholders of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed.

Our transfer agent is Mountain Share Transfer, Inc., 2030 Powers Ferry Rd. SE, Suite # 212, Atlanta, Georgia 30339. Their telephone number is (404) 474-3110.

Repurchase of Equity Securities

On November 3, 2021,May 10, 2022, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $5.0 million worth of shares of common stock beginning November 22, 2021. The amountstock. As part of the Amendment to the Loan Agreement with BankUnited, we agreed that we will not repurchase any of our currently outstanding securities. Therefore, the stock repurchase program represented approximately 17% of the outstandingwas terminated.

2020 Restricted Stock Plan

We did not acquire any shares of our common stock valued atduring the closing price on November 3, 2021. Duringfourth quarter 2023 as a result of the year ended December 31, 2021, we repurchased 1,806,752surrender of shares by our employees to satisfy tax withholding obligations in connection with the vesting of restricted shares of common stock awarded under this repurchase program at an average price of $2.77 per share for a total of approximately $5.0 million.our 2020 Restricted Stock Plan.

Use of Initial Public Offering ProceedsReverse Stock Split

On September 1, 2020, we sold 2,031,705 sharesWe filed Articles of Amendment to our Articles of Incorporation to effect a reverse split of our common stock in an initial public offering at a price of $6.00 per share pursuant to a Registration Statement on Form S-1 (Registration No. 333-237507), which was declared effective by the Securities and Exchange Commission (“SEC”) on August 28, 2020. The aggregate proceeds to us were approximately $10.8 million reflecting gross proceeds of $12.2 million, net of underwriting fees and other offering costs. During the period from the offering through December 31, 2020, we used the proceeds from the initial public offering as follows: approximately $3.3 million for land acquisition and development; approximately $3.4 million to purchase land from Olympic Views, LLC; approximately $0.79 million for Directors and Officers insurance; $1.1 million for debt reduction; and approximately $0.1 million to fund our operations. There was no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on August 31, 2020 pursuant to Rule 424(b)(4).

Use of Underwritten Public Offering Proceeds

On January 15 and 20, 2021, we closed on an offering (the “Follow-On Offering”) of 9,200,000outstanding shares of common stock at a ratio of 1-for-20 (the “Reverse Stock Split”) with the public offering priceWashington Secretary of $3.00 per share, which includes 1,200,000State 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 soldeither issued and outstanding immediately prior to the effective time was, automatically and without any action on the part of the respective holders thereof, combined and converted into one share of common stock. The Reverse Stock Split also applied to common stock issuable upon fullthe exercise of our outstanding warrants, outstanding stock options, unvested restricted stock awards, stock and stock option plans, and upon the underwriters’ option to purchase additionalconversion of our Series A Preferred Stock. The Reverse Stock Split did not affect the par value of our common stock or the shares of common stock for gross proceedswe are authorized to issue under our Articles of $27.6 million, prior to deducting underwriting discounts and estimated offering expenses. We usedIncorporation, as amended. No fractional shares were issued in connection with the net proceedsReverse Stock Split. Fractional shares which would otherwise result from the Follow-On Offering for land acquisition, construction,Reverse Stock Split were rounded up to the nearest whole share. All share and development, and working capital. There was no material change in the planned use of proceeds from our public offering as described in our final prospectus filed with the SEC on January 13, 2021 pursuant to Rule 424(b)(4).

On June 11, 2021, we closed the public offering of 1,200,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock and 4,140,000 warrants to each purchase oneper share amounts of common stock at an exercise price of $5.00, including 540,000 warrants as a result of a partial exercise ofpresented in this Annual Report on Form 10-K have been retroactively adjusted to reflect the over-allotment option granted to the underwriter. We received gross proceeds of $30.0 million from the offering, prior to deducting underwriting discounts and estimated offering expenses. We used the net proceeds from the offering for land acquisition, construction, and development; debt reduction; and working capital. There was no material change in the planned use of proceeds from our public offering as described in our final prospectus filed with the SEC on June 10, 2021 pursuant to Rule 424(b)(4).1-for-20 Reverse Stock Split.

