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 finished 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 Securities and Exchange Commission (“SEC”) and started trading on The Nasdaq Stock
Market LLC (“Nasdaq”) on August 28, 2020.
Principles
of Consolidation
The
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 LLCs):
SCHEDULE
OF STATEMENT OF SUBSIDIARIES
Names
|
|
Dates
of Formation
|
|
|
Attributable
Interest
|
|
|
|
|
|
|
September
30,
|
|
|
December 31,
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Saylor View Estates, LLC
|
|
|
March
30, 2014
|
|
|
|
51
|
%
|
|
|
51
|
%
|
Belfair Apartments, LLC
|
|
|
December
3, 2019
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Pacific Ridge CMS, LLC
|
|
|
May
24, 2021
|
|
|
|
100
|
%
|
|
|
N/A
|
|
Tanglewilde, LLC
|
|
|
June
25, 2021
|
|
|
|
100
|
%
|
|
|
100
|
%
|
HCDI FL CONDO LLC
|
|
|
August
3, 2021
|
|
|
|
100
|
%
|
|
|
N/A
|
|
HCDI Mira, LLC
|
|
|
August
30, 2021
|
|
|
|
100
|
%
|
|
|
N/A
|
|
HCDI Wyndstone, LLC
|
|
|
September
15, 2021
|
|
|
|
100
|
%
|
|
|
N/A
|
|
All
intercompany transactions and balances have been eliminated in consolidation.
As
of September 30, 2021 and December 31, 2020, the aggregate non-controlling interest was $(1,291,600) and $(1,289,900), respectively.
Basis
of Presentation
The
unaudited financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the
opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods
presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 31, 2021. The Company
assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the
preceding fiscal year and the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The
condensed consolidated balance sheet at December 31, 2020 was derived from the audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the interim
periods presented are not necessarily indicative of results for the year ending December 31, 2021.
The
Company’s Board of Directors and stockholders approved a 1-for-2.22 reverse split of the Company’s common stock, which was
effected on April 15, 2020. The reverse split combined each 2.22 shares of the Company’s outstanding common stock into one share
of common stock. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the
reverse split were rounded up to the nearest whole share. All references to common stock, options to purchase common stock, restricted
stock, share data, per share data, and related information, as applicable have been adjusted in the financial statements to reflect the
split of the common stock as if it had occurred at the beginning of the earliest period presented.
All
numbers in these financial statements are rounded to the nearest $100.
Use
of Estimates
Management
uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Stock-Based
Compensation
Effective
as of November 19, 2018, the Company’s Board of Directors and stockholders approved and adopted the 2018 Incentive and Non-Statutory
Stock Option Plan (the “2018 Plan”). The 2018 Plan allows the Administrator (as defined in the 2018 Plan), currently the
Board of Directors, to determine the issuance of incentive stock options and non-qualified stock options to eligible employees and outside
directors and consultants of the Company. The Company reserved 675,676 shares of common stock for issuance under the 2018 Plan.
Effective
as of December 3, 2020, the Company’s Board of Directors and stockholders approved and adopted the 2020 Restricted Stock Plan (the
“2020 Plan”). The 2020 Plan allows the Administrator (currently the Compensation Committee) to determine the issuance of
restricted stock to eligible officers, directors, and key employees. The Company reserved 700,000 shares of common stock for issuance
under the 2020 Plan.
The
Company accounts for stock-based compensation in accordance with ASC Topic 718, “Compensation – Stock Compensation”
(“ASC 718”) which establishes financial accounting and reporting standards for stock-based 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.
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. If an award is granted, but vesting does not occur, any previously
recognized compensation expense is reversed in the period related to the termination of service.
Stock-based
compensation expenses are included in selling, general and administrative expenses in the consolidated statement of operations.
For
the nine months ended September 30, 2021 and 2020 when computing fair value of share-based payments, the Company has considered the following
variables:
SCHEDULE
OF FAIR VALUE ASSUMPTIONS OF SHARE-BASED PAYMENTS
|
|
September
30, 2021
|
|
|
September
30, 2020
|
|
Risk-free interest rate
|
|
|
0.23%-1.11
|
%
|
|
|
0.47%-1.46
|
%
|
Exercise price
|
|
$
|
2.76-$5.00
|
|
|
$
|
2.22
- $7.50
|
|
Expected life of grants
|
|
|
2.50-6.5
years
|
|
|
|
2.99
- 6.00 years
|
|
Expected volatility of underlying stock
|
|
|
42.63%-56.13
|
%
|
|
|
32.39%
- 43.41
|
%
|
Dividends
|
|
|
0
|
|
|
|
0
|
|
The
expected term is computed using the “simplified” method as permitted under the provisions of ASC 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 as of the grant date
was determined by an independent third party 409(a) valuation until the Company’s stock became publicly traded. Now the share price
is the public trading price at the time of grant. Expected volatility is based on the historical stock price volatility of comparable
companies’ common stock, as the stock does not have sufficient historical trading activity. Risk free interest rates were obtained
from U.S. Treasury rates for the applicable periods.
Earnings
(Loss) Per Share
Earnings
(Loss) per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“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 denominator is increased to
include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued
during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement,
stock options or warrants.
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 common share.
SCHEDULE
OF NET INCOME (LOSS) PER SHARE
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months
Ended
|
|
|
For the Nine Months
Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable
to common stockholders
|
|
$
|
3,077,000
|
|
|
$
|
(437,100
|
)
|
|
$
|
2,458,800
|
|
|
$
|
(1,620,200
|
)
|
Effect of dilutive securities:
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
|
|
$
|
3,077,000
|
|
|
$
|
(437,100
|
)
|
|
$
|
2,458,800
|
|
|
$
|
(1,620,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
14,898,594
|
|
|
|
4,180,054
|
|
|
|
14,350,143
|
|
|
|
3,737,318
|
|
Dilutive securities (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
140,957
|
|
|
|
-
|
|
|
|
145,884
|
|
|
|
-
|
|
Warrants
|
|
|
19,367
|
|
|
|
-
|
|
|
|
19,683
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding and assumed
|
|
|
15,058,918
|
|
|
|
4,180,054
|
|
|
|
14,515,710
|
|
|
|
3,737,318
|
|
conversion – diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss)
per common share
|
|
$
|
0.21
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
per common share
|
|
$
|
0.20
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.17
|
|
|
$
|
(0.43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) - Anti-dilutive
securities excluded:
|
|
|
9,379,890
|
|
|
|
164,308
|
|
|
|
9,379,890
|
|
|
|
164,308
|
|
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
For
purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months
or less to be cash equivalents. There were no cash equivalents as of September 30, 2021 and December 31, 2020.
Restricted
Cash
On
August 10, 2021, the Company entered a Letter of Credit (“LOC”) agreement with WaFd bank in the amount of $597,600. 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 to a controlled account on August 13, 2021. See footnote
7.
Accounts
Receivable
Accounts
receivables are reported at the amount the Company expects to collect from outstanding balances. The Company provides an allowance for
doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic
conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined
to be uncollectible by management. The allowance for doubtful accounts was $11,000 and $0 as of September 30, 2021 and December 31, 2020,
respectively.
Property
and Equipment and Depreciation
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged
to operations as incurred. Depreciation is computed by the straight-line method (after considering their respective estimated residual
values) over the estimated useful lives:
SCHEDULE OF PROPERTY AND EQUIPMENT 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 805, “Business Combinations,” where acquired assets are recorded at fair value. Interest, property
taxes, insurance and other incremental costs (including salaries) directly related to a project are capitalized during the construction
period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and
ends when the asset constructed is completed. The capitalized costs are recorded as part of the asset to which they relate and are expensed
when the underlying asset is sold.
The
Company capitalized interest from related party borrowings of $152,800 and $203,600 for the three months ended September 30, 2021 and
2020, respectively. The Company capitalized interest from related party borrowings of $557,200 and $840,000 for the nine months ended
September 30, 2021 and 2020, respectively. The Company capitalized interest from third-party borrowings of $298,200 and $783,100 for
the three months ended September 30, 2021 and 2020, respectively. The Company capitalized interest from third-party borrowings of $774,000
and $1,834,000 for the nine months ended September 30, 2021 and 2020, respectively.
A
property is classified as “held for sale” when all 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 classified as “held for sale.”
In
addition to the annual assessment of potential triggering events in accordance with ASC 360, the Company applies a fair value-based impairment
test to the net book value assets on an annual basis and on an interim basis if certain events or circumstances indicate that an impairment
loss may have occurred.
As
of September 30, 2021 and December 31, 2020, the Company did not have any projects that qualified for an impairment charge.
Revenue
and Cost Recognition
ASC
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 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 recognition of Entitled Land Revenue is as follows:
1.
Identify the contract with a customer.
The
Company signs an agreement with a buyer to purchase the parcel of entitled land.
2.
Identify the performance obligations in the contract.
Performance
obligations of the Company include delivering entitled land 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 is a separate performance obligation 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 performance obligations once title is transferred.
A
detailed breakdown of the five-step process for the revenue recognition of Developed Lots Revenue is as follows:
1.
Identify the contract with a customer.
The
Company signs an agreement with the buyer to purchase lots that have completed infrastructure.
2.
Identify the performance obligations in the contract.
Performance
obligations of the Company include delivering developed lots to the customer, 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.
All
lots are a single performance obligation for the specific price 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 performance obligations once title is transferred.
A
detailed breakdown of the five-step process for the revenue recognition of Fee Build Revenue is as follows:
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 asset in the Company’s balance sheet under the caption “Contract Asset” which is further disclosed in
Note 15. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue
recognized on the contract are reflected as a current liability in the Company’s balance sheet under the caption “Billings
in excess of costs and estimated earnings.”
A
detailed breakdown of the five-step process for the revenue recognition of Home Revenue is as follows:
1.
Identify the contract with a customer.
The
Company signs an agreement with a home buyer to purchase a lot with a completed house.
2.
Identify the performance obligations in the contract.
Performance
obligations of the Company include delivering a developed lot with a completed house to the customer, which is 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.
Each
lot with a completed house is a separate performance obligation, for which the specific price in the contract is allocated.
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 performance obligations once title is transferred.
A
detailed breakdown of the five-step process for the revenue recognition of Construction Materials sold to or received from contractors
is as follows:
1.
Identify the contract with a customer.
There
are no signed contracts. Each transaction is verbally agreed to with the customer.
2.
Identify the performance obligations in the contract.
The
Company delivers or receives materials from customers based on the verbal agreement reached.
3.
Determine the transaction price.
The
Company has a set price list for receiving approved fill materials to recycle or provides customers with a combination of said materials.
4.
Allocation of the transaction price to performance obligations in the contract.
There
is only one performance obligation, which is to pick up or deliver the materials. The entire transaction price is therefore allocated
to the performance obligation.
5.
Recognize revenue when (or as) the entity satisfies a performance obligation.
The
performance obligation is fulfilled, and revenue is recognized when the materials have been received or delivered by the Company.
Revenues
from contracts with customers are summarized by category as follows for the three and nine months ended September 30:
SCHEDULE
OF REVENUES FROM CONTRACTS WITH CUSTOMERS
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Entitled Land
|
|
$
|
10,440,000
|
|
|
$
|
-
|
|
|
$
|
19,750,000
|
|
|
$
|
-
|
|
Developed Lots
|
|
|
770,000
|
|
|
|
-
|
|
|
|
7,770,000
|
|
|
|
-
|
|
Fee Build
|
|
|
2,871,300
|
|
|
|
-
|
|
|
|
4,219,500
|
|
|
|
-
|
|
Homes
|
|
|
3,762,000
|
|
|
|
7,704,300
|
|
|
|
13,947,900
|
|
|
|
25,625,300
|
|
Construction Materials
|
|
|
167,300
|
|
|
|
102,200
|
|
|
|
329,800
|
|
|
|
452,000
|
|
Total Revenue
|
|
$
|
18,010,600
|
|
|
$
|
7,806,500
|
|
|
$
|
46,017,200
|
|
|
$
|
26,077,300
|
|
Disaggregation
of Revenue from Contracts with 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 and nine months ended September 30, 2021 and 2020:
DISAGGREGATION OF REVENUE FROM CONTRACTS WITH CUSTOMERS
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Performance obligations satisfied
at a point in time
|
|
$
|
15,139,300
|
|
|
$
|
7,806,500
|
|
|
$
|
41,797,700
|
|
|
$
|
26,077,300
|
|
Performance obligations
satisfied over time
|
|
|
2,871,300
|
|
|
|
-
|
|
|
|
4,219,500
|
|
|
|
-
|
|
Total Revenue
|
|
$
|
18,010,600
|
|
|
$
|
7,806,500
|
|
|
$
|
46,017,200
|
|
|
$
|
26,077,300
|
|
Cost
of Sales
Land
acquisition costs are allocated to each lot based on the size of the lot in relation to the size of the total project. Development cost
and capitalized interest are allocated to lots sold based on the same criteria.
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
Costs
for designing, producing and communicating advertising are expensed as incurred. Advertising expense for the three months ended September
30, 2021 and 2020 was $15,600 and $0, respectively.
Advertising
expense for the nine months ended September 30, 2021 and 2020 was $27,600 and $8,500, respectively.
Leases
On
January 1, 2019, the Company adopted ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements
to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s
leasing activities.
As
part of the adoption the Company elected the practical expedients permitted under the transition guidance within the new standard, which
among other things, allowed the Company to:
|
1.
|
Not
separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components
associated with that lease component as a single lease;
|
|
|
|
|
2.
|
Not
to apply the recognition requirements in ASC 842 to short-term leases; and
|
|
|
|
|
3.
|
Not
record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial.
|
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 in the FASB
released Accounting Standards Update No. 2019-12, Income taxes (Topic 740) (the Update) to determine
if any valuation allowances are needed each year.
The
Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by taxing authorities, based on the technical merits of the position. There are no uncertain tax positions as of September
30, 2021 and December 31, 2020.
Recent
Accounting Pronouncements
On
December 18, 2019, the FASB released Accounting Standards Update No. 2019-12, Income taxes (Topic 740) (the Update). The Board issued
this update as part of its initiative to reduce complexity in accounting standards. The Standard is effective for fiscal years beginning
after December 15, 2020. The adoption did not have a material impact on the Company.
In
August 2020, the FASB issued Accounting Standards Update 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify
accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion
and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity
classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible
debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings
per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective
January 1, 2022 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1,
2021. The Company adopted ASU 2020-06 on January 1, 2021. The adoption of ASU 2020-06 did not have an impact on the Company.
On
May 3, 2021, the FASB released Accounting Standards Update No. 2021-04, Compensation – Earning Per Share (Topic 260), Debt - Modifications
and Extinguishments (subtopic 470-50), Compensation - Stock compensation (Topic 718), Contracts in Entity’s Own Equity (Subtopic
815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. 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 does not believe the adoption will have a material impact on the Company.
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 September 30,
2021 and December 31, 2020, there were no impairment losses recognized for long-lived assets.
Offering
Costs Associated with a Public Offering
The
Company complies with the requirements of FASB ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (“SAB”) Topic 5A —
“Expenses of Offering.”
On
January 15 and 20, 2021, the Company closed on a follow-on public offering and over-allotment option, respectively, of common
stock. During 2020, the Company incurred approximately $65,100
of capitalizable costs associated with the follow-on public
offering, which were netted against the proceeds received in 2021. These costs were capitalized as of December 31, 2020 and are shown
on the Balance Sheet as Deferred Offering Costs.
As
of September 30, 2021, the Company incurred approximately $133,400 of capitalizable costs associated with a preferred stock offering
which will be netted against proceeds of the offering and is discussed in footnote 16 subsequent events.
2.
CONCENTRATION, RISKS, AND UNCERTAINTIES
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 $4,264,400 and $2,146,000 as of September
30, 2021 and December 31, 2020, respectively.
Revenue
Concentrations
Homes
For
the three months ended September 30, 2021, five customers each represented 19%
of homes revenue. For the nine months ended September 30, 2021, there were no concentrations in relation to the homes revenue
segment. For the three and nine months ended September 30, 2020, there were no concentrations in relation to the homes revenue
segment.
Completed
Lots
For
the three months ended September 30, 2021, three customers represented 38%,
38%,
and 24%
of completed lots revenue, respectively. For the three months ended September 30, 2020, there were no
concentrations in relation to the completed lots
revenue segment. For the nine months ended September 30, 2021 and 2020, Lennar Northwest, Inc. (“Lennar”) represented
90%
and 0%
of the completed lots revenue, respectively.
Entitled
Land
For
the three months ended September 30, 2021 and 2020, Lennar represented 100%
and 0%
of entitled land revenue, respectively. For the nine months ended September 30, 2021 and 2020, Lennar represented 100%
and 0%
of entitled land revenue, respectively.
Fee
Build
For
the three months ended September 30, 2021 and 2020, Lennar represented 100%
and 0%
of fee build revenue, respectively. For the nine months ended September 30, 2021 and 2020, Lennar represented 100%
and 0%
of fee build revenue, respectively.
COVID-19
In
March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic
which continues to spread throughout the United States and the world. The Company is monitoring the outbreak of COVID-19 and the related
business and travel restrictions and changes to behavior intended to reduce its spread, in addition to the impact on its employees. Due
to the rapid development and fluidity of this situation, the magnitude and duration of the pandemic and its impact on the Company’s
operations and liquidity are uncertain as of the date of this report.
The
COVID-19 Pandemic has had the following effect on the Company’s business:
1.
|
Construction
not related to safety, spoliation, or critical infrastructure was halted by Washington State Governor Inslee (the “Governor”)
on March 23, 2020. Some operations could continue based on the aforementioned exceptions to the shutdown order, but the Company did
experience a significant operational slowdown.
|
2.
|
Soundview
Estates (a large Harbor Custom Development, Inc. site) continued selective activities that yielded rock byproduct, considered an
essential material, needed for critical infrastructure projects for an Amazon distribution center and a local hospital.
|
3.
|
On
April 24, 2020, the Governor approved the restart of most residential housing projects, deeming them essential, as long as they adhered
to certain safety measures. Under this order, most existing permitted residential homes or projects were considered essential. The
order allowed the Company to resume near full construction activities on all permitted lots.
|
4.
|
On
May 1, 2020, the Governor established a four-phase plan for Washington businesses to follow. All Harbor Custom Development, Inc.
development sites were in Phase 3 of the plan where construction was able to continue, and new construction was allowed, as long
as the Company created a safety plan adhering to certain safety practices, which the Company had done.
|
5.
|
As
of June 30, 2021, Washington State reopened the state under the Washington Ready plan. All industry sectors previously covered by
the Roadmap to Recovery or the Safe Start Plan (which included all Harbor Custom Development, Inc. operational activities) returned
to usual capacity and operations.
|
The
Company has not, at this time, experienced any cancelled sales contracts. The Company has experienced some supply-chain issues with both
cabinetry and appliances related to COVID-19. As of the date of this report, the Company’s projects are on-schedule and operations
are not being materially impacted by the COVID-19 pandemic. While there could ultimately be a material impact on operations and liquidity
of the Company, at the time of issuance of this report, the ultimate impact could not be determined.
3.
PROPERTY AND EQUIPMENT
Property
and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Machinery and Equipment
|
|
$
|
10,557,100
|
|
|
$
|
8,908,000
|
|
Vehicles
|
|
|
71,800
|
|
|
|
73,500
|
|
Furniture and Fixtures
|
|
|
147,500
|
|
|
|
136,300
|
|
Leasehold Improvements
|
|
|
7,000
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Assets
|
|
|
10,783,400
|
|
|
|
9,124,800
|
|
|
|
|
|
|
|
|
|
|
Less Accumulated
Depreciation
|
|
|
(1,650,500
|
)
|
|
|
(948,800
|
)
|
|
|
|
|
|
|
|
|
|
Fixed Assets, Net
|
|
$
|
9,132,900
|
|
|
$
|
8,176,000
|
|
Depreciation
expense was $300,400 and $133,400 for the three months ended September 30, 2021 and 2020, respectively.
Depreciation
expense was $783,500 and $419,200 for the nine months ended September 30, 2021 and 2020, respectively.
4.
REAL ESTATE
Real
Estate consisted of the following components:
SCHEDULE OF REAL ESTATE
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Land Held for Development
|
|
$
|
77,841,100
|
|
|
$
|
9,532,800
|
|
Construction in Progress
|
|
|
23,620,300
|
|
|
|
9,042,700
|
|
Held for Sale
|
|
|
4,002,300
|
|
|
|
1,794,800
|
|
Real estate
|
|
$
|
105,463,700
|
|
|
$
|
20,370,300
|
|
5.
EQUIPMENT LOANS
Consists
of the following:
SCHEDULE OF EQUIPMENT LOANS
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Various notes payable to banks
and financial institutions with interest rates varying from 0.00% to 13.89%, collateralized by equipment with monthly payments ranging
from $400 to $11,600 through 2026:
|
|
$
|
5,731,800
|
|
|
$
|
5,595,500
|
|
Book value of collateralized equipment:
|
|
$
|
7,840,900
|
|
|
$
|
6,475,600
|
|
Future
equipment loan maturities are as follows:
For
the twelve months ended September 30:
SCHEDULE OF FUTURE EQUIPMENT LOAN MATURITIES
|
|
|
|
|
2022
|
|
$
|
1,876,900
|
|
2023
|
|
|
1,787,700
|
|
2024
|
|
|
1,652,200
|
|
2025
|
|
|
410,200
|
|
2026
|
|
|
4,800
|
|
|
|
|
|
|
Equipment Loans
|
|
$
|
5,731,800
|
|
6.
CONSTRUCTION LOANS
The
Company has various construction loans with private individuals and finance companies. The loans are collateralized by specific construction
projects. All loans have a one-year term but will be refinanced if the project is not completed within one year and will be due upon
the completion of the project. Interest accrues on the loans and is included with the payoff of the loan. Interest ranges from 5% to
39%. Interest expense and amortization of debt discount are capitalized when incurred and expensed as cost of goods sold when the corresponding
property is sold. The loan balances related to third party lenders as of September 30, 2021 and December 31, 2020, were $39,560,700 and
$10,092,500, respectively. The book value of collateralized real estate as of September 30, 2021 and December 31, 2020 was $105,463,700
and $20,370,300, respectively.
7.
LINE OF CREDIT
The
Company entered into a Line of credit (“LOC”) agreement with WaFd bank of $597,600 on August 10, 2021. There was no borrowing
against the LOC as of September 30, 2021. The LOC expires February 1, 2032. The interest rate of the LOC is Prime plus 1%. The LOC has
been established for the purpose of collateralizing the Company’s lease obligations with their new landlord, the landlord is the
beneficiary of the LOC. As of September 30, 2021, there was $0 outstanding on the LOC.
8.
NOTE PAYABLE D&O INSURANCE
The
Company purchased D&O insurance on August 28, 2020 for $1,531,900. A down payment of $306,400 was made and the remaining balance
of $1,225,500 was financed over ten months. The interest rate on the loan is 4.74%. The loan balance as of September 30, 2021 and December
31, 2020 was $0 and $741,200, respectively.
The
Company purchased D&O insurance on September 1, 2021 for $1,541,400.
A down payment of $131,100
was made and the remaining balance of $1,410,300
was financed over ten months. The interest rate
on the loan is 4.42%.
The loan balance as of September 30, 2021 and December 31, 2020 was $1,284,000
and $0,
respectively.
9.
NOTE PAYABLE PPP
On
April 11, 2020, the Company entered into a term note with Timberland Bank, with a principal amount of $582,800 pursuant to the Paycheck
Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The PPP Loan is evidenced by a promissory note (“PPP Term Note”). The PPP Term Note bears interest at a fixed annual rate
of 1.00%, with the first six months of interest deferred. Beginning in November 2020, 18 equal monthly payments of principal and interest
were due with the final payment due in April 2022. The PPP Term Note may be accelerated upon the occurrence of an event of default.
The
PPP Term Note is unsecured and guaranteed by the United States Small Business Administration. The Company may apply for forgiveness of
the PPP Term Note, with the amount which may be forgiven equal to the sum of payroll costs, covered rent and mortgage obligations, and
covered utility payments incurred by the Company during the applicable period beginning upon receipt of PPP Term Note funds, calculated
in accordance with the terms of the CARES Act.
On
November 9, 2020 and February 1, 2021, the SBA forgave $562,300 and $10,000, respectively, on the PPP Loan.
As
of September 30, 2021 and December 31, 2020, the balance of the PPP Loan was $0 and $19,300, respectively.
10.
DEFINED CONTRIBUTION PLAN
Effective
January 1, 2016, the Company established a 401(k) plan for qualifying employees; employee contributions are voluntary. Company contributions
to the plan for the three months ended September 30, 2021 and 2020 were $24,900 and $0, respectively. Company contributions to the plan
for the nine months ended September 30, 2021 and 2020 were $74,500 and $0, respectively.
11.
COMMITMENTS
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
September 17, 2020, the Company entered into a purchase and sale agreement for the acquisition of 9.6 acres of land in Port Orchard,
Washington for $1,440,000. Closing is contingent on permit approval and is expected to take place on or before November 28, 2021.
On
June 15, 2020, the Company entered into a purchase and sale agreement to acquire property for the construction of 30 townhomes located
in East Bremerton, Washington for $2,040,000. Closing is expected to take place on or before June 30, 2022.
On
August 8, 2021, the Company entered into a purchase and sale agreement to acquire property for the construction of 75 condominiums units
located in Yelm, Washington for $3,250,000. Closing took place on October 4, 2021. See subsequent event footnote 16.
On
August 30, 2020, the Company entered into a purchase and sale agreement for the acquisition of 67 lot in Auburn, California. Closing
is expected to take place on or before August 30, 2022.
12.
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 January 2021; all of the loans have a one-year maturity with interest rates
ranging between 8.49% and 12.00%. For the three months ended September 30, 2021 and 2020, the Company incurred loan origination fees
of $0 and $178,500, respectively. For the nine months ended September 30, 2021 and 2020, the Company incurred loan origination fees of
$552,800 and $283,300, respectively. These fees are recorded as debt discount and amortized over the life of the loan. The amortization
is capitalized to real estate. As of September 30, 2021, and December 31, 2020, there were $292,600 and $202,500 of remaining debt discounts,
respectively. During the three months ended September 30, 2021 and 2020 the Company incurred prepaid interest of $0 and $296,100, respectively.
During the nine months ended September 30, 2021 and 2020 the Company incurred prepaid interest of $1,431,100 and $840,000, respectively.
This interest is recorded as debt prepaid interest and amortized over the life of the loan. The interest is capitalized to real estate.
As of September 30, 2021, and December 31, 2020 there were $1,123,700 and $466,600 of remaining prepaid interest reserves, respectively.
As of September 30, 2021, and December 31, 2020 the outstanding loan balances were $12,792,300 and $6,489,900, respectively.
The
Company entered into a construction loan with Curb Funding, LLC of which Robb Kenyon a former director and minority shareholder, is 100%
owner. The loan originated on August 13, 2020. The loan has a one-year maturity with an interest rate of 12%. As of September 30, 2021
and December 31, 2020, the Company incurred loan fees of $0 and $3,500, respectively. These fees are recorded as debt discount and amortized
over the life of the loan. The amortization is capitalized to real estate. As of September 30, 2021, and December 31, 2020, there were
$0 and $1,100 of remaining debt discounts, respectively. As of September 30, 2021, and December 31, 2020, the outstanding loan balances
were $0, and $51,800, respectively. The Company incurred interest expense of $2,800 and $0 for the nine months ended September 30, 2021
and 2020, respectively.
Robb
Kenyon resigned as a director of the Company on July 8, 2021.
On
April 19, 2019, the Company entered into a construction loan with Olympic Views, LLC of which the Company’s Chief Executive Officer
and President previously owned a 50% interest. The loan amount was $442,000 with an interest rate of 12% and a maturity date of April
19, 2020. The loan was collateralized by a deed of trust on the land. The amounts outstanding were $0 and $0 as of September 30, 2021
and December 31, 2020, respectively. The interest expense was $0 and $8,900 for the three months ended September 30, 2021 and 2020 and
was capitalized as part of Real Estate The interest expense was $0 and $41,900 for the nine months ended September 30, 2021 and 2020
and was capitalized as part of Real Estate. In May 2020, the Company entered into an agreement with Olympic Views, LLC to convert this
debt and accrued interest of $55,000 to common stock at the Initial Public Offering price of $6.00. This conversion was effected on August
28, 2020 simultaneous with the Initial Public Offering. This transaction resulted in 82,826 shares of common stock being issued to
Olympic Views, LLC.
Due
to Related Party
The
Company utilizes a quarry to process waste materials from the completion of raw land into sellable/buildable lots. The quarry is located
on land owned by 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. On September 30, 2021 and December
31, 2020, the commission payable was $8,200 and $0, respectively. The commission expense for the three months ended September 30, 2021
and 2020, was $17,100 and $209,100, respectively. The commission expense for the nine months ended September 30, 2021 and 2020, was $72,800
and $209,100, respectively.
Richard
Schmidtke, a Company director, provided accounting services in 2021 and 2020 to the Company. On September 30, 2021 and December 31, 2020,
the fees payable to Mr. Schmidtke were $0 and $500, respectively. The accounting expense incurred by the Company for Mr. Schmidtke’s
services for the three months ended September 30, 2021 and 2020 was $500 and $6,000, respectively. The accounting expense incurred by
the Company for Mr. Schmidtke’s services for the nine months ended September 30, 2021 and 2020 was $1,000 and $40,300, respectively.
Land
Purchase from a Related Party
On
September 2, 2020, the Company purchased 99 unfinished lots for $3,430,000 from Olympic Views, LLC. The Company’s Chief Executive
Officer and President owned a 50% interest in this LLC at the date of purchase. He currently has no ownership interest in this LLC.
13.
STOCKHOLDERS’ EQUITY
Common
Stock
The
Company is authorized to issue 50,000,000 shares of common stock, at no par value per share. At September 30, 2021, the Company has 14,922,094
shares of common stock issued and outstanding.
Each
share of common stock has one vote per share for all purposes. Common stock does not provide any preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions or rights. Common stockholders are not entitled to cumulative voting for
purposes of electing members to the Board of Directors.
Preferred
Stock
At
September 30, 2021, the Company is authorized to issue 10,000,000 shares of preferred stock, at no par value per share. As of September
30, 2021, the Company has 1,260,555 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% per annum payable
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. Beginning on June 9, 2024, the Company may, at its option, redeem the Series A Preferred Shares, in whole or in part,
by paying $25.00 per share, plus any accrued and unpaid dividends to but not including the date of redemption. To the extent declared
by the board of Directors, dividends will be payable not later than 20 days after the end of each calendar month. Dividends on the Series
A Preferred Shares will accumulate whether or not the Company has earnings, whether or not there are funds legally available for the
payment of such dividends, and whether or not such dividends are declared by the Board of Directors.
Conversion
at Option of Holder. Each Series A Preferred Share, together with accrued but unpaid dividends, is convertible into common stock
at a conversion price of $4.50 per share of common stock, which initially equals 5.556 shares of common stock 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 of 8% per annum payable monthly in
arrears. The Company has accrued dividends of $210,600 as of September 30, 2021 which were paid to the shareholders on October 20, 2021.
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.
Public
Offering and Conversion of Debt
The
registration statement for the Company’s initial public offering (the “Initial Public Offering”) became effective on
August 28, 2020. On September 1, 2020, the Company closed on the Initial Public Offering of 2,031,705 shares of its common stock at the
public offering price of $6.00 per share, which included 265,005 shares of common stock sold upon full exercise of the underwriters’
option to purchase additional shares of common stock for gross proceeds of $12,190,200. The net proceeds from the Initial Public Offering
after deducting the underwriting discount and the underwriters’ fees and expenses were $10,789,000.
In
addition, upon closing of the Initial Public Offering, the Company issued to the underwriters warrants to purchase an aggregate
of 88,335
shares of common stock exercisable at a per share
price of $7.50
for a term of four
years beginning on August 28, 2021. The fair value
of these warrants is $167,400.
Also,
upon closing of the Initial Public Offering, the Company issued to Olympic Views, LLC (“Olympic”), 82,826 shares of its common
stock as a result of the conversion of debt owed to Olympic in the amount of $442,000 and accrued interest of $55,000 at the public offering
price per share of $6.00.
2021
Common Stock Offering
On
January 15 and 20, 2021, the Company closed on an offering (the “Follow-On Offering”) of 9,200,000 shares of common stock
at the public offering price of $3.00 per share, which includes 1,200,000 shares of common stock sold upon full exercise of the underwriters’
option to purchase additional shares of common stock for gross proceeds of $27,600,000. The net proceeds after deducting stock issuance
costs were $25,101,000.
In
addition, upon closing of the Follow-On Offering the Company issued to the underwriters, warrants to purchase an aggregate of 400,000
shares of common stock exercisable at a per share
price of $3.75
for a term of five years beginning on January
12, 2021 which vest on July 12, 2021. The fair value of these warrants is $453,800.
Preferred
Stock Offering
On
June 11, 2021, the Company closed an offering (the “Preferred Stock Offering”) for 1,200,000 Series A Preferred Shares and
warrants to purchase 4,140,000 shares of common stock at an exercise price of $5.00 per share, which included 540,000 warrants pursuant
to the underwriter’s partial exercise of their over-allotment option, for gross proceeds of $30,005,400. On June 30, 2021, the
underwriters made another partial exercise of their over-allotment option and purchased an additional 60,555 Series A Preferred Shares
for additional gross proceeds of $1,406,200. The net proceeds from the Preferred Stock Offering after deducting stock issuance costs
was $28,661,000.
In
addition, upon closing of the Preferred Stock Offering, the Company issued to the underwriters two warrants, including (i) warrants to
purchase 12,000 Series A Preferred Shares; and (ii) warrants to purchase 36,000 shares of common stock at an exercise price of $5.00.
The
warrants issued to investors in this offering have an exercise price of $5.00
with a life of five years from the date of issue.
The fair value of the warrants was $3,701,600,
which was valued using the Black Scholes Model.
(A)
Options
The
following is a summary of the Company’s option activity:
SCHEDULE
OF STOCK OPTIONS ACTIVITY
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
– December 31, 2020
|
|
|
442,172
|
|
|
$
|
2.53
|
|
Exercisable
– December 31, 2020
|
|
|
219,085
|
|
|
$
|
1.31
|
|
Granted
|
|
|
150,000
|
|
|
$
|
3.23
|
|
Exercised
|
|
|
(45,046
|
)
|
|
$
|
0.40
|
|
Forfeited/Cancelled
|
|
|
(33,114
|
)
|
|
$
|
3.18
|
|
Outstanding
– September 30, 2021
|
|
|
514,012
|
|
|
$
|
2.88
|
|
Exercisable
– September 30, 2021
|
|
|
363,361
|
|
|
$
|
2.84
|
|
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
|
|
|
Options
Outstanding
|
|
|
|
|
Options
Exercisable
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
- $6.50
|
|
|
514,012
|
|
|
6.73
|
|
|
$
|
2.88
|
|
|
363,361
|
|
$
|
2.84
|
|
During
the nine months ended September 30, 2021, the Company issued 150,000 options to employees. The options have an exercise price between
$2.76 and $3.41 per share, a term of 10 years, and vest over two or three years. The options have an aggregated fair value of approximately
$192,900 that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 1 under Stock-Based
Compensation.
During
the nine months ended September 30, 2021, the Company had 45,046 options exercised by a former employee. These shares were exercised
at $0.40 per share for a total of $18,000.
The
Company recognized share-based compensation net of forfeitures related to options of $90,700 and $9,900 for the three months ended September
30, 2021 and 2020, respectively.
The
Company recognized share-based compensation net of forfeitures related to options of $246,200 and $11,000 for the nine months ended September
30, 2021 and 2020, respectively.
As
of September 30, 2021, unrecognized share-based compensation was $170,300.
The
intrinsic value for outstanding and exercisable options as of September 30, 2021 was $333,400 and $306,500.
(B)
Warrants
The
following is a summary of the Company’s Common Stock Warrant activity:
SCHEDULE OF WARRANTS ACTIVITY
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
– December 31, 2020
|
|
|
110,859
|
|
|
$
|
6.06
|
|
Exercisable
– December 31, 2020
|
|
|
22,524
|
|
|
$
|
0.40
|
|
Granted
|
|
|
4,036,000
|
|
|
$
|
4.88
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
– September 30, 2021
|
|
|
4,146,859
|
|
|
$
|
4.91
|
|
Exercisable
– September 30, 2021
|
|
|
3,710,859
|
|
|
$
|
5.03
|
|
SCHEDULE OF WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
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
|
|
|
4,146,859
|
|
|
4.66
|
|
|
$
|
4.91
|
|
|
3,710,859
|
|
$
|
5.03
|
|
The
intrinsic value for outstanding and exercisable warrants as of September 30, 2021 was $43,900 and $43,900, respectively.
The
following is a summary of the Company’s Preferred Stock Warrant activity:
SCHEDULE OF WARRANTS ACTIVITY
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
– December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable
– December 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
12,000
|
|
|
$
|
24.97
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
– September 30, 2021
|
|
|
12,000
|
|
|
$
|
24.97
|
|
Exercisable
– September 30, 2021
|
|
|
-
|
|
|
$
|
-
|
|
SCHEDULE OF WARRANTS OUTSTANDING AND EXERCISABLE
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24.97
|
|
|
12,000
|
|
|
4.69
|
|
|
$
|
24.97
|
|
|
12,000
|
|
$
|
24.97
|
|
The
intrinsic value for outstanding and exercisable warrants as of September 30, 2021 was $0 and $0, respectively.
(C)
Restricted Stock Plan
The
following is a summary of the Company’s restricted stock activity:
SCHEDULE OF RESTRICTED STOCK UNIT ACTIVITY
|
|
Restricted
Stock
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
– December 31, 2020
|
|
|
34,000
|
|
|
$
|
4.53
|
|
Exercisable
– December 31, 2020
|
|
|
8,500
|
|
|
$
|
4.53
|
|
Granted
|
|
|
70,000
|
|
|
$
|
3.12
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding
– September 30, 20201
|
|
|
104,000
|
|
|
$
|
3.58
|
|
Exercisable
– September 30, 2021
|
|
|
51,500
|
|
|
$
|
4.05
|
|
The
Company periodically grants restricted stock awards to the board of directors and certain employees pursuant to the 2020 Plan. These
typically are awarded by the board of directors at one time and from time to time, to vest in four equal installments on the last day
of a fiscal quarter. The Company recognized $93,100 and $0 of share-based compensation expense during the three months ended September
30, 2021 and 2020, respectively. The Company recognized $170,100 and $0 of share-based compensation during the nine months ended September
30, 2021 and 2020, respectively. On September 30, 2021, there was $163,800 of unrecognized compensation related to non-vested restricted
stock.
14.
SEGMENTS
The
Company’s business is organized into four material reportable segments which aggregate 99% of revenue:
1)
Homes
2)
Completed lots
3)
Entitled land
4)
Fee build
The
reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements.
The following represents selected information for the Company’s reportable segments for the three months ended September 30, 2021
and 2020 and the nine months ended September 30, 2021 and 2020. Immaterial construction materials revenues and costs are included in
the homes segment.
SCHEDULE OF COMPANY’S REPORTABLE SEGMENT
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
For the Three
Months Ended
|
|
|
For the Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2021
|
|
|
|
2020
|
|
|
|
2021
|
|
|
|
2020
|
|
Revenue by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
$
|
3,929,300
|
|
|
$
|
7,806,500
|
|
|
$
|
14,277,700
|
|
|
$
|
26,077,300
|
|
Completed lots
|
|
|
770,000
|
|
|
|
-
|
|
|
|
7,770,000
|
|
|
|
-
|
|
Entitled land
|
|
|
10,440,000
|
|
|
|
-
|
|
|
|
19,750,000
|
|
|
|
-
|
|
Fee
Build
|
|
|
2,871,300
|
|
|
|
-
|
|
|
|
4,219,500
|
|
|
|
-
|
|
Revenue
|
|
$
|
18,010,600
|
|
|
$
|
7,806,500
|
|
|
$
|
46,017,200
|
|
|
$
|
26,077,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
$
|
3,498,000
|
|
|
$
|
7,183,900
|
|
|
$
|
12,378,200
|
|
|
$
|
24,448,100
|
|
Completed lots
|
|
|
495,400
|
|
|
|
-
|
|
|
|
7,541,700
|
|
|
|
-
|
|
Entitled land
|
|
|
4,492,600
|
|
|
|
-
|
|
|
|
11,449,400
|
|
|
|
-
|
|
Fee
Build
|
|
|
2,380,200
|
|
|
|
-
|
|
|
|
3,569,000
|
|
|
|
-
|
|
Cost of Revenue
|
|
$
|
10,866,200
|
|
|
$
|
7,183,900
|
|
|
$
|
34,938,300
|
|
|
$
|
24,448,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) by segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homes
|
|
$
|
431,300
|
|
|
$
|
622,600
|
|
|
$
|
1,899,500
|
|
|
$
|
1,629,200
|
|
Completed lots
|
|
|
274,600
|
|
|
|
-
|
|
|
|
228,300
|
|
|
|
-
|
|
Entitled land
|
|
|
5,947,400
|
|
|
|
-
|
|
|
|
8,300,600
|
|
|
|
-
|
|
Fee
Build
|
|
|
491,100
|
|
|
|
-
|
|
|
|
650,500
|
|
|
|
-
|
|
Gross Profit
|
|
$
|
7,144,400
|
|
|
$
|
622,600
|
|
|
$
|
11,078,900
|
|
|
$
|
1,629,200
|
|
15.
UNCOMPLETED CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts are summarized as follows at September 30, 2021 and December 31, 2020:
SUMMARY OF COST, ESTIMATED EARNINGS AND BILLINGS ON UNCOMPLETED CONTRACTS
|
|
September
30, 2021
|
|
|
December
31, 2020
|
|
Costs
incurred on uncompleted contracts
|
|
$
|
3,717,000
|
|
|
$
|
-
|
|
Estimated
earnings
|
|
|
723,700
|
|
|
|
-
|
|
Costs
and estimated earnings on uncompleted contracts
|
|
|
4,440,700
|
|
|
|
-
|
|
Billings
to date
|
|
|
4,207,600
|
|
|
|
-
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
624,000
|
|
|
|
-
|
|
Costs
and earnings in excess of billings on completed contracts
|
|
|
(390,900)
|
|
|
|
-
|
|
Total
|
|
$
|
233,100
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Costs
in excess of billings
|
|
$
|
624,000
|
|
|
$
|
-
|
|
Billings
in excess of cost
|
|
|
(390,900)
|
|
|
|
-
|
|
Total
|
|
$
|
233,100
|
|
|
$
|
-
|
|
The
contract asset of $4,762,400 consists of uncollected billings of $4,138,400 and costs in excess of billings of $624,000.
16.
SUBSEQUENT EVENTS
On
August 8, 2021, the Company entered into a purchase and sale agreement to acquire property for the construction of 75 condominiums units
located in Yelm, Washington for $3,250,000 which closed on October 4, 2021.
On
October 7, 2021, the Company closed an offering (the “Preferred Stock Offering”) for 2,400,000 Series A Preferred Shares
and warrants to purchase 13,800,000 shares of common stock at an exercise price of $2.97 per share, which included 1,380,000 warrants
pursuant to the underwriter’s exercise of their over-allotment option, for gross proceeds of $33,076,700.
On
October 14, 2021, the Company entered into a purchase and sale agreement to sell 20 lots in Semiahmoo, Washington for $3,800,000,
closing on or before December 8, 2021.
On
October 27, 2021, the Company entered into a purchase and sale agreement to sell 24 lots in Semiahmoo, Washington for $4,800,000,
closing on or before December 21, 2021.
On
October 29, 2021, the Company’s Board of Directors (the “Board”) appointed Lance Brown as the Company’s Chief
Financial Officer and Principal Financial Officer, effective as of November 1, 2021. Mr. O’Sullivan ceased to be the Company’s
interim Chief Financial Officer effective as of the same date. Pursuant to Mr. Brown’s employment agreement, Mr. Brown receives
a salary of $280,000 per annum. In addition, Mr. Brown will receive a one-time sign on bonus of $75,000 and is eligible to participate
in the Company’s annual bonus plan. The Company also granted Mr. Brown 100,000 shares of common stock pursuant to the 2020 Plan,
33,333 shares of which will vest on November 8, 2022, and thereafter, the remaining 66,666 shares will vest on a quarterly basis in eight
equal installments, whereby all shares shall be vested by November 8, 2024.
On
November 1, 2021, the Company entered into a purchase and sale agreement to sell 30 lots in Horseshoe Bay, Texas for $6,045,500,
closing on or before December 21, 2021.
On
November 3, 2021, the Company entered into a purchase and sale agreement to sell 27 lots in Semiahmoo, Washington for $4,860,000,
closing on or before December 15, 2021.
On
November 5, 2021, the Company closed on the Underwriter’s exercise of its over-allotment option to purchase 360,000
Series A Preferred Shares from the Preferred
Stock Offering and received net proceeds of $5,005,300.
On
November 8, 2021, the Company entered into a purchase and sale agreement to sell one house in Bremerton, Washington for $739,000,
closing on or before December 15, 2021.