Form 10-Q - Quarterly report [Sections 13 or 15(d)]

Name	Symbol	Market	Type
Harbor Custom Development Inc	NASDAQ:HCDIP	NASDAQ	Preference Share

	Price Change	% Change	Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Traded	Last Trade
	0.00	0.00%	1.10	1.05	1.25				0	00:00:00

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2023


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

For the transition period from to

Commission File Number: 001-39266

HARBOR CUSTOM DEVELOPMENT, INC.

(Exact name of registrant as specified in its charter)


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

1201 Pacific Avenue, Suite 1200

Tacoma, Washington 98402

(Address of principal executive offices)

(253) 649-0636

Registrant’s telephone number, including area code

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


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

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

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

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


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

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

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

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

Table of Contents


		Page
PART I - FINANCIAL INFORMATION		1

Item 1.	Interim Condensed Consolidated Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38

PART II - OTHER INFORMATION		38

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

	Signatures	43

PART I

ITEM 1. FINANCIAL STATEMENTS

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Cash	$	8,051,300	$	9,665,300
Restricted Cash	597,600		597,600
Accounts Receivable	184,100		1,707,000
Notes Receivable, net	1,060,000		4,525,300
Prepaid Expense and Other Assets	1,755,100		5,318,100
Real Estate	208,860,500		205,478,200
Property and Equipment, net	1,683,900		2,289,500
Right of Use Assets	1,788,500		1,926,100
Deferred Tax Asset, net	—		4,659,300
TOTAL ASSETS	$	223,981,000	$	236,166,400

LIABILITIES AND STOCKHOLDERS’ EQUITY

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

COMMITMENTS AND CONTINGENCIES - SEE NOTE 12

STOCKHOLDERS’ EQUITY
Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at September 30, 2023 and December 31, 2022	62,912,100		62,912,100
Common Stock, no par value per share, 50,000,000 shares authorized and 2,329,322 issued and outstanding at September 30, 2023 and 718,835 issued and outstanding at December 31, 2022	41,689,500		35,704,700
Additional Paid In Capital	4,401,600		1,266,300
Retained Earnings (Accumulated Deficit)	(57,550,700)		(24,327,200)
TOTAL STOCKHOLDERS’ EQUITY	51,452,500		75,555,900

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

See accompanying notes to the condensed consolidated financial statements.

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

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

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

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

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes to the condensed consolidated financial statements.

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

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


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

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

CASH FLOWS FROM FINANCING ACTIVITIES
Construction loans	61,953,600		65,240,900
Payments on construction loans	(28,810,500)		(16,080,500)
Financing fees construction loans	(1,563,400)		(2,304,000)
Related party construction loans	—		8,576,500
Payments on related party construction loans	(8,177,300)		(13,220,500)
Financing fees related party construction loans	(75,000)		(23,600)
Revolving line of credit loan	—		24,788,900
Payments on revolving line of credit loan	(10,141,900)		—
Financing fees revolving line of credit loan	—		(1,097,700)
Payments on note payable - insurance	(465,300)		(956,400)
Payments on equipment loans	(2,057,100)		(1,655,300)
Payments on financing leases	(74,800)		(70,700)
Preferred dividends	(634,700)		(5,892,400)
Repurchase of common stock	—		(437,700)
Proceeds from common stock offering	602,600		—
Proceeds from pre-funded and common warrants offering	8,335,400		—
Proceeds from exercise of stock options	—		8,600
Proceeds from exercise of common warrants	—		413,800
NET CASH PROVIDED BY FINANCING ACTIVITIES	18,891,600		57,289,900

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



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

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

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

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

See accompanying notes to the condensed consolidated financial statements.

(Amounts rounded to the nearest $100)

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


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

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

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

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

Preferred Stock Dividends									(1,940,000)		(1,940,000)				(1,940,000)
Stock Compensation Expense	875						112,300				112,300				112,300
Conversion of Preferred stock	60,326	3,595,400		(217,156)	(3,595,400)						—				—
Exercise of Warrants	6,965	413,800									413,800				413,800
Share Repurchase	(12,597)	(437,700)									(437,700)				(437,700)
Net Loss									(4,509,100)		(4,509,100)				(4,509,100)

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

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

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

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

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

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

Preferred Stock Dividends									(1,903,700)		(1,903,700)				(1,903,700)
Stock Compensation Expense	2,941						75,300				75,300				75,300
Public Offering - Common Stock	160,500	602,600									602,600				602,600
Public Offering - Pre-funded Warrants and Common Warrants							8,335,300				8,335,300				8,335,300
Exercise of Pre-funded Warrants	906,609	3,403,700					(3,403,700)				—				—
Net Loss									(4,376,000)		(4,376,000)				(4,376,000)

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

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

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

See accompanying notes to the condensed consolidated financial statements.

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

HARBOR CUSTOM DEVELOPMENT, INC. AND SUBSIDIARIES

D/B/A HARBOR CUSTOM HOMES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company’s principal business activity involves acquiring raw land and developed lots for the purpose of building and selling single family and multi-family dwellings in Washington, California, Texas, and Florida.

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

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

Principles of Consolidation

The condensed consolidated financial statements include the following subsidiaries of Harbor Custom Development, Inc. as of the reporting period ending date, as follows:


Names	Dates of Formation	Attributable Interest
		September 30, 2023		December 31, 2022
Saylor View Estates, LLC*	March 30, 2014	N/A		N/A
Belfair Apartments, LLC	December 3, 2019	100	%	100	%
Pacific Ridge CMS, LLC	May 24, 2021	100	%	100	%
Tanglewilde, LLC	June 25, 2021	100	%	100	%
HCDI FL CONDO LLC	July 30, 2021	100	%	100	%
HCDI Mira, LLC**	August 31, 2021	N/A		N/A
HCDI, Bridgeview LLC	October 28, 2021	100	%	100	%
HCDI Wyndstone, LLC	September 15, 2021	100	%	100	%
HCDI Semiahmoo, LLC	December 17, 2021	100	%	100	%
Mills Crossing, LLC	July 21, 2022	100	%	100	%
Broadmoor Ventures, LLC	August 24, 2022	100	%	100	%
GPB Holdings LLC	October 29, 2022	100	%	100	%
Winding Lane Estate LLC	November 30, 2022	100	%	100	%
Beacon Studio Farms LLC	March 20, 2023	100	%	N/A

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

**HCDI Mira, LLC was voluntarily dissolved with the State of Washington as of April 26, 2023.

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

Basis of Presentation

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

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

Reclassification

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

Use of Estimates

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

Going Concern Uncertainty

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

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

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

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

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

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

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

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

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

•substantially completed its fee build contracts;

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

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

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

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Stock-Based Compensation

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

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

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

The Company recognizes all forms of share-based payments, including stock option grants, warrants, and restricted stock grants, at their fair value on the grant date.

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

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

For the nine months ended September 30, 2023 and 2022 when computing fair value of share-based awards, the Company has considered the following range of assumptions:


	September 30, 2023	September 30, 2022
Risk-free interest rate	4.30%	1.73% - 3.54%
Exercise price	$3.73	$22.40 - $60.00
Expected life of grants in years	6.38	3.93 - 6.51
Expected volatility of underlying stock	43.50%	42.34% - 48.13%
Dividends	—	—

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

Repurchase of Equity Securities

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

Reverse Stock Split

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

2023 Public Offering

On May 18, 2023, the Company closed on a public offering of 160,500 shares of common stock, 1,790,718 pre-funded warrants, and 1,951,218 common warrants for net proceeds of $8.9 million. In addition, upon closing of this public offering, the Company issued to the placement agent 117,073 warrants to purchase shares of common stock.

The pre-funded warrants and common warrants were evaluated in accordance with FASB ASC Topics 480, Distinguishing Liabilities from Equity and 815, Derivatives and Hedging. The Company assessed whether the pre-funded warrants and common warrants are freestanding financial instruments that are legally detachable and separately exercisable from the equity instruments, are mandatorily redeemable, embody obligations to repurchase shares or issue a variable number of shares, are exercisable without any contingent provisions, permit the holders to receive a fixed number of shares of common stock upon exercise, are indexed to the Company's common stock, and are settled in shares. Based on this assessment, the pre-funded warrants and common warrants were classified as a component of permanent stockholders' equity within additional paid-in capital and were recorded at the issuance date using a relative fair value allocation method. The Company values these equity instruments at issuance and allocated net proceeds from the sale proportionately to the common stock, the pre-funded warrants, and the common warrants. Of the net proceeds, $0.6 million was allocated to common stock, $6.7 million was allocated to pre-funded warrants, $1.6 million was allocated to common warrants, and $0.1 million was allocated to the placement agent warrants.

The common warrants and placement agent warrants were valued using a Black-Scholes pricing model. When computing the fair value of these warrants, the Company used 3.94% as the risk free interest rate, an exercise price of $5.00 or $6.41, an expected life of 2.5 years, and expected volatility of 37.83% as assumptions in the model. (See Note 15. Stockholders’ Equity.)

Earnings (Loss) Per Share (“EPS”)

EPS is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to ASC Topic 260-10-45 of the FASB ASC. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator may have to adjust for any dividends and income or loss associated with potentially dilutive securities that are assumed to have resulted in the issuance of shares of common stock and the denominator may have to adjust to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued during the period to reflect the potential dilution that could occur from shares of common stock issuable through a contingent shares issuance arrangement, stock options, warrants, RSUs, or convertible preferred stock. For purposes of determining diluted earnings per common share, the treasury stock method is used for stock options, warrants, and RSUs, and the if-converted method is used for convertible preferred stock as prescribed in FASB ASC Topic 260. Because of the net loss for the three and nine months ended September 30, 2023, the impact of including these in our computation of diluted EPS was anti-dilutive.

In accordance with FASB ASC Topic 260-10-45, pre-funded warrants have been included in the weighted average common shares outstanding number for the purpose of calculating EPS.

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net loss attributable to common stockholders per share of common stock for the three and nine months ended September 30, 2023 and 2022.


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

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

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

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

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

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

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

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

(1) The number of outstanding warrants, issued prior to the reverse stock split on March 6, 2023, did not change or split pursuant to the reverse stock split, but the number of shares of common stock issuable upon exercise of these warrants was adjusted based on a 1 to 0.05 ratio.

(2) The number of outstanding warrants issued after the reverse stock split on March 6, 2023 are exercisable for shares of common stock on a 1 to 1 ratio.

(3) Preferred stock and warrants to purchase convertible preferred stock are convertible into common stock on a 0.2778 to 1 ratio.

Fair Value of Financial Instruments

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

Cash and Cash Equivalents

The Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents as of September 30, 2023 and December 31, 2022.

Restricted Cash

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

Accounts Receivable

Accounts receivables are reported at the amount the Company expects to collect from outstanding balances. The Company provides for an allowance for credit losses based upon a review of the outstanding accounts receivable, historical collection information, and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The allowance for credit losses was $0 as of September 30, 2023 and December 31, 2022.

Notes Receivable

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

The Company reviews notes receivable for impairment whenever events or circumstances indicate that the note may not be fully recoverable. Impairment is present when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. If management determines an amount to be uncollectible, impairment is measured based on the estimated uncollectible amount less the fair value of the underlying collateral. Impairment is recognized with a valuation allowance against the note receivable with a corresponding charge to bad debt expense under operating expenses. The valuation allowance is written down when the remaining note amount is collected in full. There was no valuation allowance as of September 30, 2023. The valuation allowance was $1.2 million for notes receivable as of December 31, 2022. (See Note 3. Notes Receivable.)

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

Property and Equipment and Depreciation

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


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

Real Estate Assets

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

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

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

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

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

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

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

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

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

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

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

The Company recorded impairment charges of $2.5 million relating to the Wyndstone apartments, $1.0 million relating to the Darkhorse lots, $1.5 million relating to the Summit Rock lots and homes, $0.8 million relating to the Cimarron Hills homes, $0.4 million relating to Sienna Creek homes, $0.2 million relating to Trails of HSB lots, and $0.1 million relating to a Flintrock Falls home for the three months ended September 30, 2023. For the nine months ended September 30, 2023, the Company recorded impairment charges of $3.9 million relating to the Darkhorse lots, $3.2 million relating to the Pacific Ridge apartments, $2.5 million relating to the Wyndstone apartments, $1.5 million relating to the Summit Rock lots and homes, $0.8 million relating to the Cimarron Hills homes, $0.4 million relating to Sienna Creek homes, $0.2 million relating to a Bunker Ranch home, $0.2 million relating to Trails of HSB lots, and $0.1 million relating to a Flintrock Falls home. No impairment charges were recorded for the comparable periods in 2022. For the year ended December 31, 2022, the Company recorded impairment charges of $1.2 million and $2.4 million relating to the Winding Lane lots and Pacific Ridge apartments, respectively. These charges are recorded in cost of sales and real estate as presented in Note 5. The Company did not identify any other real estate that qualified for an impairment charge.

Revenue and Cost Recognition

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

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

determines revenue recognition, depicting the transfer of goods or services to customers in amounts reflecting the payment to which the Company expects to be entitled in exchange for those goods or services.

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

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

Homes, Developed Lots, and Entitled Land

1. Identify the contract with a customer.

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

2. Identify the performance obligations in the contract.

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

3. Determine the transaction price.

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

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

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

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

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

Fee Build

1. Identify the contract with a customer.

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

2. Identify the performance obligations in the contract.

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

3. Determine the transaction price.

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

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

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

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

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

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

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

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

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

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

The Company uses the total costs incurred on the project relative to the total expected costs to satisfy the performance obligation. The input method involves measuring the resources consumed, labor hours expended, costs incurred, time lapsed, or machine hours used relative to the total expected inputs to the satisfaction of the performance obligation. Costs incurred prior to actual contract (i.e., design, engineering, procurement of material, etc.) should not be recognized as the Company does not have control of the good/service provided. When the estimate on a contract indicates a loss or claims against costs incurred reduce the likelihood of recoverability of such costs, the Company records the entire estimated loss in the period the loss becomes known. Project contracts typically provide for a schedule of billings or invoices to the customer based on the Company’s job to date percentage of completion of specific tasks inherent in the fulfillment of its performance obligation(s). The schedules for such billings usually do not precisely match the schedule on which costs are incurred. As a result, contract revenue recognized in the statement of operations can and usually does differ from amounts that can be billed or invoiced to the customer at any point during the contract. Amounts by which cumulative contract revenue recognized on a contract as of a given date exceed cumulative billings and unbilled receivables to the customer under the contract are reflected as a current contract asset in the Company’s balance sheet. Amounts by which cumulative billings to the customer under a contract as of a given date exceed cumulative contract revenue recognized on the contract would be reflected as a current contract liability in the Company’s balance sheet. (See Note 17. Uncompleted Contracts.)

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


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

Disaggregation of Revenue from Contracts with Customers:

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


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

Rental Income

Rental income attributable to residential leases has been evaluated under FASB ASC Topic 842, Leases. Rental income is recorded when due from residents and recognized monthly as it was earned. Residential apartment leases may include lease income related to such items as utility recoveries, parking rent, storage rent and pet rent that the Company treats as a single lease component because the amenities cannot be leased on their own and the timing and pattern of revenue recognition are the same. Leases entered into between a resident and a property for the rental of an apartment unit are generally six months to one year, and typically renewed on a month-to-month basis after the initial term.