On October 7, 2021, we closed the public offering of 2,400,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock and 13,800,000 warrants to each purchase one share of common stock, including 1,800,000 warrants as a partial exercise of the over allotment option granted to the underwriter. We received gross proceeds of approximately $36.0 million from the offering, prior to deducting underwriting discounts and estimated offering expenses. We used the net proceeds from the offering for land acquisition, construction, and development, and working capital. There was no material change in the planned use of proceeds from our public offering as described in our final prospectus filed with the SEC on October 5, 2021 pursuant to Rule 424(b)(4).

ITEM 6. [Reserved]

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Harbor Custom Development, Inc. is a real estate development company, which is now in the process of winding-down its operations and liquidating all of its assets pursuant to a proposed Chapter 11 Liquidation Plan, subject to Bankruptcy Court approval.

We were involved in all aspects of the land development cycle, including land acquisition, entitlements, development, construction of project infrastructure, singlehome and multi-family verticalapartment building construction, marketing, sales, and managementsales of various residential projects in Western Washington’s Puget Sound region; Sacramento, California; Austin, Texas; and Punta Gorda, Florida.

As of December 31, 2023, we own or control 15 communities in Washington, Texas, California, Texas, and Florida. Please refer to “Item 1. Business” and “Item 2. Properties” for further information.Florida, containing approximately 539 lots or units in various stages of development.

Results of Operations

The following table sets forth the summary statements of operations for the years ended December 31, 20212023 and 2020.2022. For information on the year ended December 31, 2019,2021, refer to Part II, Item 7 of our 20202022 Annual Report on Form 10-K.10-K/A.

Sales

Our sales increased by 43.6%6.9% to $72.4$59.3 million for the year ended December 31, 20212023 as compared to $50.4$55.4 million for the year ended December 31, 2020. Sales increased in 20212022. This increase was primarily due to an increaseincreases in multi-family revenue of $38.1 million and the sale of developed lots of $1.5 million, which were partially offset by decreases in home sales of $19.6 million, fee build revenue of $8.2 million and the sale of entitled land of $20.6 million, developed lot$7.9 million. The increase in multi-family revenue was mainly due to closing of Wyndstone apartments and Mills Crossing townhomes in the current year. The decreases in home and entitled land sales of $14.3 million, and fee build income of $6.8 million from Lennar, which were partially offset bymainly due to a decrease in number of home closed in Texas and non-recurrence of a large entitled land sales of $19.6 million.in Washington. The fee build revenue continued to decrease as the fee build projects have been substantially completed.

Gross ProfitLoss

Our overall gross profit margin was 30.3%loss for the year ended December 31, 20212023 increased to $(51.4) million compared to 4.0%$(0.5) million for the year ended December 31, 2020. For2022. Gross loss was (86.8)% for the yearsyear ended December 31, 2021 and 2020, the gross margin on land sales was 43.3% and 0%, respectively. Gross margin on developed lot sales2023 compared to (0.8)% for the years ended December 31, 2021same period last year. The increase in gross loss was primarily due to increases in multi-family gross loss of $18.7 million, entitled land gross loss of $18.6 million, developed lots gross loss of $10.0 million, and 2020,home gross loss of $9.6 million, which was 40.8% and (5.7)%, respectively. Gross margin for homes closed was 14.1% and 5.7%, respectively. For the years ended December 31, 2021 and 2020, the gross margin forpartially offset by a decrease in fee build gross loss of $4.4 million. The 86.0% increase in gross loss was 11.9%primarily driven by impairment charges in the current year. The decrease was also partly due to interest expense incurred to finance the multi-family rental properties and 0%, respectively.

non-recurrence of high margin land and home sales. Such decrease was partially offset by gross loss due to cost overruns with fee build projects in 2022 that did not recur in 2023.

Operating Expenses

Our operating expenses increaseddecreased by 103.0%39.9% to $11.2$9.8 million for the year ended December 31, 2021,2023, as compared to $5.5$16.2 million for the year ended December 31, 2020.2022. The increasedecrease in total operating expenses iswas primarily attributable to our focused reduction in general and administrative costs. Compensation costs of $2.0 million, bad debt expense of $2.0 million, depreciation of $1.1 million, insurance expense of $0.6 million, professional fees of $0.5 million, and right of use expense of $0.4 million were the following:largest contributors to the cost savings. These decreases were partially offset by an increase in cancelled projects costs of $0.6 million related to Grandis Pond and Firecrest cancellations in 2023 as compared to the Westry Village cancellation in 2022.

