UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~

2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39266

HARBOR CUSTOM DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)


Washington						46-4827436
(State of organization)						(I.R.S. Employer Identification No.)

1201 Pacific Avenue, Suite 1200

Tacoma, Washington 98402

(Address of principal executive offices)

(253) 649-0636

Registrant’s telephone number, including area code

~~11505 Burnham Dr., Suite 301~~

~~Gig Harbor, Washington 98332~~

~~(Former name, former address and former fiscal year, if changed since last report)~~

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered.
Common Stock	HCDI	The Nasdaq Stock Market LLC
Series A Cumulative Convertible Preferred Stock	HCDIP	The Nasdaq Stock Market LLC
Warrants	HCDIW	The Nasdaq Stock Market LLC
Warrants	HCDIZ	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐ No

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


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

There are ~~14,582,434~~732,544 shares of common stock outstanding as of May ~~9, 2022.~~10, 2023.

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED BALANCE SHEETS

~~(Unaudited)~~


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
							(Unaudited)
ASSETS	ASSETS					ASSETS
Cash	Cash	$	22,274,900	$	25,629,200	Cash	$	7,689,500	$	9,665,300
Restricted Cash	Restricted Cash	597,600		597,600		Restricted Cash	597,600		597,600
Accounts Receivable, net	Accounts Receivable, net	1,177,200		1,113,500		Accounts Receivable, net	1,239,600		1,707,000
Contract Assets, net		2,639,100		2,167,200
Notes Receivable		12,746,800		2,000,000
Notes Receivable, net						Notes Receivable, net	2,390,300		4,525,300
Prepaid Expense and Other Assets	Prepaid Expense and Other Assets	2,526,000		2,778,100		Prepaid Expense and Other Assets	2,451,000		5,318,100
Real Estate	Real Estate	129,069,400		122,136,100		Real Estate	217,835,900		205,478,200
Property, Plant and Equipment, net		9,938,400		9,199,700
Property and Equipment, net						Property and Equipment, net	1,950,100		2,289,500
Right of Use Assets	Right of Use Assets	2,535,000		3,429,700		Right of Use Assets	1,878,000		1,926,100
Deferred Tax Assets		1,014,100		649,000
Deferred Tax Asset						Deferred Tax Asset	5,936,800		4,659,300
TOTAL ASSETS	TOTAL ASSETS	$	184,518,500	$	169,700,100	TOTAL ASSETS	$	241,968,800	$	236,166,400

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES	LIABILITIES					LIABILITIES
Accounts Payable and Accrued Expenses	Accounts Payable and Accrued Expenses	$	15,917,300	$	10,662,800	Accounts Payable and Accrued Expenses	$	13,781,400	$	14,090,700
Dividends Payable	Dividends Payable	670,900		670,900		Dividends Payable	1,903,700		634,700
Contract Liabilities						Contract Liabilities	672,200		497,400
Deferred Revenue	Deferred Revenue	123,000		44,800		Deferred Revenue	150,300		52,000
Revolving Line of Credit Loan, net of Debt Discount of $1.1 million and $0 respectively		10,987,000		—
Note Payable - Insurance						Note Payable - Insurance	237,700		378,500
Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0 and $0.6 million, respectively						Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0 and $0.6 million, respectively	22,893,500		24,359,700
Equipment Loans	Equipment Loans	5,167,600		5,268,500		Equipment Loans	1,300		2,057,100
Note Payable D&O Insurance		519,400		903,800
Finance Leases	Finance Leases	129,900		543,400		Finance Leases	—		154,500
Construction Loans, net of Debt Discount of $1.6 million and $4.4 million respectively		37,080,400		34,957,100
Construction Loans - Related Party, net of Debt Discount of $0.03 million and $1.1 million respectively		10,940,200		13,426,600
Construction Loans, net of Unamortized Debt Discount of $1.4 million and $1.9 million, respectively						Construction Loans, net of Unamortized Debt Discount of $1.4 million and $1.9 million, respectively	122,608,300		107,483,700
Construction Loans - Related Party, net of Unamortized Debt Discount of $0.1 million and $0.1 million, respectively						Construction Loans - Related Party, net of Unamortized Debt Discount of $0.1 million and $0.1 million, respectively	8,127,300		8,122,800
Right of Use Liabilities	Right of Use Liabilities	3,361,200		3,484,400		Right of Use Liabilities	2,719,300		2,779,400
TOTAL LIABILITIES	TOTAL LIABILITIES	$	84,896,900	$	69,962,300	TOTAL LIABILITIES	173,095,000		160,610,500

COMMITMENTS AND CONTINGENCIES - SEE NOTE 12	COMMITMENTS AND CONTINGENCIES - SEE NOTE 12	0		0		COMMITMENTS AND CONTINGENCIES - SEE NOTE 12

STOCKHOLDERS’ EQUITY	STOCKHOLDERS’ EQUITY					STOCKHOLDERS’ EQUITY
Preferred Stock, No Par, 10,000,000 shares authorized and 4,016,955 issued and outstanding at March 31, 2022 and December 31, 2021		$	66,507,500	$	66,507,500
Common Stock, No Par, 50,000,000 shares authorized and 13,237,179 issued and outstanding at March 31, 2022 and 13,155,342 issued and outstanding at December 31, 2021		32,133,200		32,122,700
Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at March 31, 2023 and December 31, 2022						Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at March 31, 2023 and December 31, 2022	62,912,100		62,912,100
Common Stock, no par value per share, 50,000,000 shares authorized and 732,245 issued and outstanding at March 31, 2023 and 718,835 issued and outstanding at December 31, 2022						Common Stock, no par value per share, 50,000,000 shares authorized and 732,245 issued and outstanding at March 31, 2023 and 718,835 issued and outstanding at December 31, 2022	35,704,700		35,704,700
Additional Paid In Capital	Additional Paid In Capital	993,200		752,700		Additional Paid In Capital	1,349,700		1,266,300
Retained Earnings (Accumulated Deficit)	Retained Earnings (Accumulated Deficit)	(12,300)		1,646,500		Retained Earnings (Accumulated Deficit)	(31,092,700)		(24,327,200)
Total Stockholders’ Equity		99,621,600		101,029,400
Non-Controlling Interest		—		(1,291,600)
TOTAL STOCKHOLDERS’ EQUITY	TOTAL STOCKHOLDERS’ EQUITY	99,621,600		99,737,800		TOTAL STOCKHOLDERS’ EQUITY	68,873,800		75,555,900

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	184,518,500	$	169,700,100	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	241,968,800	$	236,166,400

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three months ended March 31,					Three Months Ended March 31,
		2022		2021			2023		2022

Sales	Sales	$	28,581,000	$	13,874,200	Sales	$	9,181,000	$	28,581,000

Cost of Sales	Cost of Sales	22,526,300		13,267,000		Cost of Sales	11,225,400		22,526,300

Gross Profit		6,054,700		607,200
Gross Profit (Loss)						Gross Profit (Loss)	(2,044,400)		6,054,700

Operating Expenses	Operating Expenses	3,839,300		2,049,800		Operating Expenses	2,935,400		3,839,300

Operating Income (Loss)	Operating Income (Loss)	2,215,400		(1,442,600)		Operating Income (Loss)	(4,979,800)		2,215,400

Other Income (Expense)	Other Income (Expense)					Other Income (Expense)
Interest Expense						Interest Expense	(1,207,100)		(124,500)
Interest Income						Interest Income	72,900		55,000
Loss on Sale of Equipment	Loss on Sale of Equipment	—		(35,900)		Loss on Sale of Equipment	(36,200)		—
Other Income	Other Income	7,900		27,400		Other Income	10,900		7,900
Interest Income		55,000		—
Interest Expense		(124,500)		(98,100)
Total Other Expense	Total Other Expense	(61,600)		(106,600)		Total Other Expense	(1,159,500)		(61,600)

Income (Loss) Before Income Tax	Income (Loss) Before Income Tax	2,153,800		(1,549,200)		Income (Loss) Before Income Tax	(6,139,300)		2,153,800

Income Tax Expense		508,500		—
Income Tax Expense (Benefit)						Income Tax Expense (Benefit)	(1,277,500)		508,500

Net Income (Loss)	Net Income (Loss)	1,645,300		(1,549,200)		Net Income (Loss)	(4,861,800)		1,645,300

Net Income (Loss) Attributable to Non-controlling interests		(500)		600
Net Loss Attributable to Non-controlling interests						Net Loss Attributable to Non-controlling interests	—		(500)
Preferred Dividends	Preferred Dividends	(2,012,500)		—		Preferred Dividends	(1,903,700)		(2,012,500)

Net Loss Attributable to Common Stockholders	Net Loss Attributable to Common Stockholders	$	(366,700)	$	(1,549,800)	Net Loss Attributable to Common Stockholders	$	(6,765,500)	$	(366,700)

Loss Per Share - Basic	Loss Per Share - Basic	$	(0.03)	$	(0.12)	Loss Per Share - Basic	$	(9.39)	$	(0.56)
Loss Per Share - Diluted	Loss Per Share - Diluted	$	(0.03)	$	(0.12)	Loss Per Share - Diluted	$	(9.39)	$	(0.56)

Weighted Average Common Shares Outstanding - Basic	Weighted Average Common Shares Outstanding - Basic	13,200,758		13,269,055		Weighted Average Common Shares Outstanding - Basic	720,618		660,038
Weighted Average Common Shares Outstanding - Diluted	Weighted Average Common Shares Outstanding - Diluted	13,200,758		13,269,055		Weighted Average Common Shares Outstanding - Diluted	720,618		660,038

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three months ended March 31,					Three Months Ended March 31,
		2022		2021			2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES	CASH FLOWS FROM OPERATING ACTIVITIES					CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	Net Income (Loss)	$	1,645,300	$	(1,549,200)	Net Income (Loss)	$	(4,861,800)	$	1,645,300
Adjustments to reconcile net income (loss) to net cash from operating activities:	Adjustments to reconcile net income (loss) to net cash from operating activities:					Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation	Depreciation	303,800		240,200		Depreciation	95,000		303,800
Amortization of right of use assets	Amortization of right of use assets	195,500		70,900		Amortization of right of use assets	48,100		195,500
Lease incentives	Lease incentives	260,100		—		Lease incentives	—		260,100
Loss on sale of equipment	Loss on sale of equipment	—		35,900		Loss on sale of equipment	36,200		—
Provision for loss on contract						Provision for loss on contract	23,800		—
Impairment loss on real estate						Impairment loss on real estate	1,555,800		—
Stock compensation	Stock compensation	242,400		115,100		Stock compensation	83,400		242,400
Forgiveness on PPP loan		—		(10,000)
Amortization of revolver issuance costs	Amortization of revolver issuance costs	45,700		—		Amortization of revolver issuance costs	640,300		45,700
Net change in assets and liabilities:	Net change in assets and liabilities:					Net change in assets and liabilities:
Accounts receivable	Accounts receivable	(63,700)		43,600		Accounts receivable	467,300		(63,700)
Retainage receivable		—		(250,000)
Contract assets	Contract assets	(471,900)		—		Contract assets	—		(471,900)
Notes receivable	Notes receivable	(10,746,800)		—		Notes receivable	2,135,000		(10,746,800)
Prepaid expenses and other assets	Prepaid expenses and other assets	691,500		155,200		Prepaid expenses and other assets	2,689,800		691,500
Real estate	Real estate	(6,347,500)		(14,712,100)		Real estate	(13,149,200)		(6,347,500)
Deferred tax asset	Deferred tax asset	(365,100)		—		Deferred tax asset	(1,277,500)		(365,100)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	5,254,600		(93,800)		Accounts payable and accrued expenses	(309,500)		5,254,600
Contract liabilities						Contract liabilities	151,000		—
Deferred revenue	Deferred revenue	78,200		(896,300)		Deferred revenue	98,300		78,200
Payments on right of use liability		(123,200)		(66,100)
Payments on right of use liability, net of incentives						Payments on right of use liability, net of incentives	(60,100)		(123,200)
NET CASH USED IN OPERATING ACTIVITIES	NET CASH USED IN OPERATING ACTIVITIES	(9,401,100)		(16,916,600)		NET CASH USED IN OPERATING ACTIVITIES	(11,634,100)		(9,401,100)

CASH FLOWS FROM INVESTING ACTIVITIES	CASH FLOWS FROM INVESTING ACTIVITIES					CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	Purchase of property and equipment	(1,042,600)		(149,100)		Purchase of property and equipment	—		(1,042,600)
Proceeds on the sale of equipment	Proceeds on the sale of equipment	—		69,500		Proceeds on the sale of equipment	128,500		—
NET CASH USED IN INVESTING ACTIVITIES		(1,042,600)		(79,600)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES						NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	128,500		(1,042,600)

CASH FLOWS FROM FINANCING ACTIVITIES	CASH FLOWS FROM FINANCING ACTIVITIES					CASH FLOWS FROM FINANCING ACTIVITIES
Construction loans	Construction loans	6,640,800		4,645,000		Construction loans	17,866,800		6,640,800
Payments on construction loans	Payments on construction loans	(6,930,800)		(5,070,500)		Payments on construction loans	(3,002,300)		(6,930,800)
Financing fees construction loans	Financing fees construction loans	(577,500)		(92,900)		Financing fees construction loans	(224,800)		(577,500)
Related party construction loans	Related party construction loans	3,757,300		4,708,800		Related party construction loans	—		3,757,300
Payments on related party construction loans	Payments on related party construction loans	(3,838,700)		(4,424,300)		Payments on related party construction loans	—		(3,838,700)
Financing fees related party construction loans	Financing fees related party construction loans	—		(376,900)		Financing fees related party construction loans	(75,000)		—
Revolving line of credit loan	Revolving line of credit loan	12,038,900		—		Revolving line of credit loan	—		12,038,900
Payments on revolving line of credit loan						Payments on revolving line of credit loan	(2,106,500)		—
Financing fees revolving line of credit loan	Financing fees revolving line of credit loan	(1,097,700)		—		Financing fees revolving line of credit loan	—		(1,097,700)
Payments on note payable - insurance						Payments on note payable - insurance	(163,000)		(384,500)
Payments on equipment loans						Payments on equipment loans	(2,055,900)		(471,000)
Payments on financing leases	Payments on financing leases	(43,500)		(101,300)		Payments on financing leases	(74,800)		(43,500)
Payments on PPP loan		—		(3,400)
Repayments on note payable D&O insurance		(384,500)		(368,500)
Net proceeds from issuance of common stock		—		25,101,000
Preferred dividends	Preferred dividends	(2,012,500)		—		Preferred dividends	(634,700)		(2,012,500)
Payments on equipment loans		(471,000)		(415,600)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	8,600		18,000		Proceeds from exercise of stock options	—		8,600
Deferred offering cost		—		27,300
NET CASH PROVIDED BY FINANCING ACTIVITIES	NET CASH PROVIDED BY FINANCING ACTIVITIES	7,089,400		23,646,700		NET CASH PROVIDED BY FINANCING ACTIVITIES	9,529,800		7,089,400

NET (DECREASE) INCREASE IN CASH AND RESTRICTED CASH		(3,354,300)		6,650,500
NET DECREASE IN CASH AND RESTRICTED CASH						NET DECREASE IN CASH AND RESTRICTED CASH	(1,975,800)		(3,354,300)

CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD	CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD	26,226,800		2,396,500		CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD	10,262,900		26,226,800

CASH AND RESTRICTED CASH AT END OF PERIOD	CASH AND RESTRICTED CASH AT END OF PERIOD	$	22,872,500	$	9,047,000	CASH AND RESTRICTED CASH AT END OF PERIOD	$	8,287,100	$	22,872,500


SUPPLEMENTAL CASH FLOW INFORMATION	SUPPLEMENTAL CASH FLOW INFORMATION					SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	Interest paid	$	1,093,800	$	98,100	Interest paid	$	4,235,200	$	1,093,800

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES	SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES					SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Refinancing of construction loans		$	4,478,000	$	—
Financing of fixed asset additions		$	—	$	725,400
Termination of finance leases						Termination of finance leases	$	79,700	$	—
Cancellation of promissory note for earnest money						Cancellation of promissory note for earnest money	$	200,000	$	—
Conversion of finance lease to equipment loan	Conversion of finance lease to equipment loan	$	370,100	$	—	Conversion of finance lease to equipment loan	$	—	$	370,100
Amortization of debt discount capitalized	Amortization of debt discount capitalized	$	585,900	$	586,600	Amortization of debt discount capitalized	$	764,300	$	585,900
Financing of insurance						Financing of insurance	$	22,300	$	—
Dividends declared but not paid						Dividends declared but not paid	$	1,903,700	$	—

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

(Unaudited)


		Common Stock			Preferred Stock			Additional Paid in Capital				Retained Earnings (Accumulated Deficit)		Stockholders' Equity (Deficit)			Non-Controlling Interest				Total Equity (Deficit)				Common Stock						Preferred Stock			Additional Paid in Capital		Retained Earnings (Accumulated Deficit)		Stockholders' Equity (Deficit)		Non-Controlling Interest		Total Equity (Deficit)
		Shares Issued	No Par		Shares Issued	No Par										Shares Issued								No Par			Shares Issued			No Par

Balance, January 1, 2021		5,636,548	$	11,956,900	—	—				$	234,800			$	(4,487,100)				$	7,704,600			$	(1,289,900)		$	6,414,700

Net proceeds from issuance of common stock		9,200,000	25,101,000											25,101,000							25,101,000
Exercise of Stock Options		45,046						18,000						18,000							18,000
Stock Compensation Expense		8,500						115,100						115,100							115,100
Net Income (Loss)		—										(1,549,800)		(1,549,800)			600				(1,549,200)

Balance, March 31, 2021		14,890,094	$	37,057,900	—	$	—	$	367,900			$	(6,036,900)	$	31,388,900		$	(1,289,300)			$	30,099,600

Balance, January 1, 2022	Balance, January 1, 2022	13,155,342	32,122,700		4,016,955	66,507,500		752,700				1,646,500		101,029,400			(1,291,600)				99,737,800			Balance, January 1, 2022	657,767			$	32,122,700		4,016,955	$	66,507,500	$	752,700	$	1,646,500	$	101,029,400	$	(1,291,600)	$	99,737,800

Preferred Dividends												(2,012,500)		(2,012,500)							(2,012,500)
Preferred Stock Dividends																								Preferred Stock Dividends												(2,012,500)		(2,012,500)				(2,012,500)
Exercise of Stock Options	Exercise of Stock Options	21,623	10,500					(1,900)						8,600							8,600			Exercise of Stock Options	1,081			10,500						(1,900)				8,600				8,600
Stock Compensation Expense	Stock Compensation Expense	60,214						242,400						242,400							242,400			Stock Compensation Expense	3,011									242,400				242,400				242,400
Dissolution of Non-Controlling Interest	Dissolution of Non-Controlling Interest											(1,292,100)		(1,292,100)			1,292,100				—			Dissolution of Non-Controlling Interest												(1,292,100)		(1,292,100)		1,292,100		—
Net Income (Loss)	Net Income (Loss)											1,645,800		1,645,800			(500)				1,645,300			Net Income (Loss)												1,645,800		1,645,800		(500)		1,645,300

Balance, March 31, 2022	Balance, March 31, 2022	13,237,179	$	32,133,200	4,016,955	$	66,507,500	$	993,200			$	(12,300)	$	99,621,600		$	—			$	99,621,600		Balance, March 31, 2022	661,859			$	32,133,200		4,016,955	$	66,507,500	$	993,200	$	(12,300)	$	99,621,600	$	—	$	99,621,600

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

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

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

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company’s principal business activity involves acquiring raw land and developed lots for the purpose of building and selling single family and multi-family dwellings in Washington, California, Texas, and Florida. It utilizes its heavy equipment resources to develop an inventory of developed lots and provide development infrastructure construction, on a contract basis, for other home builders. Single family construction and infrastructure construction contracts vary but are typically less than one year.

On August 1, 2019, the Company changed its name from Harbor Custom Homes, Inc. to Harbor Custom Development, Inc.

The Company became an effective filer with the SEC and started trading on The Nasdaq Stock Market LLC ("(“Nasdaq”) on August 28, 2020.

Principles of Consolidation

The condensed consolidated financial statements include the following subsidiaries of Harbor Custom Development, Inc. as of the reporting period ending dates as ~~follows (all entities are formed as Washington LLC's):~~follow:


Names	Names	Dates of Formation	Attributable Interest				Names	Dates of Formation	Attributable Interest
			March 31, 2022		December 31, 2021				March 31, 2023		December 31, 2022
Saylor View Estates, LLC*	Saylor View Estates, LLC*	March 30, 2014	N/A		51	%	Saylor View Estates, LLC*	March 30, 2014	N/A		N/A
Harbor Materials, LLC**		July 5, 2018	N/A		N/A
Belfair Apartments, LLC	Belfair Apartments, LLC	December 3, 2019	100	%	100	%	Belfair Apartments, LLC	December 3, 2019	100	%	100	%
Pacific Ridge CMS, LLC	Pacific Ridge CMS, LLC	May 24, 2021	100	%	100	%	Pacific Ridge CMS, LLC	May 24, 2021	100	%	100	%
Tanglewilde, LLC	Tanglewilde, LLC	June 25, 2021	100	%	100	%	Tanglewilde, LLC	June 25, 2021	100	%	100	%
HCDI FL CONDO LLC	HCDI FL CONDO LLC	August 3, 2021	100	%	100	%	HCDI FL CONDO LLC	July 30, 2021	100	%	100	%
HCDI Mira, LLC	HCDI Mira, LLC	August 30, 2021	100	%	100	%	HCDI Mira, LLC	August 31, 2021	100	%	100	%
HCDI Bridgeview LLC		October 28, 2021	100	%	100	%
HCDI, Bridgeview LLC							HCDI, Bridgeview LLC	October 28, 2021	100	%	100	%
HCDI Wyndstone, LLC	HCDI Wyndstone, LLC	September 15, 2021	100	%	100	%	HCDI Wyndstone, LLC	September 15, 2021	100	%	100	%
HCDI Semiahmoo, LLC	HCDI Semiahmoo, LLC	December 17, 2021	100	%	100	%	HCDI Semiahmoo, LLC	December 17, 2021	100	%	100	%
Mills Crossing, LLC							Mills Crossing, LLC	July 21, 2022	100	%	100	%
Broadmoor Ventures, LLC							Broadmoor Ventures, LLC	August 24, 2022	100	%	100	%
Winding Lane Estate LLC							Winding Lane Estate LLC	November 30, 2022	100	%	100	%

*Saylor View Estates, LLC was voluntarily dissolved with the State of Washington as of January 20, 2022.

**Harbor Materials, LLC was voluntarily dissolved with the State of Washington as of January 29, 2021.

As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the aggregate non-controlling interest was $0 and ~~$(1.3) million,~~$0, respectively.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements included in ~~our~~the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022. The accompanying unaudited condensed consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of ~~our~~the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.

All numbers in the financial statements are rounded to the nearest $100, except for Earnings (Loss) per Share ~~("EPS"~~(“EPS”) data, and numbers in the notes to the financial statements are rounded to the nearest ~~million.~~million, where appropriate.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with ~~generally accepted accounting principles.~~GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.

Going Concern Uncertainty

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

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

Regarding the first step of this assessment, the Company concluded that under the standards of ASC 205-40, the following conditions raised substantial doubt about the Company’s ability to continue as a going concern: during the year ended 2022, the Company failed to maintain compliance with certain financial covenants within its loan agreements requiring loan amendment or covenant waivers; the Company has no borrowing availability under its revolving credit facility; it has significant construction related debt maturing over the next 12 months; it has had significant uses of cash flows from operations over the past two years; it had a $16.9 million net loss in 2022 and a $4.9 million net loss for the first quarter of 2023; and the real estate and construction industries are experiencing declining market conditions which have negatively impacted property valuations as well as financing capabilities and terms.

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

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

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

•has $36.7 million of sales closed after December 31, 2022 or under contract as of May 10, 2023 and significant additional assets that are held for sale;

•has construction loans in place;

•has met its equity requirement for its Pacific Ridge, Wyndstone, Meadowscape, and Belfair Phase 1 projects;

•has substantially completed its fee build contracts;

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

•filed a registration statement with the SEC providing for the sale of common stock and warrants.

Additionally, the Company's future plans include: raising additional funds through the sales of real estate assets; obtaining new debt financing and/or refinancing existing debt; pulling cash out of one or more of its multi-family properties by obtaining a project level equity partner; and/or raising capital in the private or public equity or debt markets. Based on the properties under contract for sale, interest in the Company’s available for sale properties, its prior track record of raising capital through issuance of debt or sale of equity, and management’s ongoing discussions and negotiations with potential financing partners, management believes it is probable that the Company’s plans will be effectively implemented and probable that those plans will mitigate the previously mentioned conditions and events that raised substantial doubt.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the

recoverability and classification of assets or the amounts and classification of liabilities that may result from the Company’s failure to continue as a going concern.

Stock-Based Compensation

Effective November 19, 2018, the Company’s Board of Directors and stockholders approved and adopted the 2018 Incentive and Nonstatutory Stock Option Plan (the “2018 Plan”). The 2018 Plan allows the Administrator (as defined in the 2018 Plan), currently the Compensation Committee, to determine the issuance of incentive stock options and non-qualified stock options to eligible employees and outside directors and consultants of the Company. The Company has 133,784 shares of common stock reserved for issuance under the 2018 plan.

Effective December 3, 2020, the Company’s Board of Directors and stockholders approved and adopted the 2020 Restricted Stock Plan (the “2020 Plan”). The 2020 Plan allows the Administrator, currently the Compensation Committee, to determine the issuance of restricted stock to eligible officers, directors, and key employees. The Company has 135,000 shares of common stock reserved for issuance under the 2020 plan.

The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board ~~("FASB"~~(“FASB”) Accounting Standard Codification ~~("ASC"~~(“ASC”) Topic 718, “~~Compensation~~“Compensation – Stock Compensation” (“ASC 718”) which establishes financial accounting and reporting standards for stock-based employee and non-employee compensation. It defines a fair value-based method of accounting for an employee stock option or similar equity instrument.

The Company recognizes all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant ~~date, which is based on the estimated number of awards that are ultimately expected to vest.~~date.

Options and warrants are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. The Company accounts for forfeitures of stock options as they occur. When forfeitures occur, the unvested portion of the previously recognized compensation cost is reversed in the period of the forfeiture.

Stock-based compensation expenses are included in operating expenses in the condensed consolidated statement of operations.

For the three months ended March 31, 2023, the Company did not grant any share-based awards. For the three months ended March 31, 2022 ~~and 2021~~ when computing fair value of share-based ~~payments,~~awards, the Company has considered the following ~~variables:~~range of assumptions:


	March 31, ~~2022~~2023	March 31, ~~2021~~2022
Risk-free interest rate	—%	1.73% - 2.14%	~~0.23%~~
Exercise price	$—	$2.00 - $3.00	~~$3.75~~
Expected life of grants in years	—	3.93 - 6.50	~~2.75~~
Expected volatility of underlying stock	—%	42.39% - 48.13%	~~53.52%~~
Dividends	—	—

The expected term is computed using the ~~“simplified” method~~“simplified method” as permitted under the provisions of FASB ASC Topic 718-10-S99. The Company uses the simplified method to calculate the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The share price is the ~~public trading~~closing price aton the ~~time~~date of grant. Expected volatility is based on the historical stock price volatility of comparable companies’ common stock as the stock does not have sufficient historical trading activity. Risk free interest rates were obtained from U.S. Treasury rates for the applicable ~~periods.~~expected terms.

Repurchase of Equity Securities

Share repurchases are recorded to common stock at the value of the cash consideration paid, as the Company's common stock has no par value. These shares were being repurchased for the purpose of constructive retirement. (See Note 15. Stockholders’ Equity.)

Reverse Stock Split

On March 6, 2023, the Company effected a 1-for-20 reverse stock split of its issued and outstanding shares of common stock (the “Reverse Stock Split”) on the Nasdaq Capital Market. Accordingly, all share and per share data included in these condensed consolidated financial statements and notes thereto have been adjusted retroactively to reflect the impact of the Reverse Stock Split.

Earnings (Loss) Per Share (“EPS”)

EPS is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to topic 260-10-45 of the FASB ASC. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on

preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common ~~shares~~stock and the denominator may have to adjust to include the number of additional shares of common ~~shares~~stock that would have been outstanding if the dilutive potential shares of common ~~shares~~stock had been issued during the period to reflect the potential dilution that could occur from shares of common ~~shares~~stock issuable through a contingent shares issuance arrangement, stock options, warrants, RSUs, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, warrants, and RSUs, and the if-converted method is used for convertible preferred stock as prescribed in FASB ASC Topic 260.

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per share of common ~~share~~stock for the three months ended March 31, ~~2022~~2023 and ~~2021.~~2022.

March 31, 2022 March 31, 2021
Numerator:
Net loss attributable to common stockholders $ (366,700) $ (1,549,800)
Effect of dilutive securities: — —

Diluted net loss $ (366,700) $ (1,549,800)

Denominator:
Weighted average common shares outstanding - basic 13,200,758 13,269,055
Dilutive securities (a):
  Restricted Stock Awards — —
  Options — —
  Warrants — —
  Convertible Preferred Stock — —

Weighted average common shares outstanding and assumed conversion – diluted 13,200,758 13,269,055

Basic net loss per common share $ (0.03) $ (0.12)

Diluted net loss per common share $ (0.03) $ (0.12)

(a) - Outstanding anti-dilutive securities excluded:
Unvested restricted stock units 127,500 —
Stock options 468,925 256,345
Warrants to purchase common stock 18,586,859 22,525
Convertible preferred stock 4,016,955 —
Warrants to purchase convertible preferred stock 12,000 —


	For the Three Months Ended March 31,
	2023		2022
Numerator:
Net income (loss) attributable to common stockholders	$	(6,765,500)	$	(366,700)
Effect of dilutive securities:	—		—

Diluted net income (loss)	$	(6,765,500)	$	(366,700)

Denominator:
Weighted average common shares outstanding - basic	720,618		660,038
Dilutive securities (a):
Restricted Stock Awards	—		—
Options	—		—
Warrants	—		—
Convertible Preferred Stock	—		—

Weighted average common shares outstanding and assumed conversion – diluted	720,618		660,038

Basic net earnings (loss) per common share	$	(9.39)	$	(0.56)

Diluted net earnings (loss) per common share	$	(9.39)	$	(0.56)

(a) - Outstanding anti-dilutive securities excluded:
Unvested restricted stock awards	11,520		6,375
Stock options	36,871		23,446
Warrants to purchase common stock (1)	18,447,564		18,586,859
Convertible preferred stock (2)	3,799,799		4,016,955
Warrants to purchase convertible preferred stock (2)	12,000		12,000

(1) The number of outstanding warrants did not change or split pursuant to the reverse stock split, but the number of shares of common stock issuable upon exercise will be adjusted based on a 1 to 0.05 ratio.

(2) Preferred stock isand warrants to purchase convertible preferred stock are convertible into common ~~shares~~stock on a ~~5.556~~0.2778 to 1 ratio.

Fair Value of Financial Instruments

For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments.

Cash and Cash Equivalents

The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

Restricted Cash

On August 10, 2021, the Company entered into a Letter of Credit (“LOC”) agreement with WaFd ~~bank~~Bank in the amount of $0.6 million. The Company signed a lease on October 5, 2021 for a new office space. The landlord of the property, University Street Properties I, LLC, is the beneficiary of the LOC. The amount of funds that cover this LOC were moved by ~~the~~ WaFd ~~bank~~Bank to a controlled account on August 13, 2021. (See Note 10. Letter of ~~Credit).~~Credit.)

Accounts Receivable

Accounts receivables are reported at the amount the Company expects to collect from outstanding balances. The Company provides for an allowance for ~~doubtful accounts~~credit losses based upon a review of the outstanding accounts receivable, historical collection information, and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The allowance for ~~doubtful accounts~~credit losses was $0 as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

Notes Receivable

Notes receivables are recorded at amounts due to the Company according to the contractual terms of the loan agreement. The Company's notes receivables are for the sale of real estate properties or financing the development of the properties prior to acquisition and are each secured by the underlying improved real estate properties.

The Company reviews notes receivable for impairment whenever events or circumstances indicate that the note may not be fully recoverable. Impairment is present when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. If management determines an amount to be uncollectible, impairment is measured based on the estimated uncollectible amount less the fair value of the underlying collateral. Impairment is recognized with a valuation allowance against the note receivable with a corresponding charge to bad debt expense under operating expenses. The valuation allowance is written down when the remaining note amount is collected in full. There was no valuation allowance as of March 31, 2023. The valuation allowance was $1.2 million for notes receivable as of December 31, 2022. (See Note 3. Notes Receivable.)

In March 2022, the Company entered into a promissory note with Rocklin Winding Lane 22, LLC for $4.8 million (“the note”) for the sale of developed lots. In the third quarter of 2022, Rocklin Winding Lane 22, LLC defaulted on the note due to a missed interest payment on June 30, 2022. As a result, the Company issued a letter of default in August 2022 and began foreclosure proceedings on the underlying real estate asset in October 2022. In the third quarter of 2022, the Company recorded a valuation allowance against the note and related bad debt expense within operating expenses of $0.8 million. In the fourth quarter of 2022, the Company was successful in the foreclosure of the underlying property and took ownership of the property, which was recorded for a fair value of $5.1 million at the time of repossession. Pursuant to the subordination agreement, the underlying real estate asset had a $1.0 million senior loan to a third party that was taken over by the Company upon the foreclosure of the property.

Property and Equipment and Depreciation

Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repair charges are expensed as incurred. Depreciation is computed by the straight-line method (after considering their respective estimated residual values) over the estimated useful lives:


Construction Equipment			5-10 years
Leasehold Improvements			The lesser of 10 years or the remaining life of the lease
Furniture and Fixtures			5 years
Computers			3 years
Vehicles			10 years

Real Estate Assets

Real estate assets are recorded at cost, except when real estate assets are acquired that meet the definition of a business combination in accordance with FASB ASC Topic 805, “Business Combinations,” where acquired assets are recorded at fair value. Interest, property taxes, insurance, and other incremental costs (including salaries) directly related to a project are capitalized during the construction period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and ends when the asset ~~constructed~~construction is ~~completed.~~completed or the asset is sold. The capitalized costs are recorded as part of the asset to which they relate and are expensed when the underlying asset is sold.

The Company capitalized interest from related party borrowings of ~~$0.3~~$0.2 million and ~~$0.2~~$0.3 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company capitalized interest from third-party borrowings of ~~$0.8~~$2.8 million and ~~$0.2~~$0.8 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

A property is classified as “held for sale” when all of the following criteria for a plan of sale have been met:

(1) Management, having the authority to approve the action, commits to a plan to sell the property;

(2) The property is available for immediate sale in its present condition, subject only to terms that are usual and customary;

(3) An active program to locate a buyer and other actions required to complete the plan to sell have been initiated;

(4) The sale of the property is probable and is expected to be completed within one year of the contract date;

(5) The property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

(6) Actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

~~When all these criteria have been met, the property is~~The real estate assets classified as ~~“held~~held for ~~sale.”~~sale were $54.5 million and $34.4 million as of March 31, 2023 and December 31, 2022, respectively.

In addition to the annual assessment of potential triggering events in accordance with FASB ASC Topic 360, the Company applies a fair value-based impairment test to the net book value of assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment loss may have occurred.

As of March 31, ~~2022~~2023, the Company recorded impairment charges of $0.8 million, $0.6 million, and $0.2 million relating to the Pacific Ridge apartments, Dark Horse lots, and Bunker Ranch home, respectively. As of December 31, ~~2021,~~2022, the Company recorded impairment charges of $1.2 million and $2.4 million relating to the Winding Lane lots and Pacific Ridge apartments, respectively. These charges are recorded in cost of sales and real estate as presented in Note 5. The Company did not identify any ~~triggering events~~other real estate that ~~would require further investigation under ASC 360.~~qualified for an impairment charge.

Revenue and Cost Recognition

FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s ~~contract~~contracts to provide goods or services to customers.

In accordance with ASC 606, revenue is recognized when a customer obtains control of the promised good or service. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these goods or services. The provision of ASC 606 includes a five-step process by which the Company determines revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which the Company expects to be entitled in exchange for those goods or services.

ASC 606 requires the Company to apply the following steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, performance obligations are satisfied.

A detailed breakdown of the five-step process for ~~the~~ revenue recognitions is as follows:

Homes, Developed Lots, and Entitled Land

1. Identify the contract with a customer.

The Company signs an agreement with a buyer to purchase the parcel of entitled land, developed lots that have completed infrastructure, ~~and~~or completed ~~home.~~homes.

2. Identify the performance obligations in the contract.

Performance obligations of the Company include delivering entitled land, developed lots, and completed homes to the customer, which are required to meet certain specifications outlined in the contract.

3. Determine the transaction price.

The transaction price is fixed and specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.

4. Allocation of the transaction price to performance obligations in the contract.

The parcel, lots, and ~~home~~homes are a separate performance ~~obligation~~obligations for which the specific price is in the contract.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company recognizes revenue when title is transferred. The Company does not have any further material performance obligations once title is transferred.

Fee Build

1. Identify the contract with a customer.

The Company signs an agreement with a customer to construct the required infrastructure so that houses can be developed on the lots.

2. Identify the performance obligations in the contract.

Performance obligations of the Company include delivering developed lots which are required to meet certain specifications that are outlined in the contract.

3. Determine the transaction price.

The transaction price is fixed and specified in the contract. Any subsequent change orders or price changes are required to be approved by both parties.

4. Allocation of the transaction price to performance obligations in the contract.

The nature of the industry involves a number of uncertainties that can affect the current state of the contract. Variable considerations are the estimates made due to a contract modification in the contractual service. Change orders, claims, extras, or back charges are common in contractual services activity as a form of variable consideration. If there is going to be a contract modification, judgment by management will need to be made to determine if the variable consideration is enforceable. The following factors are considered in determining if the variable consideration is enforceable:

1.The customer’s written approval of the scope of the change order;

2.Current contract language that indicates clear and enforceable entitlement relating to the change order;

3.Separate documentation for the change order costs that are identifiable and reasonable; and

4.The Company’s experience in negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated.

Once the Company receives a contract, it generates a budget of projected costs for the contract based on the contract price. If the scope of the contract during the contractual period needs to be modified, the Company files a change order. The Company does not continue to perform services until the change modification is agreed upon with documentation by both the Company and the customer. There are few times that claims, extras, or back charges are included in the contract.

If there are multiple performance obligations to the contract, the costs must be allocated appropriately and consistently to each performance obligation. In the Company’s experience, usually only one performance obligation is stated per contract. If there are multiple services provided for one customer, the Company has a policy of splitting out the services over multiple contracts.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e., design, engineering, procurement of material, etc.) should not be recognized as the Company does not have control of the good/service provided. When the estimate on a contract indicates a loss or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its

performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current contract asset in the Company’s balance ~~sheet under the caption “Contract Asset, net” which is further disclosed in Note 17.~~sheet. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract would be reflected as a current contract liability in the Company’s balance sheet. (See Note 17. Uncompleted Contracts.)

Revenues from contracts with customers are summarized by category as follows for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended March 31,					For the Three Months Ended March 31,
		2022		2021			2023		2022
Homes	Homes	$	12,274,500	$	6,814,200	Homes	$	6,049,700	$	12,274,500
Developed Lots	Developed Lots	9,080,000		7,000,000		Developed Lots	2,440,300		9,080,000
Entitled Land	Entitled Land	4,480,000		—		Entitled Land	—		4,480,000
Fee Build	Fee Build	2,713,900		—		Fee Build	424,200		2,713,900
Multi-family						Multi-family	266,800		—
Construction Materials	Construction Materials	32,600		60,000		Construction Materials	—		32,600
Total Revenue	Total Revenue	$	28,581,000	$	13,874,200	Total Revenue	$	9,181,000	$	28,581,000

Disaggregation of Revenue from Contracts with ~~Customers~~Customers:

The following table disaggregates the Company’s revenue based on ~~the type of sale or service and~~ the timing of satisfaction of performance obligations for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


		Three Months Ended March 31,					For the Three Months Ended March 31,
		2022		2021			2023		2022
Performance obligations satisfied at a point in time	Performance obligations satisfied at a point in time	$	25,867,100	$	13,874,200	Performance obligations satisfied at a point in time	$	8,914,200	$	25,867,100
Performance obligations satisfied over time	Performance obligations satisfied over time	2,713,900		—		Performance obligations satisfied over time	266,800		2,713,900
Total Revenue	Total Revenue	$	28,581,000	$	13,874,200	Total Revenue	$	9,181,000	$	28,581,000

Rental Income

Rental income attributable to residential leases is recorded when due from residents and recognized monthly as it was earned. Residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. Leases entered into between a resident and a property for the rental of an apartment unit are generally six months to one year, and typically renewed on a month-to-month basis after the initial term.

Rental income is included as a part of sales on the statement of operations and within the Multi-family segment presented in Note 16. Segments. Rental income was $0.4 million and $0 for three months ended March 31, 2023 and 2022, respectively.

Cost of Sales

Land acquisition costs are typically allocated to each lot based on the size of the lot in relation to the size of the total project. Development costs and capitalized interest are allocated to lots sold based on the same criteria.

Fee build costs are charged to cost of sales as incurred. See the revenue recognition criteria above.

Costs relating to the handling of recycled construction materials and converting items into usable construction materials for resale are charged to cost of sales as incurred.

Advertising

Advertising expenses, which are expensed as incurred and included in operating expenses, were $0.1 million and $0.04 million for the three months ended March 31, 2023 and 2022.

Income Taxes

Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss, credit carryforwards, and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. Management applies the criteria established under FASB ASC Topic 740, Income Taxes, to determine ifwhether any valuation allowances are needed each year.

The Company calculated the effective tax rate for the three months ended March 31, 2023 based on the actual effective tax rate for the year-to-date period compared to the estimate of the annual effective tax rate for the three months ended March 31, 2022.

The Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. There are no uncertain tax positions as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law. The IRA includes a 15% Corporate Alternative Minimum Tax (“Corporate AMT”) for tax years beginning after December 31, 2022. The Company does not expect the Corporate AMT to have a material impact on its condensed consolidated financial statements. Additionally, the IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations. The excise tax is imposed on the value of the net stock repurchased or treated as repurchased. The new law will apply to stock repurchases occurring after December 31, 2022. The IRA also extended the federal tax credit for building new energy-efficient homes delivered from January 1, 2022 (retroactively) through December 31, 2032, as well as modifies and increases it starting in 2023. The federal tax credits in 2022 reflected the impact of the extension under the IRA.

Recent Accounting Pronouncements

On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. Pursuant to ASU No. 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2022 for small reporting companies, non-SEC filers, and all other companies. The adoption of ASU 2016-13 did not have a material impact on the Company's condensed financial statements.

On March 12, 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this update are elective and apply to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has applied certain optional expedients that are retained through the end of the hedging relationship. In December 2022, ASU 2022-06 was issued which was effective upon issuance, defers the sunset date of this prior guidance from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief guidance in Topic 848. The adoption of ASU 2020-04 and ASU 2022-06 did not have a material impact on the Company’s condensed financial statements.

On May 3, 2021, the FASB released ASU No. 2021-04, Compensation – Earning Per Share (Topic 260), Debt - Modifications and Extinguishments (subtopic 470-50), Compensation - Stock ~~compensation~~Compensation (Topic 718), Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding

Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example warrants) that remain equity classified after modification or exchange. The standard is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-04 on January 1, 2022, however the adoption did not have an impact on the ~~Company's Financial Statements.~~Company’s condensed financial statements.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is present when the sum of estimated undiscounted future cash flow expected to result from use of the assets is less than carrying value. If impairment is present, the carrying value of the impaired asset is reduced to its fair value. Fair value is determined based on discounted cash flow or appraised values,

depending on the nature of the assets. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, there were no impairment losses recognized for long-lived assets.

2. CONCENTRATIONS

Cash Concentrations

The Company maintains cash balances at various financial institutions. These balances are secured by the Federal Deposit Insurance Corporation. These balances generally exceed the federal insurance limits. Uninsured cash balances were ~~$20.8~~$6.2 million and ~~$24.5~~$8.1 million as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Revenue Concentrations

Homes

~~There were no concentrations in relation to~~For the ~~homes revenue segment for~~three months ended March 31, 2023, four customers each represented 23%, 24%, 26%, and 27% of the home revenue. For the three months ended March 31, 2022, ~~and 2021.~~there was no concentration in relation to the homes revenue segment.

Developed Lots

~~SAC Land Dev LLC and Suhail Ahmad, Muhammad Azhar Chaudhary and Ghulam Murtaza represented 62% and 26%, respectively of the developed lots revenue for~~For the three months ended March 31, ~~2022. Lennar Northwest, Inc.~~2023, two customers each represented ~~100%~~26% and 34% of the developed lots ~~revenue for~~revenue. For the three months ended March 31, ~~2021.~~2022, two customers each represented 62% and 26% of the developed lots revenue.

Entitled Land

For the three months ended March 31, 2023, there was no concentration in relation to entitled land revenue. For the three months ended March 31, 2022, Noffke ~~Horizon View LLC~~Homes represented 100% of the entitled land ~~revenue for the three months ended March 31, 2022.~~revenue.

Fee Build

Lennar Northwest, Inc. represented 100% of fee build revenue for the three months ended March 31, 2023 and 2022.

3. NOTES RECEIVABLE

The ~~total principal~~outstanding balance of ~~the~~ notes receivable amounted to $~~12.7~~2.4 million and $4.5 million at March 31, 2023 and December 31, 2022, respectively. These notes arose as financing by the Company for the sale of real estate properties or financing the development of the properties prior to ~~purchasing.~~acquisition. These notes are secured by the underlying improved real estate properties and accrue interest at annual rates ranging from 5%8% to 9%. All payments of principal and interest are due in full between December ~~31, 2022~~1, 2024 and December 20, 2024. ~~The outstanding balance of the notes amounted to~~ ~~$12.7 million~~ ~~and $2.0 million at March 31, 2022 and December 31, 2021, respectively.~~ Interest income was $0.1 million and $0$0.1 million for the three months ended March 31, 2023 and 2022, respectively.

In March 2022, the Company and ~~2021, respectively.~~Noffke Horizon View, LLC entered into a promissory note with a payment in full due on March 31, 2023 of $3.3 million (“the note”) for the sale of land. In March 2023, Noffke Horizon View, LLC notified the Company that they are unable to pay this amount in full by the due date and the Company agreed to settle the note for a reduced amount totaling $2.1 million. The Company ~~considers~~recorded a valuation allowance against the note receivable ~~plus accrued interest to be~~as of December 31, 2022 and the reduced note amount was fully ~~collectible and, therefore, has determined that an allowance is not necessary.~~ collected during the quarter ended March 31, 2023.

The details of notes receivables, net of a valuation allowance are as follows:

March 31, 2022 December 31, 2021
Broadmoor Commons LLC $ 624,300 $ 500,000
Modern Homestead LLC 2,000,000 1,500,000
Rocklin Winding Lane 22, LLC 4,802,500 —
Noffke Horizon View, LLC 3,280,000 —
Suhail Ahmad, Ghulam Murtaza Ansari, and Muhammad Azhar Chaudhary 2,040,000 —
$ 12,746,800 $ 2,000,000


	March 31, 2023		December 31, 2022
Broadmoor Commons LLC	$	1,000,300	$	1,000,300
Modern Homestead LLC	1,390,000		1,445,000
Noffke Horizon View, LLC	—		2,080,000
Total Notes Receivable, Net	$	2,390,300	$	4,525,300

4. PROPERTY AND EQUIPMENT

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


		March 31, 2022		December 31, 2021
							March 31, 2023		December 31, 2022
Machinery and Equipment	Machinery and Equipment	$	10,566,900	$	10,577,600	Machinery and Equipment	$	207,500	$	505,300
Vehicles	Vehicles	71,800		71,800		Vehicles	26,200		26,200
Furniture and Fixtures	Furniture and Fixtures	468,600		420,300		Furniture and Fixtures	695,600		695,600
Leasehold Improvements	Leasehold Improvements	1,086,100		81,200		Leasehold Improvements	1,471,300		1,524,000
Total Fixed Assets	Total Fixed Assets	12,193,400		11,150,900		Total Fixed Assets	2,400,600		2,751,100
Less Accumulated Depreciation	Less Accumulated Depreciation	(2,255,000)		(1,951,200)		Less Accumulated Depreciation	(450,500)		(461,600)
Fixed Assets, Net	Fixed Assets, Net	$	9,938,400	$	9,199,700	Fixed Assets, Net	$	1,950,100	$	2,289,500

Depreciation expense was ~~$0.3~~$0.1 million and ~~$0.2~~$0.3 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

5. REAL ESTATE

Real Estate consisted of the following components:


		March 31, 2022		December 31, 2021
							March 31, 2023		December 31, 2022
Land Held for Development	Land Held for Development	$	55,395,800	$	73,524,400	Land Held for Development	$	44,556,000	$	47,166,700
Construction in Progress	Construction in Progress	58,264,500		43,362,700		Construction in Progress	118,759,100		123,927,300
Held for Sale	Held for Sale	15,409,100		5,249,000		Held for Sale	54,520,800		34,384,200
		$	129,069,400	$	122,136,100
Total Real Estate						Total Real Estate	$	217,835,900	$	205,478,200

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued liabilities consisted of the following:


		March 31, 2022		December 31, 2021
							March 31, 2023		December 31, 2022
Trade Accounts Payable	Trade Accounts Payable	$	8,772,500	$	5,558,400	Trade Accounts Payable	$	10,308,400	$	11,472,100
Income Tax Payable		3,289,500		2,415,900
Accrued Compensation, Bonuses, and Benefits	Accrued Compensation, Bonuses, and Benefits	649,900		1,071,700		Accrued Compensation, Bonuses, and Benefits	716,000		1,130,300
Accrued Quarry Reclamation Costs	Accrued Quarry Reclamation Costs	442,700		500,000		Accrued Quarry Reclamation Costs	564,800		384,700
Retainage Payable	Retainage Payable	784,800		445,800		Retainage Payable	76,500		76,200
Other Accruals		1,977,900		671,000
Other Accrued Expenses						Other Accrued Expenses	2,115,700		1,027,400
Total Accounts Payable and Accrued Expenses	Total Accounts Payable and Accrued Expenses	$	15,917,300	$	10,662,800	Total Accounts Payable and Accrued Expenses	$	13,781,400	$	14,090,700

7. REVOLVING LINE OF CREDIT

On March 7, 2022, the Company entered into a senior secured revolving credit facility ~~"the~~(“the credit ~~facility"~~facility”) with BankUnited, N.A. (the “Lender”) for $25.0 million. The credit facility ~~has a 2~~had an initial two year term, with a maturity date of March 7, 2024. The unpaid principal ~~bears~~bore interest at a fluctuating rate of interest per annum equal to the daily simple secured overnight financing rate (SOFR) plus the applicable margin of 4.75%. The credit facility iswas used to fund ~~our~~the Company’s general working capital needs and interest is expensed as incurred. ~~For the three months ended March 31, 2022, the Company incurred debt issuance costs of $1.1 million. Amortization of debt discount is recognized ratably over the life of the loan.~~ The credit facility is collateralized by ~~various~~all of the Company’s assets ~~and contains~~wherein the Lender is granted a junior priority interest in all collateralized Company assets that

Lender has previously identified as a permitted lien or other encumbrance that the Company regularly incurs through its ordinary course of business; in all other Company assets, Lender maintains a first priority security interest. The credit facility also contained specific financial covenants. As of ~~March~~December 31, 2022, the ~~company~~Company was not in compliance with ~~these covenants. Interest~~the minimum interest coverage ratio requirement and consolidated liquidity covenant.

On February 23, 2023, the Company entered into an amended loan agreement (the “Amendment”) with the Lender, whereby the Lender agreed to waive its right to accelerate and declare all of the debt immediately due and owing, based upon the previously disclosed non-compliance with financial covenants resulting in technical default under the loan agreement. Further, the Lender waived the requirement that the Company comply with certain financial covenants through maturity of the debt. These concessions were made as a result of the Company granting the Lender second mortgage positions for certain properties owned by the Company, as well as transferring to the Lender membership certificates pledging certain properties as collateral and perfecting the Lender’s security interest in the pledged LLCs. Additionally, the Company agreed to make principal reduction payments including paying the Lender $0.6 million on the 20th of every month which otherwise would have been paid to preferred shareholders as a dividend on the preferred stock, and pay to the Lender 25% of all net cash proceeds from asset sales, public offerings of any class of stock or debt, private equity recaptures, or any capital raise. The Company also agreed that it will not close on any new projects without the Lender's express written consent and will not repurchase any of its outstanding securities. The aforementioned payments will continue to be made until the earlier of March 7, 2024 or until the loan has been paid in full.

The Company evaluated the Amendment in accordance with ASC 470-50, Debt - Modifications and Extinguishments and applied the borrowing capacity model as it relates to a revolving debt arrangement. Under the Amendment, the Lender is no longer committed and has no further lending obligations to the Company, which reduced the borrowing capacity of available credit to $0. The Company determined that this modification is considered a partial extinguishment and expensed the remaining unamortized debt discount of $0.5 million within interest expense ~~was $0.03 million and $0~~ for the three months ended March 31, ~~2022~~2023.

Interest expense was $1.2 million and ~~2021,~~$0.03 million for the three months ended March 31, 2023 and 2022, respectively.

As of March 31, 2023 and December 31, 2022, the revolving line of credit loan balance was ~~$12.1~~$22.9 million and $25.0 million and the unamortized debt discount balance was ~~$1.1 million.~~$0 and $0.6 million, respectively.

8. EQUIPMENT LOANS

Equipment loans consists of the following:


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022

Various notes payable to banks and financial institutions with interest rates varying from 0% to 13.89%, collateralized by equipment with monthly payments ranging from $400 to $11,600 through 2025:		$	5,167,600	$	5,268,500
Various notes payable to banks and financial institutions with interest rates varying from 0% to 13.89%, collateralized by equipment with monthly payments ranging from $400 to $10,500:						Various notes payable to banks and financial institutions with interest rates varying from 0% to 13.89%, collateralized by equipment with monthly payments ranging from $400 to $10,500:	$	1,300	$	2,057,100
Book value of collateralized equipment:	Book value of collateralized equipment:	7,612,500		7,229,000		Book value of collateralized equipment:	11,100		11,800

Future equipment loan maturities at March 31, ~~2022~~2023 are as follows:

Year Ending December 31,

2022 (nine months) $ 1,512,200
2023 1,860,400
2024 1,613,800
2025 181,200
$ 5,167,600


2023 (nine months)	$	1,300
2024	—
2025	—
2026	—
Total	$	1,300

Interest expense was ~~$0.04~~$0.001 million and $0.04 million for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

9. CONSTRUCTION LOANS

The Company has various construction loans with private individuals and finance companies. The loans are collateralized by specific construction projects. Most loans are generally on ~~a 1-year term~~one to two year terms but will be extended or refinanced if the project is not completed within one ~~year~~ to two years and will be due upon the completion of the project. ~~Interest accrues on the~~The loans ~~and is included with the payoff of the loan. Interest ranges~~have

interest ranging from 5%7.99% to 9%13.00%. Interest expense and amortization of debt discount are capitalized when incurred and expensed as cost of goods sold when the corresponding property is sold. ~~During the quarter ended March 31, 2022, we refinanced construction loans of $4.5 million. These modifications are accounted for as the extinguishment of existing debt and the issuance of new debt.~~ The loan balances related to third party lenders as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022 were ~~$38.7~~$124.0 million and ~~$39.4~~$109.4 million, respectively. The unamortized debt discounts related to these construction loans as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 were ~~$1.6~~$1.4 million and ~~$4.4~~$1.9 million, respectively. The book value of collateralized real estate as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$129.1~~$205.3 million and ~~$122.1~~$193.1 million, respectively.

10. LETTER OF CREDIT

The Company entered into a letter of credit agreement with WaFd ~~bank~~Bank of $0.6 million on August 10, 2021. The letter of credit expires February 1, 2032. The interest rate of the letter of credit is Prime plus 1%. The letter of credit has been established for the purpose of collateralizing the Company’s new Tacoma office lease obligations with the landlord ~~who~~which is the beneficiary of the letter of credit. (See Note 1. Restricted Cash.)

11. NOTE PAYABLE ~~DIRECTORS & OFFICERS~~ INSURANCE

The Company purchased Directors & Officers ~~("D&O")~~(D&O) insurance on August 28, ~~2021~~2022 for ~~$1.5~~$0.6 million. A down payment of $0.1 million was made and the remaining balance ~~of $1.4 million~~ was financed over ~~eleven~~11 months. The interest rate on the loan is ~~4.42%~~4.75%. The loan balance as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 was ~~$0.5~~$0.2 million and ~~$0.9~~$0.4 million, respectively.

12. COMMITMENTS AND CONTINGENCIES

From time to time, the Company is subject to compliance audits by federal, state, and local authorities relating to a variety of regulations including wage and hour laws, taxes, and workers’ compensation. There are no significant or pending litigation or regulatory proceedings known at this time.

On June 15, 2020, the Company entered into a purchase and sale agreement to acquire property for the construction of 33 ~~town homes~~townhomes located in East Bremerton, Washington for $2.0 million. ~~Closing is expected to take place~~This purchase and sale agreement was subsequently rescinded in Q2 ~~2022.~~2023.

On December 2, 2021, the Company entered into a purchase and sale agreement for the acquisition of 438 acres in Blaine, Washington for $13.5 million. Closing is expected to take place in Q4 2023.

On ~~December 15, 2021,~~April 21, 2022, the Company entered into a purchase and sale agreement for the ~~acquisition~~purchase of ~~66 town homes located~~4.81 acres in ~~Poulsbo,~~Port Orchard, Washington for ~~$2.9~~$2.6 million. Closing is expected to take place in Q3 2023.

On November 15, 2022, the Company entered into a purchase and sale agreement for the purchase of 15.30 acres in Stanwood, Washington for $4.6 million. Closing is expected to take place in Q2 ~~2022.~~2024.

On ~~March 18, 2022,~~January 12, 2023, the Company entered into a purchase and sale agreement for the sale of ~~112 lots~~the Mills Crossing multi-family development located in ~~Burien,~~Bremerton, Washington for ~~$3.8~~$14.3 million. Closing is expected to take place in Q2 ~~2022.~~2023.

13. RELATED PARTY TRANSACTIONS

Notes Payable

The Company entered into construction loans with Sound Equity, LLC of which Robb Kenyon, a former director and minority shareholder, is a partner. These loans were originated between April 2019 and June 2021; ~~all of~~ the loans generally have a ~~one-year~~12 to 24 month maturity, ~~with~~including those that have been extended. The interest rates ~~ranging~~range between 7.99% and ~~9.99%~~11.00%. As of March 31, 2023, and December 31, 2022, the outstanding loan balances were $8.2 million and $8.2 million, respectively. For the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, the Company ~~incurred~~capitalized loan ~~origination~~ fees of $0$0.1 million and ~~$0.1 million,~~$0, respectively. These fees are recorded as debt discount and amortized over the life of the loan. The amortization is capitalized to real estate. As of March 31, ~~2022,~~2023 and December 31, ~~2021,~~2022, there were ~~$0.03~~$0.1 million and ~~$0.2~~$0.1 million of remaining unamortized debt discounts, respectively. The interest is capitalized to real estate as ~~incurred.~~incurred and will be expensed to cost of goods sold when the property is sold. During the three months ended March 31, ~~2022~~2023 and ~~2021~~2022, the Company incurred interest of ~~$0.3~~$0.2 million and ~~$0.2 million, respectively. As of March 31, 2022, and December 31, 2021 the outstanding loan balances were $11.0 million and $14.5~~$0.3 million, respectively.

Robb Kenyon resigned as a director of the Company on July 8, 2021.

Due to Related Party

The Company ~~utilizes~~previously utilized a quarry to process waste materials from the completion of raw land into sellable/buildable lots. The materials produced by the quarry ~~is located on land owned~~and sold by the Company to others were subject to a 25% commission payable to SGRE, LLC, which is 100% owned by the Company’s Chief Executive Officer and President. The ~~materials produced by the quarry and sold by the Company to others are subject to a 25% commission payable to SGRE, LLC. The~~ commission expense iswas recorded in operating expenses. On March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the commission payable was ~~$0.01 million~~$0 and ~~$0.01 million,~~$0, respectively. The commission expense for the three months ended March 31, 2023 and 2022, was $0 and ~~2021, was~~ $0.03 million, respectively. The Company is winding up its quarry operations and ~~$0.02~~will no longer incur any commission expenses.

Rental Expense

The Company entered into property management agreements with Olympic Management Company (“OMC”), which is owned and operated by a family member related to the Company’s Chief Executive Officer and President. OMC serves as a managing agent for leasing and managing the Company's Mills Crossing, Belfair View, Pacific Ridge and Wyndstone multi-family properties. The Company pays management fees to OMC, which consist of service fees of up to $3,000 per month and $500 for each lease of a vacant apartment unit. The Company also reimburses the payroll, benefits, and other employment costs relating to an office manager, leasing consultant, and maintenance staff employed by OMC for their time incurred in the operations of the property. For the three months ended March 31, 2023 and 2022, the management fees and payroll and benefits incurred and recorded as rental expense within cost of sales were $0.2 million and $0, respectively. Subsequent to March 31, 2023, the Company terminated the agreements with OMC and engaged a third party property management company for leasing and managing the Company's Belfair, Pacific Ridge and Wyndstone multi-family properties. Mills Crossing is currently under contract and will continue to be managed by OMC until it is sold, which is expected to occur in the second quarter of 2023.

14. INCOME TAX

~~Our~~The Company’s effective tax rate for the three months ~~ending~~ended March 31, ~~2022~~2023 was ~~23.6%~~a benefit of 20.8%, compared to 0%23.6% for the three months ~~ending~~ended March 31, ~~2021.~~2022. The ~~increase~~Company calculated the effective tax rate for the three months ended March 31, 2023 based on the actual effective tax rate for the year-to-date period compared to the estimate of the annual effective tax rate for the three months ended March 31, 2022. The decrease in the effective tax rate for the three months ended March 31, ~~2022~~2023 compared to the three months ended March 31, ~~2021~~2022 is driven by the ~~release of the valuation allowance at December 31, 2021~~decrease in blended state tax rates and ~~nondeductible~~ incentive stock ~~options~~.compensation.

15. STOCKHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue 50,000,000 shares of common stock, at no par value per share. At March 31, ~~2022,~~2023, the Company has ~~13,237,179~~732,245 shares of common stock issued and outstanding.

Each share of common stock has 1one vote per share for all purposes. Common stock does not provide any preemptive, subscription, or conversion rights and there are no redemption or sinking fund provisions or rights. Common stockholders are not entitled to cumulative voting for purposes of electing members to the Board of Directors.

Preferred Stock

At March 31, ~~2022,~~2023, the Company is authorized to issue 10,000,000 shares of preferred stock, at no par value per share. As of March 31, ~~2022,~~2023, the Company has ~~4,016,955~~3,799,799 shares of Series A Cumulative Convertible Preferred Stock (“Series A Preferred Shares”) issued and outstanding. The holders of the Series A Preferred Shares are entitled to receive dividends at ~~a rate of 8%~~$2.00 per share per annum ~~payable~~which are paid monthly in arrears starting June 30, ~~2021 and are entitled to a liquidation preference equal~~

~~to $25.00 per share plus all accrued and unpaid dividends.~~2021. Beginning on June 9, 2024, the Company may, at its option, redeem the Series A Preferred Shares, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to but not including the date of redemption. To the extent declared by the Board of Directors, dividends will be payable not later than 20 days after the end of each calendar month. Dividends on the Series A Preferred Shares will accumulate whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, and whether or not such dividends are declared by the Board of Directors.

Conversion at Option of Holder. Each ~~of these~~ Series A Preferred ~~Shares,~~Share, together with accrued but unpaid dividends, is convertible into ~~5.556~~0.2778 shares of common stock (subject to adjustment) at any time at the option of the holder.

Dividends

Preferred Stock. The holders of the Series A Preferred Shares are entitled to receive dividends ~~at a rate~~in the amount of 8%$2.00 per share per annum, ~~payable monthly in arrears.~~which is equivalent to 8% of the $25.00 liquidation preference per share. The Company has accrued dividends of ~~$0.7~~$1.9 million as of March 31, 2023. The Company had accrued dividends of $0.6 million as of December 31, 2022 which were paid to the shareholders on ~~April 11, 2022.~~January 20, 2023.

On January 20, 2023, the Board of Directors voted to suspend the cash dividend on the Series A Preferred Stock as announced on a Current Report on Form 8-K on January 25, 2023. On February 23, 2023, as part of the Amendment to the Loan Agreement with BankUnited, the Company agreed to pay $0.6 million to BankUnited each month, which otherwise would have been paid as a dividend to the holders of the Series A Preferred Stock.

Common Stock. The declaration of any future cash dividends is at the discretion of the board of directors and depends upon the Company’s earnings, if any, capital requirements and financial position, general economic conditions, and other pertinent conditions. It is the Company’s present intention not to pay any cash dividends on the Company’s common stock in the foreseeable future, but rather to reinvest earnings, if any, in business operations.

Repurchase of Equity Securities

On May 10, 2022, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $5.0 million worth of shares of common stock. The amount of the repurchase program represented approximately 15% of the outstanding shares of the Company’s common stock valued at the closing price on May 10, 2022. During the three months ended March 31, 2023, the Company did not repurchase any shares of common stock.

As a part of the amended loan agreement reached with BankUnited, N.A. on February 23, 2023, the Company agreed that it will not repurchase any of its currently outstanding securities.

Reverse Stock Split

On February 17, 2023, the Company held a special meeting of stockholders at which the stockholders approved a proposal to effect a reverse split of its issued and outstanding shares of common stock at a ratio of between 1-for-3 and 1-for-25 (the “Reverse Stock Split”), such ratio to be selected at the sole discretion of the Company's Board without further stockholder action.

On February 27, 2023, the Board of Directors approved the implementation of the Reverse Stock Split at a ratio of 1-for-20 shares of the common stock. The Company filed Articles of Amendment to Articles of Incorporation for the Reverse Stock Split with the Washington Secretary of State on March 1, 2023 and the Reverse Stock Split was effected on the Nasdaq Capital Market on March 6, 2023.

As a result of the Reverse Stock Split, every 20 shares of common stock either issued or outstanding immediately prior to the effective time was, automatically and without any action on the part of the respective holders thereof, combined and converted into one share of common stock. The Reverse Stock Split also applied to common stock issuable upon the exercise of the Company’s outstanding warrants, outstanding stock options, unvested restricted stock awards, stock and stock option plans, and upon the conversion of the Series A Preferred Stock. The Reverse Stock Split did not affect the par value of common stock or the shares of common stock authorized to issue under the Articles of Incorporation, as amended. No fractional shares were issued in connection with the Reverse Stock Split. Fractional shares which would otherwise result from the Reverse Stock Split were rounded up to the nearest whole share.

(A) Options

The following is a summary of the Company’s option activity:

Options Weighted
Average
Exercise Price
Outstanding – January 1, 2022 463,251 $ 2.82
Exercisable – January 1, 2022 343,724 $ 2.77
Granted 30,000 $ 2.03
Exercised (21,623) $ 0.40
Forfeited/Cancelled (2,703) $ 0.40
Outstanding – March 31, 2022 468,925 $ 2.76
Exercisable – March 31, 2022 342,565 $ 2.74


	Options	Weighted Average Exercise Price
Outstanding – January 1, 2023	37,546	$	41.51
Exercisable – January 1, 2023	19,696	$	55.55
Granted	—	$	—
Exercised	—	$	—
Forfeited/Cancelled	(675)	$	22.40
Outstanding – March 31, 2023	36,871	$	41.86
Exercisable – March 31, 2023	20,488	$	55.94


		Options Outstanding				Options Exercisable				Options Outstanding				Options Exercisable
Exercise Price	Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price		Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price

$0.40 - $6.50		468,925	7.59	$	2.76	342,565	$	2.74
$7.99 - $130.00									$7.99 - $130.00	36,871	7.66	$	41.86	20,488	$	55.94

During the three months ended March 31, 2023, the Company did not issue options to employees. During the three months ended March 31, 2022, the Company issued ~~30,000~~1,500 options to employees. The options have an exercise price between ~~$2.00~~$40.00 and ~~$2.09~~$41.80 per share, a term of 10ten years, and vest over one or three years. The options have an aggregated fair value of approximately $0.03 million that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 1 under Stock-Based ~~Compensation.~~Compensation

~~During the three months ended March 31, 2022, the Company had 21,623 options exercised by former employees. These shares were exercised at $0.40 per share for a total of $0.01 million.~~

The Company recognized share-based compensation net of forfeitures related to options of ~~$0.02~~$0.03 million and ~~$0.1~~$0.02 million for the three months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively.

On March 31, ~~2022,~~2023, unrecognized share-based compensation was ~~$0.1~~$0.2 million.

The intrinsic value for outstanding and exercisable options as of March 31, 2023 was $0. The intrinsic value for outstanding and exercisable options as of March 31, 2022 was $0.3 million and $0.2 million.

(B) Warrants

The following is a summary of the Company’s ~~Common Stock Warrant~~common stock warrant activity:

Warrants Weighted
Average
Exercise Price
Outstanding – January 1, 2022 18,486,859 $ 3.46
Exercisable – January 1, 2022 18,486,859 $ 3.46
Granted 100,000 $ 3.00
Exercised — $ —
Forfeited/Cancelled — $ —
Outstanding – March 31, 2022 18,586,859 $ 3.46
Exercisable – March 31, 2022 18,495,192 $ 3.46

Warrants Outstanding Warrants Exercisable
Exercise Price Number
Outstanding Weighted
Average
Remaining
Contractual
Life
(in years) Weighted
Average
Exercise
Price Number
Exercisable Weighted
Average
Exercise Price

$0.40 - $7.50 18,586,859 4.44 $ 3.46 18,495,192 $ 3.46


	Warrants*	Weighted Average Exercise Price
Outstanding – January 1, 2023	18,447,564	$	3.47
Exercisable – January 1, 2023	18,380,897	$	3.47
Granted	—	$	—
Exercised	—	$	—
Forfeited/Cancelled	—	$	—
Outstanding – March 31, 2023	18,447,564	$	3.47
Exercisable – March 31, 2023	18,389,231	$	3.47

*As a result of the Reverse Stock Split, each warrant now entitles the holder to purchase one-twentieth (0.05) of one share of common stock.


	Warrants Outstanding				Warrants Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$0.40 - $7.50	18,447,564	3.43	$	3.47	18,389,231	$	3.47

During the three months ended March 31, 2023, the Company did not issue any warrants. During the three months ended March 31, 2022, the Company issued 100,000 warrants in connection with investor relation services being performed. The warrants have an exercise price of $3.00 per ~~share,~~warrant, a term of 5five years, and vest over 3three years. The fair value of these warrants is $0.1 million as of March 31, 2022.

The intrinsic value for outstanding and exercisable warrants as of March 31, 2023 was $0. The intrinsic value for outstanding and exercisable warrants as of March 31, 2022 was ~~$0.04 million and~~ $0.04 million.

The following is a summary of the Company’s ~~Preferred Stock Warrant~~preferred stock warrant activity:

Warrants Weighted
Average
Exercise Price
Outstanding – January 1, 2022 12,000 $ 24.97
Exercisable – January 1, 2022 12,000 $ 24.97
Granted — $ —
Exercised — $ —
Forfeited/Cancelled — $ —
Outstanding – March 31, 2022 12,000 $ 24.97
Exercisable – March 31, 2022 12,000 $ 24.97


	Warrants	Weighted Average Exercise Price
Outstanding – January 1, 2023	12,000	$	24.97
Exercisable – January 1, 2023	12,000	$	24.97
Granted	—	$	—
Exercised	—	$	—
Forfeited/Cancelled	—	$	—
Outstanding – March 31, 2023	12,000	$	24.97
Exercisable – March 31, 2023	12,000	$	24.97


		Warrants Outstanding				Warrants Exercisable				Warrants Outstanding				Warrants Exercisable
Exercise Price	Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price		Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price

$	24.97	12,000	4.19	$	24.97	12,000	$	24.97	24.97	12,000	3.19	$	24.97	12,000	$	24.97

During the three months ended March 31, 2023 and March 31, 2022, the Company did not issue any preferred warrants.

The intrinsic value for outstanding and exercisable preferred warrants as of March 31, 2023 was $0. The intrinsic value for outstanding and exercisable preferred warrants as of March 31, 2022 was $0.

The following is a summary of the Company’s restricted stock activity:


		Restricted Stock	Weighted Average Exercise Price			Restricted Stock	Weighted Average Fair Value
Non Vested Balance - January 1, 2022		145,000	$	2.45
Non Vested Balance - January 1, 2023					Non Vested Balance - January 1, 2023	12,000	$	38.48
Granted	Granted	61,100	$	2.37	Granted	—	$	—
Vested	Vested	78,600	$	2.54	Vested	480	$	45.46
Forfeited/Cancelled	Forfeited/Cancelled	—	$	—	Forfeited/Cancelled	—	$	—
Non Vested Balance - March 31, 2022		127,500	$	2.36
Non Vested Balance - March 31, 2023					Non Vested Balance - March 31, 2023	11,520	$	38.19

The Company periodically grants restricted stock awards to the Board of Directors and certain employees pursuant to the 2020 ~~Restricted Stock Plan (the "2020 Plan”).~~Plan. These typically are awarded by the Compensation Committee at one time and from time to time, to vest ~~in 4 equal installments quarterly,~~over one to three years, unless otherwise determined by the Compensation Committee.

The Company recognized ~~$0.2~~$0.05 million and ~~$0.04~~$0.2 million of share-based compensation during the three months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively.

On March 31, ~~2022,~~2023, there was $0.3 million of unrecognized compensation related to non-vested restricted stock.

16. SEGMENTS

In accordance with FASB ASC Topic 280, Segment Reporting, an operating segment is defined as a component of an enterprise for which discrete financial information is available and reviewed regularly by the chief operating decision maker ~~("CODM"~~(“CODM”), or decision making group, to evaluate performance and make operating decisions.

The Company identified its CODM group as its 3three executive officers, the Chief Executive Officer, Chief Financial Officer, and ~~the~~ Chief Operating Officer. In determining the reportable segments, the CODM group considers similar economics and characteristics including product types, construction processes, customer type, regulatory environments, and underlying demand and supply.

The Company’s business is organized into 4five material reportable segments which aggregate ~~99%~~100% of ~~revenue:~~sales for the three months ended March 31, 2023:

1) Homes

2) Developed ~~lots~~Lots

3) Entitled ~~land~~Land

4) Multi-family

5)Fee ~~build~~Build

2025

The reporting segments follow the same accounting policies used in the preparation of the Company’s condensed consolidated financial statements. The following represents ~~selected~~sales, cost of sales, and gross profit (loss) information for the Company’s reportable segments for the three months ended March 31, ~~2022~~2023 and ~~2021. Immaterial construction materials revenues and costs are included in the homes segment.~~2022:


		Three Months Ended March 31,					For the Three Months Ended March 31,
		2022		2021			2023		2022
Revenue by segment
Sales by segment						Sales by segment
Homes	Homes	$	12,274,500	$	6,814,200	Homes	$	6,049,700	$	12,274,500
Developed lots	Developed lots	9,080,000		7,000,000		Developed lots	2,440,300		9,080,000
Entitled land	Entitled land	4,480,000		—		Entitled land	—		4,480,000
Multi-family						Multi-family	424,200		—
Fee Build	Fee Build	2,713,900		—		Fee Build	266,800		2,713,900
Other	Other	32,600		60,000		Other	—		32,600
Total Sales						Total Sales	$	9,181,000	$	28,581,000
		$	28,581,000	$	13,874,200

Cost of goods sold by segment
Cost of sales by segment						Cost of sales by segment
Homes	Homes	$	10,551,500	$	6,060,800	Homes	$	5,961,700	$	10,551,500
Developed lots	Developed lots	8,063,400		6,844,300		Developed lots	3,134,700		8,063,400
Entitled land	Entitled land	712,900		—		Entitled land	90,600		712,900
Multi-family						Multi-family	1,155,100		—
Fee Build	Fee Build	2,564,800		—		Fee Build	706,700		2,564,800
Other	Other	633,700		361,900		Other	176,600		633,700
		$	22,526,300	$	13,267,000
Total Cost of Sales						Total Cost of Sales	$	11,225,400	$	22,526,300

Gross profit (loss) by segment	Gross profit (loss) by segment					Gross profit (loss) by segment
Homes	Homes	$	1,723,000	$	753,400	Homes	$	88,000	$	1,723,000
Developed lots	Developed lots	1,016,600		155,700		Developed lots	(694,400)		1,016,600
Entitled land	Entitled land	3,767,100		—		Entitled land	(90,600)		3,767,100
Multi-family						Multi-family	(730,900)		—
Fee Build	Fee Build	149,100		—		Fee Build	(439,900)		149,100
Other	Other	(601,100)		(301,900)		Other	(176,600)		(601,100)
		$	6,054,700	$	607,200
Total Gross Profit (Loss)						Total Gross Profit (Loss)	$	(2,044,400)	$	6,054,700

The following represents total assets for the Company’s reportable segments at March 31, 2023 and December 31, 2022:


	March 31, 2023		December 31, 2022
Homes	$	24,450,200	$	29,880,500
Developed lots	43,740,300		43,469,900
Entitled land	11,977,500		9,499,600
Multi-family	141,620,700		131,485,900
Fee Build	1,197,200		1,703,200
Unallocated (Shared)	18,982,900		20,127,300
Total Assets	$	241,968,800	$	236,166,400

17. UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows at March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Costs incurred on uncompleted contracts	Costs incurred on uncompleted contracts	$	8,556,100	$	5,991,300	Costs incurred on uncompleted contracts	$	20,112,700	$	19,429,800
Estimated earnings		968,500		811,600
Estimated loss						Estimated loss	(3,911,200)		(3,495,100)
Costs and estimated earnings on uncompleted contracts	Costs and estimated earnings on uncompleted contracts	9,524,600		6,802,900		Costs and estimated earnings on uncompleted contracts	16,201,500		15,934,700
Billings to date	Billings to date	6,885,500		4,635,700		Billings to date	16,690,800		16,273,000
Costs and estimated earnings in excess of billings on uncompleted contracts	Costs and estimated earnings in excess of billings on uncompleted contracts	2,639,100		2,167,200		Costs and estimated earnings in excess of billings on uncompleted contracts	—		—
Billings in excess of costs and estimated earnings on uncompleted contracts	Billings in excess of costs and estimated earnings on uncompleted contracts	—		—		Billings in excess of costs and estimated earnings on uncompleted contracts	(489,300)		(338,300)
		$	2,639,100	$	2,167,200
Provision for loss on contract						Provision for loss on contract	(182,900)		(159,100)
Contract Liabilities						Contract Liabilities	$	(672,200)	$	(497,400)

~~At March 31, 2022, the~~The contract ~~asset of $2.6 million consists of estimated earnings of $1.0~~liabilities were $0.7 million and ~~costs in excess of billings of $1.6 million. The uncollected billings~~$0.5 million as of March 31, ~~2022 were $1.1 million. At~~2023 and December 31, ~~2021 the~~

~~contract asset of $2.2 million consists of estimated earnings of $0.8 million and costs in excess of billings of $1.4 million.~~2022, respectively. The uncollected billings were $1.2 million and $1.7 million as of March 31, 2023 and December 31, ~~2021 were $1.0 million.~~2022, respectively.

18. SUBSEQUENT EVENTS

On April ~~10, 2022, the board of directors of~~11, 2023, the Company ~~declared a monthly cash dividend on~~entered into an agreement to rescind its offer for purchase of property for the ~~Company’s 8.0% Series A Cumulative Convertible Preferred Stock~~construction of ~~$0.167 per share. The cash dividend is payable on May 20, 2022 to stockholders of record on April 30, 2022.~~33 townhomes located in East Bremerton, Washington for $2.0 million.

On April ~~22, 2022 the Company entered into a purchase and sale agreement for the purchase of 4.81 acres in Port Orchard, Washington for $2.6 million. Closing is expected to take place in Q4 2022.~~

~~On May 3, 2022 the Company entered into a purchase and sale agreement for the purchase of 261 units in Edmonds, Washington for $11.5 million. Closing is expected to take place in Q4 2022.~~

~~On May 11, 2022~~25, 2023, the Company entered into a purchase and sale agreement for the sale of ~~15.44~~9.64 acres of land located in ~~Blaine,~~Port Orchard, Washington for ~~$5.4~~$11.0 million. Closing is expected to take place in Q2 ~~2022.~~2023.

On May 1, 2023, the Company entered into an amended purchase and sale agreement for the sale of its Mills Crossing multi-family development. As a part of this amendment, the expected closing date changed from on or before April 28, 2023 to on or before June 16, 2023. The amendment also waived all contingencies and increased the non-refundable earnest money to $0.4 million and that earnest money has been released to the Company.

On May 11, 2023, the Company announced that Sterling Griffin, Chief Executive Officer, President and Chairman of the Board of Directors, will be retiring from all roles with the Company effective July 12, 2023. Mr. Griffin will serve as a non-executive strategic advisor through January 12, 2025. In connection with Mr. Griffin’s retirement, the Company and Mr. Griffin entered into a letter agreement on May 11, 2023. Pursuant to the letter agreement, effective July 12, 2023, Mr. Griffin will remain engaged by the Company in a new, non-executive role of Strategic Advisor and provide strategic advisory services as requested by the Board for a period of 18 months ending on January 12, 2025. During such transition period, Mr. Griffin will be paid monthly compensation of $27,777.77 and may receive performance fees for closing sales of certain specified multifamily projects.

The Board expects to appoint Jeffrey Habersetzer, currently the Chief Operating Officer, General Counsel, and Corporate Secretary of the Company, as Interim Chief Executive Officer and Interim President of the Company, effective as of July 12, 2023, to succeed Mr. Griffin. Terms of an agreement with Mr. Habersetzer will be announced when determined by the Board.

The Company also plans to appoint Lance Brown, currently Chief Financial Officer of the Company, as Interim Chief Operating Officer to succeed Mr. Habersetzer, effective as of July 12, 2023. The terms of Mr. Brown’s Employment Agreement will not change other than to add his new title and duties as Chief Operating Officer effective July 12, 2023.

2227

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“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 Report are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future construction, revenues, income, cost of sales, expenses, and capital spending. 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 forward-looking statements in this Report speak only as of the date of this document and we disclaim any obligation to update these statements unless required by law 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. 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 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:

•our ability to meet our financial obligations as they become due;

•economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates, and inflation;

•downturn in the homebuilding industry;

•changes in assumptions used to make industry forecasts;

•volatility and uncertainty in the credit markets and broader financial markets;

•our future operating results and financial condition;

•our business operations;

•changes in our business and investment strategy;

•availability of land to acquire and our ability to acquire such land on favorable terms or at all;

•availability, terms, and deployment of capital;

•shortages of or increased prices for labor, land, or raw materials used in housing construction;

•delays in land development or home construction resulting from adverse weather conditions or other events outside our control;

•the cost and availability of insurance and surety bonds;

•changes in, or the failure or inability to comply with, governmental laws and regulations;

•the timing of receipt of regulatory approvals and the opening of projects;

•the degree and nature of our competition;

•our leverage and debt service obligations;

•general volatility of the capital markets;

•availability of qualified personnel and our ability to retain our key personnel;

•our financial performance;

•our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;

•~~the extent to which the COVID-19 pandemic continues to impact our business;~~ and

•additional factors discussed under Part I - Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the “Annual Report on Form 10-K”) as such factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission (the “SEC”) which are accessible on the SEC’s website at http://www.sec.gov.

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 Report and are subject to risks and uncertainties. Moreover, we operate in a very highly competitive and rapidly changing environment. 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 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.

2328

The forward-looking statements made in this 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 Report or to conform such statements to actual results or revised expectations, except as required by law.

Overview

Harbor Custom Development, Inc. is a real estate development company involved in all aspects of the land development cycle, including land acquisition, entitlements, development, construction of project infrastructure, ~~single~~home and ~~multi-family vertical~~apartment building construction, marketing, ~~sales,~~ and ~~management~~sales of various residential projects in ~~Washington, California, Texas,~~Western Washington's Puget Sound region; Sacramento, California; Austin, Texas; and Punta Gorda, Florida.

As a land developer and builder of apartments, and single-family ~~homes,~~ luxury homes, ~~townhomes, condominiums and apartments,~~ 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~~focus on acquiring 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.~~

Our portfolio of land, lots, home plans, and finishing options, coupled with ~~a historic~~the low inventory of residential and multi-family housing in our principal geographic areas, provide an opportunity for us to increase revenue and overall market share. In addition to our single-family residential projects, we ~~plan to~~ build and sell townhomes ~~condominiums,~~ and apartments and ~~anticipate commencement~~have completed or substantially completed construction of ~~land development and construction on ten~~several multi-family sites in ~~Washington and Florida in 2022.~~ Washington.

In an effort to strategically ~~control~~manage the expanding needs of our corporate team, we signed a lease on October 5, 2021 for a new office space in Tacoma, Washington and moved our headquarters ~~starting~~in April 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.~~mind.

It is customary for us to sign purchase and sale agreements that contain a due diligence period which allows us time, usually between 3060 and 60120 days, to evaluate the acquisition. However, in many cases, the closing will not occur until the entitlement and permitting processes are complete, which can further extend the due diligence period. 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 construct single-family homes, townhomes, ~~condominiums,~~ and apartments utilizing a base of employees in conjunction with third-party subcontractors.

As of May ~~9, 2022,~~10, 2023, we own or control 2421 communities in Washington, Texas, California, and Florida, containing ~~more than 2,700~~approximately 2,650 lots or units in various stages of development.

Results of Operations

Three Months Ended March 31, 2023 as Compared to the Three Months Ended March 31, 2022

The following table sets forth the summary statements of operations for the three months ended March 31, ~~2022~~2023 and ~~2021.~~2022.


	2023		2022

Sales	$	9,181,000	$	28,581,000
Cost of sales	(11,225,400)		(22,526,300)
Gross profit (loss)	(2,044,400)		6,054,700
Operating expenses	(2,935,400)		(3,839,300)
Other expense	(1,159,500)		(61,600)
Income tax benefit (expense)	1,277,500		(508,500)
Net income (loss)	$	(4,861,800)	$	1,645,300

2429

2022 2021

Sales $ 28,581,000 $ 13,874,200
Cost of sales 22,526,300 13,267,000
Gross profit 6,054,700 607,200
Operating expenses 3,839,300 2,049,800
Other expense, net of other income 61,600 106,600
Income tax expense 508,500 —
Net income (loss) $ 1,645,300 $ (1,549,200)
Sales

~~Sales~~

Our sales ~~increased~~decreased by ~~106.0%~~67.9% to $9.2 million for the three months ended March 31, 2023 as compared to $28.6 million for the three months ended March 31, ~~2022,~~2022. Sales decreased in 2023 primarily due to a decrease in the sale of developed lots of $6.6 million, a decrease in home sales of $6.2 million, a decrease in the sale of entitled land of $4.5 million, and a decrease in fee build revenue of $2.4 million. These decreases were partially offset by $0.4 million of rental revenues earned from multi-family projects in the three months ended March 31, 2023. The decreases in developed lots, home, and entitled land sales were mainly due to large prior year sales in California and Washington that did not recur in the three months ended March 31, 2023. The fee build revenue continues to decrease as ~~compared~~these fee build projects are nearing completion.

Gross Profit

Our overall gross profit (loss) for the quarter decreased by 133.8% to ~~$13.9~~$(2.0) million for the three months ended March 31, 2021. Sales increased in 2022 due to an increase in the sale of homes of $5.5 million, the sale of entitled land of $4.5 million, developed lot sales of $2.1 million, and fee build income of $2.7 million from Lennar Northwest, Inc.

~~Gross Profit~~

~~Our overall gross profit for the quarter increased by 897.2%~~2023 as compared to $6.1 million for the three months ended March 31, ~~2022, as compared to $0.6 million~~2022. Gross margin (loss) was (22.3)% for the three months ended March 31, ~~2021. The increase in gross profit was primarily attributable~~2023 compared to ~~the increase in sales year over year, with entitled land sales having the largest impact. Gross margin was~~ 21.2% for the three months ended March 31, 2022. The $8.1 million decrease in gross profit and 43.5% decrease in gross margin were primarily due to the non-recurrence of high margin entitled land sales that occurred in 2022, ~~compared~~lower margins on home and developed lot sales in 2023, $1.6 million of impairment loss on the Pacific Ridge, Darkhorse, and Bunker Ranch properties, and a decrease in fee build gross profit and gross margin due to ~~4.4%~~additional cost overruns to complete our legacy fee build projects that are nearing completion. The entitled land sales in the three months ended March 31, 2022 provided $3.8 million gross profit dollars at a gross margin of 84.1% which did not recur in the three months ended March 31, 2023. The gross profit for home and developed lot sales, excluding impairment charges, decreased by $1.5 million and $1.1 million, respectively, and the related gross margins decreased to 4.2% and approximately break-even, respectively for the three months ended March 31, 2021. For the three months ended March 31, 2022 and 2021, the gross margin on land sales was 84.1% and 0%, respectively. Gross margin on developed lot sales for the three months ended March 31, 2022 and 2021, was 11.2% and 2.2%, respectively. Gross margin for homes closed was 14.0% and 11.1%, respectively. For the three months ended March 31, 2022 and 2021, the gross margin for fee build was 5.5% and 0%, respectively.2023.

Operating Expenses

Our operating expenses ~~increased~~decreased by ~~87.3%~~23.5% to $2.9 million for the three months ended March 31, 2023, as compared to $3.8 million for the three months ended March 31, ~~2022, as compared~~2022. The $0.9 million decrease in operating expenses was primarily due to ~~$2.0~~continued efforts to reduce our general and administrative costs. The majority of the savings came from reductions of professional fees, insurance expense, depreciation, and stock compensation expense.

Other Income (Expense)

Other income (expense) was $(1.2) million for the three months ended March 31, ~~2021. The increase in total operating expenses is primarily attributable~~2023 as compared to ~~the following:~~

1)~~Payroll expenses increased by $0.8~~$(0.1) million ~~due to increase in staff from the continued investment in our public company infrastructure and personnel to support our future growth plan;~~

2)~~Professional fees and director fees increased by $0.4 million and $0.1 million, primarily driven by establishing and maintaining public company infrastructure and oversight;~~

3)~~Stock compensation costs increased by $0.1 million, primarily driven by stock options and restricted stock issued to directors, executives, and employees;~~

4)~~Additional right of use expense of $0.1 million from leasing an office space in Tacoma, Washington for our new headquarters; and~~

5)~~Additional depreciation expense of $0.1 million related to equipment additions.~~

~~Other Expense~~

~~Other expense remained relatively consistent~~ for the three months ended March 31, ~~2022 as compared~~2022. This change is primarily due to ~~the three months ended March 31, 2021. We incurred $0.1~~$1.2 million of interest expense ~~and $0.1 million of interest income related to our financing arrangements as compared to $0.1 million and $0 respectively,~~incurred for the three months ended March 31, ~~2021.~~2023, offset by $0.1 million of interest income incurred. The interest expense increased due to borrowings on the revolving line of credit loan we entered into on March 7, 2022.

Net Income (Loss)

Our net income (loss) ~~increased~~decreased by ~~206.2%~~395.5% to $(4.9) million for the three months ended March 31, 2023 as compared to $1.6 million for the three months ended March 31, ~~2022 as compared to a loss of $1.5 million for the three months ended March 31, 2021.~~2022. The ~~increase~~decrease in net income was primarily attributable to ~~an increase~~a decrease in revenue and ~~improved~~ gross margins and increases in ~~2022~~cost of sales and operating expenses in the three months ended March 31, 2023, as explained above.

Liquidity and Capital Resources

Overview

Our principal uses of capital were operating expenses, ~~land purchases,~~ land development, single and multi-family construction, the payment of routine liabilities, payments on construction loans and related party construction loans, and financing fees for the revolving line of credit and construction loans. We used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in land acquisitions and development operations and home construction operations in order to maintain a strong balance sheet and keep us poised for growth.

We employ both debt and equity as part of our ongoing financing strategy to provide us with the financial flexibility to access capital 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 indebtedness 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~~company as a whole, to generate cash flow to cover the expected debt ~~service.~~service costs. 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.

We intend to finance future acquisitions and developments with the most advantageous source of capital available to us at the time 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, property level equity, and other public, private, or bank debt.

Real Estate Assets

Our real estate assets ~~have~~ increased to ~~$129.1~~$217.8 million as of March 31, ~~2022~~2023 from ~~$122.1~~$205.5 million as of December 31, ~~2021.~~2022. This increase was due to an increase in development and construction activities for houses ~~condominiums, townhomes,~~ and apartments.

BankUnited Loan Restructuring

As previously reported on a Current Report on Form 8-K on October 28, 2022, and as updated on a Current Report on Form 8-K on January 25, 2023, we were working with BankUnited, N.A. (“BankUnited”) to restructure our Loan (defined below) after failing to meet two financial covenants of the Loan Agreement (defined below), namely the minimum interest coverage ratio and consolidated liquidity covenants.

As previously reported on a Current Report on Form 8-K filed on February 24, 2023, on or about February 23, 2023, we entered into that certain Amendment to the Loan Agreement (the “Amendment”) with BankUnited for the restructuring of the Loan Agreement dated March 7, 2022 (the “Loan Agreement”), which consists of a $22.9 million principal balance (the “Loan”) as of March 31, 2023.

Pursuant to the Amendment, BankUnited agreed to:

i.waive any and all defaults to date in the Loan Agreement;

ii.waive our future compliance requirements with the financial covenants contained in Article 7 of the Loan Agreement until the Loan is repaid in full and the Loan Agreement terminated; and

iii.waive its right to accelerate the Loan and receive immediate payments.

In consideration of BankUnited’s waivers described above, we agreed that we will:

i.Not repurchase any of our currently outstanding securities;

ii.Not make any dividend payments to our Series A Preferred stockholders but instead pay the amount that would have been paid in dividends to the Series A Preferred stockholders to BankUnited;

iii.Grant BankUnited a second mortgage on our Winding Lane and Punta Gorda properties and remit to BankUnited 25% of the net proceeds from any sales of such properties;

iv.Remit to BankUnited 25% of the net proceeds of all asset sales;

v.Remit to BankUnited 25% of the net proceeds from public offerings of any class of stock or debt, private equity recaptures, and any capital raise;

vi.Transfer to BankUnited the membership certificates of our subsidiaries, solely as collateral, in order to perfect BankUnited’s security interests; and

vii.Not close on any new projects without BankUnited’s express written consent, but we may continue to identify, conduct due diligence, and negotiate the purchase of new projects.

The aforementioned payments will continue to be made until the earlier of: (i) March 7, 2024 or (ii) the Loan has been repaid in full. If we fail to make any of the payments or meet any of the agreed upon conditions, such failure will constitute an event of default under the Loan Agreement. BankUnited has no further lending obligations to us.

Liabilities

Liabilities increased to ~~$84.9~~$173.1 million as of March 31, ~~2022~~2023 from ~~$70.0~~$160.6 million as of December 31, ~~2021.~~2022. This increase is primarily attributable to an increase in our construction loans of $15.1 million to fund the ~~following:~~development of land and

1.~~A new~~construction of houses and apartments and an increase in our dividends payable of $1.3 million. This increase was partially offset by a decrease in our equipment loans of $2.1 million, a decrease in our revolving line of credit ~~facility was entered into with BankUnited and we borrowed $11.0 million~~loan, net of unamortized debt discount ~~to fund our general working capital needs;~~of $1.5 million, and

2.~~Accounts~~ a decrease in accounts payable and accrued expenses ~~increased by $5.3 million, primarily driven by an increase~~ of ~~real estate projects in process and income tax payable.~~$0.3 million.

Unrestricted Cash Balance

As of March 31, ~~2022,~~2023, our unrestricted cash balance was ~~$22.3~~$7.7 million compared to ~~$25.6~~$9.7 million as of December 31, ~~2021.~~2022.

Operating Activities

Net cash used in operating activities for the three months ended March 31, ~~2022~~2023 was ~~$9.4~~$11.6 million as compared to ~~$16.9~~$9.4 million for the three months ended March 31, ~~2021.~~2022. The ~~decrease~~increase in cash used is primarily attributable to ~~decrease~~an increase in ~~cash used in the acquisition and development of~~ real estate assets of ~~$8.4~~$6.8 million, a ~~change~~decrease in net income (loss) of $6.5 million, a decrease in accounts payable and accrued ~~expenses~~expense of ~~$5.3~~$5.6 million, ~~in 2022,~~ and an increase in ~~net income~~deferred tax asset of ~~$3.2 million, which is~~$0.9 million. This was partially offset by ~~increase~~a decrease in ~~cash used for~~ notes receivable ~~by $10.7~~of $12.9 million, a decrease in prepaid expenses and other assets of $2.0 million, and an impairment loss on real estate of $1.6 million.

Investing Activities

Net cash ~~used in~~provided by investing activities for the three months ended March 31, ~~2022~~2023 was ~~$1.0~~$0.1 million as compared to net cash used of ~~$0.1~~$1.0 million for the three months ended March 31, ~~2021.~~2022. During the three months ended March 31, 2022, $1.0 million was used for the furniture, fixtures, and leasehold improvements ~~for our~~of the new corporate office ~~building compared to $0.1 million used for the acquisition~~and purchase of ~~new~~ equipment, which did not occur for the three months ended March 31, ~~2021.~~2023. For the three months ended March 31, 2023, there was $0.1 million of cash proceeds from the sale of equipment related to fee build and quarry projects.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, ~~2022~~2023 was ~~$7.1~~$9.5 million as compared to net cash provided of ~~$23.6~~$7.1 million for the three months ended March 31, ~~2021.~~2022. This ~~decrease~~increase was primarily caused by an increase in cash provided by construction loans, net ~~proceeds from a common stock offering~~ of ~~$25.1 million in 2021 and preferred stock dividend~~ payments of ~~$2.0~~$15.2 million, a decrease in ~~2022,~~cash used for preferred dividends of $1.4 million, and a decrease in financing fees on the revolving line of credit of $1.1 million. This increase was partially offset by ~~net~~a decrease in cash provided by the revolving line of credit ~~loan~~ of ~~$10.9~~$12.0 million, an increase in ~~2022.~~payments on the revolving line of credit of $2.1 million, and payment on equipment loans of $1.6 million.

Cash Resources

Although the expected revenue growth and control of expenses leads management to believe that it is probable that our cash resources will be sufficient to meet ~~cash requirements through~~our financial obligations as they become due within one year after the ~~fiscal year ending December 31, 2022,~~date that the financial statements are issued, we may require additional funding to finance the growth of our current 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. (See Note 1. Nature of Operations and Summary of Significant Accounting Policies.)

Off-Balance Sheet Arrangements

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

Inflation

Our operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates which can significantly affect the affordability of mortgage financing to ~~homebuyers.~~homebuyers, thereby further decreasing demand. 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.

Critical Accounting Policies

Our condensed consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions,

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

Our significant accounting policies are summarized in Note 1 of our condensed 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:

•a requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in a public offering registration statement;

•an exemption to provide ~~less~~fewer than five years of selected financial data in a public offering registration statement;

•an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act (“SOX”) in the assessment of the emerging growth company’s internal control over financial reporting;

•an exemption from the adoption of new or revised financial accounting standards until they would apply to private companies; and

•an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit partner rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of this election, the information that we provide in this 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We borrow from lenders using financial instruments such as term loans, notes payable, and a revolving credit facility. We utilize both fixed and variable interest rates in these financing operations. Interest incurred from our term loans and notes payables is calculated primarily using a fixed rate, whereas interest incurred from our revolving credit facility is calculated using a variable rate. We do not have the obligation to prepay these 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 exposed to market risks related to fluctuations in interest rates on our outstanding revolving line of ~~credit.~~credit and our construction loans relating to Meadowscape and Bridgeview apartments. The interest rate for our variable rate indebtedness as of March 31, ~~2022~~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 March 31, ~~2022,~~2023, the daily SOFR was ~~0.29%~~4.87% and one month SOFR was 4.63%. The variable prime rate was 8.00%. 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.~~$0.2 million for the line of credit and $0.2 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 March 31, ~~2022,~~2023, we had outstanding fixed-rate borrowings net of debt discount and financing fees of approximately ~~$53.8~~$107.7 million and outstanding variable-rate borrowings net of debt discount and financing fees of approximately ~~$11.0~~$46.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision of our Chief Executive Officer and President and Chief Financial Officer performed an evaluation (the “Evaluation”) of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide a reasonable level of assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation, our Chief Executive Officer and President and Chief Financial Officer concluded that our disclosure controls and procedures are operating effectively except for the material weakness in internal control relating to diluted earnings per share as indicated in the 2021 Annual Report on Form 10-K/A as well as the third quarter interim Report on Form 10-Q/A.

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 provided 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. Management will determine whether the material weakness is remediated in the upcoming quarter by monitoring the effectiveness of these improvements made to the overall control environment.effectively.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. 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 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.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities

None.

(b) Use of Proceeds from Sales of Securities

None.

2020 Restricted Stock Plan

The following table sets forth the shares of our common stock we acquired during the quarter as a result of the surrender of shares by employees to satisfy tax withholding obligations in connection with the vesting of restricted shares of common stock awarded under our 2020 Restricted Stock Plan.

Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Program Maximum Number of
Shares That May Yet be Purchased Under the Plans or Programs
January 1, 2022 - January 31, 2022 18,386 $ 2.37 — —
February 1, 2022 - February 28, 2022 — — — —
March 1, 2022 - March 31, 2022 — — — —
Total 18,386 $ 2.37 — —


Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Program	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
January 1, 2023 - January 31, 2023	6	$	7.42	6	$	—
February 1, 2023 - February 28, 2023	153	8.39		153	—
March 1, 2023 - March 31, 2023	6	10.80		6	—
Total	165	—		165	—

(1) Represents shares surrendered to ~~the Company~~us by employees to satisfy tax withholding obligations arising in connection with the vesting of ~~61,100~~479 shares of ~~restricted~~common stock awarded under our 2020 Restricted Stock Plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

~~Not applicable.~~During the year ended December 31, 2022, we failed to meet two financial covenants of the Loan Agreement with BankUnited, N.A. (the “Lender”), dated March 7, 2022 (the “Loan”). Under the Loan, we covenanted that we would not allow our Interest Coverage Ratio as of the last day of each fiscal quarter to be less than 2.50 and that we would not allow our Consolidated Liquidity as of the last day of each fiscal quarter to be less than $5 million. The Interest Coverage Ratio is defined as the ratio of EBITDA for the trailing four quarters to Interest Expense for the trailing four quarters. Consolidated Liquidity is defined as cash and cash equivalents plus marketable securities, plus 30-day short-term receivables minus short-term payables. As of December 31, 2022, we were not in compliance with the minimum interest coverage ratio requirement and consolidated liquidity covenant. Under the Loan, a failure to maintain the required financial covenants is defined as an “Event of Default.” For such Event of Default, the Lender may accelerate all amounts due under the Loan.

On February 23, 2023, we entered into an amended loan agreement (the “Amendment”) with the Lender, whereby the Lender agreed to waive its right to accelerate and declare all of the debt immediately due and owing, based upon the previously disclosed non-compliance with financial covenants resulting in technical default under the loan agreement. Further, the Lender waived the requirement that we comply with certain financial covenants through maturity of the debt. These concessions were made as a result of granting the Lender second mortgage positions for certain properties we own, as well as transferring to the Lender membership certificates pledging certain properties as collateral and perfecting the Lender’s security interest in the pledged LLCs. Additionally, we agreed to make principal reduction payments including paying the Lender $0.6 million on the 20th of every month which otherwise would have been paid to preferred shareholders as a dividend on the preferred stock, and pay to the Lender 25% of all net cash proceeds from asset sales, public offerings of any class of stock or debt, private equity recaptures, or any capital raise. We also agreed that we will not close on any new projects without the Lender's express written consent and will not repurchase any of our outstanding securities. The aforementioned payments will continue to be made until the earlier of March 7, 2024 or until the loan has been paid in full.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit No.

Description

Form

Exhibit

Filing Date

Filed Herewith

Exhibit No.

Description

Form

Exhibit

Filing Date

Filed Herewith

10.1

Loan A greement , dated March 7, 2022 by and between Harbor Custom Development Inc. and BankUnited , N.A.

8-K

1.1

3/10/2022

10.1

Letter Agreement, dated May 11, 2023, between Harbor Custom Development, Inc. and Sterling Griffin

8-K

10.1

5/11/2023

10.2

Security Agreement, dated March 7, 2022, by and between Harbor Custom Development, Inc. and BankUnited, N.A.

8-K

1.2

3/10/2022

10.3

Revolving Line of Credit Promissory Note, dated March 7, 2022, by Harbor Custom Development, Inc.

8-K

1.3

3/10/2022

31.1

Certification of Chief Principal Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.1

31.2

Certification of Chief Principal Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

32.1

Certification of Chief Principal Officer and Chief Principal Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.1

101. INS

XBRL Instance Document

101. INS

XBRL Instance Document

101. SCH

XBRL Taxonomy Extension Schema Document

101. SCH

XBRL Taxonomy Extension Schema Document

101. CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101. CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF

XBRL Taxonomy Extension definition Linkbase Document

101. DEF

XBRL Taxonomy Extension definition Linkbase Document

101. LAB

XBRL Taxonomy Extension Label Linkbase Document

101. LAB

XBRL Taxonomy Extension Label Linkbase Document

101. PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101. PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

3036

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused

this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	HARBOR CUSTOM DEVELOPMENT, INC.

Date: May ~~12, 2022~~15, 2023	By	/s/ Sterling Griffin
		Sterling Griffin Chief Executive Officer and President (Principal Executive Officer)

Date: May ~~12, 2022~~15, 2023	By	/s/ Lance Brown
		Lance Brown Chief Financial Officer (Principal Financial and Accounting Officer)

3137


		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Interim Condensed Consolidated Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2328
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2833
Item 4.	Controls and Procedures	2834

PART II - OTHER INFORMATION		2934

Item 1.	Legal Proceedings	2934
Item 1A.	Risk Factors	2934
Item 2.	Un ~~registered~~Unregistered Sales of Equity Securities and Use of Proceeds	2934
Item 3.	Defaults Upon Senior Securities	2935
Item 4.	Mine Safety Disclosures	2935
Item 5.	Other Information	2935
Item 6.	Exhibits	2936

SIGNATURES		3371


	March 31, 2022		March 31, 2021
Numerator:
Net loss attributable to common stockholders	$	(366,700)	$	(1,549,800)
Effect of dilutive securities:	—		—

Diluted net loss	$	(366,700)	$	(1,549,800)

Denominator:
Weighted average common shares outstanding - basic	13,200,758		13,269,055
Dilutive securities (a):
Restricted Stock Awards	—		—
Options	—		—
Warrants	—		—
Convertible Preferred Stock	—		—

Weighted average common shares outstanding and assumed conversion – diluted	13,200,758		13,269,055

Basic net loss per common share	$	(0.03)	$	(0.12)

Diluted net loss per common share	$	(0.03)	$	(0.12)

(a) - Outstanding anti-dilutive securities excluded:
Unvested restricted stock units	127,500		—
Stock options	468,925		256,345
Warrants to purchase common stock	18,586,859		22,525
Convertible preferred stock	4,016,955		—
Warrants to purchase convertible preferred stock	12,000		—


2022 (nine months)	$	1,512,200
2023	1,860,400
2024	1,613,800
2025	181,200
	$	5,167,600


	Options	Weighted Average Exercise Price
Outstanding – January 1, 2022	463,251	$	2.82
Exercisable – January 1, 2022	343,724	$	2.77
Granted	30,000	$	2.03
Exercised	(21,623)	$	0.40
Forfeited/Cancelled	(2,703)	$	0.40
Outstanding – March 31, 2022	468,925	$	2.76
Exercisable – March 31, 2022	342,565	$	2.74