Rental income is included as a part of sales on the statement of operations and within the multi-family segment presented in Note 16. Segments. Rental income was $1.1 million and $0.03 million for the three months ended September 30, 2023 and 2022, respectively. Rental income was $2.3 million and $0.03 million for the nine months ended September 30, 2023 and 2022, respectively.

Security deposits related to the residential apartment leases are maintained in a checking account, separate from the Company's operating account, in accordance with Washington State laws. These security deposits are recorded within cash and customer deposit liabilities within accounts payable and accrued expenses.

Cost of Sales

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

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

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

Rental expenses, relating to our multi-family rental revenue, are charged to cost of sales as incurred.

Advertising

Advertising expenses, which are expensed as incurred and included in operating expenses, were $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively. Advertising expenses were $0.3 million and $0.2 million for the nine months ended September 30, 2023 and 2022, respectively.

Income Taxes

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

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

The Company recognizes a tax benefit for an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. There are no uncertain tax positions as of September 30, 2023 and December 31, 2022.

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

Recent Accounting Pronouncements

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

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

On May 3, 2021, the FASB released ASU No. 2021-04, Compensation – Earning Per Share (Topic 260), Debt - Modifications and Extinguishments (subtopic 470-50), Compensation - Stock Compensation (Topic 718), Contracts in Entity’s Own Equity (Subtopic 815-40), Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The FASB issued this update to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example warrants) that remain equity classified after modification or exchange. The standard is effective for fiscal years beginning after December 15, 2021. The Company adopted ASU 2021-04 on January 1, 2022, however the adoption did not have an impact on the Company’s condensed financial statements.

In July 2023, the FASB released ASU No. 2023-03, Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock (SEC Update). The FASB issued this update to describe and clarify the amendments as listed above. The Company assessed the amendments related to this update, specifically for Topics 205, 505 and 718 and noted that ASU No. 2023-03 does not have an impact on the Company’s condensed financial statements.

In July 2023, the SEC adopted the final rule under SEC Release No. 33-11216, Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, requiring disclosure of material cybersecurity incidents on Form 8-K and periodic disclosure of a registrant’s cybersecurity risk management, strategy and governance in annual reports. Regulation S-K Item 6 disclosure requirements under this rule will be effective for us in the fourth quarter of 2023. Incident disclosure

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

Impairment of Property and Equipment

The Company reviews fixed assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is present when the sum of estimated undiscounted future cash flow expected to result from use of the assets is less than carrying value. If impairment is present, the carrying value of the impaired asset is reduced to its fair value. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. As of September 30, 2023 and December 31, 2022, there were no impairment losses recognized for fixed assets.

2. CONCENTRATIONS

Cash Concentrations

The Company maintains cash balances at various financial institutions. These balances are secured by the Federal Deposit Insurance Corporation. These balances generally exceed the federal insurance limits. Uninsured cash balances were $6.4 million and $8.1 million as of September 30, 2023 and December 31, 2022, respectively.

Revenue Concentrations

Homes

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

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

Developed Lots

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

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

Entitled Land

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

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

Fee Build

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

Multi-Family

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

3. NOTES RECEIVABLE

The outstanding balance of notes receivable amounted to $1.1 million and $4.5 million at September 30, 2023 and December 31, 2022, respectively. These notes arose as financing by the Company for the sale of real estate properties or financing the development of the properties prior to acquisition and are secured by the underlying improved real estate properties. The remaining note accrues interest at an annual rate of 9% and all payments of principal and interest are due in full on December 20, 2024. Interest income was $0.03 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively. Interest income was $0.1 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively.

In March 2022, the Company and Noffke Horizon View, LLC entered into a promissory note with a payment in full due on March 31, 2023 of $3.3 million (“the note”) for the sale of land. In March 2023, Noffke Horizon View, LLC notified the Company that they were unable to pay this amount in full by the due date and the Company agreed to settle the note for a reduced amount totaling $2.1 million. The Company recorded a valuation allowance against the note receivable as of December 31, 2022 and the reduced note amount was fully collected during the quarter ended March 31, 2023.

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


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

4. PROPERTY AND EQUIPMENT

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


	September 30, 2023		December 31, 2022
Machinery and Equipment	$	44,000	$	505,300
Vehicles	—		26,200
Furniture and Fixtures	692,100		695,600
Leasehold Improvements	1,467,100		1,524,000
Total Fixed Assets	2,203,200		2,751,100
Less Accumulated Depreciation	(519,300)		(461,600)
Fixed Assets, Net	$	1,683,900	$	2,289,500

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

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

5. REAL ESTATE

Real Estate consisted of the following components:


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

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued liabilities consisted of the following:


	September 30, 2023		December 31, 2022
Trade Accounts Payable	$	6,211,400	$	11,472,100
Accrued Compensation, Bonuses, and Benefits	145,000		384,700
Accrued Quarry Reclamation Costs	39,400		76,200
Retainage Payable	153,900		1,130,300
Other Accrued Expenses	978,200		1,027,400
Total Accounts Payable and Accrued Expenses	$	7,527,900	$	14,090,700

7. REVOLVING LINE OF CREDIT

On March 7, 2022, the Company entered into a senior secured revolving credit facility (“the credit facility”) with BankUnited, N.A. (the “Lender”) for $25.0 million. The credit facility had an initial two year term, with a maturity date of March 7, 2024. The unpaid principal bore interest at a fluctuating rate of interest per annum equal to the daily simple secured overnight financing rate (SOFR) plus the applicable margin of 4.75%. The credit facility was used to fund the Company’s general working capital needs and interest is expensed as incurred. The credit facility is collateralized by all of the Company’s assets wherein the Lender is granted a junior priority interest in all collateralized Company assets that Lender has previously identified as a permitted lien or other encumbrance that the Company regularly incurs through its ordinary course of business; in all other Company assets, Lender maintains a first priority security interest. The credit facility also contained specific financial covenants. As of December 31, 2022, the Company was not in compliance with the minimum interest coverage ratio requirement and consolidated liquidity covenant.

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

The Company evaluated the Amendment in accordance with ASC 470-50, Debt - Modifications and Extinguishments and applied the borrowing capacity model as it relates to a revolving debt arrangement. Under the Amendment, the Lender is no longer committed and has no further lending obligations to the Company, which reduced the borrowing capacity of available credit to $0. The Company determined that this modification is considered a partial extinguishment and expensed the remaining unamortized debt discount of $0.5 million within interest expense for the nine months ended September 30, 2023.

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

As of September 30, 2023 and December 31, 2022, the revolving line of credit loan balance was $14.9 million and $25.0 million and the unamortized debt discount balance was $0 and $0.6 million, respectively.

8. EQUIPMENT LOANS

Equipment loans consists of the following:


	September 30, 2023		December 31, 2022
Various notes payable to banks and financial institutions with interest rates varying from 0% to 13.89%, collateralized by equipment with monthly payments ranging from $400 to $10,500:	$	—	$	2,057,100
Book value of collateralized equipment:	—		11,800

There were no future equipment loan maturities as of September 30, 2023.

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

Interest expense was $0.001 million and $0.1 million for the nine months ended September 30, 2023 and 2022, respectively.

9. CONSTRUCTION LOANS

The Company has various construction loans with private individuals and finance companies. The loans are collateralized by specific construction projects. Most loans are generally on one to two year terms but will be extended or refinanced if the project is not completed within one to two years and will be due upon the completion of the project. The loans have interest ranging from 7.99% to 13.00%. Interest expense and amortization of debt discount are capitalized when incurred and expensed as cost of goods sold when the corresponding property is sold. The loan balances related to third party lenders as of September 30, 2023 and December 31, 2022 were $142.3 million and $109.4 million, respectively. The unamortized debt discounts related to these construction loans as of September 30, 2023 and December 31, 2022 were $1.2 million and $1.9 million, respectively. The book value of collateralized real estate as of September 30, 2023 and December 31, 2022 was $208.9 million and $193.1 million, respectively.

10. LETTER OF CREDIT

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

11. NOTE PAYABLE INSURANCE

The Company purchased Directors & Officers (D&O) insurance on August 28, 2023 for $0.4 million. A down payment of $0.03 million was made and the remaining balance was financed over 11 months. The interest rate on the loan is 7.90%. The Company purchased Directors & Officers (D&O) insurance on August 28, 2022 for $0.6 million. A down payment of $0.1 million was made and the remaining balance was financed over 11 months. The interest rate on the loan is 4.75%. The loan balance as of September 30, 2023 and December 31, 2022 was $0.3 million and $0.4 million, respectively.

12. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

13. RELATED PARTY TRANSACTIONS

Notes Payable

The Company entered into construction loans with Sound Equity, LLC of which Robb Kenyon, a former director and minority shareholder, is a partner. These loans were originated between April 2019 and June 2021; the loans generally have a 12 to 24 month maturity, including those that have been extended. The interest rates range between 7.99% and 11.00%. As of September 30, 2023, and December 31, 2022, the outstanding loan balances were $0 and $8.2 million, respectively. For the three months ended September 30, 2023 and 2022, the Company capitalized loan fees of $0 and $0.01 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company capitalized loan fees of $0.1 million and $0.02 million, respectively. These fees are recorded as debt discount and amortized over the life of the loan. The amortization is capitalized to real estate. As of September 30, 2023 and December 31, 2022, there were $0 and $0.1 million of remaining unamortized debt discounts, respectively. The interest is capitalized to real estate as incurred and will be expensed to cost of goods sold when the property is sold. During the three months ended September 30, 2023 and 2022, the Company incurred interest (refund) of $(0.1) million and $0.3 million, respectively. During the nine months ended September 30, 2023 and 2022, the Company incurred interest of $0.4 million and $0.9 million, respectively.

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

Due to Related Party

The Company previously utilized a quarry to process waste materials from the completion of raw land into sellable/buildable lots. The materials produced by the quarry and sold by the Company to others were subject to a 25% commission payable to SGRE, LLC, which is 100% owned by the Company’s former Chief Executive Officer and President. The commission expense was recorded in operating expenses. On September 30, 2023 and December 31, 2022, the commission payable was $0 and $0, respectively. The commission expense for the three months ended September 30, 2023 and 2022, was $0 and $0.01 million, respectively. For the nine months ended September 30, 2023 and 2022, the commission expense was $0 and $0.04 million, respectively. The Company has completed its quarry operations and no longer incurs any commission expenses.

Rental Expense

The Company previously entered into property management agreements with Olympic Management Company (“OMC”), which was owned and operated by a family member related to the Company’s former Chief Executive Officer and President. OMC served as a managing agent for leasing and managing the Company's Mills Crossing, Belfair View, Pacific Ridge, and Wyndstone multi-family properties. The Company paid management fees to OMC, which consisted of service fees of up to $3,000 per month and $500 for each lease of a vacant apartment unit. The Company also reimbursed the payroll, benefits, and other employment costs relating to an office manager, leasing consultant, and maintenance staff employed by OMC for their time incurred in the operations of the property. For the three months ended September 30, 2023 and 2022, the management fees and payroll and benefits incurred and recorded as rental expense within cost of sales were $0 and $0, respectively. The management fees and payroll and benefits incurred and recorded for the nine months ended September 30, 2023 and 2022 were $0.3 million and $0, respectively. The Company terminated the agreements with OMC and transitioned to a third party property management company, effective June 7, 2023 for leasing and managing the Company’s Belfair, Pacific Ridge, and Wyndstone multi-family properties. Mills Crossing was managed by OMC until it was sold on June 16, 2023.

14. INCOME TAX

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

The Company is required to establish a valuation allowance for any portion of the deferred tax asset that the Company concludes is more likely than not to be unrealizable. The Company’s assessment considered all evidence, both positive and negative, including the nature, frequency, and severity of any current and cumulative losses, taxable income in carry back

years, the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. As of September 30, 2023, the Company determined that it was not more likely than not that the Company's deferred tax assets would be realized and therefore recorded a valuation allowance of $9.7 million. As of December 31, 2022, the Company had no valuation allowance recorded against the deferred tax assets.

15. STOCKHOLDERS’ EQUITY

Common Stock

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

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

Preferred Stock

The Company is authorized to issue 10,000,000 shares of preferred stock, no par value per share. As of September 30, 2023, the Company has 3,799,799 shares of Series A Cumulative Convertible Preferred Stock (“Series A Preferred Shares”) issued and outstanding. The holders of the Series A Preferred Shares are entitled to receive dividends at $2.00 per share per annum which are paid monthly in arrears starting June 30, 2021. Beginning on June 9, 2024, the Company may, at its option, redeem the Series A Preferred Shares, in whole or in part, by paying $25.00 per share, plus any accrued and unpaid dividends to but not including the date of redemption. To the extent declared by the Board of Directors, dividends will be payable not later than 20 days after the end of each calendar month. Dividends on the Series A Preferred Shares will accumulate whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, and whether or not such dividends are declared by the Board of Directors.

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

Dividends

Preferred Stock. The holders of the Series A Preferred Shares are entitled to receive dividends in the amount of $2.00 per share per annum, which is equivalent to 8% of the $25.00 liquidation preference per share. The Company has accrued dividends of $5.7 million as of September 30, 2023. The Company had accrued dividends of $0.6 million as of December 31, 2022 which were paid to the shareholders on January 20, 2023.

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

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

2023 Public Offering

On May 16, 2023, the Company entered into securities purchase agreements (the “Purchase Agreements”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell to the Investors in a public offering (the “Offering”) (i) 160,500 shares (the “Shares”) of common stock of the Company, no par value, (ii) pre-funded warrants (the “Pre-Funded Warrants”) to purchase up to 1,790,718 shares of common stock and (iii) warrants to purchase up to 1,951,218 shares of common stock (the “Warrants”) at a combined public offering price of $5.125 per share of common stock and accompanying Warrant or $5.1249 per Pre-Funded Warrant and accompanying Warrant. On May 18, 2023, the Company closed on the Offering. The net proceeds after deducting Offering costs were $8.9 million. In addition, upon the closing the Offering, the Company issued to the placement agent warrants to purchase 117,073 shares of common stock with an exercise price of $6.41 per share of common stock for a term of five years beginning on May 18, 2023, all of which vested immediately upon closing. The net proceeds allocated to each of these instruments were $0.6 million for common stock, $6.7 million for Pre-Funded Warrants, $1.6 million for Warrants, and $0.1 million for placement agent warrants.

Reverse Stock Split

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

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

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

Repurchase of Equity Securities

On May 10, 2022, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $5.0 million worth of shares of common stock. The amount of the repurchase program represented approximately 15% of the outstanding shares of the Company’s common stock valued at the closing price on May 10, 2022. During the nine months ended September 30, 2023, the Company did not repurchase any shares of common stock.

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

(A) Options

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


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


	Options Outstanding				Options Exercisable
Exercise Price	Number Outstanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$3.73 - $130.00	106,922	8.90	$	16.14	24,672	$	52.01

During the nine months ended September 30, 2023, 140,000 options were issued to officers of the Company. These options have an exercise price of $3.73 per share and a term of ten years. One half of these options will vest upon the filing of the

Company's next Form 10-K with the U.S. Securities and Exchange Commission, with the remainder to vest in equal proportions upon the first and second anniversary of said filing. The options have an aggregated fair value of approximately $0.3 million that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 1 under Stock-Based Compensation.

During the nine months ended September 30, 2022, the Company issued 19,600 options to employees. These options have an exercise price between $22.40 and $41.80 per share, a term of ten years, and vest over one or three years. The options have an aggregated fair value of approximately $0.2 million that was calculated using the Black-Scholes option-pricing model based on the assumptions discussed above in Note 1 under Stock-Based Compensation.

During the nine months ended September 30, 2023, the Company had no option exercised by former employees. During the nine months ended September 30, 2022, the Company had 1,081 options exercised by former employees. These options were exercised at $8.00 per share for a total of $0.01 million.

The Company recognized share-based compensation net of forfeitures related to options of $0.01 million and $0.02 million for the three months ended September 30, 2023 and 2022, respectively. The Company recognized share-based compensation net of forfeitures related to options of $0.1 million and $0.1 million for the nine months ended September 30, 2023 and 2022, respectively.

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

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

(B) Warrants

The following is a summary of the Company’s common stock warrant activity, for warrants that are exercisable at a 20 to 1 ratio to common stock:


	Warrants*	Weighted Average Exercise Price
Outstanding – January 1, 2023	18,447,564	$	3.47
Exercisable – January 1, 2023	18,380,897	$	3.47
Granted	—	$	—
Exercised	—	$	—
Forfeited/Cancelled	—	$	—
Outstanding – September 30, 2023	18,447,564	$	3.47
Exercisable – September 30, 2023	18,405,897	$	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	2.93	$	3.47	18,405,897	$	3.47

During the nine months ended September 30, 2023, the Company did not issue any warrants with a 20 to 1 ratio. During the nine months ended September 30, 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 warrant, a term of five years, and vest over three years. The fair value of these warrants is $0.1 million as of September 30, 2022.

The intrinsic value for outstanding and exercisable warrants as of September 30, 2023 was $0. The intrinsic value for outstanding and exercisable warrants as of September 30, 2022 was $0.01 million.

The following is a summary of the Company’s common stock warrant activity, for warrants that are exercisable at a 1 to 1 ratio to common stock:


	Warrants	Weighted Average Exercise Price
Outstanding – January 1, 2023	—	$	—
Exercisable – January 1, 2023	—	$	—
Granted	2,068,291	$	5.08
Exercised	—	$	—
Forfeited/Cancelled	—	$	—
Outstanding – September 30, 2023	2,068,291	$	5.08
Exercisable – September 30, 2023	2,068,291	$	5.08


	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
$5.00 - $6.41	2,068,291	4.64	$	5.08	2,068,291	$	5.08

During the nine months ended September 30, 2023, the Company issued 2,068,291 warrants in connection with the Offering. The warrants have an exercise price between $5.00 and $6.41 per warrant, a term of five years, and vested immediately. The fair value of these warrants was $1.8 million before the net proceed allocations.

The intrinsic value for outstanding and exercisable warrants as of September 30, 2023 was $0.

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


	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 – September 30, 2023	12,000	$	24.97
Exercisable – September 30, 2023	12,000	$	24.97


		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	2.69	$	24.97	12,000	$	24.97

During the nine months ended September 30, 2023 and September 30, 2022, the Company did not issue any preferred warrants.

The intrinsic value for outstanding and exercisable preferred warrants as of September 30, 2023 was $0. The intrinsic value for outstanding and exercisable preferred warrants as of September 30, 2022 was $0.

The following is a summary of the Pre-Funded Warrant activity:


	Pre-Funded Warrants	Weighted Average Exercise Price
Outstanding – January 1, 2023	—	$	—
Exercisable – January 1, 2023	—	$	—
Granted	1,790,718	$	0.0001
Exercised	(1,433,609)	$	0.0001
Forfeited/Cancelled	—	$	—
Outstanding – September 30, 2023	357,109	$	0.0001
Exercisable – September 30, 2023	357,109	$	0.0001

During the nine months ended September 30, 2023, the Company issued Pre-Funded Warrants to purchase 1,790,718 shares of common stock in connection with the Offering. The Pre-Funded Warrants have an exercise price of $0.0001 per Pre-Funded Warrant, and are exercisable at any time after their original issuance at the option of the holder, subject to certain restrictions. The fair value of these Pre-Funded Warrants was $7.6 million before the net proceed allocations.

During the nine months ended September 30, 2023, Pre-Funded Warrants were exercised for 1,433,609 shares of common stock.

The carrying value of the outstanding Pre-Funded Warrants was $1.3 million as of September 30, 2023.

(D) Restricted Stock Plan

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


	Restricted Stock	Weighted Average Fair Value
Non Vested Balance - January 1, 2023	12,000	$	38.48
Granted	—	$	—
Vested	3,834	$	38.78
Forfeited/Cancelled	(6,999)	$	38.70
Non Vested Balance - September 30, 2023	1,167	$	36.20

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 Compensation Committee at one time and from time to time, to vest over one to three years, unless otherwise determined by the Compensation Committee.

The Company recognized $0.01 million and $0.05 million of share-based compensation during the three months ended September 30, 2023 and 2022, respectively. The Company recognized $0.1 million and $0.4 million of share-based compensation during the nine months ended September 30, 2023 and 2022, respectively.

On September 30, 2023, there was $0.04 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”), or decision making group, to evaluate performance and make operating decisions.

The Company identified its CODM group as its two executive officers, the interim Chief Executive Officer and Chief Accounting 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 five material reportable segments which aggregate 100% of sales for the nine months ended September 30, 2023:

1) Homes;

2) Developed Lots;

3) Entitled Land;

4) Multi-family; and

5) Fee Build.

The reporting segments follow the same accounting policies used in the preparation of the Company’s condensed consolidated financial statements. The following represents sales, cost of sales, and gross profit (loss) information for the Company’s reportable segments for the three and nine months ended September 30, 2023 and 2022:


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

Cost of goods sold by segment
Homes	$	2,697,200	$	3,805,000	$	11,181,400	$	21,461,100
Developed Lots	5,829,100		87,300		13,068,700		8,144,300
Entitled land	250,900		3,347,900		588,400		4,060,800
Multi-family	4,948,000		25,100		21,722,500		27,300
Fee Build	54,800		3,791,200		1,024,100		11,010,600
Other	6,500		254,300		191,000		1,351,300
Total Cost of Sales	$	13,786,500	$	11,310,800	$	47,776,100	$	46,055,400

Gross profit (loss) by segment
Homes	$	(2,579,300)	$	888,900	$	(2,364,800)	$	4,297,000
Developed Lots	(1,598,100)		(87,300)		(4,497,400)		935,700
Entitled land	(250,900)		52,100		(588,400)		3,819,200
Multi-family	(3,869,300)		2,100		(5,187,300)		(100)
Fee Build	53,900		(167,700)		(385,300)		(3,185,300)
Other	(6,500)		(250,400)		(191,000)		(1,305,900)
Total Gross Profit (Loss)	$	(8,250,200)	$	437,700	$	(13,214,200)	$	4,560,600

The following represents total assets for the Company’s reportable segments at September 30, 2023 and December 31, 2022:


	September 30, 2023		December 31, 2022
Homes	$	24,486,400	$	29,880,500
Developed lots	39,890,200		43,469,900
Entitled land	7,814,300		9,499,600
Multi-family	140,851,300		131,485,900
Fee Build	63,700		1,703,200
Unallocated (Shared)	10,875,100		20,127,300
Total Assets	$	223,981,000	$	236,166,400

17. UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows at September 30, 2023 and December 31, 2022:


	September 30, 2023		December 31, 2022
Costs incurred on uncompleted contracts	$	20,552,300	$	19,429,800
Estimated loss	(3,968,300)		(3,495,100)
Costs and estimated earnings on uncompleted contracts	16,584,000		15,934,700
Billings to date	16,842,700		16,273,000
Costs and estimated earnings in excess of billings on uncompleted contracts	—		—
Billings in excess of costs and estimated earnings on uncompleted contracts	(258,700)		(338,300)
Provision for loss on contract	(60,500)		(159,100)
Contract Liabilities	$	(319,200)	$	(497,400)

The contract liabilities were $0.3 million and $0.5 million as of September 30, 2023 and December 31, 2022, respectively. The uncollected billings were $0.1 million and $1.7 million as of September 30, 2023 and December 31, 2022, respectively.

18. SUBSEQUENT EVENTS

On October 20, 2023, the Company cancelled three purchase and sale agreements for the purchase of 5.15, 5.24, and 6.38 acres of land located in Arlington, Washington for a purchase price of $12 per usable land square foot but not less than a total of $1.8 million, $1.9 million, and $1.9 million, respectively.

Effective November 14, 2023, the Company’s Board of Directors appointed Shelly Crocker to serve as the Company’s Chief Restructuring Officer (“CRO”). The Company and Ms. Crocker entered into an employment agreement on November 14, 2023 that entitles her to compensation of $50,000 per month for full-time services and $500 per hour if services are reduced to part-time and the same benefits provided to other executives in the Company. Ms. Crocker’s employment is at-will and may be terminated at any time, with or without cause.

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 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 recurring losses and negative cash flow from operations, as well as current cash and liquidity projections, raise substantial doubt about our ability to continue as a going concern;

•our business would be adversely affected if we are unable to service our debt obligations;

•our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and expose us to interest rate risk on our variable rate debt;

•we will need to raise additional capital and/or restructure/refinance our existing debt to continue to fund our existing operations and service our debt obligations;

•the Amendment for the restructuring of the Loan Agreement restricts our current and future operations, particularly our ability to respond to changes or to take certain actions;

•servicing our existing debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt or related interest,

•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; 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, 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.

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, home and apartment building construction, marketing, and sales of various residential projects in Western Washington's Puget Sound region; Sacramento, California; Austin, Texas; and Punta Gorda, Florida.

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

Our portfolio of land, lots, home plans, and finishing options, coupled with 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 build and sell townhomes and apartments and have completed or substantially completed construction of several multi-family sites in Washington that are rented until sold.

In an effort to strategically 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 in April 2022. This office space is designed with a hybrid workforce in mind.

It is customary for us to sign purchase and sale agreements that contain a due diligence period which allows us time, usually between 60 and 120 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.

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

As of November 9, 2023, we own or control 17 communities in Washington, Texas, California, and Florida, containing approximately 1,384 lots or units in various stages of development.

Results of Operations

Three Months Ended September 30, 2023 as Compared to the Three Months Ended September 30, 2022

The following table sets forth the summary statements of operations for the three months ended September 30, 2023 and 2022.


	2023		2022

Sales	$	5,536,300	$	11,748,500
Cost of sales	(13,786,500)		(11,310,800)
Gross profit (loss)	(8,250,200)		437,700
Operating expenses	(2,387,100)		(4,523,800)
Other expense	(395,600)		(396,500)
Income tax benefit (expense)	(7,241,700)		1,067,800
Net loss	$	(18,274,600)	$	(3,414,800)

Sales

Our sales decreased by 52.9% to $5.5 million for the three months ended September 30, 2023 as compared to $11.7 million for the three months ended September 30, 2022. This decrease was primarily due to decreases in home sales of $4.6 million, entitled land sales of $3.4 million, and fee build revenue of $3.5 million, which were partially offset by an increase in developed lot sales of $4.2 million and $1.1 million of rental revenue earned from multi-family projects. The decreases in home and entitled land sales were mainly due to the non-recurrence of prior year home sales in Texas and a large entitled land sale in Washington in the three months ended September 30, 2023. The fee build revenue continued to decrease as the fee build projects are nearing completion. The increase in developed lots sales was primarily due to lots sold in California in the three months ended September 30, 2023 as we continue to reduce our exposure to the California market.

Gross Profit (Loss)

Our overall gross profit (loss) for the quarter decreased by 1,984.9% to $(8.3) million for the three months ended September 30, 2023 as compared to $0.4 million for the three months ended September 30, 2022. Gross margin (loss) was (149.0)% for the three months ended September 30, 2023 compared to 3.7% for the three months ended September 30, 2022. The $8.7 million decrease in gross profit was primarily due to $6.5 million of additional impairment losses recorded on the Texas, Darkhorse, and Wyndstone properties, decrease in home profit excluding impairment charge of $(1.0) million or (136.6)% gross margin decrease, and decrease in multi-family profit excluding impairment charges of $(1.3) million or (130.2)% gross margin decrease as compared to the three months ended September 30, 2022. Home sales in the three months ended September 30, 2022 provided $0.9 million gross profit and a gross margin of 18.9% that did not recur in the three months ended September 30, 2023. The decrease in multi-family profit was mainly due to interest expense incurred to finance the multi-family rental properties. For context, the multi-family rental profit excluding interest expense was $0.4 million or 34.8% gross margin for the three months ended September 30, 2023.

Operating Expenses

Our operating expenses decreased by 47.2% to $2.4 million for the three months ended September 30, 2023, as compared to $4.5 million for the three months ended September 30, 2022. The $2.1 million decrease in operating expenses was primarily due to our reduction in general and administrative costs. The majority of the savings came from reductions of compensation costs, depreciation, insurance expense, right of use expense, and professional fees. The non-recurrence of prior year bad debt expense related to notes and interest receivable from the sale of Winding Lanes developed lots from the three months ended September 30, 2022 also contributed to the overall decrease. These decreases were partially offset by an increase in pre-acquisition due diligence costs associated with the cancellations of the Grandis Pond project in the three months ended September 30, 2023 and Westry Village in the three months ended September 30, 2022. Operating expenses as a percentage of sales for the three months ended September 30, 2023 were 43.1% compared to 38.5% for the three months ended September 30, 2022. The increase in operating expenses as a percentage of sales was primarily due to lower sales in the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, partially offset by a decrease in operating expenses for the comparable periods.

Other Income (Expense)

Other income (expense) was $(0.4) million for the three months ended September 30, 2023 as compared to $(0.4) million for the three months ended September 30, 2022, remaining consistent in each of the periods.

Income Tax Expense (Benefit)

Income tax expense for the three months ended September 30, 2023 was $7.2 million compared to tax benefit of $(1.1) million for the three months ended September 30, 2022. The increase in income tax expense was primarily due to a full valuation allowance recorded on our federal and state deferred tax assets in the three months ended September 30, 2023.

Net Income (Loss)

Our net loss increased by 435.2% to $(18.3) million for the three months ended September 30, 2023 as compared to $(3.4) million for the three months ended September 30, 2022. The increase in net loss is due to a decrease in sales, increase in cost of sales, and increase in income tax expense, partially offset by a decrease in operating expenses in the three months ended September 30, 2023, as explained above.

Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022

The following table sets forth the summary statements of operations for the nine months ended September 30, 2023 and 2022.


	2023		2022

Sales	$	34,561,900	$	50,616,000
Cost of sales	(47,776,100)		(46,055,400)
Gross profit (loss)	(13,214,200)		4,560,600
Operating expenses	(7,701,000)		(12,017,200)
Other expense	(2,007,800)		(759,800)
Income tax benefit (expense)	(4,589,400)		1,937,800
Net loss	$	(27,512,400)	$	(6,278,600)

Sales

Our sales decreased by 31.7% to $34.6 million for the nine months ended September 30, 2023 as compared to $50.6 million for the nine months ended September 30, 2022. This decrease was primarily due to decreases in sales of homes of $16.9 million, entitled land of $7.9 million, and fee build of $7.2 million, partially offset by an increase in multi-family revenue of $16.5 million. The decreases in sales of homes and entitled land were mainly due to large prior year sales in Texas and Washington that did not recur in the nine months ended September 30, 2023. The fee build revenue continued to decrease as the fee build projects are nearing completion. The increases in multi-family revenue were due to the sale of Mills Crossing townhomes for $14.3 million and $2.3 million of rental revenue from four multi-family rental properties.

Gross Profit (Loss)

Our overall gross profit (loss) for the nine months ended September 30, 2023 decreased by 389.7% to $(13.2) million as compared to $4.6 million for the nine months ended September 30, 2022. Gross margin (loss) was (38.2)% for the nine months ended September 30, 2023 compared to 9.0% for the nine months ended September 30, 2022. The $(17.8) million decrease in gross profit was primarily due to decreases in home gross profit of $(6.7) million, developed lots gross profit of $(5.4) million, entitled land gross profit of $(4.4) million, and gross profit from multi-family of $(5.2) million, partially offset by a decrease in fee build gross loss of $2.8 million. The (47.2)% decrease in gross margin was primarily driven by non-recurrence of high margin land and home sales and a $12.8 million impairment loss related to the Texas, Darkhorse, Pacific Ridge, and Wyndstone properties. These gross margin declines were partially offset by gross loss due to cost overruns with fee build projects in 2022 that did not recur in 2023, and $1.5 million gross profit from the sale of Mills Crossing townhomes in the nine months ended September 30, 2023.

Operating Expenses

Our operating expenses decreased by 35.9% to $7.7 million for the nine months ended September 30, 2023, as compared to $12.0 million for the nine months ended September 30, 2022. The $4.3 million decrease in operating expenses was primarily attributable to our focused reduction in general and administrative costs. Compensation costs, bad debt expense, depreciation, insurance expense, professional fees and right of use expense were the largest contributors to the cost savings of $(1.1) million, $(0.9) million, $(0.8) million, $(0.7) million, $(0.5) million and $(0.3) million, respectively. These

decreases were partially offset by an increase in cancelled project costs of $0.3 million related to the Grandis Pond cancellation in 2023 as compared to the Westry Village cancellation in 2022. Operating expenses as a percentage of sales for the nine months ended September 30, 2023 were 22.3% compared to 23.7% for the nine months ended September 30, 2022. The decrease in operating expenses as a percentage of sales was primarily due to the decrease in operating expenses as described above, partially offset by lower sales for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Other Income (Expense)

Other income (expense) was $(2.0) million for the nine months ended September 30, 2023 as compared to $(0.8) million for the nine months ended September 30, 2022. This change is primarily due to $2.1 million of interest expense incurred on the revolving line of credit for the nine months ended September 30, 2023, compared to $0.9 million of interest expense incurred on the revolving line of credit for nine months ended September 30, 2022.

Income Tax Expense (Benefit)

Income tax expense for the nine months ended September 30, 2023 was $4.6 million compared to tax benefit of $(1.9) million for the nine months ended September 30, 2022. The increase in income tax expense was primarily due to the establishment of a full deferred tax asset valuation allowance in the nine months ended September 30, 2023 as noted above.

Net Income (Loss)

Our net loss increased by 338.2% to $(27.5) million for the nine months ended September 30, 2023 as compared to $(6.3) million for the nine months ended September 30, 2022. The increase in net loss was primarily attributable to decreases in revenue and gross profit and increase in income tax expense, partially offset by a decrease in operating expenses in the nine months ended September 30, 2023, as explained above.

Liquidity and Capital Resources

Overview

Our principal uses of capital were operating expenses, 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 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, 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 as a whole, to generate cash flow to cover the expected debt 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 property 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.

As a result of continuing anticipated operating cash outflows, we believe that substantial doubt exists regarding our ability to continue as a going concern without additional funding or debt restructuring/refinancing. (See “—Cash Resources” and “Item 1A. Risk Factors—Risks related to our financial condition and capital requirements.”)

Real Estate Assets

Our real estate assets increased to $208.9 million as of September 30, 2023 from $205.5 million as of December 31, 2022. This increase was primarily due to an increase in development and construction activities for houses and apartments.

BankUnited Loan Restructuring

We restructured our Loan (defined below) with BankUnited, N.A. (“BankUnited”) after failing to meet two financial covenants of the Loan Agreement (defined below), namely the minimum interest coverage ratio and consolidated liquidity covenants. 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”), the principal balance being $14.9 million as of September 30, 2023 (the “Loan”).

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. We have met all of the agreed upon conditions and payments.

Liabilities

Liabilities increased to $172.5 million as of September 30, 2023 from $160.6 million as of December 31, 2022. This increase is primarily attributable to an increase in our construction loans of $25.5 million to fund the development of land and construction of houses and apartments and an increase in our dividends payable of $5.1 million. This increase was partially offset by a decrease in our revolving line of credit loan of $9.5 million, a decrease in accounts payable and accrued expenses of $6.6 million, and a decrease in our equipment loans of $2.1 million.

Unrestricted Cash Balance

As of September 30, 2023, our unrestricted cash balance was $8.1 million compared to $9.7 million as of December 31, 2022.

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2023 was $20.8 million as compared to $67.6 million for the nine months ended September 30, 2022. The decrease in cash used is primarily attributable to a decrease in real estate assets of $42.3 million, an impairment loss on real estate of $12.8 million, an increase in notes receivable of $12.0 million, an increase in accounts receivable of $5.9 million, an increase in deferred tax asset change of $6.6 million, and an increase in prepaid expenses and other assets of $3.5 million. This was partially offset by an increase in net loss of $21.2 million, a decrease in accounts payable and accrued expense of $9.2 million, and a decrease in contract assets of $2.2 million.

Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2023 was $0.2 million as compared to net cash used of $1.6 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, $1.8 million was used for furniture, fixtures, and leasehold improvements for the new corporate office and purchase of equipment, which did not recur in the nine months ended September 30, 2023. For the nine months ended September 30, 2023, there was $0.2 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 nine months ended September 30, 2023 was $18.9 million as compared to net cash provided of $57.3 million for the nine months ended September 30, 2022. This decrease was primarily caused by a decrease in cash provided by the revolving line of credit of $24.8 million, an increase in payments on the revolving line of credit of $10.1 million, a decrease in cash provided by construction loans net of payments of $16.0 million, and a decrease in related party construction loans, net of payments of $3.5 million. This decrease was partially offset by an increase in cash provided from the public offering of $8.9 million, a decrease in cash used for preferred dividends of $5.3 million, and a decrease in financing fees on the revolving line of credit of $1.1 million.

Cash Resources

We expect that our cash resources may not be sufficient to meet our financial obligations as they become due within one year after the date that the financial statements are issued unless we sell assets at profitable levels, obtain additional financing, and/or restructure/refinance or existing debt obligations. There can be no assurance that we can sell our real estate assets at profitable levels in the current market, obtain financing in amounts or terms acceptable to us, if at all, or restructure/refinance our existing debt obligation. If we are unable to sell our real estate assets at profitable levels, obtain financing, and/or restructure/refinance our existing debt, we may have to liquidate assets at unfavorable prices or not be able to continue operations and possibly seek bankruptcy protections. (See Note 1. Nature of Operations and Summary of Significant Accounting Policies—Going Concern Uncertainty and “Item 1A. Risk Factors—Risks related to our financial condition and capital requirements.”)

Appointment of Chief Restructuring Officer

Effective November 14, 2023, our Board of Directors appointed Shelly Crocker, age 61, to serve as our Chief Restructuring Officer (“CRO”).

For the past ten years, Ms. Crocker operated Shelly Crocker LLC as a Seattle business consultant for both profit and nonprofit businesses. She regularly conducts strategic planning processes and provides interim leadership to organizations in transition or seeking strategic direction. She frequently serves as a restructuring professional, helping manage at-risk companies and building on her prior career as a restructuring attorney. She holds a Bachelor of Arts in Philosophy and History and a Master of Arts in Philosophy from the University of Washington and a Juris Doctorate from the University of Minnesota. Ms. Crocker is licensed to practice law in the state of Washington.

There are no arrangements or understandings between Ms. Crocker and any other person pursuant to which Ms. Crocker was selected as CRO. There are no family relationships between Ms. Crocker and any of our directors or executive officers. Ms. Crocker has no direct or indirect material interest in any existing or currently proposed transaction that would require disclosure under Item 404(a) of Regulation S-K.

In connection with her appointment as CRO, Ms. Crocker executed an employment agreement (the “Employment Agreement”) dated November 14, 2023, which provides, among other things, compensation at the rate of $50,000 per month for full-time services and $500 per hour if and when services are reduced to part-time. Ms. Crocker’s employment is at-will and may be terminated at any time, with or without cause. Ms. Crocker is entitled to the same benefits provided to our other executive officers and is subject to standard non-competition and non-solicitation provisions.

The foregoing summary does not purport to be complete and is qualified in its entirety to the full text of the Employment Agreement which is filed herewith as Exhibit 10.1 and is incorporated herein by reference.

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 interest rates which can significantly affect the affordability of mortgage financing to 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” 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 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 $1.235 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 and our construction loans relating to the Meadowscape and Bridge View apartments. The interest rate for our variable rate indebtedness as of September 30, 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 Bridge View construction loan. At September 30, 2023, the daily SOFR was 5.31% and one month SOFR was 5.32%. The variable prime rate was 8.50%. A hypothetical 100 basis point increase in the interest rate on our variable rate indebtedness would increase our annual interest cost by approximately $0.1 million for the line of credit and $0.4 million for the two construction loans, respectively. Based on this, we do not believe that the future interest rate risks related to our existing indebtedness will have a material adverse impact on our financial position, results of operations, or liquidity.

At September 30, 2023, we had outstanding fixed-rate borrowings net of debt discount and financing fees of approximately $106.0 million and outstanding variable-rate borrowings net of debt discount and financing fees of approximately $50.3 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision of our interim Chief Executive Officer and interim President and Chief Accounting 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 interim Chief Executive Officer and interim President and Chief Accounting Officer concluded that our disclosure controls and procedures are operating 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 material changes to the risk factors we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as disclosed below.

Risks related to our financial condition and capital requirements

Our recurring losses and negative cash flow from operations, as well as current cash and liquidity projections, raise substantial doubt about our ability to continue as a going concern.

As disclosed in Note 1 of our unaudited financial statements, we believe that our current level of cash, cash equivalents and marketable securities, together with committed financing facilities, are not sufficient to fund ongoing operations for at least the twelve-month period after the financial statements are issued without additional funding or financing. The existence of these conditions raises substantial doubt about our ability to continue as a “going concern” for at least the twelve month period following the date the financial statements were issued.

Our financial statements for the quarter ended September 30, 2023 are prepared assuming that we will continue as a going concern. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize sale of our real estate assets, obtain additional financing and/or restructure/refinancing our existing debt obligations, and discharge our liabilities and commitments in the normal course of business and 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 our inability to continue as a going concern. These assumptions are subject to the risks described herein. Our current cash positions and recurring operating losses have raised substantial doubt about our ability to continue as a going concern for at least the twelve month period following the date the financial statements were issued. As of September 30, 2023, we had cash and cash equivalents of $8.6 million. Further, we have incurred, and expect to continue to incur, negative cash flows in pursuit of our business plans for at least the twelve-month period following the date the financial statements are issued. Without giving effect to the prospect of raising additional capital, restructuring or refinancing our existing debt, selling our real estate assets at profitable levels, increasing revenue in the near future, or executing other mitigating plans, many of which are beyond our control, it is unlikely that we will be able to generate sufficient cash flows to meet our required financial obligations, including our debt service and other obligations due to third parties. Management’s plans to address this uncertainty are discussed under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our ability to continue as a going concern is dependent upon our success in obtaining additional equity or debt financing, restructuring or refinancing existing debt, selling our real estate assets as profitable levels, continuing to reduce expenditures and ultimately, generating significant revenue growth. Our plans to raise additional capital and/or restructure/refinance our existing debt, including our ability to consummate any equity or debt financing, sell our real estate assets at profitable levels, or take other actions to address any doubt regarding our ability to continue as a going concern, may not be successful. There can be no assurance that we would be able to obtain additional liquidity when needed or under acceptable terms, if at all. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing for the continuation of our operations and could result in the loss of confidence by investors, customers and employees, and cause a decrease in our stock price.

There can be no assurance that our current operating plan will be achieved, that we will be able to restructure or refinance our existing debt or that additional funding will be available on terms acceptable to us, or at all. If we are unable to raise additional capital at levels sufficient to fund our operations or on terms acceptable to us, we will need to consider other various strategic alternatives, including a merger, reverse merger, sale, wind-down, bankruptcy, liquidation, dissolution or other strategic transaction, and/or be unable to continue operations. Further, if we are unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

Our business would be adversely affected if we are unable to service our debt obligations.

We have incurred substantial indebtedness. Our ability to pay interest and principal when due and comply with debt covenants depends upon, among other things, asset sales and cash flow levels and other factors that affect our future financial and operating performance, including prevailing economic conditions and financial and business factors, many of which are beyond our control. Given the current economic environment, and ongoing challenges to our business, we may be unable to service our debt obligations, or comply with the other terms of the Amendment which would among other things, result in an event of default under the Amendment and cross-defaults of our other debt instruments.

As discussed above, if we become unable in the future to generate sufficient cash flow to meet our debt service requirements, we may be forced to take remedial actions such as restructuring or refinancing our debt; seeking additional debt or equity capital; reducing or delaying our business activities and strategic initiatives, selling assets, or other strategic transactions and/or measures. There can be no assurance that any such measures would be successful, and we may be unable to continue operations and may need to consider a wind-down, bankruptcy, liquidation, dissolution, or other strategic transaction.

Our ability to obtain any additional financing or any refinancing of our debt, if needed at any time, depends upon many factors, including our existing level of indebtedness and restrictions in the agreements governing our indebtedness, historical business performance, financial projections, the value and sufficiency of collateral, prospects and creditworthiness, external economic conditions and general liquidity in the credit and capital markets. Any additional debt, equity or equity-linked financing may require modification of our existing debt agreements, which there is no assurance would be obtainable. Any additional financing or refinancing could also be extended only at higher costs and require us to satisfy more restrictive covenants, which could further limit or restrict our business and results of operations, or be dilutive to our stockholders.

Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk on our variable rate debt.

We have a significant amount of debt outstanding. As of September 30, 2023, we had $156.3 million of outstanding debt.

Our degree of leverage could have consequences, including:

•increasing our vulnerability to general economic and industry conditions;

•requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, research and development and future business opportunities;

•exposing us to the risk of increased interest rates under our credit facilities to the extent such facilities have variable rates of interest, as well as to refinancing risks as facilities mature;

•limiting our ability to make strategic acquisitions and investments;

•limiting our ability to refinance our indebtedness as it becomes due; and

•limiting our ability to adjust quickly or at all to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

General economic, financial market, competitive, legislative and regulatory factors, among other things, may negatively affect our ability to fund our debt requirements or reduce our debt, which could have a material adverse effect on our business, operating results, cash flows and financial condition.

Despite our level of indebtedness, we may incur additional indebtedness. The incurrence of additional indebtedness could further exacerbate the risks associated with our degree of leverage.

We may incur additional indebtedness in the future. We could enter into higher interest rate loans in order to pay off existing debt obligations as they become due. Such additional indebtedness could exacerbate our inability to continue as a going concern by increasing, rather than decreasing, our debt servicing obligations.

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	Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
July 1, 2023 - July 31, 2023	7	$	3.02	7	$	—
August 1, 2023 - August 31, 2023	6	2.54		6	—
September 1, 2023 - September 30, 2023	—	—		—	—
Total	13	—		13	—

(1) Represents shares surrendered to us by employees to satisfy tax withholding obligations arising in connection with the vesting of 40 shares of common stock awarded under our 2020 Restricted Stock Plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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 Agreement”). Under the Loan Agreement, 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 Agreement, 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

Appointment of Chief Restructuring Officer

Effective November 14, 2023, our Board of Directors appointed Shelly Crocker, to serve as our Chief Restructuring Officer (“CRO”) as noted in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The employment agreement is filed herewith as Exhibit 10.1 and is incorporated herein by reference.

Indemnification Agreements

Effective as of November 12, 2023, in accordance with the terms of our Second Amended and Restated Bylaws, the Audit Committee and Board of Directors approved an indemnification agreement (the “Indemnification Agreement”) to be entered into with each of our directors and executive officers (each, an “indemnitee”). Pursuant to the terms of the Indemnification Agreement, we agreed to provide each indemnitee contractual indemnification meant to supplement the indemnification obligations within our charter documents and as provided by applicable law. The Indemnification Agreement provides that we will indemnify the indemnitee to the fullest extent permitted by law, as may be amended from time to time, against any and all expenses actually and reasonably incurred by the indemnitee or on the indemnitee’s behalf in connection with any proceeding or claim that the indemnitee is a party or is threatened to be made a party by reason of the indemnitee’s corporate status if the indemnitee acted in good faith and in a manner the indemnitee reasonably believed to be in or not opposed to our best interests and, with respect to any criminal action or proceeding, the indemnitee had no reasonable cause to believe that the indemnitee’s conduct was unlawful. In addition, the Indemnification Agreement provides for the advancement of fees and expenses, including fees and expenses for serving as a witness in any proceeding relating to the indemnitee’s corporate status, subject to certain exceptions. The duration of each Indemnification Agreement shall continue after the indemnitee has ceased to serve as a director or officer and shall be binding upon us and our successors and assigns and inure to the benefit of the indemnitee's heirs, executors, and administrators.

The foregoing description of the Indemnification Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Indemnification Agreement which is filed herewith as Exhibit 10.2 and is incorporated herein by reference.

ITEM 6. EXHIBITS

Exhibit No.

Description

Form

Exhibit

Filing Date

Filed Herewith

10.1

Employment Agreement with Shelly Crocker, dated November 14, 2023

10.1

10.2

Form of Indemnification Agreement, dated November 12, 2023

10.2

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 Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

32.1

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

32.1

101. INS

XBRL Instance Document

101. SCH

XBRL Taxonomy Extension Schema Document

101. CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF

XBRL Taxonomy Extension definition Linkbase Document

101. LAB

XBRL Taxonomy Extension Label Linkbase Document

101. PRE

XBRL Taxonomy Extension Presentation Linkbase Document

104

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

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: November 14, 2023	By	/s/ Jeffrey Habersetzer
		Jeffrey Habersetzer Interim Chief Executive Officer and Interim President (Principal Executive Officer)

Date: November 14, 2023	By	/s/ Yoshi Niino
		Yoshi Niino Chief Accounting Officer (Principal Financial and Accounting Officer)

1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this “Agreement”), dated and effective as of November __, 2023 (the “Effective Date”), is entered into by and between Harbor Custom Development, Inc., a Washington corporation (the “Company”), and Shelly Crocker (the “Executive”). WHEREAS, the Company desires to employ the Executive and to enter into an agreement embodying the terms of such employment; and WHEREAS, the Executive desires to accept employment with the Company, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows: 1. Employment, Duties and Agreements. (a) The Company hereby agrees to employ the Executive as its Chief Restructuring Officer and the Executive hereby accepts such position and agrees to serve the Company in such capacity during the employment period fixed by Section 3 hereof (the “Employment Period”). The Executive shall report to the Company’s Board of Directors (the “Board”). The Executive’s principal place of employment shall be Tacoma, Washington. The Executive shall have such duties and responsibilities as are consistent with the Executive’s position and as may be reasonably assigned by the Board from time to time. During the Employment Period, the Executive shall be subject to, and shall act in accordance with, all reasonable instructions and directions of the Board and all applicable policies and rules of the Company. (b) During the Employment Period, excluding any periods of vacation and sick leave which the Executive is granted, until the parties may otherwise agree in writing as set forth in the next sentence of this Section 1(b), the Executive shall devote Executive’s full working time and efforts to the performance of Executive’s duties and responsibilities hereunder and shall endeavor to promote the business and best interests of the Company. In the event that the Board determines that Executive’s services are no longer required on a full-time basis, then the parties agree that Executive’s employment shall thereafter be provided on an hourly part-time basis. (c) The Company acknowledges that Executive has certain pre-existing engagements, which Executive represents and warrants are not in the same industry as the Company and do not present any conflict with Executive’s duties hereunder (the “Pre-Existing Services”). During the Employment Period, for so long as Executive is a full-time employee, Executive shall not engage in any new business activity (other than for the Company and the Pre-Existing Services) without the prior written approval of the Board, which approval shall not be unreasonably withheld, conditioned or delayed (provided that such business activity does not interfere with the performance of Executive’s responsibilities as an executive officer of the Company). Notwithstanding the foregoing, during the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees consistent with the Company’s conflicts of interests policies and corporate governance guidelines in effect from time to time, (B) deliver lectures or fulfill speaking engagements, or (C) manage Executive’s personal investments, so long as such activities do not interfere with the performance of the Executive’s responsibilities as an executive officer of the Company.

2 2. Compensation. During the Employment Period: (a) Base Salary. As compensation for the agreements made by the Executive herein and the performance by the Executive of Executive’s obligations hereunder, during the Employment Period, for so long as Executive is a full-time employee, the Company shall pay Executive, pursuant to the Company’s normal and customary payroll procedures, a base salary at the rate of $50,000 per month (the “Base Salary”); provided that the Base Salary shall be pro rated for any period during the Employment Period that is not a full calendar month. In addition, in the event that the Board determines that the Company only requires Executive’s services on a part-time basis as set forth in Section 1(b) above, then the Company and Executive agree that Executive’s Base Salary shall thereafter be paid on an hourly basis at the rate of $500 per hour. (b) Benefit Plans. In addition, (i) the Executive shall be eligible to participate in all other practices, policies and programs, and all savings and retirement plans, policies and programs, in each case that are applicable generally to senior executives of the Company; (ii) the Executive and the Executive’s eligible family members shall be eligible for participation in the welfare benefit plans, practices, policies and programs (including, if applicable, medical, dental, vision, disability, employee life, group life and accidental death insurance plans and programs) maintained by the Company for its senior executives; and (iii) the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive in accordance with subsection (e) below and the policies, practices, and procedures of the Company provided to senior executives of the Company. (c) PTO. The Executive shall be entitled to twenty (20) paid personal time off (PTO) days per year (pro rated for any partial year), and to such paid holidays as are observed by the Company from time to time, all in accordance with the Company’s policies and practices that are applicable to the Company’s senior executives. Unused PTO will be carried over from year to year as provided in the Company’s plans and polices in effect from time to time. (d) Insurance; Indemnification. The Company shall maintain (i) a directors’ and officers’ liability insurance policy, or an equivalent errors and omissions liability insurance policy and (ii) an employment practices liability insurance policy. Each such policy shall cover the Executive with scope, exclusions, amounts and deductibles no less favorable to the insured than those applicable to the Company’s senior executive officers and directors on the Effective Date, or any more favorable as may be available to any other director or senior executive officer of the Company during the term of Executive’s employment. In addition, Executive shall be entitled to enter into the Company’s standard form of indemnification agreement that is applicable to other similarly situated officers. (e) Business Expenses. The Company shall reimburse the Executive for all reasonable business expenses (including related travel expenses) upon the presentation of statements of such expenses in accordance with the Company’s policies and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. 3. Employment Period. The Employment Period shall commence on the Effective Date and shall continue until terminated by either party as set forth herein. Executive’s employment will be at-will, meaning that Executive or the Company may terminate the employment relationship at any time, with or without cause, and with or without notice. Any contrary representations that may have been made to Executive are superseded by this Agreement. This is the full and complete agreement between Executive and the Company on this term. Although Executive’s duties, title, compensation, and benefits, as well as the Company’s personnel policies and procedures, may change from time to time, the “at will” nature of Executive’s employment may only be changed in an express agreement signed by Executive and an authorized representative of the Company.

3 4. Protective Covenants. (a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 4 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to impair or infringe upon Executive’s right to work, earn a living, or acquire and possess property from the fruits of Executive’s labor. Executive hereby acknowledges that Executive has received good and valuable consideration for the post-employment restrictions set forth in this Section 4 in the form of the compensation and benefits provided for herein. Executive hereby further acknowledges that the post-employment restrictions set forth in this Section 4 are reasonable and that they do not, and will not, unduly impair Executive’s ability to earn a living after the termination of this Agreement. In addition, the parties acknowledge: (A) that Executive’s services under this Agreement require unique expertise and talent in the provision of Competitive Services and that Executive will have substantial contacts with customers, suppliers, advertisers and vendors of the Company; (B) that pursuant to this Agreement, Executive will be placed in a position of trust and responsibility and Executive will have access to a substantial amount of Confidential Information and Trade Secrets and that the Company is placing Executive in such position and giving Executive access to such information in reliance upon Executive’s agreement to abide by the covenants set forth in this Section 4; (C) that due to Executive’s unique experience and talent, the loss of Executive’s services to the Company under this Agreement cannot reasonably or adequately be compensated solely by damages in an action at law; (D) that Executive is capable of competing with the Company; and (E) that Executive is capable of obtaining gainful, and desirable employment that does not violate the restrictions contained in this Agreement. Therefore, Executive shall be subject to the restrictions set forth in this Section 4. (b) Definitions. The following capitalized terms used in this Agreement shall have the meanings assigned to them below, which definitions shall apply to both the singular and the plural forms of such terms: (i) “Competitive Services” means any business that engages in residential real estate and property development. (ii) “Confidential Information” means any and all data and information relating to the Company, its activities, business, or customers that (A) was disclosed to Executive or of which Executive became aware as a consequence of Executive’s employment with the Company; (B) has value to the Company; and (C) is not generally known outside of the Company. “Confidential Information” shall include, but is not limited to the following types of information regarding, related to, or concerning the Company: trade secrets (as defined by applicable law); financial plans and data; management planning information; business plans; operational methods; market studies; marketing plans or strategies; pricing information; product development techniques or plans; customer lists; customer files, data and financial information; details of customer contracts; current and anticipated customer requirements; identifying and other information pertaining to business referral sources; past, current and planned research and development; computer aided systems, software, strategies and programs; information technology (“IT”) systems, IT system maps, server data, IT system security protocols, or IT user information; business acquisition plans; management organization and related information (including, without limitation, data and other information concerning the compensation and benefits paid to officers, directors, employees and management); personnel and compensation policies; new personnel acquisition plans; and other similar information. “Confidential Information” also includes combinations of information or materials which individually may be generally known outside of the Company, but for which the nature, method, or procedure for combining such information or materials is not generally known outside of the Company. In addition to data and information relating to the Company, “Confidential Information” also includes any and all data and information relating to or concerning a third party that otherwise meets the definition set forth above, that was provided or made available to the Company by such third party, and that the Company has

4 a duty or obligation to keep confidential. This definition shall not limit any definition of “confidential information” or any equivalent term under state or federal law. “Confidential Information” shall not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. (iii) “Person” means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise. (iv) “Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant. (v) “Protected Customer” means any Person to whom the Company has sold its products or services or actively solicited to sell its products or services, and with whom Executive has had contact on behalf of the Company during Executive’s employment with the Company or Executive learned of during Executive’s employment with Company. (vi) “Protective Covenants” means the restrictive covenants contained in Sections 4(c) through (g) hereof. (vii) “Restricted Period” means any time during Executive’s full-time employment with the Company. (viii) “Restricted Territory” means the states of Washington and Texas. (ix) “Termination” means the termination of Executive’s employment with the Company, for any reason, whether with or without cause, upon the initiative of either party. (c) Restriction on Disclosure and Use of Confidential Information. Executive agrees that Executive shall not, directly or indirectly, use any Confidential Information on Executive’s own behalf or on behalf of any Person other than Company, or reveal, divulge, or disclose any Confidential Information to any Person not expressly authorized by the Company to receive such Confidential Information. Executive understands and agrees that this restriction shall continue to apply after the termination of Executive’s employment for any reason, and shall remain in effect for as long as the information or materials in question retain their status as Confidential Information. Executive further agrees that Executive shall fully cooperate with the Company in maintaining the Confidential Information to the extent permitted by law. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or Executive’s obligations under any state or federal statutory or common law regarding trade secrets and unfair trade practices. Anything herein to the contrary notwithstanding, Executive shall not be restricted from: (i) disclosing information that is required to be disclosed by law, court order or other valid and appropriate legal process; provided, however, that in the event such disclosure is required by law, Executive shall provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive; (ii) reporting possible violations of federal, state, or local law or regulation to any governmental agency or entity, or from making other disclosures that are protected under the whistleblower provisions of federal, state, or local law or regulation, and Executive shall not need the prior authorization of the Company to make any such reports or disclosures and shall not be required to notify the Company that Executive has made such reports or disclosures. In addition, and anything herein to the contrary notwithstanding, Executive is hereby given notice that Executive shall not be criminally or civilly liable under any federal or state trade secret law for: (iii) disclosing a trade secret (as defined by 18 U.S.C. § 1839) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, in either event solely for the purpose of

5 reporting or investigating a suspected violation of law; or (iv) disclosing a trade secret (as defined by 18 U.S.C. § 1839) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. (d) Non-Competition. Executive agrees that, during the Restricted Period, Executive will not, without prior written consent of the Company, directly or indirectly (i) carry on or engage in Competitive Services within the Restricted Territory on Executive’s own or on behalf of any Person or any Principal or Representative of any Person, or (ii) own, manage, operate, join, control or participate in the ownership, management, operation or control, of any business, whether in corporate, proprietorship or partnership form or otherwise where such business is engaged in the provision of Competitive Services within the Restricted Territory. (e) Non-Solicitation of Protected Customers. Executive agrees that, during the Restricted Period, Executive shall not, without the prior written consent of the Company, directly or indirectly, on Executive’s own behalf or as a Principal or Representative of any Person, solicit, divert, take away, or attempt to solicit, divert, or take away a Protected Customer for the purpose of engaging in, providing, or selling Competitive Services. (f) Non-Recruitment of Employees and Independent Contractors. Executive agrees that during the Restricted Period, Executive shall not, directly or indirectly, whether on Executive’s own behalf or as a Principal or Representative of any Person, hire, recruit, solicit, or induce or attempt to hire, recruit, solicit or induce any individual who is an employee (temporary or full-time or part-time) independent contractor, or consultant for the Company to leave Executive’s or Executive’s employment or engagement to provide Competitive Services. (g) Return of Materials. Executive agrees that on or prior to the date of Termination, Executive returned any and all property of the Company that was in Executive’s possession or subject to Executive’s control by virtue of Executive’s position as an executive of the Company, including, but not limited to, customer files and information, papers, drawings, notes, manuals, specifications, designs, devices, code, email, documents, diskettes, CDs, tapes, keys, access cards, credit cards, identification cards, equipment, computers, mobile devices, other electronic media, all other files and documents relating to the Company and its business (regardless of form, but specifically including all electronic files and data of the Company), together with all Confidential Information belonging to the Company or that Executive received from or through Executive’s employment with the Company. Executive will not make, distribute, or retain copies of any such information or property. To the extent that Executive has electronic files or information in Executive’s possession or control that belong to the Company or contain Confidential Information (specifically including but not limited to electronic files or information stored on personal computers, mobile devices, electronic media, or in cloud storage), on or prior to the date of Termination, or at any other time the Company requests, Executive shall (i) provide the Company with an electronic copy of all of such files or information (in an electronic format that readily accessible by the Company); (ii) after doing so, delete all such files and information, including all copies and derivatives thereof, from all non-Company- owned computers, mobile devices, electronic media, cloud storage, and other media, devices, and equipment, such that such files and information are permanently deleted and irretrievable; and (iii) provide a written certification to the Company that the required deletions have been completed and specifying the files and information deleted and the media source from which they were deleted. (h) Enforcement of Protective Covenants. (i) Rights and Remedies Upon Breach. The parties specifically acknowledge and agree that the remedy at law for any breach of the Protective Covenants will be inadequate, and that in the event Executive breaches, or threatens to breach, any of the Protective Covenants, the Company shall

6 have the right and remedy, to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Protective Covenants and to have the Protective Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Protective Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company. Such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity. The parties understand and agree that if the parties become involved in legal action regarding the enforcement of the Protective Covenants, the prevailing party in such legal action shall be entitled, in addition to any other remedy, to recover from the other party its reasonable attorney fees and cost incurred in connection with such litigation. The Company’s ability to enforce its rights under the Protective Covenants or applicable law against Executive shall not be impaired in any way by the existence of a claim or cause of action on the part of Executive based on, or arising out of, this Agreement or any other event or transaction. (ii) Severability and Modification of Covenants. Executive acknowledges and agrees that, given the nature of the business of the Company and Executive’s role and responsibilities, each of the Protective Covenants is reasonable and valid in time and scope and in all other respects, because of the scope of the Company’s operations and Executive’s activities on its behalf. Executive further acknowledges that the Protective Covenants are narrowly tailored as to time, geography, and scope of activity to be restrained, and operate to avoid unfair competition and irreparable harm to the Company. Executive acknowledges and agrees that the Protective Covenants set forth herein do not constitute a general restraint that prevent Executive from engaging in a lawful profession, nor do they operate as a general covenant against competition. The parties agree that it is their intention that the Protective Covenants be enforced in accordance with their terms to the maximum extent permitted by law. Each of the Protective Covenants shall be considered and construed as a separate and independent covenant. Should any part or provision of any of the Protective Covenants be held invalid, void, or unenforceable, such invalidity, voidness, or unenforceability shall not render invalid, void, or unenforceable any other part or provision of this Agreement or such Protective Covenant. If any of the provisions of the Protective Covenants should ever be held by a court of competent jurisdiction to exceed the scope permitted by the applicable law, such provision or provisions shall be automatically modified to such lesser scope as such court may deem just and proper for the reasonable protection of the Company’s legitimate business interests and may be enforced by the Company to that extent in the manner described above and all other provisions of this Agreement shall be valid and enforceable. (iii) Extension of Restrictions. If Executive is found to have violated any of the provisions of Section 4, Executive agrees that the Restricted Period set forth therein shall be extended by a period of time equal to the period of such violation by Executive. It is the intent of this paragraph that the running of the applicable Restricted Period shall be tolled during any period of violation of Section 4 so that the Company may obtain the full and reasonable protection for which it contracted and so that Executive may not profit by any breach of such provisions. 5. Miscellaneous. (a) Notices. Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall be deemed to be given when delivered personally or by email or four (4) days after it is mailed by registered or certified mail, postage prepaid, return receipt requested or one (1) day after it is sent by a reputable overnight courier service and, in each case, addressed as follows (or if it is sent through any other method agreed upon by the parties), or to any new address that the company may have, if reasonably known to the Executive:

7 If to the Company: Harbor Custom Development, Inc. 1201 Pacific Ave., Suite 1200 Tacoma, WA 98403 Email: Attention: Chief Executive Officer If to the Executive: Shelly Crocker Email: or to such other address as any party hereto may designate by notice to the others. (b) Intellectual Property. Executive agrees to fully and promptly disclose to the Company, without additional compensation, all ideas, inventions, discoveries, improvements, designs, processes, production methods and technological innovations, whether or not patentable, which, while employed by the Company, are made, conceived or reduced to practice by Executive, alone or with others, during or after usual working hours either on or off Executive’s job, and which are related to the business of or which result from tasks assigned to Executive by the Company (“Intellectual Property”). Executive acknowledges that the Company owns all such Intellectual Property rights as works made for hire to the fullest extent permitted by law and, for the avoidance of doubt, assigns to the Company all such rights in any and all Intellectual Property now known or hereafter developed, during the course of employment. Executive agrees, at any time during or after employment, to sign all papers and do such other acts and things, at the Company’s expense, as the Company deems necessary or desirable and may reasonably require of Executive to protect the Company’s rights to such Intellectual Property, including applying for, obtaining and enforcing patents on such Intellectual Property in any and all countries. (c) Non-Disparagement. To the extent permitted by law, during the period of Executive’s employment with the Company and after cessation thereof for any reason, Executive agrees not to engage in any form of conduct or make any statements or representations that disparage, portray in a negative light, or otherwise impair the reputation, goodwill or commercial interests of the Company, or its officers, directors, attorneys, agents and employees. Nothing in this paragraph is intended to interfere with Executive’s rights under Section 7 of the National Labor Relations Act. (d) Entire Agreement. As of the Effective Date, this Agreement constitutes the final, complete and exclusive agreement between the Executive and the Company with respect to the subject matter hereof, except for any other equity or additional compensation that exists after the date of execution hereunder. (e) Amendments; No Waiver. This Agreement may be amended only by an instrument in writing signed by the parties hereto, and any provision hereof may be waived only by an instrument in writing signed by the party or parties against whom or which enforcement of such waiver is sought. The failure of any party hereto at any time to require the performance by any other party hereto of any provision hereof shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by any party hereto of a breach of any provision hereof be taken or held to be a waiver of any

8 succeeding breach of such provision or a waiver of the provision itself or a waiver of any other provision of this Agreement. (f) Choice of Law; Forum Selection. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of Washington. Executive agrees that the exclusive forum for any action seeking temporary or preliminary injunctive relief shall be the Superior Court of Pierce County, Washington, or the United States District Court for the Western District of Washington. With respect to any such court action, Executive hereby (i) irrevocably submits to the personal jurisdiction of such courts; (ii) consents to service of process; (iii) consents to venue; and (iv) waives any other requirement (whether imposed by statute, rule of court, or otherwise) with respect to personal jurisdiction, service of process, or venue. Executive further agrees that such courts are convenient forums for any dispute that may arise here from and that Executive shall raise as a defense that such courts are not convenient forums. (g) Agreement Negotiated. The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this Agreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor or against either party. (h) Representations. The parties hereto hereby represent that they each have the authority to enter into this Agreement, and the Executive hereby represents to the Company that the execution of, and performance of duties under, this Agreement shall not constitute a breach of or otherwise violate any other agreement to which the Executive is a party. The Executive hereby further represents to the Company that Executive will not utilize or disclose any confidential information obtained by the Executive in connection with any former employment with respect to Executive’s duties and responsibilities hereunder. (i) Consultation with Counsel. The Executive acknowledges that Executive has had a full and complete opportunity to consult with counsel and other advisors of Executive’s own choosing concerning the terms, enforceability and implications of this Agreement, and that the Company has not made any representations or warranties to the Executive concerning the terms, enforceability or implications of this Agreement other than as reflected in this Agreement. The Company shall pay directly or reimburse the Executive for all reasonable attorneys’ fees and costs incurred by the Executive in connection with the negotiation, preparation and execution of this Agreement. (j) Binding Agreement; Assignment. This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, assigns, heirs, executors, administrators and other legal representatives. Neither this Agreement nor any right or obligation hereunder may be assigned by the Executive. (k) Successors and Assigns. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, the “Company” shall mean both the Company as defined above and any such successor that assumes this Agreement, by operation of law or otherwise. (l) Severability. Any provision of this Agreement (or portion thereof) which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this Section 5(l), be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting

9 in any way the remaining provisions hereof in such jurisdiction or rendering any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. (m) Withholding. The Company may withhold from any amounts payable to the Executive hereunder all federal, state, city or other taxes that the Company may reasonably determine are required to be withheld pursuant to any applicable law or regulation (it being understood that the Executive shall be responsible for payment of all taxes in respect of the payments and benefits provided herein). (n) Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. A facsimile or PDF of a signature shall be deemed to be and have the effect of an original signature. (o) Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of any provision hereof. [Signature Page Follows]

10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. COMPANY: HARBOR CUSTOM DEVELOPMENT, INC. By: Its: EXECUTIVE: Shelly Crocker

1 HARBOR CUSTOM DEVELOPMENT, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement (this “Agreement”) is made as of __________ __, 2023, and is between Harbor Custom Development, Inc., a Washington corporation (the “Company”), and ____________________ (“Indemnitee”). RECITALS WHEREAS, Indemnitee’s service to the Company substantially benefits the Company; WHEREAS, competent and experienced individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service; WHEREAS, Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer without additional protection; WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law; and WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s organizational documents, and any resolutions adopted pursuant thereto, and applicable law, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed to limit, diminish or abrogate any rights of Indemnitee thereunder. NOW, THEREFORE, the Company and Indemnitee do hereby agree as follows: 1. Definitions. (a) “Beneficial Owner” and “Beneficial Ownership” shall have the meanings set forth in Rule 13d- 3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as in effect on the date hereof. (b) “Change in Control” shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events: (i) Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors, unless (1) the change in the relative Beneficial Ownership of the Company’s securities by any Person results solely from a reduction in the aggregate number of outstanding shares of securities entitled to vote generally in the election of directors, or (2) such acquisition was approved in advance by the Continuing Directors (as defined below) and such acquisition would not constitute a Change in Control under part (iii) of this definition;

2 (ii) Change in Board of Directors. Individuals who, as of the date hereof, constitute the Board, and any new director whose election by the Board or nomination for election by the Company’s shareholders was approved by a vote of at least two thirds of the directors then still in office who were directors on the date hereof or whose election for nomination for election was previously so approved (collectively, the “Continuing Directors”), cease for any reason to constitute at least a majority of the members of the Board; (iii) Corporate Transactions. The effective date of a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, involving the Company and one or more businesses (a “Business Combination”), in each case, unless, following such Business Combination: (1) all or substantially all of the individuals and entities who were the Beneficial Owners of securities entitled to vote generally in the election of directors immediately prior to such Business Combination beneficially own, directly or indirectly, more than 51% of the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more Subsidiaries (as defined below)) in substantially the same proportions as their ownership immediately prior to such Business Combination, of the securities entitled to vote generally in the election of directors; (2) no Person (excluding any corporation resulting from such Business Combination) is the Beneficial Owner, directly or indirectly, of fifteen percent (15%) or more of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the surviving corporation except to the extent that such ownership existed prior to the Business Combination; and (3) at least a majority of the Board of Directors of the corporation resulting from such Business Combination were Continuing Directors at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; (iv) Liquidation. The approval by the shareholders of the Company of a complete liquidation of the Company or an agreement or series of agreements for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than factoring the Company’s current receivables or escrows due (or, if such shareholder approval is not required, the decision by the Board to proceed with such a liquidation, sale, or disposition in one transaction or a series of related transactions); or (v) Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or any successor rule) (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement. (c) “Corporate Status” describes the status of a person who is or was a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise. (d) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (e) “Enterprise” means the Company and any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary.

3 (f) “Expenses” all direct and indirect costs, fees and expenses of any type or nature whatsoever, including, without limitation, all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees and costs of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding, including reasonable compensation for time spent by Indemnitee for which he or she is not otherwise compensated by the Company or any third party. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond or other appeal bond or their equivalent, and (ii) for purposes of Section 12(c), Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee. (g) “Independent Counsel” shall mean a law firm or a member of a law firm with significant experience in matters of corporate law and that neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements); or (ii) any other party to the Proceeding (as defined below) giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. (h) “Person” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act as in effect on the date hereof; provided, however, that “Person” shall exclude: (i) the Company; (ii) any Subsidiaries (as defined below) of the Company; (iii) any employment benefit plan of the Company or of a Subsidiary (as defined below) of the Company or of any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company; and (iv) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or of a Subsidiary (as defined below) of the Company or of a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (i) “Proceeding” means any actual, threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification or advancement of expenses can be provided under this Agreement. (j) “Subsidiary,” with respect to any Person, shall mean any corporation, limited liability company, partnership, joint venture, trust or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by that Person.

4 (k) “Washington Law” means the body of law enacted by the State of Washington which governs business entities having the same organizational form as the Company. (l) Reference to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement. 2. Indemnity in Third-Party Proceedings. Subject to the terms of this Agreement, including, without limitation, Sections 9 and 10, the Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. 3. Indemnity in Proceedings by or in the Right of the Company. Subject to the terms of this Agreement, including, without limitation, Sections 9 and 10, the Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged by a court of competent jurisdiction to be liable to the Company, unless and only to the extent that a Washington court or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as a Washington court or such other court shall deem proper. 4. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the extent that Indemnitee is a party to or a participant in and is successful (on the merits or otherwise) in defense of any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall, to the fullest extent permitted by applicable law, indemnify, hold harmless and exonerate Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter. If Indemnitee is not wholly successful in such Proceeding, the Company also shall, to the fullest extent permitted by applicable law, indemnify, hold harmless and exonerate Indemnitee against all Expenses reasonably incurred in

5 connection with a claim, issue or matter related to any claim, issue, or matter on which Indemnitee was successful. For purposes of this Section, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. 5. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his or her Corporate Status, a witness or deponent in any Proceeding to which Indemnitee is not a party or threatened to be made a party, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. 6. Additional Indemnification. (a) Notwithstanding any limitation in Sections 2, 3 or 4, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with the Proceeding or any claim, issue or matter therein. No indemnification, hold harmless or exoneration rights shall be available under this Section 6 on account of Indemnitee’s conduct which constitutes a breach of Indemnitee’s duty of loyalty to the Company or its shareholders or is an act or omission not in good faith or which involves intentional misconduct or a knowing violation of the law. (b) For purposes of Section 6(a), the meaning of the phrase “to the fullest extent permitted by applicable law” shall include, but not be limited to: (i) the fullest extent permitted by the provision of Washington Law that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of Washington Law; and (ii) the fullest extent authorized or permitted by any amendments to or replacements of Washington Law adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors. 7. Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Proceeding (or any part of any Proceeding): (a) for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid; (b) for an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act or similar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlement arrangements); (c) for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits

6 arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes- Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements); (d) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part of the Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, (iii) otherwise authorized in Section 12(c) or (iv) otherwise required by applicable law; or (e) if prohibited by applicable law. 8. Advances of Expenses. The Company shall advance, to the extent not prohibited by law, the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made as soon as reasonably practicable, but in any event no later than sixty (60) days, after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free and made without regard to Indemnitee’s ability to repay such advances. Advances shall include any and all reasonable Expenses incurred pursuing a Proceeding to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed. To the fullest extent required by applicable law, such payments of Expenses in advance of the final disposition of the Proceeding shall be made only upon the Company’s receipt of an executed written affirmation of the Indemnitee’s good faith belief that the Indemnitee has met the standard of conduct set forth herein and an undertaking by Indemnitee to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 8 shall not apply to any claim made by Indemnitee for which indemnity is not permitted under this Agreement. 9. Procedure for Notification and Defense of Claim. (a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof. The written notification to the Company shall include a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notify the Company will not relieve the Company from any liability which it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights, except to the extent that such failure or delay materially prejudices the Company. (b) If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all reasonably necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. (c) Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.

7 (d) The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) without the Company’s prior written consent, which shall not be unreasonably withheld. (e) The Company shall have the right to settle any Proceeding (or any part thereof) without the consent of Indemnitee, provided that the Company shall not settle any action, claim or Proceeding (in whole or in part) which would impose any Expense, judgment, liability, fine, penalty or limitation on Indemnitee without Indemnitee’s prior written consent. (f) Following such a written application for indemnification by Indemnitee, Indemnitee’s entitlement to indemnification shall be determined according to Section 10 of this Agreement. 10. Procedure upon Application for Indemnification. (a) To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and as is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding. The Company shall, as soon as reasonably practicable after receipt of such a request for indemnification, advise the board of directors that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to Section 10(a), a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following methods: (A) if not Change in Control has occurred: (1) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (3) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s Board of Directors, a copy of which shall be delivered to Indemnitee or (4) if so directed by the Company’s Board of Directors, by the shareholders of the Company; or (B) if a Change in Control has occurred, by Independent Counsel. The Company promptly will advise Indemnitee in writing with respect to any determination that Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied. If it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law. (c) The Company agrees to pay the reasonable fees and expenses of Independent Counsel and to fully indemnify and hold harmless such Independent Counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

8 11. Presumptions and Effect of Certain Proceedings. (a) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall, to the fullest extent not prohibited by law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 10(a) of this Agreement, and the Company shall, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption in connection with the making by such person, persons or entity of any determination contrary to that presumption. (b) If the person, persons or entity empowered or selected under Section 10 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within thirty (30) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall, to the fullest extent permitted by law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a final judicial determination that any or all such indemnification is expressly prohibited under applicable law; provided, however, that such 30-day period may be extended for a reasonable time, not to exceed an additional fifteen (15) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto. (c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his or her conduct was unlawful. (d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith to the extent Indemnitee relied in good faith on (i) the records or books of account of the Enterprise, including financial statements, (ii) information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, (iii) the advice of legal counsel for the Enterprise or its board of directors or counsel selected by any committee of the board of directors or (iv) information or records given or reports made to the Enterprise by an independent certified public accountant, an appraiser, investment banker or other expert selected with reasonable care by the Enterprise or its board of directors or any committee of the board of directors. The provisions of this Section 11(c) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. (e) Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. 12. Remedies of Indemnitee. (a) Subject to Section 12(d), in the event that (i) a determination is made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 or 12(c) of this Agreement, (iii) no

9 determination of entitlement to indemnification shall have been made pursuant to Section 10 of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Sections 4, 5 and 12(c) of this Agreement, within thirty (30) days after receipt by the Company of a written request therefor, (v) a contribution payment is not made in a timely manner pursuant to Section 13 of this Agreement, (vi) payment to Indemnitee pursuant to any hold harmless or exoneration rights under this Agreement or otherwise is not made in accordance with this Agreement or (vii) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of his or her entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his or her option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication or award in arbitration in accordance with this Agreement. (b) Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or shareholders to have made a determination that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or shareholders that Indemnitee has not met the applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 12, the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (as soon as reasonably practicable, but in any event no later than sixty (60) days, after receipt by the Company of a written request therefor) advance such Expenses to Indemnitee that are incurred by Indemnitee in connection with any action for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action and to the extent not prohibited by law. If Indemnitee commences a judicial proceeding or arbitration pursuant to this Section 12, Indemnitee shall not be required to reimburse the Company for any advances pursuant to Section 8 until a final determination is made with respect to Indemnitee’s entitlement to indemnification (as to which all rights of appeal have been exhausted or lapsed). (d) If a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 12, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement

10 not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. (e) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 12 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. (f) Interest shall be paid by the Company to Indemnitee at the legal rate under Washington law for amounts which the Company indemnifies, holds harmless or exonerates, or advances, or is obliged to indemnify, hold harmless or exonerate or advance for the period commencing with the date on which Indemnitee requests indemnification, to be held harmless, exonerated, contribution, reimbursement or advancement of any Expenses and ending with the date on which such payment is made to Indemnitee by the Company. (g) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding. 13. Contribution; Joint Liability. (a) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for Expenses, judgments, fines or amounts paid or to be paid in settlement, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and transaction(s) giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its other directors, officers, employees and agents) in connection with such event(s) and transaction(s). (b) The Company shall not enter into any settlement of any Proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such Proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee. (c) The Company hereby agrees to fully indemnify, hold harmless and exonerate Indemnitee from any claims for contribution which may be brought by officers, directors or employees of the Company other than Indemnitee who may be jointly liable with Indemnitee. 14. Non-exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Company’s organizational documents, any agreement, a vote of shareholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement shall adversely affect any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in Washington Law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Company’s organizational documents and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right

11 and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy. 15. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment for such amounts under any insurance policy, contract, agreement or otherwise. Notwithstanding any other provision of this Agreement to the contrary (i) Indemnitee shall have no obligation to reduce, offset, allocate, pursue or apportion any indemnification, hold harmless, exoneration, advancement, contribution or insurance coverage among multiple parties possessing such duties to Indemnitee prior to the Company’s satisfaction and performance of all its obligations under this Agreement, and (ii) the Company shall perform fully its obligations under this Agreement without regard to whether Indemnitee holds, may pursue or has pursued any indemnification, advancement, hold harmless, exoneration, contribution or insurance coverage rights against any person or entity other than the Company. 16. Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, trustees, general partners, managing members, officers, employees, agents or fiduciaries of the Company or any other Enterprise, Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position. 17. Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. 18. Services to the Company. Indemnitee agrees to serve as a director and/or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s organizational documents or Washington Law. 19. Duration. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee serves as a director or officer of the Company or as a director, officer, trustee, partner, manager, managing member, fiduciary, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other Enterprise which Indemnitee serves at the request of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible Proceeding (including any rights of appeal thereto and any Proceeding commenced by Indemnitee pursuant to Section 12 of this Agreement) by reason of Indemnitee’s Corporate Status,

12 whether or not Indemnitee is acting in any such capacity at the time any liability or expense is incurred for which indemnification or advancement can be provided under this Agreement. 20. Maintenance of Insurance. The Company shall use commercially reasonable efforts to obtain and maintain in effect during the entire period for which the Company is obligated to indemnify the Indemnitee under this Agreement, one or more policies of insurance with reputable insurance companies to provide the officers/directors of the Company with coverage for losses from wrongful acts and omissions and to ensure the Company’s performance of its indemnification obligations under this Agreement. The Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director or officer under such policy or policies. In all such insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee with the same rights and benefits as are accorded to the most favorably insured of the Company’s directors and officers. 21. Successors. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 22. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby. 23. Enforcement; Injunctive Relief. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company. The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, may be inadequate, impracticable and difficult of proof, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that Indemnitee may, to the fullest extent permitted by law, enforce this Agreement by seeking, among other things, injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to which Indemnitee may be entitled. The Company and Indemnitee further agree that Indemnitee shall, to the fullest extent permitted by law, be entitled to such specific performance and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertaking in connection therewith. The Company acknowledges that in the absence of a waiver, a bond or undertaking may be

13 required of Indemnitee by a court of competent jurisdiction. The Company hereby waives any such requirement of such a bond or undertaking to the fullest extent permitted by law. 24. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Company’s organizational documents and applicable law. 25. Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver. 26. Notices. All notices, requests, demands and other communications under this agreement shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, or (c) mailed by reputable overnight courier and receipted by the party to whom said notice or other communication shall have been directed: (a) If to Indemnitee, at such address as indicated, or such other address as Indemnitee shall provide to the Company. (b) If to the Company to: Harbor Custom Development, Inc. 1201 Pacific Avenue Tacoma, WA 98402 Attention : ___ with a copy to: Cairncross & Hempelmann, P.S. c/o Laura A. Bertin 524 Second Avenue, Suite 500 Seattle, WA 98104 or to any other current address as may have been furnished to Indemnitee by the Company. 27. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Washington, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 12(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (a) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought in King County, State of Washington, and not in any other state or federal court in the United States of America or any court in any other country, (b) consent to submit to the exclusive jurisdiction of King County, State of Washington for purposes of any action or proceeding arising out of or in connection with this Agreement, (c) waive any objection to the laying of venue of any such action or proceeding in King County, State of Washington, and (d) waive, and agree

14 not to plead or to make, any claim that any such action or proceeding brought in King County, State of Washington has been brought in an improper or inconvenient forum. 28. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 29. Captions. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. (Signature page follows)

1 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written. HARBOR CUSTOM DEVELOPMENT, INC. (Signature) (Print name) (Title) INDEMNITEE (Signature) (Print name) (Street address) (City, State and ZIP)

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey Habersetzer, certify that:

1.I have reviewed this report on Form 10-Q of Harbor Custom Development, Inc. (the registrant);

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly during the period in which this report is being prepared;

b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.disclosed in this report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions);

a.All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


Dated: November 14, 2023			/s/ Jeffrey Habersetzer
			Jeffrey Habersetzer
			Interim Chief Executive Officer and Interim President (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Yoshi Niino, certify that:

1.I have reviewed this report on Form 10-Q of Harbor Custom Development, Inc. (the registrant);

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.


Dated: November 14, 2023			/s/ Yoshi Niino
			Yoshi Niino
			Chief Accounting Officer (Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officers of Harbor Custom Development, Inc., a Washington corporation (the “Company”), each hereby certify, to such officer’s knowledge, that:

The quarterly report on Form 10-Q for the quarter ended September 30, 2023 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: November 14, 2023			/s/ Jeffrey Habersetzer
			Jeffrey Habersetzer
			Interim Chief Executive Officer and Interim President (Principal Executive Officer)


Dated: November 14, 2023			/s/ Yoshi Niino
			Yoshi Niino
			Chief Accounting Officer (Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Cover - shares	9 Months Ended
Cover - shares	Sep. 30, 2023	Nov. 09, 2023
Document Information [Line Items]
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2023
Document Transition Report	false
Entity File Number	001-39266
Entity Registrant Name	HARBOR CUSTOM DEVELOPMENT, INC.
Entity Incorporation, State or Country Code	WA
Entity Tax Identification Number	46-4827436
Entity Address, Address Line One	1201 Pacific Avenue, Suite 1200
Entity Address, City or Town	Tacoma
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	98402
City Area Code	253
Local Phone Number	649-0636
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		2,329,322
Entity Central Index Key	0001784567
Document Fiscal Year Focus	2023
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Amendment Flag	false
Common Stock
Document Information [Line Items]
Title of 12(b) Security	Common Stock
Trading Symbol	HCDI
Security Exchange Name	NASDAQ
Series A Cumulative Convertible Preferred Stock
Document Information [Line Items]
Title of 12(b) Security	Series A Cumulative Convertible Preferred Stock
Trading Symbol	HCDIP
Security Exchange Name	NASDAQ
Warrants
Document Information [Line Items]
Title of 12(b) Security	Warrants
Trading Symbol	HCDIW
Security Exchange Name	NASDAQ
Warrants
Document Information [Line Items]
Title of 12(b) Security	Warrants
Trading Symbol	HCDIZ
Security Exchange Name	NASDAQ

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2023	Dec. 31, 2022
ASSETS
Cash	$ 8,051,300	$ 9,665,300
Restricted Cash	597,600	597,600
Accounts Receivable	184,100	1,707,000
Notes Receivable, net	1,060,000	4,525,300
Prepaid Expense and Other Assets	1,755,100	5,318,100
Real Estate	208,860,500	205,478,200
Property and Equipment, net	1,683,900	2,289,500
Right of Use Assets	1,788,500	1,926,100
Deferred Tax Asset, net	0	4,659,300
TOTAL ASSETS	223,981,000	236,166,400
LIABILITIES
Accounts Payable and Accrued Expenses	7,527,900	14,090,700
Dividends Payable	5,711,100	634,700
Contract Liabilities	319,200	497,400
Deferred Revenue	49,200	52,000
Note Payable - Insurance	356,000	378,500
Revolving Line of Credit Loan, net of Unamortized Debt Discount of $0 and $0.6 million, respectively	14,858,100	24,359,700
Equipment Loans	0	2,057,100
Finance Leases	0	154,500
Right of Use Liabilities	2,605,800	2,779,400
TOTAL LIABILITIES	172,528,500	160,610,500
COMMITMENTS AND CONTINGENCIES - SEE NOTE 12
STOCKHOLDERS’ EQUITY
Preferred Stock, no par value per share, 10,000,000 shares authorized and 3,799,799 issued and outstanding at September 30, 2023 and December 31, 2022	62,912,100	62,912,100
Common Stock, no par value per share, 50,000,000 shares authorized and 2,329,322 issued and outstanding at September 30, 2023 and 718,835 issued and outstanding at December 31, 2022	41,689,500	35,704,700
Additional Paid In Capital	4,401,600	1,266,300
Retained Earnings (Accumulated Deficit)	(57,550,700)	(24,327,200)
TOTAL STOCKHOLDERS’ EQUITY	51,452,500	75,555,900
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	223,981,000	236,166,400
Nonrelated Party
LIABILITIES
Construction Loans	141,101,200	107,483,700
Related Party
LIABILITIES
Construction Loans	$ 0	$ 8,122,800

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)	Sep. 30, 2023	Dec. 31, 2022
Revolving line of credit loan, net of debt discount	$ 0	$ 600,000
Preferred stock, shares authorized (in shares)	10,000,000	10,000,000
Preferred stock, shares issued (in shares)	3,799,799	3,799,799
Preferred stock, shares outstanding (in shares)	3,799,799	3,799,799
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares, issued (in shares)	2,329,322	718,835
Common stock outstanding (in shares)	2,329,322	718,835
Nonrelated Party
Debt discount	$ 1,200,000	$ 1,900,000
Related Party
Debt discount	$ 0	$ 100,000

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2023	Sep. 30, 2022	Sep. 30, 2023	Sep. 30, 2022
Income Statement [Abstract]
Sales	$ 5,536,300	$ 11,748,500	$ 34,561,900	$ 50,616,000
Cost of Sales	13,786,500	11,310,800	47,776,100	46,055,400
Gross Profit (Loss)	(8,250,200)	437,700	(13,214,200)	4,560,600
Operating Expenses	2,387,100	4,523,800	7,701,000	12,017,200
Operating Loss	(10,637,300)	(4,086,100)	(20,915,200)	(7,456,600)
Other Income (Expense)
Interest Expense	(420,700)	(565,800)	(2,158,400)	(1,046,800)
Interest Income	25,500	163,900	127,600	378,900
Loss on Sale of Equipment	(9,600)	(12,600)	(20,000)	(118,100)
Other Income	9,200	18,000	43,000	26,200
Total Other Expense	(395,600)	(396,500)	(2,007,800)	(759,800)
Loss Before Income Tax	(11,032,900)	(4,482,600)	(22,923,000)	(8,216,400)
Income Tax Expense (Benefit)	7,241,700	(1,067,800)	4,589,400	(1,937,800)
Net Loss	(18,274,600)	(3,414,800)	(27,512,400)	(6,278,600)
Net Loss Attributable to Non-controlling interests	0	0	0	(600)
Preferred Dividends	(1,903,700)	(1,903,700)	(5,711,100)	(5,856,200)
Net Loss Attributable to Common Stockholders, Basic	(20,178,300)	(5,318,500)	(33,223,500)	(12,134,200)
Net Loss Attributable to Common Stockholders, Diluted	$ (20,178,300)	$ (5,318,500)	$ (33,223,500)	$ (12,134,200)
Loss Per Share - Basic (in dollars per share)	$ (7.51)	$ (7.41)	$ (19.60)	$ (17.51)
Loss Per Share - Diluted (in dollars per share)	$ (7.51)	$ (7.41)	$ (19.60)	$ (17.51)
Weighted Average Common Shares Outstanding - Basic (in shares)	2,686,426	717,545	1,695,452	693,143
Weighted Average Common Shares Outstanding - Diluted (in shares)	2,686,426	717,545	1,695,452	693,143

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended				9 Months Ended		12 Months Ended
	Sep. 30, 2023	Mar. 31, 2023	Sep. 30, 2022	Mar. 31, 2022	Sep. 30, 2023	Sep. 30, 2022	Dec. 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$ (18,274,600)	$ (4,861,800)	$ (3,414,800)	$ 1,645,300	$ (27,512,400)	$ (6,278,600)	$ (16,900,000)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation	100,000		400,000		260,100	1,022,200
Amortization of right of use assets					137,600	440,300
Loss on sale of equipment					20,000	119,800
Provision for loss on contract					100,500	421,400
Impairment loss on notes and related interest receivable					0	898,400
Impairment loss on real estate			0		12,829,000	0
Stock compensation					182,200	473,800
Amortization of revolver issuance costs					640,300	320,100
Net change in assets and liabilities:
Accounts receivable					1,522,900	(4,390,400)
Contract assets					0	2,167,200
Notes receivable					3,465,300	(8,524,600)
Prepaid expenses and other assets					3,855,600	328,400
Real estate					(13,894,100)	(56,179,400)
Deferred tax asset					4,659,300	(1,937,800)
Accounts payable and accrued expenses					(6,562,800)	2,677,600
Contract liabilities					(278,600)	475,300
Deferred revenue					(2,700)	19,100
Payments on right of use liability, net of incentives					(173,600)	349,600
NET CASH USED IN OPERATING ACTIVITIES					(20,751,400)	(67,597,600)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment					0	(1,808,000)
Proceeds on the sale of equipment					245,800	194,400
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES					245,800	(1,613,600)
CASH FLOWS FROM FINANCING ACTIVITIES
Construction loans					61,953,600	65,240,900
Payments on construction loans					(28,810,500)	(16,080,500)
Financing fees construction loans					(1,563,400)	(2,304,000)
Related party construction loans					0	8,576,500
Payments on related party construction loans					(8,177,300)	(13,220,500)
Financing fees related party construction loans					(75,000)	(23,600)
Revolving line of credit loan					0	24,788,900
Payments on revolving line of credit loan					(10,141,900)	0
Financing fees revolving line of credit loan					0	(1,097,700)
Payments on note payable - insurance					(465,300)	(956,400)
Payments on equipment loans					(2,057,100)	(1,655,300)
Payments on financing leases					(74,800)	(70,700)
Preferred dividends					(634,700)	(5,892,400)
Repurchase of common stock					0	(437,700)
Proceeds from common stock offering					602,600	0
Proceeds from pre-funded and common warrants offering					8,335,400	0
Proceeds from exercise of stock options					0	8,600
Proceeds from exercise of common warrants					0	413,800
NET CASH PROVIDED BY FINANCING ACTIVITIES					18,891,600	57,289,900
NET DECREASE IN CASH AND RESTRICTED CASH					(1,614,000)	(11,921,300)
CASH AND RESTRICTED CASH AT BEGINNING OF PERIOD		$ 10,262,900		$ 26,226,800	10,262,900	26,226,800	26,226,800
CASH AND RESTRICTED CASH AT END OF PERIOD	$ 8,648,900		$ 14,305,500		8,648,900	14,305,500	$ 10,262,900
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid					12,239,000	5,350,400
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Amortization of debt discount capitalized					2,317,300	1,617,300
Promissory note issued for earnest money					300,000	0
Cancellation of promissory note for earnest money					450,000	0
Financing of insurance					442,900	590,100
Financing of fixed assets additions					0	110,000
Conversion of finance lease to equipment loan					0	394,800
Termination of leases					79,700	52,100
Dividends declared but not paid					5,711,100	634,600
Conversion of preferred to common stock					0	3,595,400
Exercise of pre-funded warrants					$ 5,382,300	$ 0

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - USD ($)	Total	Stockholders' Equity (Deficit)	Common Stock	Preferred Stock	Additional Paid in Capital	Retained Earnings (Accumulated Deficit)	Non-Controlling Interest
Beginning balance, shares (in shares) at Dec. 31, 2021			657,767
Beginning balance, shares (in shares) at Dec. 31, 2021				4,016,955
Beginning balance at Dec. 31, 2021	$ 99,737,800	$ 101,029,400	$ 32,122,700	$ 66,507,500	$ 752,700	$ 1,646,500	$ (1,291,600)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(2,012,500)	(2,012,500)				(2,012,500)
Exercise of Stock Options (in shares)			1,081
Exercise of Stock Options	8,600	8,600	$ 10,500		(1,900)
Stock Compensation Expense (in shares)			3,011
Stock Compensation Expense	242,400	242,400			242,400
Dissolution of Non-Controlling Interest	0	(1,292,100)				(1,292,100)	1,292,100
Net Income (Loss)	1,645,300	1,645,800				1,645,800	(500)
Ending balance, shares (in shares) at Mar. 31, 2022			661,859
Ending balance, shares (in shares) at Mar. 31, 2022				4,016,955
Ending balance at Mar. 31, 2022	99,621,600	99,621,600	$ 32,133,200	$ 66,507,500	993,200	(12,300)	0
Beginning balance, shares (in shares) at Dec. 31, 2021			657,767
Beginning balance, shares (in shares) at Dec. 31, 2021				4,016,955
Beginning balance at Dec. 31, 2021	99,737,800	101,029,400	$ 32,122,700	$ 66,507,500	752,700	1,646,500	(1,291,600)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss)	(6,278,600)
Ending balance, shares (in shares) at Sep. 30, 2022			717,619
Ending balance, shares (in shares) at Sep. 30, 2022				3,799,799
Ending balance at Sep. 30, 2022	88,061,500	88,061,500	$ 35,704,700	$ 62,912,100	1,224,600	(11,779,900)	0
Beginning balance, shares (in shares) at Dec. 31, 2021			657,767
Beginning balance, shares (in shares) at Dec. 31, 2021				4,016,955
Beginning balance at Dec. 31, 2021	99,737,800	101,029,400	$ 32,122,700	$ 66,507,500	752,700	1,646,500	(1,291,600)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss)	$ (16,900,000)
Ending balance, shares (in shares) at Dec. 31, 2022	718,835		718,835
Ending balance, shares (in shares) at Dec. 31, 2022	3,799,799			3,799,799
Ending balance at Dec. 31, 2022	$ 75,555,900	75,555,900	$ 35,704,700	$ 62,912,100	1,266,300	(24,327,200)	0
Beginning balance, shares (in shares) at Mar. 31, 2022			661,859
Beginning balance, shares (in shares) at Mar. 31, 2022				4,016,955
Beginning balance at Mar. 31, 2022	99,621,600	99,621,600	$ 32,133,200	$ 66,507,500	993,200	(12,300)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(1,940,000)	(1,940,000)				(1,940,000)
Stock Compensation Expense (in shares)			875
Stock Compensation Expense	112,300	112,300			112,300
Conversion of Preferred stock (in shares)			60,326	(217,156)
Conversion of Preferred stock	0		$ 3,595,400	$ (3,595,400)
Exercise of Warrants (in shares)			6,965
Exercise of Warrants	413,800	413,800	$ 413,800
Share Repurchase (in shares)			(12,597)
Share Repurchase	(437,700)	(437,700)	$ (437,700)
Net Income (Loss)	(4,509,100)	(4,509,100)				(4,509,100)
Ending balance, shares (in shares) at Jun. 30, 2022			717,428
Ending balance, shares (in shares) at Jun. 30, 2022				3,799,799
Ending balance at Jun. 30, 2022	93,260,900	93,260,900	$ 35,704,700	$ 62,912,100	1,105,500	(6,461,400)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(1,903,700)	(1,903,700)				(1,903,700)
Stock Compensation Expense (in shares)			191
Stock Compensation Expense	119,100	119,100			119,100
Net Income (Loss)	(3,414,800)	(3,414,800)				(3,414,800)
Ending balance, shares (in shares) at Sep. 30, 2022			717,619
Ending balance, shares (in shares) at Sep. 30, 2022				3,799,799
Ending balance at Sep. 30, 2022	$ 88,061,500	88,061,500	$ 35,704,700	$ 62,912,100	1,224,600	(11,779,900)	0
Beginning balance, shares (in shares) at Dec. 31, 2022	718,835		718,835
Beginning balance, shares (in shares) at Dec. 31, 2022	3,799,799			3,799,799
Beginning balance at Dec. 31, 2022	$ 75,555,900	75,555,900	$ 35,704,700	$ 62,912,100	1,266,300	(24,327,200)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(1,903,700)	(1,903,700)				(1,903,700)
Stock Compensation Expense (in shares)			317
Stock Compensation Expense	83,400	83,400			83,400
Round Up of Shares from Reverse Stock Split (in shares)			13,093
Net Income (Loss)	(4,861,800)	(4,861,800)				(4,861,800)
Ending balance, shares (in shares) at Mar. 31, 2023			732,245
Ending balance, shares (in shares) at Mar. 31, 2023				3,799,799
Ending balance at Mar. 31, 2023	$ 68,873,800	68,873,800	$ 35,704,700	$ 62,912,100	1,349,700	(31,092,700)	0
Beginning balance, shares (in shares) at Dec. 31, 2022	718,835		718,835
Beginning balance, shares (in shares) at Dec. 31, 2022	3,799,799			3,799,799
Beginning balance at Dec. 31, 2022	$ 75,555,900	75,555,900	$ 35,704,700	$ 62,912,100	1,266,300	(24,327,200)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Exercise of Stock Options (in shares)	0
Net Income (Loss)	$ (27,512,400)
Ending balance, shares (in shares) at Sep. 30, 2023	2,329,322		2,329,322
Ending balance, shares (in shares) at Sep. 30, 2023	3,799,799			3,799,799
Ending balance at Sep. 30, 2023	$ 51,452,500	51,452,500	$ 41,689,500	$ 62,912,100	4,401,600	(57,550,700)	0
Beginning balance, shares (in shares) at Mar. 31, 2023			732,245
Beginning balance, shares (in shares) at Mar. 31, 2023				3,799,799
Beginning balance at Mar. 31, 2023	68,873,800	68,873,800	$ 35,704,700	$ 62,912,100	1,349,700	(31,092,700)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(1,903,700)	(1,903,700)				(1,903,700)
Stock Compensation Expense (in shares)			2,941
Stock Compensation Expense	75,300	75,300			75,300
Public Offering - Common Stock (in shares)			160,500
Public Offering - Common Stock	602,600	602,600	$ 602,600
Public Offering - Pre-funded Warrants and Common Warrants	8,335,300	8,335,300			8,335,300
Exercise of Pre-funded Warrants (in shares)			906,609
Exercise of Pre-funded Warrants	0		$ 3,403,700		(3,403,700)
Net Income (Loss)	(4,376,000)	(4,376,000)				(4,376,000)
Ending balance, shares (in shares) at Jun. 30, 2023			1,802,295
Ending balance, shares (in shares) at Jun. 30, 2023				3,799,799
Ending balance at Jun. 30, 2023	71,607,300	71,607,300	$ 39,711,000	$ 62,912,100	6,356,600	(37,372,400)	0
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Preferred Stock Dividends	(1,903,700)	(1,903,700)				(1,903,700)
Stock Compensation Expense (in shares)			27
Stock Compensation Expense	23,500	23,500			23,500
Exercise of Pre-funded Warrants (in shares)			527,000
Exercise of Pre-funded Warrants	0		$ 1,978,500		(1,978,500)
Net Income (Loss)	$ (18,274,600)	(18,274,600)				(18,274,600)
Ending balance, shares (in shares) at Sep. 30, 2023	2,329,322		2,329,322
Ending balance, shares (in shares) at Sep. 30, 2023	3,799,799			3,799,799
Ending balance at Sep. 30, 2023	$ 51,452,500	$ 51,452,500	$ 41,689,500	$ 62,912,100	$ 4,401,600	$ (57,550,700)	$ 0

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2023

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

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

Principles of Consolidation

The condensed consolidated financial statements include the following subsidiaries of Harbor Custom Development, Inc. as of the reporting period ending date, as follows:


Names	Dates of Formation	Attributable Interest
		September 30, 2023		December 31, 2022
Saylor View Estates, LLC*	March 30, 2014	N/A		N/A
Belfair Apartments, LLC	December 3, 2019	100	%	100	%
Pacific Ridge CMS, LLC	May 24, 2021	100	%	100	%
Tanglewilde, LLC	June 25, 2021	100	%	100	%
HCDI FL CONDO LLC	July 30, 2021	100	%	100	%
HCDI Mira, LLC**	August 31, 2021	N/A		N/A
HCDI, Bridgeview LLC	October 28, 2021	100	%	100	%
HCDI Wyndstone, LLC	September 15, 2021	100	%	100	%
HCDI Semiahmoo, LLC	December 17, 2021	100	%	100	%
Mills Crossing, LLC	July 21, 2022	100	%	100	%
Broadmoor Ventures, LLC	August 24, 2022	100	%	100	%
GPB Holdings LLC	October 29, 2022	100	%	100	%
Winding Lane Estate LLC	November 30, 2022	100	%	100	%
Beacon Studio Farms LLC	March 20, 2023	100	%	N/A

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

**HCDI Mira, LLC was voluntarily dissolved with the State of Washington as of April 26, 2023.

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

Basis of Presentation

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

Going Concern Uncertainty

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

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

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

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

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

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

•substantially completed its fee build contracts;

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

Stock-Based Compensation

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.

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

For the nine months ended September 30, 2023 and 2022 when computing fair value of share-based awards, the Company has considered the following range of assumptions:


	September 30, 2023	September 30, 2022
Risk-free interest rate	4.30%	1.73% - 3.54%
Exercise price	$3.73	$22.40 - $60.00
Expected life of grants in years	6.38	3.93 - 6.51
Expected volatility of underlying stock	43.50%	42.34% - 48.13%
Dividends	—	—

Repurchase of Equity Securities

Reverse Stock Split

2023 Public Offering

Earnings (Loss) Per Share (“EPS”)

In accordance with FASB ASC Topic 260-10-45, pre-funded warrants have been included in the weighted average common shares outstanding number for the purpose of calculating EPS.


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

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

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

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

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

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

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

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

(2) The number of outstanding warrants issued after the reverse stock split on March 6, 2023 are exercisable for shares of common stock on a 1 to 1 ratio.

(3) Preferred stock and warrants to purchase convertible preferred stock are convertible into common stock on a 0.2778 to 1 ratio.

Fair Value of Financial Instruments

Cash and Cash Equivalents

Restricted Cash

Accounts Receivable

Notes Receivable

Property and Equipment and Depreciation


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