Other Expense

Other expense increased by 2.2%decreased for the year ended December 31, 2023 to $0.2$2.4 million as compared to $4.7 million for the year ended December 31, 20212022. The decrease in other expense was primarily due to a $3.3 million loss incurred in the prior year from selling a significant portion of machinery and equipment which was primarily used for fee build and quarry projects. This decrease was partially offset by increase in interest expense from a revolving line of credit and decrease in interest income from notes receivables.

Bankruptcy Expenses

Bankruptcy expenses increased for the year ended December 31, 2023 to $0.4 million as compared to $0.2$0 for the year ended December 31, 2022. They were primarily related to the salary of Chief Restructuring Officer and professional fees incurred on the bankruptcy filing in the current year.

Net Loss

Our net loss increased by 305.5% to $(68.6) million for the year ended December 31, 2020. For the year ended December 31, 2021, $0.01 million of our PPP loan was forgiven2023 as compared to $0.6$(16.9) million for the year ended December 31, 2020. We incurred $0.2 million of interest expense related to our fixed assets financing arrangements as compared to $0.4 million for the year ended December 31, 2020. In addition, we recorded $0.04 million of loss on sales of equipment for the year ended December 31, 2021 as compared to $0.3 million for the year ended December 31, 2020. For the year ended December 31, 2021, other income increased mainly due to timber sales of $0.1 million as compared to $0.004 million for the year ended December 31, 2020.

Net Income (Loss)

Our net income (loss) increased by 335.4% to $8.9 million for the year ended December 31, 2021 as compared to a loss of $3.8 million for the year ended December 31, 2020.2022. The increase in net incomeloss was primarily attributable to an increase in revenue and improved gross margins in 2021loss as explained above.

Liquidity and Capital Resources

Overview

Our principal uses of capital were operating expenses, land purchases, land development, homesingle and multi-family construction, the payment of routine liabilities, payments on construction loans and common stock repurchases.related party construction loans, financing fees for the revolving line of credit and construction loans, and repurchase of company equity securities. We used funds generated by operations capital raises, and available borrowings to meet our short-term working capital requirements. We remain focused on generating increasingly positive margins

As a result of our significant debt of $140.3 million maturing over the next 12 months as of December 31, 2023, a net loss of $68.6 million for the year ended December 31, 2023, the real estate and construction industries experiencing declining market conditions, lack of financing capabilities, along with the cessation of our major business activities, lack of any additional sources of revenue, as well as the risks and uncertainties related to our ability to successfully complete the Chapter 11 Case, including our ability to realize value from our assets; our ability to develop, negotiate, confirm, and consummate the Proposed Plan, after which our ongoing operations are expected to be limited; the effects of disruption from the Chapter 11 Case; and the costs of the Chapter 11 Case, substantial doubt exists regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of our consolidated financial statements.

Due to the failed purchase contracts for some of our properties, the lack of suitable revenue-generating offers for our properties, and our limited ability to raise sufficient capital in land acquisitionsthe current market environment, we determined it was in the best interests of our stakeholders to take aggressive actions to cut costs and development operationspreserve cash, file the Chapter 11 Case and home construction operationscease our major business activities.

On December 11, 2023, we voluntarily initiated the Chapter 11 Case in orderthe Bankruptcy Court. Since filing the Chapter 11 Case, we have operated our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. After we filed our Chapter 11 petitions, the Bankruptcy Court granted certain relief enabling us to maintainconduct our business activities in the ordinary course.

Our liquidity and ability to continue as a strong balance sheetChapter 11 Case is dependent upon, among other things: (i) our ability to develop, confirm and keep us poised for growth.consummate the Proposed Plan or other alternative liquidating transaction, (ii) the outcome of the Company’s efforts to realize value, of any, from its remaining assets, and (iii) the cost, duration and outcome of the Chapter 11 Case.

We employ both debthave incurred significant professional fees and equityother costs in connection with preparation for the Chapter 11 Case and expect to continue to incur significant professional fees and costs The Bankruptcy Court established February 16, 2024, as partthe deadline by which parties are required to file proofs of our ongoing financing strategyclaim in the Chapter 11 Case and June 10, 2024 for all governmental entities to file their proofs of claim. We cannot provide us withany assurances regarding what the financial flexibility to access capitalCompany’s total actual liabilities based on the best terms available. In that regard, we employ prudent leverage levels to finance the acquisition and development of our lots and construction of our homes, townhomes, condominiums, and apartments. Our existing indebtedness is recourse to us and we anticipate that future indebtednesssuch claims will likewise be recourse.

Our management considers a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets, and the ability of particular assets, and our Company as a whole, to generate cash flow to cover the expected debt service. Our governing documents do not contain a limitation on the amount of debt we may incur and our board of directors may change our target debt levels at any time without the approval of our shareholders.be.

We intendhave engaged Keen in order to finance future acquisitions and developments withsell our multi-family properties. Any sale by Keen is subject to the most advantageous source of capital available to us at the timeapproval of the transaction, which may include a combination of common and preferred equity, secured and unsecured corporate level debt, property level debt and mortgage financing, and other public, private, or bank debt.

Secured Revolving Credit Facility - On March 7, 2022, we entered into a senior secured revolving credit facility with BankUnited for $25.0 million. The unpaid principal bears interest at a fluctuating rate of interest per annum equal to the daily simple secured overnight financing rate (SOFR) plus the applicable margin of 4.75%.Bankruptcy Court.

Real Estate Assets

OurThe value of our real estate assets have increasedhas decreased to $122.1$156.7 million as of December 31, 20212023 from $20.4$205.5 million as of December 31, 2020.2022. This increasedecrease was primarily due to an increase in the number ofimpairment charges and large multi-family sales, partially offset by development and construction activities for houses condominiums, and apartments under construction, and the purchase of additional developed and undeveloped lots.apartments.

Liabilities

Liabilities increasedslightly decreased to $70.0$158.3 million as of December 31, 20212023 from $27.2$160.6 million as of December 31, 2020.2022. This increase isdecrease was primarily attributable to the following:

Cash & RestrictedUnrestricted Cash Balance

As of December 31, 2021,2023, our cash balance was $26.2$3.6 million compared to $2.4$9.7 million as of December 31, 2020.2022.

Operating Activities

Net cash used in operating activities for the year ended December 31, 20212023 was $86.4$8.2 million as compared to net cash providedused of $3.0$93.9 million for the year ended December 31, 2020.2022. The decrease in operating cash flows isused was primarily dueattributable to the acquisition and development ofa decrease in real estate spending of $87.6 million, increase in impairment loss on real estate of $45.2 million, increase in deferred tax asset change of $8.7 million, increase in note receivable change of $7.3 million, and increase in prepaid and other assets change of $98.5$5.9 million, in 2021 and partially offset by an increase in net incomeloss of $8.9$51.7 million, and changea decrease in accounts payable and accrued expenses of $8.0 million in 2021.$9.5 million.

Investing Activities

Net cash usedprovided in investing activities for the year ended December 31, 20212023 was $0.7$0.2 million as compared to net cash provided of $0.6$2.5 million for the year ended December 31, 2020. During the year ended December 31, 2021, $0.7 million2022. The decrease was used for the acquisition of new property and equipment and there wereprimarily due to a decrease in proceeds from the sale of equipment of $0.1 million.$4.9 million, which was offset by a decrease in cash used for property and equipment. During the year ended December 31, 2020, $0.42023, there was no purchase of fixed assets as compared to $2.6 million was used for the acquisitionfurniture, fixtures, and leasehold improvements of the new propertycorporate office and equipment and there were proceeds from the salepurchase of equipment of $1.0 million.for the year ended December 31, 2022.

Financing Activities

Net cash provided by financing activities for the year ended December 31, 20212023 was $110.9$1.8 million as compared to net cash used of $1.6$75.4 million for the year ended December 31, 2020. During2022. This decrease was primarily caused by a decrease in cash provided by the year ended December 31, 2021, there was net proceeds from common stock issuancesrevolving line of $25.1credit of $25.0 million, net proceeds froman increase in payments on the preferred stock issuancesrevolving line of $66.6credit of $10.8 million, net proceeds froma decrease in cash provided by construction loans net of $29.3payments of $54.6 million, and net proceeds froma decrease in related party construction loans, net of $8.0payments of $2.7 million. These net proceeds were primarilyThis decrease was partially offset by an increase in cash outflows for financing feesprovided from construction loansthe public offering of $5.6 million, repurchase of common stock of $5.0 million, repayment of equipment loans of $1.9 million, financing fees from related party construction loans of $2.0$8.9 million, and a decrease in cash used for preferred stock dividend paymentsdividends of $2.1 million. Also, during the year ended December 31, 2020, there were net proceeds from a common stock offering of $10.8 million, which were primarily offset by cash outflows to net repayment on related party construction loans of $8 million, financing fees from related party construction loans of $1.4 million, repayment on equipment loans of $1.4 million, and financing fees from construction loans of $1.0$7.2 million.

Cash ResourcesDebtor-in Possession

AlthoughIn general, as debtors-in-possession under the expected revenue growthBankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to certain motions and controlapplications intended to limit the disruption of expenses leads managementthe bankruptcy proceedings on our operations (the First Day Motions) and other motions filed with the Bankruptcy Court, the Bankruptcy Court has authorized us to believe that it is probable thatconduct our cash resources will be sufficientbusiness activities in the ordinary course, including, among other things and subject to meet cash requirements through the fiscal year ending December 31, 2022, we may require additional funding to financeterms and conditions of such orders, pay employee wages and benefits, settle certain de minimis disputes, and pay vendors and suppliers in the growth of our currentordinary course for all goods and expected future operations as well as to achieve our strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to us, if at all. In that event, we would be required to change our growth strategy and seek funding on that basis, though there is no guarantee we will be able to do so.services.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

Inflation

Our home building operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices. Please refer to “Item 1A. Risk Factors” for further details on industry and economic risks.

Critical Accounting Policies

Our consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues, and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk, and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

Our significant accounting policies are summarized in Note 21 of our consolidated financial statements.

Implications of Being an Emerging Growth Company

We are an “emerging growth company,”company” as defined in the JOBS Act and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These provisions include:

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of this election, the information that we provide in this Annual Report may be different than the information you may receive from other public companies in which you hold equity interests.

We will cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of our initial public offering (December 31, 2025), (ii) the first fiscal year after our annual gross revenues are $1.07$1.235 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We borrow from lenders using financial instruments such as term loans, notes payable, and notes payable. In many cases, thea revolving credit facility. We utilize both fixed and variable interest costs we incur underrates in these financing operations. Interest incurred from our term loans and notes payables areis calculated primarily using a fixed rate, whereas interest incurred from our revolving credit facility is calculated using a fixedvariable rate. We do not have the obligation to prepay them prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt.

We are not exposed to material market risks related to fluctuations in interest rates.rates on our outstanding revolving line of credit and our construction loans relating to the Meadowscape and Bridgeview. The interest rate for our variable rate indebtedness as of December 31, 2023 was equal to the daily simple secured overnight financing rate (SOFR) plus an applicable margin of 4.75% for the line of credit, equal to the SOFR one month rate plus an applicable margin of 7.25% for the Meadowscape construction loan, and equal to the variable prime rate plus an applicable margin of 4.38% for the Bridgeview construction loan.

At December 31, 2021,2023, the daily SOFR was 5.38%, one month SOFR was 5.34%. The variable prime rate was 8.50%. A hypothetical 100 basis point increase in the interest rate on our variable rate indebtedness would increase our annual interest cost by approximately $0.1 million for the line of credit and $0.4 million for the two construction loans, respectively. Based on this, we do not believe that the future interest rate risks related to our existing indebtedness will have a material adverse impact on our financial position, results of operations, or liquidity.

At December 31, 2023, we had outstanding fixed-rate borrowings net of debt discount and financing fees of approximately $55.1$87.1 million and outstanding variable-rate borrowings net of debt discount and financing fees of approximately $52.9 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS