S-1/A 1 forms-1a.htm

 

As filed with the Securities and Exchange Commission on June 1, 2020.

 

Registration No. 333-237507

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Harbor Custom Development, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Washington   1531   46-4827436

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

11505 Burnham Dr., Suite 301

Gig Harbor, Washington 98332

(253) 649-0636

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Sterling Griffin, Chief Executive Officer and President

Harbor Custom Development, Inc.

11505 Burnham Dr., Suite 301

Gig Harbor, Washington 98332

(253) 649-0636

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Lynne Bolduc, Esq.   Ivan K. Blumenthal, Esq.
Fitzgerald Yap Kreditor, LLP   Mintz, Levin, Cohn, Ferris, Glovsky and
2 Park Plaza, Suite 850   Popeo, P.C.
Irvine, California 92614   666 Third Avenue
Tel: (949) 788-8900   New York, New York 10017
Fax: (949) 788-8980   Tel: (212) 935-3000
    Fax: (212) 983-3115

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: [  ]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

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

 

Large accelerated filer   [  ]   Accelerated filer   [  ]
Non-accelerated filer   [  ]   Smaller reporting company   [X]
        Emerging growth company   [X]

 

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 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE  

Title of Each Class of Securities
to be Registered
  Proposed Maximum Aggregate Offering Price(1)     Amount of
Registration
Fees(2)(6)
 
Common Stock, no par value per share(3)   $ 17,250,000     $ 2,239  
Underwriters’ Warrants to purchase Common Stock(4)   $     $  
Common Stock underlying Underwriters’ Warrants(5)   $ 937,500     $ 122  
Total Registration Fee   $ 18,187,500     $ 2,361  

 

  (1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Pursuant to Rule 416 under the Securities Act of 1933, as amended, the shares of common stock registered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of stock splits, stock dividends, recapitalizations, or other similar transactions
  (2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the registrant.
  (3) Includes the aggregate offering price of additional shares of common stock that the underwriters have the option to purchase from the Registrant in this offering to cover over-allotments, if any.
  (4) No registration fee is required pursuant to Rule 457(g) under the Securities Act.
  (5)

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act of 1933, as amended. The underwriters’ warrants are exercisable at a per-share exercise price equal to 125% of the per-share public offering price. The proposed maximum aggregate offering price of the underwriters’ warrants is $937,500, which is equal to 125% of $750,000 (5% of $15,000,000).

 

(6)

Previously paid.

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

   
 

 

The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS   SUBJECT TO COMPLETION   DATED JUNE 1, 2020

 

2,142,857 Shares
Common Stock

 

 

Harbor Custom Development, Inc.

 

This is a firm commitment initial public offering of shares of common stock of Harbor Custom Development, Inc. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price of our shares will be between $6.00 and $8.00.

 

We have applied to list the shares of our common stock on the Nasdaq Capital Market under the symbol “HCDI.” No assurance can be given that our application will be approved.

 

We are an “emerging growth company” under the federal securities laws and have elected to comply with certain reduced public company reporting requirements. (See “Prospectus Summary—Implications of Being an Emerging Growth Company.”)

 

Investing in our common stock is involves a high degree of risk. (See “Risk Factors” beginning on page 8.)

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

   Per Share   Total (2)  
Initial public offering price  $   $ 
Underwriting discounts and commissions(1)  $   $ 
Proceeds to us, before expenses  $   $ 

 

(1) Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1.0% of the initial public offering price (excluding proceeds received from exercise of the underwriters’ over-allotment option) payable to the representative of the underwriters in this offering. (See “Underwriting.”)

(2)

Assumes no exercise of the underwriters’ over-allotment option to purchase shares of our common stock we granted to the underwriters described below.

 

We have agreed to issue to the representative of the underwriters warrants to purchase up to an aggregate of 107,142 shares of our common stock, an amount equal to 5% of the shares of common stock offered pursuant to this prospectus (excluding any shares sold upon exercise of the underwriters’ over-allotment option), with an exercise price equal to 125% of the public offering price per share in this offering. The representative’s warrants will be exercisable for a four-year period beginning on the date that is one-year from the effective date of this offering. (See “Underwriting.”)

 

We have granted a 45-day option to the underwriters to purchase up to 321,428 additional shares of common stock solely to cover over-allotments, if any.

 

The underwriters expect to deliver the shares to purchasers on or about            , 2020.

 

ThinkEquity

a division of Fordham Financial Management, Inc.

 

The date of this prospectus is            , 2020

 

   
 

 

 

   
 

 

 

 

   
 

 

TABLE OF CONTENTS

 

     
Prospectus Summary   1
Risk Factors   8
Cautionary Note Concerning Forward-Looking Statements   39
Use of Proceeds   41
Capitalization   42
Dilution   43
Dividend Policy   45
Management’s Discussion and Analysis of Financial Condition and Results of Operations   46
Our Business   62
Management   74
Executive and Director Compensation   79
Certain Relationships and Related Party Transactions   84
Principal Stockholders   85
Description of Capital Stock   86
Shares Eligible For Future Sale   93
Certain Material Federal Income Tax Considerations   94
Underwriting   99
Legal Matters   105
Experts   105
Where You Can Find More Information   105
Index to Consolidated Financial Statements   106

 

   
 

 

ABOUT THIS PROSPECTUS

 

As used in this prospectus, unless the context otherwise requires or indicates, references to “the Company,” “we,” “our,” “ourselves,” and “us” refer to Harbor Custom Development, Inc. and its subsidiaries and affiliates, formerly known as Harbor Custom Homes, Inc., and including our predecessor, Harbor Custom Homes, LLC; and references to “Harbor LLC” or “our predecessor” refer to Harbor Custom Homes, LLC and (except for financial statement information, except as otherwise noted) its predecessors and affiliates.

 

You should rely only on the information contained in this prospectus and any free writing prospectus prepared by us or on our behalf that we have referred you to. Neither we nor the underwriter have authorized anyone to provide you with additional or different information. If anyone provides you with additional, different, or inconsistent information, you should not rely on it. We and the underwriter take no responsibility for, and can provide no assurance as to, the reliability of any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby and only under circumstances and in jurisdictions where it is lawful to do so. We and the underwriter are not making an offer of these securities in any state, country, or other jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document regardless of its time of delivery or the time of any sales of our common stock. Our business, financial condition, results of operations and cash flows may have changed since the date of the applicable document.

 

This prospectus describes the specific details regarding this offering and the terms and conditions of our common stock being offered hereby and the risks of investing in our common stock. For additional information, please see the section entitled “Where You Can Find More Information.”

 

You should not interpret the contents of this prospectus or any free writing prospectus to be legal, tax advice, business, or financial advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial, and other issues that you should consider before investing in our common stock.

 

Unless otherwise stated, all information in this prospectus assumes that the underwriters have not exercised their option to purchase additional shares of common stock.

 

 i 

 

 

MARKET AND INDUSTRY DATA

 

This prospectus includes industry and trade association data, forecasts, and information that we have prepared based, in part, upon data, forecasts, and information obtained from independent trade associations, industry publications and surveys, government agencies, and other independent information publicly available to us. Statements as to our market position are based on market data currently available to us. Industry publications, surveys, and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe these sources are reliable, we have not independently verified the information obtained from these sources. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources.

 

We believe our internal research is reliable, even though such research has not been verified by any independent sources. While we are not aware of any misstatements regarding our industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

 

In addition, forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. Trademarks used in this prospectus are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such trademarks. In addition, certain market and industry data has been obtained from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. We have not independently verified the data obtained from these sources. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding the other forward-looking statements in this prospectus.

 

 ii 

 

 

 

PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision. Therefore, you should read this entire prospectus carefully, including, in particular, the “Risk Factors” section of this prospectus.

 

Our Company

 

We are a real estate development company involved in all aspects of the land development cycle including, land acquisition, entitlements, construction of project infrastructure, home building, marketing, sales, and management of various residential projects in Western Washington’s Puget Sound region. We have active or recently sold out residential communities in Gig Harbor, Bremerton, Silverdale, Bainbridge Island, and Allyn in the state of Washington. Our business strategy is focused on the acquisition of land to develop property for the construction and sale of residential lots, home communities, and multi-family properties within a 30 to 60-minute commute to the Seattle metro employment corridor and our planned entry into other similar markets in the United States.

 

Our product and service portfolios provide value by offering highly coveted developed residential properties to public national builders and providing affordable new homes to single family buyers through an on-demand supply of commuter oriented single-family lots with flexible and customizable contemporary home plans. In addition, our ability to acquire and develop single and multi-family rental properties that can be held by us or sold to regional and national companies further strengthens our product offering. With over $5,000,000 worth of heavy equipment, our development infrastructure division can efficiently create a diverse range of residential communities and improved lots in a cost-effective manner. The equipment is primarily used for land clearing, public and private road improvements, installation of wet utilities such as sewer, water, and storm sewer lines in addition to construction of dry utilities lines for power, gas, phone, and cable service providers.  We believe that the wide variety of lots, home plans, and finishing options coupled with a historic low inventory of residential and multi-family housing in our principal geographic area and our targeted areas for expansion provide us with a balanced portfolio and an opportunity to increase our overall market share. For the year ended December 31, 2019, our total revenues were $30,953,500 and for the three months ended March 31, 2020, our revenues were $9,941,000 and our back log of fully executed contracts for the sale of developed residential lots and single-family homes was approximately $16,707,000.

 

As of the date of this prospectus, we owned and controlled five Western Washington residential communities containing over 350 lots in various stages of development. We seek to maximize our return on capital and reduce our risk exposure associated with holding land inventories by developing projects both for our single and multi-family lot inventory and for the sale of permitted or developed lots to regional and national builders. To further reduce our exposure, we focus on projects with targeted life cycles of approximately 24 to 36 months from the beginning of construction of the first home to close out of the community.

 

In February 2020, we entered into an agreement with Olympic Views, LLC (“Olympic”) for the purchase of 98 residential lots in Bremerton, Washington for $3,430,000 (the “Olympic Acquisition”). The closing of the Olympic Acquisition is contingent upon the completion of this offering and we intend to use a portion of the proceeds to pay the purchase price. Sterling Griffin, our Chief Executive Officer and President, owns 50% of Olympic, and as a result, Mr. Griffin has an interest in the purchase price for the Olympic Acquisition being paid. We requested an independent third-party valuation of the Olympic purchase from Colliers International Valuation & Advisory Services, who determined that the as-is market value of the subject property’s fee simple interest was $3,430,000 as of May 15, 2020.

 

The core of our business plan is to acquire and develop land strategically, based on our understanding of population growth patterns, entitlement restrictions, and infrastructure development. We focus on locations within our markets with convenient access to metropolitan areas that are generally characterized by diverse economic and employment bases and increasing populations. We believe that these conditions create strong demand for new housing, and these locations represent what we believe to be attractive opportunities for long-term growth.

 

 

 1 

 

 

 

As part of our operational strategy, we plan to develop or acquire technology platforms that will provide for both the efficient sourcing of subcontractors and suppliers and increase the distribution and sale of our single and multi-family residential lots and home product inventory across all mediums.

 

Our business strategy is focused on land acquisition for single and multi-family residential development, including: entitlements, construction, marketing, sale, and management of residential housing in Western Washington’s Puget Sound region with a plan to expand into other similarly situated commuter markets in the United States. In addition, our ability to offer permitted and developed lots to third parties differentiates us from our competition and provides us with a source of revenue that is not tied to home sales.

Our strategy is driven by the following: (i) to provide superior quality and homeowner experience and service; (ii) expansion into new and complementary markets; (iii) adherence to our core operating principles to drive consistent long-term performance; and (iv) focus on efficient operations.

We have been operating in Western Washington’s Puget Sound region since our founding in 2014.

Summary Risk Factors

An investment in the shares of our common stock involves risks. You should consider carefully the risks discussed below and described more fully along with other risks under “Risk Factors” in this prospectus before investing in our common stock.

  Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.
     
  Our long-term growth depends upon our ability to successfully identify and acquire desirable land parcels for residential build-out.
     
  If homebuyers are not able to obtain suitable financing, our results of operations may decline.
     
  Difficulty in obtaining sufficient capital could result in an inability to acquire land for our developments or increased costs and delays in the completion of development projects.
     
  Our operating performance is subject to risks associated with the real estate industry.
     
  Failure to manage land acquisitions and development and construction processes could result in significant cost overruns or errors in valuing sites.
     
  We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements available to emerging growth companies, our common stock may be less attractive to investors.
     
  There is currently no public market for shares of our common stock. If and when we achieve listing on an exchange, our common stock prices may be volatile and could decline substantially following this offering.
     
 

The extent to which the COVID-19 pandemic impacts our results and operations will depend on future developments that are highly uncertain and cannot be predicted.

 

 

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Corporate Information

 

We were formed as a Washington limited liability company in February 2014, and we converted into a Washington corporation pursuant to the Washington Business Corporation Act (the “WBCA”) effective October 1, 2018. We changed our name from Harbor Custom Homes, Inc. to Harbor Custom Development, Inc. on August 1, 2019. We own the registered trademark of “Harbor Custom Homes” in the United States.

 

Our principal executive offices are located at 11505 Burnham Dr. Suite 301, Gig Harbor, Washington 98332. Our main telephone number is (253) 649-0636. Our website is www.harborcustomdev.com. The information contained on, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.

 

Implications of Being an Emerging Growth Company

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (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, among other matters:

 

  an exemption to provide fewer years of financial statements and other financial data in an initial public offering registration statement;
     
  an exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;
     
  an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;
     
  reduced disclosure about the emerging growth company’s executive compensation arrangements; and
     
  no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We have elected to adopt the reduced disclosure requirements available to emerging growth companies. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies.

 

We would cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering, (ii) the first fiscal year after our annual gross revenues are $1.07 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 $700,000,000 as of the end of the second quarter of that fiscal year.

 

Reverse Stock Split

 

Our board of directors and shareholders approved a 1-for-2.22 reverse split of our common stock, which was effected on April 15, 2020. The reverse split combined each 2.22 shares of our outstanding common stock into one share of common stock. No fractional shares were issued in connection with the reverse split, and any fractional shares resulting from the reverse split were rounded up to the nearest whole share. All references to common stock, options to purchase common stock, restricted stock, share data, per share data, and related information, as applicable have been adjusted in this prospectus to reflect the split of our common stock as if it had occurred at the beginning of the earliest period presented.

 

 

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THE OFFERING

 

Common stock offered by us   2,142,857 shares.
     
Common stock to be outstanding after this offering   5,727,368 shares.
     
Over-allotment option   We have granted the underwriters the option to purchase up to an additional 321,428 shares of our common stock at the initial offering price, less any underwriting discounts and commissions, to cover over-allotments, if any, for a period of 45 days from the date of this prospectus.
     
Use of proceeds  

We expect to receive net proceeds from this offering of approximately $13,000,000 (assuming an initial public offering price of $7.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), or approximately $15,092,500 if the underwriters exercise in full their over-allotment option to purchase up to 321,428 additional shares of our common stock, after deducting the underwriting discounts and commissions and the estimated offering expenses of approximately $950,000 payable by us. We intend to use the net proceeds from this offering for land acquisition and development, debt reduction, and working capital. (See “Use of Proceeds.”)

     
Dividend policy   We currently intend to retain our future earnings, if any, to finance the development and expansion of our business. The determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, and such other factors as our board of directors deems relevant in its discretion. (See “Dividend Policy.”)
     
Controlled Company  

Upon completion of this offering, our founder, Chief Executive Officer, President, and Chairman of our board of directors, will control more than 50% of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the listing rules of The Nasdaq Stock Market LLC, or the Nasdaq rules. Under these standards, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and may elect not to comply with certain corporate governance standards. (See “Management.”)

     
Risk factors   Investing in our common stock involves a high degree of risk. (See “Risk Factors.”)
     
Stock exchange symbol   We have applied to list our common stock on the Nasdaq Capital Market under the proposed symbol “HCDI.” However, no assurance can be given that our application will be approved.

 

Except as otherwise indicated, all information in this prospectus is based on 3,584,511 shares outstanding as of the date of this prospectus, and:

 

 

reflects a 1-for-2.22 reverse split of our common stock, which was effected on April 15, 2020;

 

includes 70,994 shares of our common stock (assuming the initial public offering price of $7.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) that will be issued to Olympic as a result of the conversion of debt owed to Olympic in the amount of $496,956 into shares of our common stock at a per share value equal to the public offering price per share in this offering, which conversion will occur immediately following the determination of the actual public offering price per share of the common stock to be sold in this offering;

 

assumes no exercise of the underwriter’s over-allotment option to purchase up to an additional 321,428 shares of our common stock;

 

excludes 107,142 shares of our common stock issuable upon the exercise of the warrants to be issued to the representative of the underwriters upon closing of this offering;

 

excludes 675,676 shares of our common stock reserved for future issuance in connection with awards under our 2018 Incentive and Nonstatutory Stock Option Plan (our “2018 Equity Incentive Plan”) (pursuant to which we have issued to our employees, officers, and directors options exercisable for, 262,172 shares of common stock as of the date of this prospectus); and

  excludes 22,524 shares of our common stock issuable upon the exercise of outstanding warrants.

 

(See “Description of Capital Stock.”)

 

 

 4 

 

 

 

SUMMARY FINANCIAL DATA

 

The following sets forth a summary of our selected historical consolidated financial data for the periods and as of the dates indicated. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The summary selected historical consolidated financial data as of and for the years ended December 31, 2019 and 2018 are derived from our audited consolidated financial statements which are included elsewhere in this prospectus. The summary selected historical consolidated financial data as of and for the three months ended March 31,2020 and 2019, have been derived from our unaudited historical consolidated financial statements, which are included elsewhere in this prospectus, and which have been rounded to the nearest hundred unless otherwise noted.

 

   Three Months Ended March 31,     Year Ended December 31, 
                   (As restated) 
   2020     2019     2019   2018 
   (unaudited)     (audited) 
Consolidated Statements of Operations Data:                    
Revenue   $ 9,941,000     $ 4,266,500     $ 30,953,500   $5,730,300 
Cost of Sales     9,828,200       4,083,600       27,645,100    4,936,700 
Gross profit     112,800       182,900       3,308,400    793,600 
Selling and general administrative    1,029,400       855,100       3,466,800    2,765,900 
Operating loss     (916.600 )     (672,200 )     (158,400)   (1,972,300)
Other income (expense)    (87,100 )     (49,100 )     (279,200)   1,131,200 
Loss before taxes     (1,003,700 )     (721,300 )     (437,600)   (841,100)
Income tax benefit (expense)    29,800       (22,400 )     634,600    (517,800)
Net income (loss)   $ (973,900 )   $ (743,700 )   $ 197,000   $(1,358,900)
Income (loss) attributable to common shareholders  $ (752,000 )   $ (795,700 )   $ 235,600   $(1,390,400)
Basic and diluted earnings (loss) per share  $ (0.21 )   $ (0.23 )   $ 0.07   $(0.40)

 

 

 5 

 

 

 

    As of March 31, 2020  
    Actual     As Adjusted for the Offering     Pro Forma As Adjusted(1)  
Selected Balance Sheet Data (end of period):                  
Cash   $ 501,400     $ 15,501,400     $ 14,439,400  
Real Estate     27,090,300       27,090,300       27,090,300  
Total assets     33,721,000       48,721,000       47,659,000  
Total debt     31,544,000       31,544,000       30,482,000  
Total liabilities     35,919,800       35,919,800       34,857,800  
Total equity (deficit)     (2,198,800 )     12,081,200       12,081,200  

 

   Three Months Ended March 31,    Years Ended December 31, 
   (unaudited)              (As Restated) 
   2020     2019    2019   2018 
Other Financial Data:                         
EBITDA(2)  $ (407,900 )   $ (181,600 )   $1,513,900   $129,600 

 

  (1) Pro forma as adjusted reflects the use of a $1,062,000 reduction of high interest rate debt out of offering proceeds. (See “Use of Proceeds” for details on debt reduction.)
     
  (2) EBITDA represents net income attributable to us before interest, taxes, depreciation, and amortization. We believe that the presentation of EBITDA included in this prospectus provides useful information to investors with which to analyze our operating trends and performance. In addition, we believe that EBITDA is frequently used by securities analysts, investors, and other interested parties in their evaluation of companies, many of which present EBITDA measures when reporting their results. EBITDA is not a measurement of financial performance under United States generally accepted accounting principles (“GAAP”) and should not be considered as an alternative to net income as a measure of performance or to net cash flows provided by (used in) operations as a measure of liquidity.

 

 

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A reconciliation of net income to EBITDA for the periods presented is as follows:

 

   Three Months Ended March 31,     Year Ended December 31, 
                   (As Restated) 
   2020     2019     2019   2018 
   (unaudited)     (audited) 
Net loss  $ (973,900 )   $ (743,700 )   $ 197,000   $(1,358,900)
Income tax expense (benefit)    (29,800 )     22,400      (634,600)   517,800 
Interest amortized to cost of homes closing(1)    318,600       357,900      1,012,100    643,000 
Interest expense    71,600       49,100      358,300    117,700 
Depreciation and amortization    205,600       132,600      581,100    210,000 
                           
EBITDA    (407,900 )     (181,700 )    1,513,900    129,600 

 

(1)Interest previously capitalized on real estate construction loans that is expensed as part of cost of goods sold when lot/home is sold.

 

In addition, other companies may define EBITDA differently and, as a result, our measures of EBITDA may not be directly comparable to EBITDA of other companies. Furthermore, EBITDA has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

  EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;
     
  EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
     
  EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our outstanding debt;
     
  EBITDA does not reflect any provisions for income taxes, which may vary significantly from period to period;
     
  Non-cash compensation is, and will remain, a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating ongoing operating performance for a particular period;
     
  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements; and
     
  Other companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

 

 7 

 

 

RISK FACTORS

 

An investment in our common stock involves a high degree of risk and should be considered highly speculative. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks concerning our business and an investment in our common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occur, our business, prospects, liquidity, financial condition, and results of operations could be materially and adversely affected, in which case the trading price of our common stock could decline significantly, and you could lose all or part of your investment. Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Concerning Forward-Looking Statements.”

 

Risks Related to Our Business

 

Adverse changes in general economic conditions could reduce the demand for homes and, as a result, could have a material adverse effect on us.

 

The residential homebuilding industry is cyclical and is highly sensitive to changes in local and general economic conditions that are outside our control, including:

 

  the availability of financing for acquisitions;
     
  the availability of construction and permanent mortgages;
     
  the supply of developable land in our markets;
     
  consumer confidence and income generally and the confidence and income of potential homebuyers in particular;
     
  levels of employment, job and personal income growth, and household debt-to-income levels;
     
  the availability of financing for homebuyers;
     
  private and federal mortgage financing programs and federal, state, and local regulation of lending practices;
     
  short- and long-term interest rates;
     
  federal and state income tax provisions, including provisions for the deduction of mortgage interest payments;
     
  real estate taxes;
     
  inflation;
     
  the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;

 

 8 

 

 

  housing demand from population growth and demographic changes (including immigration levels and trends in urban and suburban migration);
     
  the supply of new or existing homes and other housing alternatives, such as apartments and other residential rental property; and
     
  U.S. and global financial system and credit markets, including stock market and credit market volatility.

 

Economic conditions in the U.S. housing market continue to be characterized by levels of uncertainty. Since early 2006, the U.S. housing market has been negatively impacted by declining consumer confidence, restrictive mortgage standards, and large supplies of foreclosures, resales, and new homes, among other factors. When combined with a prolonged economic downturn, high unemployment levels, increases in the rate of inflation, and uncertainty in the U.S. economy, these conditions have contributed to decreased demand for housing, declining sales prices, and increasing pricing pressure. In the event that these economic and business trends continue or decline further, we could experience declines in the market value of our inventory and demand for our homes, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

The health of the residential homebuilding industry may also be significantly affected by “shadow inventory” levels. “Shadow inventory” refers to the number of homes with a mortgage that are in some form of distress but that have not yet been listed for sale. Shadow inventory can occur when lenders put properties that have been foreclosed or forfeited to lenders on the market gradually, rather than all at once, or delay the foreclosure process. They may choose to do so because of regulations and foreclosure moratoriums, because of the additional costs and resources required to process and sell foreclosed properties, or because they want to avoid depressing housing prices further by putting many distressed properties up for sale at the same time. A significant shadow inventory in our markets could, were it to be released into our markets, adversely impact home prices and demand for our homes, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

In addition, an important segment of our customer base consists of first-time and second-time move-up buyers, who often purchase homes subject to contingencies related to the sale of their existing homes. The difficulties facing these buyers in selling their homes during recessionary periods may adversely affect our sales. Moreover, during such periods, we may need to reduce our sales prices and offer greater incentives to buyers to compete for sales that may result in reduced margins.

 

Our long-term growth depends upon our ability to successfully identify and acquire desirable land parcels for residential build-out.

 

Our future growth depends upon our ability to successfully identify and acquire attractive land parcels for development of our single-family homes at reasonable prices and with terms that meet our underwriting criteria. Our ability to acquire land parcels for new single-family homes may be adversely affected by changes in the general availability of land parcels, the willingness of land sellers to sell land parcels at reasonable prices, competition for available land parcels, availability of financing to acquire land parcels, zoning, and other market conditions. If the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other reason, our ability to grow could be significantly limited, and the number of homes that we build and sell could decline. Additionally, our ability to begin new projects could be impacted if we elect not to purchase land parcels under option contracts. To the extent that we are unable to purchase land parcels timely or enter into new contracts for the purchase of land parcels at reasonable prices, our home sales revenue and results of operations could be negatively impacted.

 

 9 

 

 

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

 

Our business strategy is focused on the design, construction, and sale of single-family homes in Western Washington’s Puget Sound region. We plan to expand into the commuter communities serving other regions in the United States following high-technology job growth. Such markets may include Portland, Oregon and Denver, Colorado. Because our operations are concentrated in these areas, a prolonged economic downturn in one or more of these areas, particularly within Western Washington, Oregon, or Colorado, could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations, and a disproportionately greater impact on us than other homebuilders with more diversified operations. For the fiscal years ended December 31, 2018 and 2019, we generated all of our revenues from our real estate inventory in Washington.

 

Any increase in unemployment or underemployment may lead to an increase in the number of loan delinquencies and property repossessions and have an adverse impact on us.

 

In the United States, the unemployment rate was 14.7% as of the end of April 2020, according to the U.S. Bureau of Labor Statistics (the “BLS”). However, due to the recent COVID-19 pandemic, the unemployment rate is expected to rise at a level that is uncertain at this time. People who are not employed, are underemployed, or are concerned about the loss of their jobs are less likely to purchase new homes, may be forced to try to sell the homes they own, and may face difficulties in making required mortgage payments. Therefore, any increase in unemployment or underemployment may lead to an increase in the number of loan delinquencies and property repossessions and have an adverse impact on us both by reducing demand for the homes we build and by increasing the supply of homes for sale.

 

If homebuyers are not able to obtain suitable financing, our results of operations may decline.

 

A substantial majority of our homebuyers finance their home purchases through lenders that provide mortgage financing. The availability of mortgage credit remains constrained in the United States, due in part to lower mortgage valuations on properties, various regulatory changes, and lower risk appetite by lenders, with many lenders requiring increased levels of financial qualification, lending lower multiples of income, and requiring greater deposits. First-time homebuyers are generally more affected by the availability of financing than other potential homebuyers. These buyers are an important source of our demand. A limited availability of home mortgage financing may adversely affect the volume of our home sales and the sales prices we achieve in the United States.

 

 10 

 

 

During the recent past, the mortgage lending industry in the United States has experienced significant instability, beginning with increased defaults on subprime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. In response, lenders, regulators, and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in recent years. Credit requirements have tightened, and investor demand for mortgage loans and mortgage-backed securities has declined. The deterioration in credit quality during the downturn had caused almost all lenders to stop offering subprime mortgages and most other loan products that were not eligible for sale to the Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”), or loans that did not conform to Fannie Mae, Freddie Mac, the Federal Housing Administration (the “FHA”) or the Veterans Administration (the “VA”) requirements. Fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans may continue to make it more difficult for certain buyers to finance the purchase of our homes. These factors may reduce the pool of qualified homebuyers and make it more difficult to sell to first-time and move-up buyers who have historically made up a substantial part of our customers. Reductions in demand adversely affected our business and financial results during the downturn, and the duration and severity of some of their effects remain uncertain. The liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. Several federal government officials have proposed changing the nature of the relationship between Fannie Mae and Freddie Mac and the federal government and even nationalizing or eliminating these entities entirely. If Fannie Mae and Freddie Mac were dissolved or if the federal government determined to stop providing liquidity support to the mortgage market, there would be a reduction in the availability of the financing provided by these institutions. Any such reduction would likely have an adverse effect on interest rates, mortgage availability, and our sales of new homes. The FHA insures mortgage loans that generally have lower loan payment requirements and qualification standards compared to conventional guidelines, and as a result, continue to be a particularly important source for financing the sale of our homes. In recent years, lenders have taken a more conservative view of FHA guidelines causing significant tightening of borrower eligibility for approval. Availability of condominium financing and minimum credit score benchmarks have reduced opportunity for those purchasers. In the near future, further restrictions are expected on FHA-insured loans, including limitations on seller-paid closing costs and concessions. This or any other restriction may negatively affect the availability or affordability of FHA financing, which could adversely affect our potential homebuyers’ ability to secure adequate financing and, accordingly, our ability to sell homes in the United States. In addition, changes in federal, state, and local regulatory and fiscal policies aimed at aiding the home buying market (including a repeal of the home mortgage interest tax deduction) may also negatively affect potential homebuyers’ ability to purchase homes.

 

In January 2013, the Consumer Financial Protection Bureau (the “CFPB”) issued a final rule, effective January 10, 2014, to implement laws requiring mortgage lenders to consider the ability of consumers to repay home loans before extending them credit and imposing minimum qualifications for mortgage borrowers. Also, in January 2013, the CFPB sought comments on related proposed rules that could modify the rules for certain narrowly defined categories of lending programs. These regulations could make it more difficult for some potential buyers to finance home purchases.

 

Decreases in the availability of credit and increases in the cost of credit adversely affect the ability of homebuyers to obtain or service mortgage debt. Even if potential homebuyers do not themselves need mortgage financing, where potential homebuyers must sell their existing homes in order to buy a new home, increases in mortgage costs, lack of availability of mortgages, and/or regulatory changes could prevent the buyers of potential homebuyers’ existing homes from obtaining a mortgage, which would result in our potential customers’ inability to buy a new home. Similar risks apply to those buyers who are awaiting delivery of their homes and are currently in backlog. The success of homebuilders depends on the ability of potential homebuyers to obtain mortgages for the purchase of homes. If our customers (or potential buyers of our customers’ existing homes) cannot obtain suitable financing, our sales and results of operations could be adversely affected, the price of our common stock may decline, and you could lose a portion of your investment.

 

 11 

 

 

Interest rate increases or changes in federal lending programs or other regulations could lower demand for our homes, which could materially and adversely affect us.

 

Most of the purchasers of our homes finance their acquisitions with mortgage financing. Rising interest rates, decreased availability of mortgage financing or of certain mortgage programs, higher down payment requirements, or increased monthly mortgage costs may lead to reduced demand for our homes and mortgage loans. Increased interest rates can also hinder our ability to realize our backlog because our home purchase contracts provide customers with a financing contingency. Financing contingencies allow customers to cancel their home purchase contracts in the event that they cannot arrange for adequate financing. As a result, rising interest rates can decrease our home sales and mortgage originations. Any of these factors could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

In addition, as a result of the turbulence in the credit markets and mortgage finance industry, the federal government has taken on a significant role in supporting mortgage lending through its conservatorship of Fannie Mae and Freddie Mac, both of which purchase home mortgages and mortgage-backed securities originated by mortgage lenders, and its insurance of mortgages originated by lenders through the FHA and the VA. The availability and affordability of mortgage loans, including consumer interest rates for such loans, could be adversely affected by a curtailment or cessation of the federal government’s mortgage-related programs or policies. The FHA may continue to impose stricter loan qualification standards, raise minimum down payment requirements, impose higher mortgage insurance premiums and other costs, and/or limit the number of mortgages it insures. Due to growing federal budget deficits, the U.S. Treasury may not be able to continue supporting the mortgage-related activities of Fannie Mae, Freddie Mac, the FHA, and the VA at present levels, or it may revise significantly the federal government’s participation in and support of the residential mortgage market. Because the availability of Fannie Mae, Freddie Mac, FHA- and VA-backed mortgage financing is an important factor in marketing and selling many of our homes, any limitations, restrictions, or changes in the availability of such government-backed financing could reduce our home sales, which could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations. Furthermore, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. This legislation provides for a number of new requirements relating to residential mortgages and mortgage lending practices, many of which are to be developed further by implementing rules. These include, among others, minimum standards for mortgages and lender practices in making mortgages, limitations on certain fees and incentive arrangements, retention of credit risk, and remedies for borrowers in foreclosure proceedings. The effect of such provisions on lending institutions will depend on the rules that are ultimately enacted. However, these requirements, as and when implemented, are expected to reduce the availability of loans to borrowers and/or increase the costs to borrowers to obtain such loans. Any such reduction could result in a decline of our home sales, which could materially and adversely affect us.

 

 12 

 

 

Recent tax law changes that increase the after-tax costs of owning a home could prevent potential customers from buying our homes and adversely affect our business or financial results.

 

Significant expenses of owning a home, including mortgage interest and real estate taxes, have historically been deductible expenses for an individual’s U.S. federal, and in some cases, state income taxes, subject to various limitations under current tax law and policy. The “Tax Cuts and Jobs Act” which was signed into law in December 2017 includes provisions which impose significant limitations with respect to these income tax deductions. For instance, the annual deduction for real estate taxes and state local income taxes (or sales in lieu of income taxes) is now generally limited to $10,000. Furthermore, through the end of 2025, the deduction for mortgage interest is generally only available with respect to the first $750,000 of a new mortgage and there is no longer a federal deduction for interest on home equity loans. If the U.S. federal government or a state government further changes its income tax laws to further eliminate or substantially limit these income tax deductions, the after-tax cost of owning a new home would further increase for many of our potential customers. The resulting loss or reduction of these homeowner tax deductions that have historically been available has and could further reduce the perceived affordability of homeownership, and therefore the demand for and sales price of new homes, including ours. In addition, increases in property tax rates or fees on developers by local governmental authorities, as experienced in response to reduced federal and state funding or to fund local initiatives, such as funding schools or road improvements, or increases in insurance premiums can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes, and can have an adverse impact on our business and financial results.

 

Increases in taxes could prevent potential customers from buying our homes and adversely affect our business or financial results.

 

Increases in property tax rates by local governmental authorities, as experienced in response to reduced federal and state funding, can adversely affect the ability of potential customers to obtain financing or their desire to purchase new homes. Fees imposed on developers to fund schools, open spaces, road improvements and/or provide low and moderate income housing, could increase our costs, and have an adverse effect on our operations. In addition, increases in sales taxes could adversely affect our potential customers who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one of our homes.

 

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

 

Slower rates of population growth or population declines in Washington, or other key markets in the United States we plan to enter, especially as compared to the high population growth rates in prior years, could affect the demand for housing, causing home prices in these markets to fall, and adversely affect our plans for growth, business, financial condition, and operating results.

 

Difficulty in obtaining sufficient capital could result in our inability to acquire land for our developments or increased costs and delays in the completion of development projects.

 

The homebuilding industry is capital-intensive and requires significant up-front expenditures to acquire land parcels and begin development. If internally generated funds are not sufficient, we may seek additional capital in the form of equity or debt financing from a variety of potential sources, including additional bank financings and/or securities offerings. The availability of borrowed funds, especially for land acquisition and construction financing, may be greatly reduced nationally, and the lending community may require increased amounts of equity to be invested in a project by borrowers in connection with both new loans and the extension of existing loans. The credit and capital markets have recently experienced significant volatility. If we are required to seek additional financing to fund our operations, continued volatility in these markets may restrict our flexibility to access such financing. If we are not successful in obtaining sufficient capital to fund our planned capital and other expenditures, we may be unable to acquire land for our housing developments and/or to develop the housing. Additionally, if we cannot obtain additional financing to fund the purchase of land under our option contracts or purchase contracts, we may incur contractual penalties and fees. Any difficulty in obtaining sufficient capital for planned development expenditures could also cause project delays and any such delay could result in cost increases. Any one or more of the foregoing events could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

 13 

 

 

We face potentially substantial risk with respect to our land and lot inventory arising from significant changes in economic or market conditions.

 

We intend to acquire land parcels for replacement and expansion of land inventory within our current and any new markets. The risks inherent in purchasing and developing land parcels increase as consumer demand for housing decreases. As a result, we may buy and develop land parcels on which homes cannot be profitably built and sold. The market value of land parcels, building lots, and housing inventories can fluctuate significantly as a result of changing market conditions, and the measures we employ to manage inventory risk may not be adequate to insulate our operations from a severe drop in inventory values. When market conditions are such that land values are not appreciating, previously entered into option agreements may become less desirable, at which time we may elect to forego deposits and pre-acquisition costs and terminate the agreements. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. In the event of significant changes in economic or market conditions, we may have to sell homes at significantly lower margins or at a loss, if we are able to sell them at all.

 

If we are unable to develop our communities successfully or within expected timeframes, our results of operations could be adversely affected.

 

Before a community generates any revenues, time and material expenditures are required to acquire land, obtain development approvals, and construct significant portions of project infrastructure, amenities, model homes, and sales facilities. A decline in our ability to develop and market our communities successfully and to generate positive cash flow from these operations in a timely manner could have a material adverse effect on our business and results of operations and on our ability to service our debt and meet our working capital requirements.

 

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

 

As a homebuilder, we are subject to numerous risks, many of which are beyond our management’s control, such as droughts, floods, wildfires, landslides, soil subsidence, earthquakes, and other weather-related and geologic events which could damage projects, cause delays in completion of projects, or reduce consumer demand for housing, and shortages in labor or materials, which could delay project completion and cause increases in the prices for labor or materials, thereby affecting our sales and profitability. For example, we plan to expand in Colorado, a market which has historically experienced seasonal wildfires, mudslides, and soil subsidence. In addition to directly damaging our projects, wildfires, mudslides, or other geologic events could damage roads and highways providing access to those projects, thereby adversely affecting our ability to market homes in those areas and possibly increasing the costs of completion.

 

 14 

 

 

There are some risks of loss for which we may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes, and other geologic events may not be insurable and other losses, such as those arising from terrorism, may not be economically insurable. A sizeable uninsured loss could materially and adversely affect our business, prospects, liquidity, financial condition, and results of operations.

 

Natural disasters or impacts of a pandemic, such as the recent outbreak of the COVID-19 virus, may negatively impact our financial results.

 

The recent outbreak in China of the Coronavirus Disease 2019, or COVID-19, which has been declared by the World Health Organization to be a “public health emergency of international concern,” has spread across the globe and is impacting worldwide economic activity. A public health epidemic, including COVID-19, poses the risk that we or our employees, subcontractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that are requested and/or mandated by governmental authorities. Our primary market and headquarters are located in the state of Washington, where COVID-19 has already been identified. We are continuing to monitor and assess the effects of the COVID-19 outbreak on our commercial operations, including any potential impact on our revenue in 2020. We may experience impacts from quarantines, market downturns and changes in consumer behavior related to pandemic fears and impacts on our workforce if the virus becomes widespread in any of our markets. If the COVID-19 pandemic becomes more pronounced in our markets, or if a more significant natural disaster or pandemic were to occur in the future, our operations in areas impacted by such events could experience an adverse financial impact due to market changes. On March 25, 2020, the Governor of Washington suspended all residential and commercial construction in the State of Washington. On April 24, 2020, the Governor of Washington lifted the moratorium on construction of single-family low-risk construction, subject to certain requirements. The extent to which the COVID-19 outbreak impacts our results and operations will depend on future developments that are highly uncertain and cannot be predicted, including the ultimate geographic spread of COVID-19, the severity of the virus, the duration of the outbreak, the length of travel restrictions, business closures imposed by the governments of impacted countries, states, and municipalities, and any new information or that may emerge concerning the severity of the virus and the actions to contain its impact.

 

Failure to recruit, retain, and develop highly skilled, competent personnel may have a material adverse effect on our standards of service.

 

Key employees, including management team members, are fundamental to our ability to obtain, generate, and manage opportunities. Key employees working in the homebuilding and construction industries are highly sought after. Failure to attract and retain such personnel or to ensure that their experience and knowledge is not lost when they leave the business through retirement, redundancy, or otherwise may adversely affect the standards of our service and may have an adverse impact on our business, financial conditions, and operating results. In addition, we do not maintain key person insurance in respect of any member of our senior management team. The loss of any of our management members or key personnel could adversely impact our business, financial condition, and operating results. (See “—Risks Related to Our Organization and Structure—We depend on key personnel,” and “Management.”)

 

Failure to find suitable subcontractors may have a material adverse effect on our standards of service.

 

Substantially all of our construction work is done by third-party subcontractors with us acting as the general contractor. Accordingly, the timing and quality of our construction depend on the availability and skill of our subcontractors. The difficult operating environment over the last seven years in the United States has resulted in the failure of some subcontractors’ businesses and may result in further failures. In addition, reduced levels of homebuilding in the United States have led to some skilled tradesmen leaving the industry to take jobs in other sectors. We do not have long-term contractual commitments with any subcontractors, and there can be no assurance that skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conduct our operations.

 

In the future, certain of the subcontractors engaged by us may be represented by labor unions or subject to collective bargaining arrangements. A strike or other work stoppage involving any of our subcontractors could also make it difficult for us to retain subcontractors for our construction work. In addition, union activity could result in higher costs to retain our subcontractors. The inability to contract with skilled subcontractors at reasonable costs on a timely basis could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

 15 

 

 

Our reliance on contractors can expose us to various liability risks.

 

We rely on contractors in order to perform the construction of our homes, and in many cases, to select and obtain raw materials. We are exposed to various risks as a result of our reliance on these contractors and their respective subcontractors and suppliers, including the possibility of defects in our homes due to improper practices or materials used by contractors, which may require us to comply with our warranty obligations and/or bring a claim under an insurance policy. For example, despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices or installing defective materials in our homes. When we discover these issues, we repair the homes in accordance with our new home warranty and as required by law. We establish warranty and other reserves for the homes we sell based on market practices, our historical experiences, and our judgment of the qualitative risks associated with the types of homes built. However, the cost of satisfying our warranty and other legal obligations in these instances may be significantly higher than our warranty reserves, and we may be unable to recover the cost of repair from such subcontractors. Regardless of the steps we take, we can, in some instances, be subject to fines or other penalties, and our reputation may be injured.

 

In addition, several other homebuilders have received inquiries from regulatory agencies concerning whether homebuilders using contractors are deemed to be employers of the employees of such contractors under certain circumstances. Although contractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the homebuilding industry, if regulatory agencies reclassify the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage, hour, and other employment-related liabilities of their contractors, which could adversely affect our results of operations.

 

If we experience shortages in labor supply, increased labor costs, or labor disruptions, there could be delays or increased costs in developing our communities or building homes which could adversely affect our operating results.

 

We require a qualified labor force to develop our communities. Access to qualified labor may be affected by circumstances beyond our control, including:

 

  work stoppages resulting from labor disputes;
  shortages of qualified trades people, such as carpenters, roofers, electricians, and plumbers, especially in our key markets;
  changes in laws relating to union organizing activity;
  changes in immigration laws and trends in labor force migration; and
  increases in subcontractor and professional services costs.

 

Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, developing one or more of our communities and building homes. We may not be able to recover these increased costs by raising our home prices because the price for each home is typically set months prior to its delivery pursuant to sales contracts with our homebuyers. In such circumstances, our operating results could be adversely affected. Additionally, market and competitive forces may also limit our ability to raise the sales prices of our homes.

 

 16 

 

 

Government regulations and legal challenges may delay the start or completion of our communities, increase our expenses, or limit our homebuilding or other activities, which could have a negative impact on our results of operations.

 

The approval of numerous governmental authorities must be obtained in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs, or in some cases cause us to determine that the property is not feasible for development. Various local, state, and federal statutes, ordinances, rules, and regulations concerning building, health and safety, environment, zoning, sales, and similar matters apply to and/or affect the housing industry.

 

Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps. If municipalities in which we operate take such actions, it could have an adverse effect on our business by causing delays, increasing our costs, or limiting our ability to operate in those municipalities.

 

We may become subject to various state and local “slow growth” or “no growth” initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those localities.

 

Governmental regulation affects not only construction activities but also sales activities, mortgage lending activities, and other dealings with consumers. In addition, it is possible that some form of expanded energy efficiency legislation may be passed by the U.S. Congress or federal agencies and certain state and local legislatures, which may, despite being phased in over time, significantly increase our costs of building homes and the sale price to our buyers, and adversely affect our sales volumes. We may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed communities, whether brought by governmental authorities or private parties.

 

An inability to obtain additional performance, payment, and completion surety bonds and letters of credit could limit our future growth.

 

We are often required to provide performance, payment, and completion surety bonds or letters of credit to secure the completion of our construction contracts, development agreements, and other arrangements. We have obtained facilities to provide the required volume of performance, payment, and completion surety bonds and letters of credit for our expected growth in the medium term; however, unexpected growth may require additional facilities. We may also be required to renew or amend our existing facilities. Our ability to obtain additional performance, payment, and completion surety bonds and letters of credit primarily depends on our credit rating, capitalization, working capital, past performance, management expertise, and certain external factors, including the capacity of the markets for such bonds. Performance, payment, and completion surety bond and letter of credit providers consider these factors in addition to our performance and claims record and provider-specific underwriting standards, which may change from time to time.

 

If our performance record or our providers’ requirements or policies change, if we cannot obtain the necessary consent from our lenders, or if the market’s capacity to provide performance, payment, and completion bonds or letters of credit is not sufficient for any unexpected growth and we are unable to renew or amend our existing facilities on favorable terms or at all, we could be unable to obtain additional performance, payment, and completion surety bonds or letters of credit from other sources when required, which could have a material adverse effect on our business, financial condition, and results of operations.

 

 17 

 

 

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

 

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

 

We are subject to environmental laws and regulations, which may increase our costs, limit the areas in which we can build homes, and delay completion of our projects.

 

We are subject to a variety of local, state, and federal statutes, rules, and regulations concerning land use and the protection of health and the environment, including those governing discharge of pollutants to water and air, including asbestos, the handling of hazardous materials, and the cleanup of contaminated sites. We may be liable for the costs of removal, investigation, or remediation of hazardous or toxic substances located on, under, or in a property currently or formerly owned, leased, or occupied by us, whether or not we caused or knew of the pollution. The costs of any required removal, investigation, or remediation of such substances or the costs of defending against environmental claims may be substantial. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect our ability to sell the land or to borrow using the land as security. Projects may be located on land that may have been contaminated by previous use. Although we are not aware of any projects requiring material remediation activities by us as a result of historical contamination, no assurances can be given that material claims or liabilities relating to such developments will not arise in the future.

 

The particular impact and requirements of environmental laws that apply to any given community vary greatly according to the community site, the site’s environmental conditions, and the present and former use of the site. We expect that increasingly stringent requirements may be imposed on homebuilders in the future. Environmental laws may result in delays, cause us to implement time consuming and expensive compliance programs and prohibit or severely restrict development in certain environmentally sensitive regions or areas, such as wetlands. We also may not identify all of these concerns during any pre-development review of project sites. Environmental regulations can also have an adverse impact on the availability and price of certain raw materials, such as lumber. Furthermore, we could incur substantial costs, including cleanup costs, fines, penalties, and other sanctions and damages from third-party claims for property damage or personal injury, as a result of our failure to comply with, or liabilities under, applicable environmental laws and regulations. In addition, we are subject to third-party challenges, such as by environmental groups, under environmental laws and regulations to the permits and other approvals required for our projects and operations. These matters could adversely affect our business, financial condition, and operating results.

 

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We may be liable for claims for damages as a result of the use of hazardous materials.

 

As a homebuilding business with a wide variety of historic homebuilding and construction activities, we could be liable for future claims for damages as a result of the past or present use of hazardous materials, including building materials which in the future become known or are suspected to be hazardous. Any such claims may adversely affect our business, financial condition, and operating results. Insurance coverage for such claims may be limited or non-existent.

 

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

 

Litigation and concern about indoor exposure to certain types of toxic molds have been increasing as the public becomes increasingly aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. Toxic molds can be found almost anywhere; they can grow on virtually any organic substance, as long as moisture and oxygen are present. There are molds that can grow on wood, paper, carpet, foods, and insulation. When excessive moisture accumulates in buildings or on building materials, mold growth will often occur, particularly if the moisture problem remains undiscovered or unaddressed. It is impossible to eliminate all mold and mold spores in the indoor environment. If mold or other airborne contaminants exist or appear at our properties, we may have to undertake a costly remediation program to contain or remove the contaminants or increase indoor ventilation. If indoor air quality were impaired, we could be liable to our homebuyers or others for property damage or personal injury.

 

We may not be able to compete effectively against competitors in the real estate development industry, especially in the new markets we plan to enter.

 

Competition in the residential real estate development industry is intense, and there are relatively low barriers to entry into our business. Developers compete for, among other things, home buying customers, desirable land parcels, financing, raw materials, and skilled labor. Increased competition could hurt our business, as it could prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion, or lead to pricing pressures on our homes that may adversely impact our margins and revenues. We compete with large national and regional homebuilding companies and with smaller local homebuilders for land, financing, raw materials, and skilled management and labor resources. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products. Furthermore, a number of our primary competitors are significantly larger, have a longer operating history and may have greater resources or lower cost of capital than us; accordingly, they may be able to compete more effectively in one or more of the markets in which we operate. Many of these competitors also have longstanding relationships with subcontractors and suppliers in the markets in which we operate. As we expand our operations into other areas of the United States, we face new competition from many established homebuilders in those markets, and we will not have the benefit of the extensive relationships and strong reputations with subcontractors, suppliers, and homebuyers that we enjoy in our Washington markets. We also compete with the resale, or “previously owned,” home market, which has increased significantly due to the large number of homes that have been foreclosed on or could be foreclosed on due to any future economic downturn, and with available rental housing. If we are unable to successfully compete, our business, prospects, liquidity, financial condition, and results of operations could be materially and adversely affected.

 

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Raw materials and building supply shortages and price fluctuations could delay or increase the cost of home construction and adversely affect our operating results.

 

The homebuilding industry has, from time to time, experienced raw material shortages and been adversely affected by volatility in global commodity prices. In particular, shortages and fluctuations in the price of concrete, drywall, lumber, or other important raw materials could result in delays in the start or completion of, or increase the cost of, developing one or more of our residential communities.

 

In addition, the cost of petroleum products, which are used both to deliver our materials and to transport workers to our job sites, fluctuates and may be subject to increased volatility as a result of geopolitical events or accidents such as the Deepwater Horizon accident in the Gulf of Mexico. Changes in such costs could also result in higher prices for any product utilizing petrochemicals. These cost increases may have an adverse effect on our operating margin and results of operations and may result in a decline in the price of our common stock. Furthermore, any such cost increase may adversely affect the regional economies in which we operate and reduce demand for our homes.

 

Homebuilding is subject to product liability and warranty claims arising in the ordinary course of business that can be significant.

 

As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. There can be no assurance that any developments we undertake will be free from defects once completed. Construction defects may occur on projects and developments and may arise during a significant period of time after completion. Defects arising on a development attributable to us may lead to significant contractual or other liabilities.

 

As a consequence, we maintain products and completed operations excess liability insurance, obtain indemnities and certificates of insurance from subcontractors generally covering claims related to damages resulting from faulty workmanship and materials, and create warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the risks associated with the types of homes built. Although we actively monitor our insurance reserves and coverage, because of the uncertainties inherent to these matters, we cannot provide assurance that our insurance coverage, our subcontractor arrangements, and our reserves will be adequate to address all of our warranty and construction defect claims in the future. In addition, contractual indemnities can be difficult to enforce. We may also be responsible for applicable self-insured retentions, and some types of claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered by and the availability of products and completed operations excess liability insurance for construction defects is currently limited and costly. This coverage may be further restricted or become more costly in the future.

 

Unexpected expenditures attributable to defects or previously unknown sub-surface conditions arising on a development project may have a material adverse effect on our business, financial condition, and operating results. In addition, severe or widespread incidents of defects giving rise to unexpected levels of expenditure, to the extent not covered by insurance or redress against subcontractors, may adversely affect our business, financial condition, and operating results.

 

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

 

We could suffer physical damage to property and liabilities resulting in losses that may not be fully compensated by insurance. In addition, certain types of risks, such as personal injury claims, may be, or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered by our insurance policies. Should an uninsured loss or a loss in excess of insured limits occur, we could sustain financial loss or lose capital invested in the affected property as well as anticipated future income from that property. In addition, we could be liable to repair damage or meet liabilities caused by uninsured risks. We may be liable for any debt or other financial obligations related to affected property. Material losses or liabilities in excess of insurance proceeds may occur in the future.

 

In the United States, the coverage offered and the availability of general liability insurance for construction defects is currently limited and is costly. As a result, an increasing number of our subcontractors in the United States may be unable to obtain insurance. If we cannot effectively recover construction defect liabilities and costs of defense from our subcontractors or their insurers, or if we have self-insured liabilities, we may suffer losses. Coverage may be further restricted and become even more costly. Such circumstances could adversely affect our business, financial condition, and operating results.

 

Our operating performance is subject to risks associated with the real estate industry.

 

Real estate investments are subject to various risks and fluctuations and cycles in value and demand, many of which are beyond our control. Certain events may decrease cash available for operations, as well as the value of our real estate assets. These events include, but are not limited to:

 

  adverse changes in financial conditions of buyers and sellers of properties, particularly residential homes, and land suitable for development of residential homes;
     
  adverse changes in international, national, or local economic and demographic conditions;
     
  competition from other real estate investors with significant capital, including other real estate operating companies, developers, and institutional investment funds;
     
  reductions in the level of demand for and increases in the supply of land suitable for development;
     
  fluctuations in interest rates, which could adversely affect our ability, or the ability of homebuyers, to obtain financing on favorable terms or at all;
     
  unanticipated increases in expenses, including, without limitation, insurance costs, development costs, real estate assessments, and other taxes and costs of compliance with laws, regulations, and governmental policies; and
     
  changes in enforcement of laws, regulations, and governmental policies, including, without limitation, health, safety, environmental, zoning and tax laws, governmental fiscal policies, and the Americans with Disabilities Act of 1990.

 

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In addition, periods of economic slowdown or recession, rising interest rates or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in the purchase of homes or an increased incidence of home order cancellations. If we cannot successfully implement our business strategy, our business, prospects, liquidity, financial condition, and results of operations will be adversely affected.

 

Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties for reasonable prices in response to changing economic, financial, and investment conditions may be limited, and we may be forced to hold non-income producing properties for extended periods of time.

 

Real estate investments are relatively difficult to sell quickly. As a result, our ability to promptly sell one or more properties in response to changing economic, financial, and investment conditions is limited, and we may be forced to hold non-income producing assets for an extended period of time. We cannot predict whether we will be able to sell any property for the price or on the terms that we set or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

 

If the market value of our land inventory decreases, our results of operations could be adversely affected by impairments and write-downs.

 

The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. There is an inherent risk that the value of the land owned by us may decline after purchase. The valuation of property is inherently subjective and based on the individual characteristics of each property. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell homes profitably.

 

In addition, our deposits for lots controlled under option or similar contracts may be put at risk. Factors, such as changes in regulatory requirements and applicable laws (including in relation to building regulations, taxation, and planning), political conditions, the condition of financial markets, both local and national economic conditions, the financial condition of customers, potentially adverse tax consequences, and interest and inflation rate fluctuations, subject land valuations to uncertainty. Moreover, all valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. If housing demand decreases below what we anticipated when we acquired our inventory, our profitability may be adversely affected, and we may not be able to recover our costs when we develop real estate projects.

 

Due to economic conditions in the United States in recent years, including increased amounts of home and land inventory that entered certain U.S. markets from foreclosure sales or short sales, the market value of our land and home inventory was negatively impacted. We regularly review the value of our land holdings and continue to review our holdings on a periodic basis. Material write-downs and impairments in the value of our inventory may be required, and we may in the future sell land or homes at a loss, which could adversely affect our results of operations and financial condition.

 

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Inflation could adversely affect our business and financial results.

 

Inflation could adversely affect us by increasing the costs of land, materials, and labor needed to operate our business. In the event of an increase in inflation, we may seek to increase the sales prices of homes in order to maintain satisfactory margins. However, an oversupply of homes relative to demand and home prices being set several months before homes are delivered may make any such increase difficult or impossible. In addition, inflation is often accompanied by higher interest rates, which historically have had a negative impact on housing demand. In such an environment, we may not be able to raise home prices sufficiently to keep up with the rate of inflation and our margins could decrease. Moreover, the cost of capital increases as a result of inflation and the purchasing power of our cash resources declines. Current or future efforts by the government to stimulate the economy may increase the risk of significant inflation and its adverse impact on our business or financial results.

 

Our quarterly operating results may fluctuate because of the seasonal nature of our business and other factors.

 

Our quarterly operating results generally fluctuate by season. Historically, we have entered into a larger percentage of contracts for the sale of our homes during the spring and summer months. Weather-related problems, typically in the fall, late winter, and early spring, may delay starts or closings and increase costs and thus reduce profitability. Seasonal natural disasters such as floods and fires could cause delays in the completion of, or increase the cost of, developing one or more of our communities, causing an adverse effect on our sales and revenues.

 

In many cases, we may not be able to recapture increased costs by raising prices. In addition, deliveries may be staggered over different periods of the year and may be concentrated in particular quarters. Our quarterly operating results may fluctuate because of these factors.

 

We will become subject to financial reporting and other requirements as a public company for which our accounting and other management systems and resources may not be adequately prepared.

 

As a public company with listed equity securities, we will need to comply with new laws, regulations, and requirements, including the requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the U.S. Securities and Exchange Commission (the “SEC”) and requirements of the , with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting.

 

Section 404 of the Sarbanes-Oxley Act requires our management and independent auditors to report annually on the effectiveness of our internal control over financial reporting. However, we are an “emerging growth company,” as defined in the JOBS Act, and, so for as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemptions, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting.

 

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We would cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering, (ii) the first fiscal year after our annual gross revenues are $1.0 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 $700,000,000 as of the end of the second quarter of that fiscal year.

 

These reporting and other obligations will place significant demands on our management, administrative, operational, and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, create or outsource an internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

We also expect that being a public company and these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

 

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting as of the end of our fiscal year 2020. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

 

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We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing, and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

 

We will be required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we continue to take advantage of the exemptions contained in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, or operating. Our remediation efforts may not enable us to avoid a material weakness in the future. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. In addition, rules implemented by the SEC and Nasdaq require changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We will also incur additional costs associated with our public company reporting requirements. We expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, particularly to serve on our audit committee and compensation committee, or as executive officers.

 

Acts of war or terrorism may seriously harm our business.

 

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

 

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Negative publicity may affect our business performance and could affect our stock price.

 

Unfavorable media related to our industry, company, brands, marketing, personnel, operations, business performance, or prospects may affect our stock price and the performance of our business, regardless of its accuracy or inaccuracy. Our success in maintaining, extending, and expanding our brand image depends on our ability to adapt to a rapidly changing media environment. Adverse publicity or negative commentary on social media outlets, such as blogs, websites, or newsletters, could hurt operating results, as consumers might avoid brands that receive bad press or negative reviews. Negative publicity may result in a decrease in operating results that could lead to a decline in the price of our common stock and cause you to lose all or a portion of your investment.

 

Failure to manage land acquisitions and development and construction processes could result in significant cost overruns or errors in valuing sites.

 

We own and purchase a large number of sites each year and are therefore dependent on our ability to process a very large number of transactions (which include, among other things, evaluating the site purchase, designing the layout of the development, sourcing materials and subcontractors, and managing contractual commitments) efficiently and accurately. Errors by employees, failure to comply with regulatory requirements and conduct of business rules, failings or inadequacies in internal control processes, inabilities to obtain desired approvals and entitlements, cost overruns, equipment failures, natural disasters, or the failure of external systems, including those of our suppliers or counterparties, could result in operational losses that could adversely affect our business, financial condition, and operating results and our relationships with our customers.

 

Poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline.

 

Residents of communities we develop rely on us to resolve issues or disputes that may arise in connection with the operation or development of their communities. Efforts made by us to resolve these issues or disputes could be deemed unsatisfactory by the affected residents and subsequent actions by these residents could adversely affect sales or our reputation. In addition, we could be required to make material expenditures related to the settlement of such issues or disputes or to modify our community development plans which could adversely affect our results of operations.

 

Tariffs may negatively impact our business.

 

A prolonged trade war with China could affect sales to entry level home buyers. Increased building material costs create corresponding increases in the sales price of new homes and could affect some first-time home buyers’ ability to participate in the residential marketplace.

 

Our trademarks and trade names may be infringed, misappropriated, or challenged by others.

 

We believe our brand name is important to our business. We seek to protect our trademarks, trade names and other intellectual property by exercising our rights under applicable trademark and copyright laws. If we were to fail to successfully protect our intellectual property rights for any reason, it could have an adverse effect on our business, results of operations and financial condition. Any damage to our reputation could have an adverse effect on our business, results of operations and financial condition.

 

Risks Related to Conflicts of Interest

 

As a result of Sterling Griffin’s relationship with us, conflicts of interest may arise with respect to any transactions involving or with Sterling Griffin, or his affiliates, and their interests may not be aligned with yours.

 

Sterling Griffin, our Chief Executive Officer, President, and Chairman of our board of directors, beneficially owns 3,291,716 shares of our common stock (including 67,568 options to purchase common stock and 70,994 shares of common stock to be held by Olympic, an entity controlled by Mr. Sterling, following the conversion of approximately $496,956 of outstanding indebtedness we owe to Olympic into shares of our common stock at a per share value equal to the public offering price per share in this offering, which conversion will occur immediately following the determination of the actual public offering price per share of the common stock to be sold in this offering), which will represent 56.8% of our common stock outstanding immediately after this offering, or 53.3% if the underwriters exercise in full their over-allotment option to purchase additional shares of our common stock in this offering. For so long as Mr. Griffin continues to beneficially own a significant stake in us, he will have significant influence over the power to:

 

  elect our directors and exercise overall control over us;

 

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  agree to sell or otherwise transfer a controlling stake in us; and
     
  determine the outcome of substantially all actions requiring the majority approval of our shareholders, including transactions with related parties, corporate reorganizations, mergers, acquisitions, and dispositions of assets.

 

Mr. Griffin’s interests as a controlling shareholder and executive officer, and the interests of our Company may not be fully aligned and in some cases may directly conflict with your interests as an investor in our common stock. In addition, Mr. Griffin’s voting control as the majority shareholder of our Company, and our Chief Executive Officer and President will effectively limit your ability to influence certain matters that are presented to our shareholders for a vote and may discourage potential future investors in our Company from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our common stock might otherwise receive a premium for your shares over the then-current market price.

 

In addition, we may pursue and enter into transactions with third parties in which Mr. Griffin may have material financial and other interests, including as a result of his equity ownership in such third parties or his ability to exercise control or significant influence over shareholder voting or management of such third parties, that present actual or perceived conflicts of interest that could provide Mr. Griffin with certain financial and other benefits from the transaction that are not shared by our stockholders in general. Even if Mr. Griffin were to recuse himself from the actions of our board of directors in connection with the board’s consideration and vote on such transactions in which Mr. Griffin may have financial or other interests that conflict with those of our shareholders in general, Mr. Griffin could still exert significant influence over the board process and vote in such transactions and any shareholder vote thereon as a result of being the controlling shareholder, a senior executive officer and board member of our company, thereby effectively causing us to effect transactions and take other action that may provide financial and other benefits to Mr. Griffin that are not shared equally by all of our shareholders.

 

For example, we have entered into an employment agreement with Mr. Griffin, our Chief Executive Officer and President, in his capacity as an officer, pursuant to which he is required to devote substantially full-time attention to our affairs. (See “Executive and Director Compensation—Employment Agreements.”) This employment agreement was not negotiated on an arm’s-length basis. We may choose not to enforce, or to enforce less vigorously, our rights under this employment agreement because of our desire to maintain our ongoing relationship with Mr. Griffin.

 

In addition, in February 2020, we entered into definitive agreements in connection with the Olympic Acquisition, pursuant to which we agreed to purchase 98 residential lots in Bremerton, Washington that are currently owned by Olympic. We intend to use $3,430,000 of the net proceeds of this offering, representing approximately 26% of such net proceeds, to pay the entire cash purchase price the 98 residential lots we are purchasing from Olympic in of the Olympic Acquisition, the closing of which is contingent upon completion of this offering. As a controlling shareholder, senior executive officer and director of our Company, both before and immediately following the completion of this offering, and is a senior executive officer and director and 50% equity holder of Olympic, Mr. Griffin controls the parties on both sides of the Olympic Acquisition and, therefore, he has significant conflicts of interest in this transaction because he will derive financial and other benefits as a result of his ownership and management control of both purchaser and seller of these residential lots in the Olympic Acquisition, including a financial interest in the $3,430,000 cash purchase price we will pay Olympic for these residential lots, which we are paying utilizing a substantial portion of the net proceeds of this offering. While we will own the residential lots upon completion of the Olympic Acquisition, there can be no assurances that the value of these residential lots will not fall significantly relative to their current value in the future and therefore be worth much less than the purchase price we paid for them, however, unlike other stockholders of our company, Mr. Griffin, by virtue of his 50% ownership interest in Olympic, would retain a material financial interest in at least half of the $3,430,000 we paid to Olympic in exchange for the properties by virtue of his 50% equity ownership of Olympic.

 

Risks Related to Financing and Indebtedness

 

We expect to use leverage in executing our business strategy, which may adversely affect the return on our assets.

 

We may incur a substantial amount of debt in the future. Our existing indebtedness is recourse to us, and we anticipate that future indebtedness will likewise be recourse. As of the date of this prospectus, we had $31,544,000 of debt outstanding, bearing interest at the rates of 3.58% to 40% depending on the type of loan. Our board of directors will consider 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 the Company as a whole, to generate cash flow to cover the expected debt service. Our governing corporate 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.

 

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Incurring a substantial amount of debt could have important consequences for our business, including:

 

  making it more difficult for us to satisfy our obligations with respect to our debt or to our trade or other creditors;
     
  increasing our vulnerability to adverse economic or industry conditions;
     
  limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the availability of financing in the capital markets is limited;
     
  requiring a substantial portion of our cash flows from operations and the proceeds from this offering for the payment of interest on our debt and reducing our ability to use our cash flows and the proceeds from this offering to fund working capital, capital expenditures, acquisitions, and general corporate requirements;
     
  limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
     
  placing us at a competitive disadvantage to less leveraged competitors.

 

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us through capital markets financings or under our credit facilities or otherwise in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before its maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, we may incur additional indebtedness in order to finance our operations or to repay existing indebtedness. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional debt or equity, financing, or reducing or delaying capital expenditures, strategic acquisitions, investments, and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would be advantageous to our shareholders or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.

 

We will require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.

 

The expansion and development of our business may require significant capital, which we may be unable to obtain, to fund our capital expenditures and operating expenses, including working capital needs. In accordance with our growth strategy, following this offering, we expect to opportunistically raise additional debt capital to help fund the growth of our business, subject to market and other conditions, but such debt capital may not be available to us on a timely basis at reasonable rates or at all.

 

In the future, we may fail to generate sufficient cash flow from the sales of our homes and land to meet our cash requirements. Further, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels, or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.

 

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To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative, and regulatory factors, and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. As a result, we may need to refinance all or a portion of our debt, on or before its maturity, or obtain additional equity or debt financing. We cannot assure you that we will be able to do so on favorable terms, if at all. Any inability to generate sufficient cash flow, refinance our debt, or incur additional debt on favorable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay or prevent the expansion of our business.

 

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

 

Our existing indebtedness is recourse to us, and we anticipate that future real estate acquisitions may also contain indebtedness that could be recourse to us. In the event we need to seek third-party sources of financing, we will depend, in part, on:

 

  general market conditions;
     
  the market’s perception of our growth potential;
     
  with respect to acquisition and/or development financing, the market’s perception of the value of the land parcels to be acquired and/or developed;
     
  our current and expected future earnings;
     
  our cash flow; and
     
  the market price per share of our common stock.

 

Recently, domestic financial markets have experienced unusual volatility, uncertainty, and a tightening of liquidity in both the investment grade debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. Given the current volatility and weakness in the capital and credit markets, potential lenders may be unwilling or unable to provide us with financing that is attractive to us or may charge us prohibitively high fees in order to obtain financing. Consequently, there is greater uncertainty regarding our ability to access the credit market in order to attract financing on reasonable terms. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure additional financing on reasonable terms, if at all.

 

Depending on market conditions at the relevant time, we may have to rely more heavily on additional equity financings or on less efficient forms of debt financing that require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, and other purposes. We may not have access to such equity or debt capital on favorable terms at the desired times, or at all.

 

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Our future financing arrangements likely will contain restrictive covenants relating to our operations.

 

The financing arrangements we enter into in the future likely will contain, covenants (financial and otherwise) affecting our ability to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our shareholders, and otherwise affect our operating policies. The restrictions contained in such financing arrangements could also limit our ability to plan for or react to market conditions, meet capital needs, make acquisitions, or otherwise restrict our activities or business plans.

 

Failing to satisfy covenants in our future debt agreements may result in default.

 

If we fail to meet or satisfy any restrictive covenants in our future debt agreements, we would be in default under those agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral, or enforce their respective interests against existing collateral. A default also could limit significantly our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets when we otherwise would not choose to do so. If we default on several of our debt agreements or any single significant debt agreement, it could have a material adverse effect on our business, prospects, liquidity, financial condition, and results of operations.

 

Secured indebtedness exposes us to the possibility of foreclosure on our ownership interests in our land parcels.

 

Incurring mortgage and other secured indebtedness increases our risk of loss of our ownership interests in our land parcels or other assets because defaults thereunder, and the inability to refinance such indebtedness, may result in foreclosure action initiated by lenders. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Material Indebtedness.”)

 

Interest expense on debt we may incur may limit our cash available to fund our growth strategies.

 

We plan to obtain one or more lines of credit to fund land acquisition, infrastructure development, and home building. We will be required to pay interest on amounts drawn down from any lines of credit at market rates which may include floating rates of interest. All interest rates require debt servicing costs and floating rate debt will increase debt servicing costs and could reduce funds available for operations, future business opportunities, or other purposes. If we need to repay debt during periods of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times which may not permit realization of the maximum return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our cash flows and results of operations.

 

Risks Related to Our Organization and Structure

 

We depend on key personnel.

 

Our success depends to a significant degree upon the contributions of certain key personnel including, but not limited to, Sterling Griffin, our Chief Executive Officer, President, and Chairman of our board of directors, who would be difficult to replace. Although we have entered into an employment agreement with Mr. Griffin, in his capacity as an officer, there is no guarantee that he will remain employed with us. If any of our key personnel were to cease employment with us, our operating results could suffer. Further, the process of attracting and retaining suitable replacements for key personnel whose services we may lose would result in transition costs and would divert the attention of other members of our senior management from our existing operations. The loss of services from key personnel or a limitation in their availability could materially and adversely impact our business, prospects, liquidity, financial condition, and results of operations. Further, such a loss could be negatively perceived in the capital markets. We have not obtained and do not expect to obtain key man life insurance that would provide us with proceeds in the event of death or disability of any of our key personnel.

 

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We may not be able to successfully operate our business.

 

We have only been conducting operations since 2014. We cannot assure you that our past experience will be sufficient to enable us to operate our business successfully or implement our operating policies and business strategies as described in this prospectus. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses or service our indebtedness. You should not rely upon the past performance of our management team as past performance may not be indicative of our future results.

 

Termination of the employment agreement with our Chief Executive Officer and President could be costly and prevent a change in control of the Company.

 

The employment agreement we have entered into with Sterling Griffin, our Chief Executive Officer and President, in his capacity as an officer, provides that if his employment with us terminates under certain circumstances, we may be required to pay him significant amounts of severance compensation, thereby making it costly to terminate his employment. Furthermore, these provisions could delay or prevent a transaction or a change in control of the Company that might involve a premium paid for shares of our common stock or otherwise be in the best interests of our shareholders, which could adversely affect the market price of our common stock. (See “Executive Officer and Director Compensation—Employment Agreements with our Named Executive Officers—Employment Agreement with Sterling Griffin.”)

 

Our corporate organizational documents and provisions of state law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult, or prevent an attempted acquisition that you may favor or an attempted replacement of our board of directors or management.

 

Our governing documents have anti-takeover effects and may delay, discourage, or prevent an attempted acquisition or change of control or a replacement of our incumbent board of directors or management. Our governing documents include provisions that:

 

  empower our board of directors, without stockholder approval, to issue our preferred stock, the terms of which, including voting power, are to be set by our board of directors;
     
  eliminate cumulative voting in elections of directors;
     
  permit our board of directors to alter, amend, or repeal our Bylaws or to adopt new Bylaws;
     
  prior to going public, require the request of holders of at least 25% of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting and after going public, require the request of holders of at least 51% of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting;
     
  require shareholders that wish to bring business before annual meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing;

 

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  require that certain business combination transactions with a significant stockholder be approved by holders of 66 2/3% of the shares held by persons other than the significant stockholder; and
     
  enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors.

 

In addition, certain provisions of Washington law, including a provision which restricts certain business combinations between a Washington corporation and certain affiliated shareholders, may delay, discourage, or prevent an attempted acquisition or change in control.

 

Furthermore, our Bylaws provide that a state court located within the state of Washington (or, if no state court located within the state of Washington has jurisdiction, the United States District Court for the Western District of Washington) will be the exclusive forum for: (a) any actual or purported derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of fiduciary duty by any of our directors or officers; (c) any action asserting a claim against us or our directors or officers arising pursuant to the WBCA, our Articles of Incorporation, or our Bylaws; or (d) any action asserting a claim against us or our officers or directors that is governed by the internal affairs doctrine. By becoming a stockholder of our Company, you will be deemed to have notice of and have consented to the provisions of our Bylaws related to choose of forum. The choice of forum provision in our Bylaws may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us. Alternatively, if a court were to find the choice of forum provision contained in our Bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition, and earnings. (See “Description of Capital Stock—Certain Provisions of Washington Law and of our Articles of Incorporation and Bylaws.”)

 

We are a “controlled company” within the meaning of the (exchange name) corporate governance standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to shareholders of companies that are subject to such requirements.

 

Upon the completion of this offering, Sterling Griffin, our founder, Chief Executive Officer, President, and Chairman of our board of directors, will continue to control a majority of the voting power of our common stock. (See “Principal Stockholders.”) As a result, we are a “controlled company” within the meaning of the Nasdaq rules. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of Nasdaq, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that we have a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, and (3) the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. Following this offering, we intend to rely on some or all of these exemptions. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.

 

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Concentrating voting control will limit or preclude our shareholders’ ability to influence corporate matters, including the election of directors, any merger, consolidation, or other major corporate transaction requiring stockholder approval, which may negatively impact your liquidity and/or your gain on your investment.

 

As of the date of this prospectus, Sterling Griffin, our founder, Chief Executive Officer, President, and Chairman of our board of directors, owned approximately 91% of our outstanding shares of common stock. Following the completion of this offering, Mr. Griffin is expected to own approximately 56.8% of our outstanding shares of common stock (which includes his beneficial interests in Olympic), or approximately 53.3% if the underwriters exercise in full their over-allotment option. As a result, Mr. Griffin will be able to control any vote of our shareholders which may be required for the foreseeable future and may negatively impact your investment.

 

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

 

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

 

We are an “emerging growth company” and, as a result of the reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

 

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 applicable to other public companies but not to emerging growth companies, including, but not limited to, a requirement to present only two years of audited financial statements, an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act, reduced disclosure about executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, and no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements. We have elected to adopt these reduced disclosure requirements. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of this offering, although a variety of circumstances could cause us to lose that status earlier.

 

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised financial accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the extended transition period and, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. In choosing to take advantage of the extended transition period, we may later decide otherwise (i.e., “opt in” by complying with the financial accounting standard effective dates applicable to non-emerging growth companies), so long as it complies with the requirements in Sections 107(b)(2) and (3) of the JOBS Act, which is irrevocable.

 

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We cannot predict if investors will find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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

 

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

 

We may face substantial damages or be enjoined from pursuing important activities as a result of existing or future litigation, arbitration, or other claims.

 

In our homebuilding activities, we are exposed to potentially significant litigation, including breach of contract, contractual disputes, and disputes relating to defective title, property misdescription or construction defects, including use of defective materials. Although we have established warranty, claim, and litigation reserves that we believe are adequate, due to the uncertainty inherent in litigation, legal proceedings may result in the award of substantial damages against us beyond our reserves. Furthermore, plaintiffs may in certain of these legal proceedings seek class action status with potential class sizes that vary from case to case. Class action lawsuits can be costly to defend, and if we were to lose any certified class action suit, it could result in substantial liability for us. In addition, we are subject to potential lawsuits, arbitration proceedings, and other claims in connection with our business.

 

With respect to certain general liability exposures, including construction defect and product liability claims, interpretation of underlying current and future trends, assessment of claims, and the related liability and reserve estimation process require us to exercise significant judgment due to the complex nature of these exposures, with each exposure often exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it is difficult to determine the extent to which the assertion of these claims will expand geographically. As a result, our insurance policies may not be available or adequate to cover any liability for damages, the cost of repairs, and/or the expense of litigation surrounding current claims, and future claims may arise out of events or circumstances not covered by insurance and not subject to effective indemnification agreements with our subcontractors. Should such a situation arise, it may have a material adverse effect on our business, financial condition, and operating results.

 

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

 

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

 

An information systems interruption or breach in security could adversely affect us.

 

We rely on fully integrated accounting, financial, and operational management information systems to conduct our operations. Any disruption in these systems could adversely affect our ability to conduct our business. Furthermore, any security breach of information systems or data could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, and a loss of confidence in our security measures, which could harm our business.

 

Risks Related to this Offering and Ownership of our Common Stock

 

There is currently no public market for shares of our common stock, a trading market for our common stock may never develop following this offering, and our common stock prices may be volatile and could decline substantially following this offering.

 

There is currently no public market for the shares of our common stock. We have applied to list the shares of our common stock on the Nasdaq Capital Market under the symbol “HCDI.” Even if we are approved for listing our common stock on Nasdaq, an active trading market for the shares of our common stock may never develop or if one develops, it may not be sustained following this offering. Accordingly, no assurance can be given as to the following:

 

  the likelihood that an active trading market for shares of our common stock will develop or be sustained;
     
  the liquidity of any such market;
     
  the ability of our shareholders to sell their shares of common stock; or
     
  the price that our shareholders may obtain for their common stock.

 

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If an active market for our common stock does not develop or is not maintained, the market price of our common stock may decline, and you may not be able to sell your shares. Even if an active trading market develops for our common stock subsequent to this offering, the market price of our common stock may be highly volatile and subject to wide fluctuations. Our financial performance, government regulatory action, tax laws, interest rates, and market conditions in general could have a significant impact on the future market price of our common stock.

 

Some of the factors that could negatively affect or result in fluctuations in the market price of our common stock include:

 

  actual or anticipated variations in our quarterly operating results;
     
  changes in market valuations of similar companies;
     
  adverse market reaction to the level of our indebtedness;
     
  additions or departures of key personnel;
     
  actions by shareholders;
     
  speculation in the press or investment community;
     
  general market, economic, and political conditions, including an economic slowdown or dislocation in the global credit markets;
     
  our operating performance and the performance of other similar companies;
     
  changes in accounting principles; and
     
  passage of legislation or other regulatory developments that adversely affect us or the homebuilding industry.

 

The offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

 

Prior to this offering, there has been no market for our common stock. The offering price per share of our common stock offered by this prospectus was negotiated between us and the underwriters. Factors considered in determining the price of our common stock include:

 

  the history and prospects of companies whose principal business is the design, construction, and sale of single-family homes;
     
  prior offerings of those companies;
     
  our prospects for acquiring land parcels for development at attractive values;
     
  our capital structure;
     
  an assessment of our management and its experience in acquiring land parcels and designing, constructing, and selling homes;

 

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  general conditions of the securities markets at the time of this offering; and
     
  other factors we deemed relevant.

 

The offering price may not accurately reflect the value of our common stock and may not be realized upon any subsequent disposition of the shares.

 

If you purchase common stock in this offering, you will experience immediate dilution.

 

The offering price of our common stock is higher than the net tangible book value per share of our common stock outstanding upon the completion of this offering. Accordingly, if you purchase common stock in this offering, you will experience immediate dilution of approximately $(4.77) in the pro forma as adjusted net tangible book value per share of our common stock, assuming an initial public offering price of $7.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds the per share net tangible book value of our assets.

 

If securities analysts do not publish research or reports about our business, or if they downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us or our business. We do not currently have, and may never obtain, research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our common stock would be negatively impacted. In the event securities or industry analysts cover us and one or more of these analysts downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which could cause our common stock price and trading volume to decline.

 

We currently do not intend to pay dividends on our common stock.

 

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business. The determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, and such other factors as our board of directors deems relevant in its discretion. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them, or at all for an indefinite period of time, except as permitted under the Securities Act and the applicable securities laws of any other jurisdiction.

 

We have broad discretion to use the proceeds from this offering, and our investment of those proceeds may not yield a favorable return.

 

Our management has broad discretion to use the proceeds from this offering in ways with which you may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns. This could harm our business and could cause the market value of our common stock to decline.

 

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Future sales of our common stock, other securities convertible into our common stock, or preferred stock could cause the market value of our common stock to decline and could result in dilution of your shares.

 

Our board of directors is authorized, without your approval, to cause us to issue additional shares of our common stock or to raise capital through the creation and issuance of preferred stock, other debt securities convertible into common stock, options, warrants and other rights, on terms and for consideration as our board of directors in its sole discretion may determine. Sales of substantial amounts of our common stock or of preferred stock could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of our common stock for future sales, on the value of our common stock. Sales of substantial amounts of our common stock by Sterling Griffin or another large stockholder, or the perception that such sales could occur, may adversely affect the market price of our common stock.

 

In addition, in connection with this offering, subject to certain exceptions, each of our officers and directors and certain significant shareholders has entered into a lock-up agreement that restricts the direct or indirect sale of shares of our common stock beneficially held by such person for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters. In addition, all of our other shareholders have agreed not to directly or indirectly sell, offer to sell, grant any option or otherwise transfer or dispose of shares of our common stock for 180 days after the date of this prospectus; provided, however, that such restrictions shall not apply with respect to any of our shareholders (other than our officers, directors, or employees) for the sale of shares of common stock acquired by them in the open market after the completion of this offering. We have agreed not to waive or otherwise modify that agreement without the prior written consent of the representatives of the underwriters. The representatives of the underwriters may, at any time, release, or authorize us to release, as the case may be, all or a portion of our common stock subject to the foregoing lock-up provisions. If the restrictions under the lock-up provisions of the lock-up agreements entered into in connection with this offering are waived, shares of our common stock may become available for sale into the market, subject to applicable law, which could reduce the market price for our common stock.

 

In addition, subsequent to the effectiveness of the registration statement of which this prospectus forms a part, and subject to the lock-up provisions of the lock-up agreements entered into in connection with this offering, we intend to file a registration statement on Form S-8 to register the 675,676 shares of our common stock that may be issued under our 2018 Equity Incentive Plan.

 

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

 

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

 

Non-U.S. holders may be subject to United States federal income tax on gain realized on the sale or disposition of shares of our common stock.

 

Because of our holdings in United States real property interests, we believe we are a “United States real property holding corporation” (“USRPHC”) for United States federal income tax purposes. As a USRPHC, our stock may be treated as a United States real property interest (“USRPI”), gains from the sale of which by non-U.S. holders would be subject to U.S. income tax and reporting obligations pursuant to the Foreign Investment in Real Property Tax Act (“FIRPTA”), as described under “Certain Material Federal Income Tax Considerations—Taxation of Non-U.S. Holders—Sales or Other Taxable Dispositions of Shares of Our Common Stock.” Our common stock will not be treated as a USRPI if it is regularly traded on an established securities market, except in the case of a non-U.S. holder that actually or constructively holds more than 10% of such class of stock at any time during the shorter of the five-year period preceding the date of disposition or the holder’s holding period for such stock. We anticipate that our common stock will be regularly traded on an established securities market following this offering. However, no assurance can be given in this regard and no assurance can be given that our common stock will remain regularly traded in the future. If our stock is treated as a USRPI, a non-U.S. holder would be subject to regular United States federal income tax with respect to any gain on such stock in the same manner as a taxable U.S. holder (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In addition, the purchaser of the stock would be required to withhold and remit to the IRS 10% of the purchase price unless an exception applies. A non-U.S. holder also would be required to file a U.S. federal income tax return for any taxable year in which it realizes a gain from the disposition of our common stock that is subject to U.S. federal income tax. Non-U.S. holders should consult their tax advisors concerning the consequences of disposing of shares of our common stock.

 

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CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 

Various statements contained in this prospectus, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income, and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “intend,” “anticipate,” “potential,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. The forward-looking statements in this prospectus speak only as of the date of this prospectus, 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:

 

  economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates, and inflation;
     
  continued or increased downturn in the homebuilding industry;
     
  changes in assumptions used to make industry forecasts;
     
  continued 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;
     
  continued or increased disruption in the availability of mortgage financing or the number of foreclosures in the market;
     
  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;

 

 39 

 

 

  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 and the lack of a public market for shares of our common stock;
     
  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;
     
  our expected use of the proceeds from this offering; and
     
  additional factors discussed under the sections captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.”

 

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 prospectus and are subject to risks and uncertainties. We discuss many of these risks in greater detail under “Risk Factors.” Moreover, we operate in a very 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 these forward-looking statements.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus forms a part 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 prospectus 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 prospectus or to conform such statements to actual results or revised expectations, except as required by law.

 

 40 

 

 

USE OF PROCEEDS

 

We expect to receive net proceeds from this offering of approximately $13,000,000 (assuming an initial public offering price of $7.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and the estimated offering expenses of approximately $950,000 payable by us.

 

We intend to use the net proceeds from this offering primarily for the acquisition and development of land, debt reduction and, working capital each as further described below.

 

The underwriters have an option to purchase up to 321,428 additional shares of our common stock at the offering price less the underwriting discounts and commissions within 45 days after the date of this prospectus to cover over-allotments, if any, made by the underwriters to investors from whom orders were solicited prior to the date of this prospectus. Exercise of this option in full would result in additional net proceeds to us of approximately $2,092,500. All of such additional net proceeds would be used for land acquisition and development.

 

    Amount     Percentage  
Net proceeds to us(1)     $ 13,000,000          
                 
Use of proceeds:                
Purchase of land from Olympic Views, LLC   $ 3,430,000       26 %
Land acquisition and development   $ 6,558,000       51 %
Debt reduction   $ 1,062,000       8 %
Working capital   $ 1,950,000       15 %
Total     13,000,000       100 %

 

  (1) Reflects estimated offering expenses, underwriting discounts and commissions payable by us and assumes no exercise of the underwriters’ option to purchase additional shares of our common stock.

 

Olympic Acquisition – We intend to use $3,430,000, representing approximately 26% of the net proceeds of this offering, to pay the entire cash purchase price of the 98 residential lots we are purchasing from Olympic in the Olympic Acquisition, the closing of which is contingent upon completion of this offering. Sterling Griffin, our Chief Executive Officer and President, exercises 50% voting power and control over Olympic (the other 50% of which is owned by a shareholder of the Company, Reed Kelly), and as a result, Mr. Griffin has a direct interest in the use of proceeds from this transaction as payment of the Olympic lot purchase price.

 

Land Acquisition and Development – We intend to use a portion of the proceeds from this offering to acquire property and expand our Western Washington footprint followed by targeted expansion of our operations in other markets, which may include Portland, Oregon; Denver, Colorado; and along the I-95 corridor in Georgia and South Carolina, including Myrtle Beach, Charleston, and Hilton Head.

 

Debt Reduction – We intend to use a portion of the proceeds of this offering to pay off a loan from Kautilya Capital, LLC with a principal amount of $1,062,000, which bears interest at 15% annually, interest paid monthly, with a maturity date of October 5, 2020.

 

Working Capital – We have strategically acquired property around Bremerton and Silverdale, the primary population centers in Kitsap County, Washington, and expect to use a portion of the proceeds of this offering to fund the development of these properties and related expenses in order to meet our immediate revenue targets for 2020 and 2021. Pending these uses, we intend to invest the net proceeds from this offering in a variety of capital preservation investments, including short-term, interest-bearing investment grade securities, money market accounts, certificates of deposit, and direct or guaranteed obligations of the U.S. government.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of the date of this prospectus:

 

  on an actual basis; and
 

as adjusted to give effect to the sale of our common stock in this offering, assuming an initial public offering price of $7.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after the payment of the underwriting discounts and commissions and the estimated offering-related expenses payable by us, and as adjusted reflects the use of a $1,062,000 reduction of high interest rate debt out of offering proceeds.

 

This table should be read in conjunction with the sections captioned “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto included elsewhere in this prospectus.

 

    (Presented in Thousands of Dollars)  
    Actual     Pro Forma As Adjusted(1)  
       
Cash     501       14,439  
Debt     31,544       30,040  
Stockholders’ equity (deficit):                
Common stock, no par value, 50,000,000 shares authorized, 3,584,511 outstanding     671       16,198  
Preferred stock, no par value, 10,000,000 shares authorized, none outstanding     -      

-

 
Additional paid-in capital     119       119  
Accumulated deficit     (1,706 )     (1,706 )

Total shareholders’ equity (deficit)

    (2,199 )     13,298  
Total capitalization     (2,199 )    

13,298

 

 

(1) The pro forma as adjusted information presented is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. A $1.00 increase (decrease) in the assumed initial public offering price of $7.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total shareholders’ equity, and total capitalization by approximately $2,143,000, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total shareholders’ equity, and total capitalization by approximately $7,000,000, assuming that the assumed initial public offering price, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ option to purchase additional shares is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total shareholders’ equity, and total capitalization would increase by approximately $2,092,500, after deducting the estimated underwriting discounts and commissions, and we would have shares of our common stock and no shares of our preferred stock issued and outstanding, pro forma as adjusted. Pro forma as adjusted also reflects the use of a $1,062,000 reduction of high interest rate debt out of offering proceeds.

 

The outstanding share information in the table above is based on 3,584,511 shares of our common stock outstanding as of the date of this prospectus, and:

 

 

reflects 1-for-2.22 reverse split of our common stock, which was effected on April 15, 2020;

     
  includes 70,994 shares of our common stock (assuming the initial public offering price of $7.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) that will be issued to Olympic as a result of the conversion of debt owed to Olympic in the amount of $496,956 into shares of our common stock at a per share value equal to the public offering price per share in this offering, which conversion will occur immediately following the determination of the actual public offering price per share of the common stock to be sold in this offering;
     
  assumes no exercise of the underwriter’s over-allotment option to purchase up to an additional 321,428 shares of our common stock;
     
  excludes up to 107,142 shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued to the representative of the underwriters at the closing of this offering;
     
 

excludes 675,676 shares of our common stock reserved for future issuance in connection with awards under our 2018 Equity Incentive Plan (pursuant to which we have issued to our employees, officers, and directors options exercisable for 262,172 shares of common stock as of the date of this prospectus); and

     
  excludes 22,524 shares of our common stock issuable upon the exercise of outstanding warrants.

 

(See “Description of Capital Stock.”)

 

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DILUTION

 

If you invest in our common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of common stock upon completion of this offering.

 

Net tangible book value per common share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Our net tangible book value as of March 31, 2020 was $(2,400,200) or $(0.68) per share of common stock, based upon 3,584,511 shares of common stock.

 

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of shares of our common stock by us at the initial public offering price of $7.00 per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of March 31, 2020 would have been approximately $12,599,800, or approximately $2.23 per share of common stock.

 

This represents an immediate increase in net tangible book value of $2.91 per share to existing common shareholders, and an immediate dilution of $(4.77) per share to investors participating in this offering. If the initial public offering price is higher or lower, the dilution to new shareholders will be greater or lower, respectively.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial offering price per share of common stock  $ 7.00  
Pro forma net tangible book value per share as of March 31, 2020   $ (0.68 )
Increase in pro forma net tangible book value per share after this offering  $ 2.91  
Pro forma as adjusted net tangible book value per share after this offering  $ 2.23  
Dilution in net tangible book value per share to new investors(1)  $ (4.77 )

 

(1) Dilution is determined by subtracting net tangible book value per common share after giving effect to this offering from the initial public offering price paid by a new investor.

 

A $1.00 increase (or decrease) in the assumed initial public offering price of $7.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, would increase (or decrease) the as adjusted net tangible book value per common share after this offering by approximately $0.11 or ($0.13), and dilution in net tangible book value per common share to new investors by approximately $(5.66) (or $3.90), assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise in full their option to purchase additional shares of our common stock in this offering, the as adjusted net tangible book value after this offering would be $2.46 per share, the increase in net tangible book value to existing shareholders would be $3.15 per share and the dilution to new investors would be $(4.54) per share, in each case assuming an initial public offering price of $7.00  per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus.

 

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The following table summarizes, as of the date of this prospectus, the differences between our existing shareholders and new investors with respect to the number of shares of our common stock purchased from us, the total consideration paid and the average price per share paid. The calculations with respect to shares purchased by new investors in this offering reflect the initial public offering price of $7.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Shares Purchased     Total Consideration     Average Price  
    Number     Percentage     Amount     Percentage     Per Share  
Existing shareholders     3,584,511     63 %   $ 1,167,856       7 %   $ 0.33  
New investors     2,142,857       37 %   $ 15,000,000       93 %   $ 7.00  
Total     5,727,368       100 %   $ 16,167,856       100 %   $ 2.82  

 

If the underwriters exercise their over-allotment option to purchase additional shares of our common stock in full, our existing shareholders would own 59% and our new investors would own 41% of the total number of shares of our common stock outstanding following this offering.

 

The outstanding share information in the table above is based on 3,584,511 shares of our common stock outstanding as of the date of this prospectus, and:

 

  reflects 1-for-2.22 reverse split of our common stock, which was effected on April 15, 2020;
  includes 70,994 shares of our common stock (assuming the initial public offering price of $7.00 per share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus) that will be issued to Olympic as a result of the conversion of debt owed to Olympic in the amount of $496,956 into shares of our common stock at a per share value equal to the public offering price per share in this offering, which conversion will occur immediately following the determination of the actual public offering price per share of the common stock to be sold in this offering;
  assumes no exercise of the underwriter’s over-allotment option to purchase up to an additional 321,428 shares of our common stock;
  excludes 107,142 shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued to the representative of the underwriters upon closing of this offering;
  excludes 675,676 shares of our common stock reserved for future issuance in connection with awards under our 2018 Equity Incentive Plan (pursuant to which we have issued to our employees, officers, and directors options to purchase 262,172 shares of common stock as of the date of this prospectus); and
  excludes 22,524 shares of our common stock issuable upon the exercise of outstanding warrants.

 

(See “Description of Capital Stock.”)

 

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DIVIDEND POLICY

 

We currently intend to retain our future earnings, if any, to finance the development and expansion of our business. The determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in any financing instruments, and such other factors as our board of directors deems relevant in its sole discretion. Accordingly, you may need to sell your shares of our common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. (See “Risk Factors—Risks Related to this Offering and Ownership of our Common Stock—We currently do not intend to pay dividends on our common stock.”)

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following in conjunction with the sections of this prospectus entitled “Risk Factors,” “Cautionary Note Concerning Forward-Looking Statements,” and “Our Business” and our historical financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

 

Overview and Outlook

 

We are a real estate development company engaged in all aspects of the land development cycle, including land acquisition and development, entitlements, and the acquisition, development, construction, marketing, sale, and management of various residential projects in Western Washington’s Puget Sound region, including Gig Harbor, Bremerton, Silverdale, Bainbridge Island, Allyn, and Belfair.

 

We believe we are transforming the operational development of construction of single-family home communities. Utilizing a strategic business plan to provide a diverse range of construction services, we have a product and services portfolio that can fully satisfy the needs for 90% of our targeted new home buyers. Our product and service portfolios provide value by offering highly coveted developed residential properties to public national builders and providing affordable new homes to single family buyers through an on-demand supply of commuter oriented single-family lots with flexible and customizable contemporary home plans.

 

With over $5,000,000 worth of heavy equipment, our development infrastructure division is able to efficiently create a diverse range of residential communities and improved lots in a cost-effective manner. As of the date of this prospectus, we owned and controlled five Western Washington residential communities containing over 350 lots in various stages of development.

 

During the quarter ended March 31, 2020 the U.S. economy was impacted by the COVID-19 outbreak. Sales of single - family homes slowed nationally primarily as a result of the reduction in inventory. The Puget Sound Region saw significant inventory reductions which resulted in rising home prices in most counties.

 

During the year ended December 31, 2019, the housing market continued to show signs of improvement driven by rising consumer confidence, historically high housing affordability metrics, and reduced home inventory levels. The Puget Sound region of Washington State and most U.S. markets have shown significant indicators of a sustainable housing recovery.

 

Basis of Presentation

 

Our consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries and have been prepared in accordance with GAAP as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).

 

Results of Operations

 

During the three months ended March 31, 2020, we generated $9,941,000 in revenue, $(1,003,700) in pre-tax net loss, and approximately $(973,900) in net loss. During the same period in 2019, we generated approximately $4,266,500 in revenue, approximately $(721,300) in pre-tax net loss, and approximately $(795,700) in net loss.

 

During the year ended December 31, 2019, we generated $30,953,500 in revenue, approximately $(437,600) in pre-tax net loss, and approximately $197,000 in net income. During the same period in 2018, we generated approximately $5,730,300 in revenue, approximately $(841,100) in pre-tax net loss, and approximately $(1,358,900) in net loss.

 

Material Indebtedness

 

As of March 31, 2020, we had real estate loans (excluding debt discount) of $28,254,200, equipment loans of $3,280,500 and finance leases of $375,100. As of March 31, 2019, we had real estate loans of $24,474,000, equipment loans of $3,476,800 and finance leases of $520,700. The increase is due to construction loans on new lots under development and purchasing more construction equipment to increase our capacity to develop lots as quickly as possible. All construction loans are secured by related property and equipment loans by the related equipment. (See footnotes 5, 6, 9, and 10 to the audited financial statements for terms and interest rates.)

 

As of December 31, 2019, we had real estate loans (excluding debt discount) of $24,474,000, equipment loans of $3,476,800 and finance leases of $520,700. As of December 31, 2018, we had real estate loans of $18,828,500, equipment loans of $997,400 and finance leases of $705,600. The increase is due to construction loans on new lots under development and purchasing more construction equipment to increase our capacity to develop lots as quickly as possible. All construction loans are secured by related property and equipment loans by the related equipment. (See footnotes 7, 8, 11, and 12 to the audited financial statements for terms and interest rates.)

 

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Revenues

 

We currently generate revenue from the following sources: (1) sales of single-family homes, (2) sales of developed lots and other real estate investments, and (3) sale and transport of raw materials to third parties. We recognize revenue on both the sale of homes and land when title to and possession of the property have been transferred to the buyer. Revenue from the sale and/or transport of raw materials is recognized at the time the service is performed.

 

Our revenues more than tripled in the first quarter of 2020 over the same period in 2019 as a result of increased home sales. Total units sold in the quarter ending March 31, 2019 were 6 and 19 in the quarter ending March 31, 2020.

 

Our revenues increased from 2018 to 2019. This is because our sales in 2018 were from smaller developments with fewer units. We were focused on building the infrastructure on two residential subdivisions, including Settler’s Field, a 51-unit subdivision, which was not completed in 2018 and thus there were no sales; and Valley View Estates, a 49 lot subdivision, which was completed in and had one sale in the fourth quarter of 2018. In 2019, 42 units in total were sold in the Settler’s Field and Valley View Estates projects, as well as the sale of 61 finished lots to a national builder.

 

Real Estate and Cost of Sales

 

Inventories include the cost of land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Cost of sales for homes closed includes the specific construction costs of each home and all applicable land acquisition, land development and related costs (both incurred and estimated to be incurred) allocated to each residential lot based upon the total number of homes expected to be closed in each community.

 

Operating Expenses

 

Operating expense represent salaries and benefits, internal and external commissions, property taxes, advertising and marketing, a management fee, rent and lease expense, depreciation, and other administrative items, and are recorded in the period incurred.

 

Other Income (Expense)

 

Other income (expense) consists of interest expense, income from the equity method investments, and income from the sale of timber cleared from lots.

 

The historical financial data presented below are not necessarily indicative of the results to be expected for any future period.

 

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Consolidated Financial Data

 

(dollars rounded to nearest hundred except for share and per share data)  Three Months Ended March 31     Years Ended December 31 
   (unaudited)     (unaudited)         (As Restated) 
   2020     2019     2019   2018 
                     
Consolidated Statement of Operations:                          
Revenues  $ 9,941,000     $ 4,266,500     $30,953,500   $5,730,300 
Cost of sales    9,828,200       4,083,600      27,645,100    4,936,700 
Gross margin    112,800       182,900      3,308,400    793,600 
Operating Expenses    1,029,400       855,100      3,466,800    2,765,900 
                           
Loss from Operations    (916,600 )     (672,200 )    (158,400)   (1,972,300)
Other income (expense)    (87,100 )     (49,100 )    (279,200)   1,131,200 
Loss before income tax    (1,003,700 )     (721,300 )    (437,600)   (841,100)
Income tax benefit (expense)    29,800       (22,400 )    634,600    (517,800)
Net income (loss)    (973,900 )      (743,700 )    197,000    (1,358,900)
Income (loss) attributable to the non-controlling interest    (221,900 )     52,000      (38,600)   31,500 
Income (loss) attributable to common shareholders  $ (752,000 )   $ (795,700 )   $235,600   $(1,390,400)
                           
Basic and diluted earnings (loss) per share  $ (0.21 )   $ (0.23 )   $0.07   $(0.40)
Pro-forma basic and diluted earnings per share(1)  $ (0.21 )   $ (0.23 )   $0.07   $(0.40)
Balance Sheet Data (end of period):                          
Cash and cash equivalents  $ 501,400     $ 222,800     $430,000   $220,900 
Real Estate    27,090,300       19,404,900      25,278,200    18,449,900 
Total assets    33,721,000       22,240,100      32,213,800    21,266,200 
Total debt    31,154,000       20,595,700      29,587,000    20,531,500 
Total liabilities    35,919,800       24,200,500      33,438,700    21,850,300 
Equity    (2,198,800 )     (1,960,400 )    (1,224,900)   (584,100)

 

Gross Margin

 

In the following tables, we calculate our gross margins.

 

    Three Months Ended March 31,     Year Ended December 31,  
   

(unaudited)

2020
    %    

(unaudited)

2019
    %     2019     %    

(As Restated)

2018
    %  
Revenues   $ 9,941,000       100     $ 4,266,500       100     $ 30,953,500       100     $ 5,730,300       100  
Cost of Sales     9,828,200       98.9       4,083,600       95.74       27,645,100       89.3       4,936,700       86.2  
                                                                 
Gross Margin     112,800       1.1       182,900       4.3       3,308,400       10.7       793,600       13.8  

 

Our gross margin percentage decreased to 1.1% for the three months ended March 31, 2020 as compared to 4.3% the three months ended March 31, 2019. Our significant components of cost of sales are land and land development, direct vertical costs of construction and interest and other indirect costs. Our decrease in gross margin from the three months ended March 31, 2020 to 2019 were the results of the final three homes in the Saylor View development where sale prices were lower than estimated at the start of the project. Each project has margins unique to the subdivision based on the cost of the land, development cost, and product type sold.

 

Our gross margin percentage decreased to 10.7% for the year ended December 31, 2019 as compared to 13.8% the year ended December 31, 2018. Our significant components of cost of sales are land and land development, direct vertical costs of construction and interest and other indirect costs. Excluding interest on cost of sales, our gross margin percentage was 14.0% for the year ended December 31, 2019, compared to 25.0% for the year ended December 31, 2018. We believe this information is meaningful as it isolates the impact that indebtedness has on gross margin and permits investors to make better comparisons with our competitors who adjust gross margins in a similar fashion.  Our decrease in gross margins from 2019 to 2018 was a result of Settler’s Field and Valley View Estates, our two principal subdivisions, generating slightly lower margins than the few homes that were sold in 2018. Each project has margins unique to the subdivision based on the cost of the land, development cost, and product type sold.

 

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Cost of Sales

 

Cost of sales increased $5,744,600, or 141%, to $9,828,200 for the three months ended March 31, 2020, from $4,083,600 for the three months ended March 31, 2019. The increase in cost of sales was primarily attributable to a 133% increase in the average number of properties sold, compared to the three months ended March 31, 2019.

 

Cost of sales increased $22,708,400, or 459%, to $27,645,100 for the year ended December 31, 2019, from $4,936,700 for the year ended December 31, 2018. The increase in cost of sales was primarily attributable to a 540% increase in the average number of properties sold, compared to the year ended December 31, 2018.

 

Operating Expenses

 

Operating expenses increased $174,300 or 20%, to $1,029,400 during the three months ended March 31, 2020, from $855,100 for the three months ended March 31, 2019. The increase was primarily attributable to growth in support staff and facilities relating to the increase in revenue.

 

Operating expenses increased $700,900 or 25%, to $3,466,800 during the year ended December 31, 2019, from $2,765,900 for the year ended December 31, 2018. The increase was primarily attributable to growth in support staff and facilities relating to the increase in revenue.

 

Other Income (Expense)

 

Other expense increased by $38,000 to $87,100 for the three months ended March 31, 2020, from expense of $49,100 for the three months ended March 31, 2019. The increase was driven by an increase in interest expenses of $38,000 on construction equipment.

 

Other income (expense) decreased by $1,410,400 to $(279,200) for the year ended December 31, 2019, from income of $1,131,200 for the year ended December 31, 2018. The decrease was driven by an increase in expenses of $240,600 from interest on construction equipment and the reduction of $1,229,700 in income relating to a one-time sale of a minority interest in Bay Vista Apartments, LLC.

 

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Income Before Tax Expense

 

As a result of the foregoing factors, loss before income tax benefit (expense) increased by $282,400 or 39%, for the three months ended March 31, 2020 to $(1,003,700) from $(721,300) for the three months ended March 31, 2019.

 

As a result of the foregoing factors, loss before income tax benefit (expense) decreased by $403,500 or 48%, for the year ended December 31, 2019 to $(437,600) from $(841,100) for the year ended December 31, 2018.

 

Income Tax Benefit (Expense)

 

Income tax benefit (provision) increased $52,200 or 233% to $29,800 for the three months ended March 31, 2020 from ($22,400) for the three months ended March 31, 2019. Our income tax benefit for the three months ended March 31, 2020 is reflective of our estimated annual tax rate of 21% due to the benefit expected to be realized from net operating losses and change in temporary timing difference between book and tax income over the three months ended March 31, 2019.

 

Our income tax benefit for the year ended December 31, 2019 is reflective of our estimated annual tax rate of 21% due to the benefit expected to be realized from net operating losses. In 2018, we were a C corporation for two months (after conversion from a limited liability company in October 2018). Income tax benefit (provision) increased $1,152,400 or 223% to $634,600 for the year ended December 31 from ($517,800) for the year ended December 31, 2018.

 

Net Income (loss)

 

As a result of the foregoing factors, net loss increased by $230,200, or 31%, for the three months ended March 31, 2020 to $973,900 from $743,700 for the same period in 2019.

 

Net income increased by $1,555,900, or 115%, for the year ended December 31, 2019 to $197,000 from $(1,358,900) for the same period in 2018. On October 1, 2018, we converted into a corporation from a limited liability company, at which time we became a taxable entity. As such, our net loss for the years ended December 31, 2019 and 2018, respectively were increased due to the above factors.

 

Liquidity and Capital Resources

 

Overview

 

Our principal uses of capital were operating expenses, land purchases, land development, home construction, and the payment of routine liabilities. We used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating increasingly positive margins in our homebuilding operations and acquiring desirable land positions in order to maintain a strong balance sheet and keep us poised for growth.

 

We employ both debt and equity as part of our ongoing financing strategy to provide us with the financial flexibility to access capital on the best terms available. In that regard, we employ prudent leverage levels to finance the acquisition and development of our lots and construction of our homes. 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 the Company as a whole, to generate cash flow to cover the expected debt service. As a means of sustaining our long-term financial health and limiting our exposure to unforeseen dislocations in the debt and financing markets, we currently expect to remain conservatively capitalized. However, 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.

 

The terms of construction loans are one year and range in interest rates from 6% to 36%. The terms of equipment loans are one to five years and range in interest rates from 3.58% to 14.41%.

 

We intend to finance future acquisitions and developments with the most advantageous source of capital available to us at the time of the transaction, which may include a combination of common and preferred equity, secured and unsecured corporate level debt, property level debt and mortgage financing and other public, private or bank debt.

 

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Cash Flows

 

Operating Activities

 

Cash used in operations for the three months ended March 31, 2020 and 2019 are funds spent on developing real estate properties which are mostly in the early stages. However, due to the long-term nature of the process of getting these properties ready for sale, we are currently spending more on properties than we are generating in revenue. This is resulting in significant outflows of cash from operations.

 

For the three months ended March 31, 2019, net cash used in operating activities of $331,500 resulting from a net loss of $743,700, an increase of $135,600 resulting from non-cash expenses and a $276,600 net cash inflow from changes in working capital. Non-cash items consisted primarily of depreciation and amortization expense of $132,600. The increase in cash resulting from changes in working capital consisted primarily of a $919,800 increase in real estate work in process and decrease in accrued expense of $1,147,600.

 

For the three months ended March 31, 2020, net cash used in operating activities of $2,811,700 resulting from a net loss of $973,900, $221,100 in non-cash items and a $2,058,900 net cash outflow from changes in working capital. Non-cash items consisted primarily of depreciation and amortization expense of $205,600. The decrease in cash resulting from changes in working capital consisted primarily of a $1,487,500 increase in real estate work in process and increase in accrued expense of $539,100.

 

Cash used in operations for the years ended December 31, 2019 and 2018 are funds spent on developing real estate properties which are mostly in the early stages. However, due to the long-term nature of the process of getting these properties ready for sale, we are currently spending more on properties than we are generating in revenue. This is resulting in significant outflows of cash from operations.

 

For the year ended December 31, 2018, net cash used in operating activities of $8,278,000 resulting from a net loss of $1,358,900, a decrease of $907,700 resulting from non-cash expenses. Non-cash expenses consisted of depreciation expense of $210,000, $1,229,700 of income from equity method investments and $112,000 for shares issued for services. In addition, we had net cash outflows from the change in real estate of $7,166,900 and cash inflows from the changes in deferred income taxes of $463,000 and accounts payable and accrued expenses of $449,400.

 

For the year ended December 31, 2019, net cash used in operating activities of $3,184,900 resulting from a net income of $197,000, $588,200 in non-cash items and a $3,970,100 net cash outflow from changes in working capital. Non-cash items consisted primarily of depreciation and amortization expense of $581,100. The decrease in cash resulting from changes in working capital consisted primarily of a $6,609,900 increase in real estate work in process and increase in accrued expense of $2,969,400.

 

Investing Activities

 

For the three months ended March 31, 2019 and 2020, net cash used in investing activities was $8,300 for the three months ended March 31,2019 and $140,200 for the three months ended March 31, 2020 provided by investing activities. In the three months ended March 31, 2019, there was $8,300 in purchase of equipment. In the three months ended March 31, 2020 there was $145,400 cash provided by investing activities for the sale of equipment and $5,200 was used for the purchase of property and equipment.

 

For the years ended December 31, 2018 and 2019, net cash provided by investing activities was $1,107,600 for 2018 and $402,800 for 2019 used in investing activities respectively. In 2018, there was $1,664,000 in proceeds from equity method investments, and the purchase of $513,000 in equipment. The 2019 cash used in investing activities was for the purchase of property and equipment.

 

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Financing Activities

 

For the three months ended March 31, 2019, net cash provided by financing activities was $341,700. In the three months ended March 31, 2019 cash provided by investing activities resulted from proceeds from a related party construction loan of $4,563,700 and repayment of non-related party construction loans of $3,524,400.

 

For the three months ended March 31, 2020, net cash provided by financing activities was $2,742,900. In the three months ended March 31, 2020, there was $5,994,300 in proceeds from construction loans and repayment of related party construction loans of $2,697,300.

 

For the year ended December 31, 2019, net cash provided by financing activities was $3,796,800, of which $6,196,200 was from construction loans, repayment of equipment loans of $444,900, repayment of financing leases of $185,100 and distributions of $488,400.

 

For the year ended December 31, 2018, net cash provided by financing activities was $6,573,900, of which $7,637,100 was from construction loans, repayment of equipment loans of $201,600, repayment of financing lease of $170,400, capital contributions of $58,100 and distributions of $749,300.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

In the ordinary course of business, we enter into land purchase contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements.

 

Contractual Obligations Table

 

The following table summarizes our future estimated cash payments under existing contractual obligations, including interest payments on long-term debt, as of March 31, 2020, including estimated cash payments due by period.

 

   Payments Due by Period (rounded to the nearest hundred) 
Contractual Obligations  Total   Less Than
1 Year
   1-3
Years
   4-5
Years
   After
5 Years
 
Construction loans (excluding debt discount)  $ 28,254,200    $ 28,254,200      -      -     - 
Equipment loans    3,280,500      775,200      2,242,500      262,800       
Finance Leases    375,100      162,400      212,700      -     - 
Operating leases  $ 1,032,700    $ 210,500    $ 722,000    $ 100,200     - 
                                  
Total  $ 32,942,500    $ 29,402,300    $ 3,177,200    $ 363,000     - 

 

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Inflation

 

Our homebuilding operations can be adversely impacted by inflation, primarily from higher land, financing, labor, material, and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices.

 

Seasonality

 

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

 

Nature of Operations

 

Our principal business activity involves acquiring raw land and developed lots for the purpose of building and selling single family and multifamily dwellings in the Puget Sound region of Washington State. We utilize our heavy equipment resources to develop lots for the creation of inventory for our residential construction arm and to provide development infrastructure construction on a contract basis to other home builders. Single family construction and infrastructure construction contracts vary but are typically less than one year.

 

Effective October 1, 2018, we converted from a Washington Limited Liability Company (S-corporation) to a Washington Profit Corporation (C-corporation).

 

On August 1, 2019, we changed our name from Harbor Custom Homes, Inc. to Harbor Custom Development, Inc.

 

Principles of Consolidation

 

Our consolidated financial statements include the following subsidiaries as of the reporting period ending dates indicated (all entities are formed as Washington LLCs):

 

Names  Dates of Formation  Attributable Interest  
      3/31/20     12/31/19     3/31/19    

12/31/18

 
Bay Vista Blvd Apartments, LLC*   May 15, 2017     N/A       N/A       N/A       50 %
Saylor View Estates, LLC  March 30, 2014    51 %     51 %     51 %     51 %
Harbor Excavation, LLC**  July 3,2017    N/A       N/A       90 %     90 %
Harbor Materials, LLC  July 5, 2018    100 %     100 %     100 %     100 %
Werner RD Industrial, LLC  December 15, 2017    0 %     0 %     0 %     100 %
Belfair Apartments, LLC  December 3,2019    100 %     100 %     100 %     100 %

 

* Bay Vista Blvd Apartments, LLC was closed as of December 31, 2018 with the IRS and dissolved with the State of Washington as of October 3, 2019.

 

** Harbor Excavation, LLC was voluntarily dissolved with the State of Washington as of June 14, 2019.

 

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All intercompany transactions and balances have been eliminated in consolidation.

 

As of March 31, 2020, December 31, 2019, and December 31, 2018, the aggregate non-controlling interest was $(1,282,500), $(1,060,600), and $(789,400), respectively.

 

Basis of Presentation

 

Our consolidated financial statements have been prepared in accordance with GAAP.

 

All numbers in these financial statements are rounded to the nearest $100.

 

Use of Estimates

 

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

 

Stock-Based Compensation

 

Effective as of November 19, 2018, our Board of Directors and stockholders approved and adopted our 2018 Incentive and Non-Statutory Stock Option Plan (the “2018 Plan”). The 2018 Plan allows the Administrator (as defined in the 2018 Plan), currently our Board of Directors, to determine the issuance of incentive stock options and non-qualified stock options to eligible employees and outside directors and consultants. We have reserved 675,676 shares of common stock for issuance under the 2018 Plan.

 

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

 

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

 

Share-based payments are valued using a Black-Scholes option pricing model. Grants of share-based payment awards issued to non-employees for services rendered have been recorded at the fair value of the share-based payment. The grants are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period. If an award is granted, but vesting does not occur, any previously recognized compensation cost is reversed in the period related to the termination of service. Stock-based compensation expenses are included in selling, general and administrative expenses in the consolidated statement of operations.

 

For the three months ended March 31, 2020 and 2019 when computing fair value of share-based payments, the Company has considered the following variables:

 

   

(unaudited)

March 31, 2020
   

(unaudited)

March 31, 2019
 
Risk-free interest rate     1.46 %     N/A  
Exercise Price   $ 2.22       N/A  
Expected life of grants     5.64 years       N/A  
Expected volatility of underlying stock     32.39 %     N/A  
Dividends     0 %     0 %

 

For the years ended December 31, 2019 and 2018, when computing fair value of share-based payments, we considered the following variables:

 

   December 31, 2019   December 31, 2018 
Risk-free interest rate   1.56-1.84 %   2.46-2.59%
Exercise Price  $0.40   $0.40-0.44 
Expected life of grants   5.0-6.53 years    2.50-6.51 years 
Expected volatility of underlying stock   31.75-32.89%   26.9-31.49%
Dividends   0%   0%

 

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The expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99. We use the simplified method to calculate expected term of share options and similar instruments as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The share price as of the grant date was determined by an independent third party 409(a) valuation. Expected volatility is based on the historical stock price volatility of comparable companies’ common stock, as our stock does not have any historical trading activity. Risk free interest rates were obtained from U.S. Treasury rates for the applicable periods.

 

Earnings (Loss) Per Share

 

Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per common share.

 

    March 31, 2020

(unaudited)

    March 31, 2019

(unaudited)

 
             
Numerator:                
Net loss attributable to common stockholders   $ (752,000 )   $ (795,700 )
Effect of dilutive securities:            
                 
Diluted net loss   $ (752,000 )   $ (795,700 )
                 
Denominator:                
Weighted average common shares outstanding - basic     3,513,517       3,513,517  
Dilutive securities (a):                
Options     -       -  
Warrants     -       -  
                 
Weighted average common shares outstanding and assumed     3,513,517       3,513,517  
conversion – diluted                
                 
Basic net loss per common share   $ (0.21 )   $ (0.23 )
                 
Diluted net loss per common share   $ (0.21 )   $ (0.23 )
                 
(a) - Anti-dilutive securities excluded:     140,695       75,076  

 

    December 31. 2019     December 31. 2018  
             
Numerator:                
Net income (loss) attributable to common stockholders   $ 235,600     $ (1,390,400 )
Effect of dilutive securities:            
                 
Diluted net income (loss)   $ 235,600     $ (1,390,400 )
                 
Denominator:                
Weighted average common shares outstanding - basic     3,513,517       3,513,517  
Dilutive securities (a):                
Options     -       -  
Warrants     -       -  
                 
Weighted average common shares outstanding and assumed     3,513,517       3,513,517  
conversion – diluted                
                 
Basic net income (loss) per common share   $ 0.07     $ (0.40 )
                 
Diluted net loss per common share   $ 0.07     $ (0.40 )
                 
(a) - Anti-dilutive securities excluded:     139,742       0  

 

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Fair Value of Financial Instruments

 

For purposes 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 our short-term financial instruments approximates fair value due to relatively short period to maturity for these instruments.

 

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents as of March 31, 2020, December 31, 2019, and December 31, 2018.

 

Restricted Cash

 

As part of the purchase of a quarry parcel, we received a mining permit which is not currently utilized. As part of the transfer process, the Washington State Department of Natural Resources required a bond or cash equivalent of $139,000. We chose to establish a restricted deposit account with our financial institution. In 2019, the restricted cash was transferred to the Sterling Griffin, our Chief Executive Officer and President, as part of the land distributions discussed in Note 11 – Related Parties.

 

Accounts Receivable

 

Accounts receivable are reported at the amount the Company expects to collect from outstanding balances. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The allowances for doubtful accounts were $1,400, $11,300, and $0 as of March 31, 2020, December 31, 2019, and December 31, 2018, respectively.

 

Property and Equipment and Depreciation

 

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

 

Construction Equipment 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 Financial Accounting Standards Board (“FASB”) ASC 805, “Business Combinations,” which 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 construction period of major facilities and land improvements. The capitalization period begins when activities to develop the parcel commence and ends when the asset constructed is completed. The capitalized costs are recorded as part of the asset to which they relate and are reduced when lots are sold.

 

We capitalized interest from related party borrowings of $313,300 and $91,000 for the three months ended March 31, 2020 and 2019, respectively. We capitalized interest from third-party borrowings of $393,100 and $487,200 for the three months ended March 31, 2020 and 2019 respectively.

 

We capitalized interest from related party borrowings of $1,229,400 and $228,600 for the years ended December 31, 2019 and 2018, respectively. We capitalized interest from third-party borrowings of $1,563,700 and $1,375,000 for the years ended December 31, 2019 and 2018 respectively.

 

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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 property being under a contract to be sold;

 

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

 

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

 

When all of these criteria have been met, the property is classified as “held for sale.”

 

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

 

As of March 31, 2020, December 31, 2019 and December 31, 2018, there was no impairment recognized for any of the projects.

 

Revenue and Cost Recognition

 

Accounting Standards codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contract to provide goods or services to customers. We adopted this new standard on January 1, 2018 under the modified retrospective method. The adoption did not have a material effect on our financial statements.

 

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

 

ASC 606 requires us to apply the following steps: (1) identify the contract with the customers; (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, we satisfy the performance obligations.

 

A detailed breakdown of the five-step process for the revenue recognition of Real Estate Revenue is as follows:

 

1. Identify the contract with a customer

 

We have signed agreements with a home buyer to purchase a lot with a completed house.

 

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2. Identify the performance obligations in the contract

 

Our performance obligations include delivering a developed lot with a completed house to the customer, both of 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

 

Each lot with a completed house is a separate performance obligation, for which the specific price in the contract is allocated.

 

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

 

The buyer performs an inspection to make sure all conditions/requirements are met before taking title of house. We recognize revenue when title is transferred. We do not have any further performance obligation once title is transferred.

 

A detailed breakdown of the five-step process for the revenue recognition of Construction Materials sold to or received from contractors is as follows:

 

1. Identify the contract with a customer

 

There are no signed contracts. Each transaction is verbally agreed to with the customer.

 

2. Identify the performance obligations in the contract

 

We identify how and when to deliver or receive materials from customers based on the verbal agreement reached.

 

3. Determine the transaction price

 

We have a set price list for receiving approved fill materials to recycle or provide customers with a combination of said materials.

 

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

 

There is only one performance obligation, which is to pick up or deliver the materials. The entire transaction price is therefore allocated to the performance obligation.

 

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

 

The performance obligation is fulfilled, and revenue recognized when the materials have been received or delivered by us.

 

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Revenues for Real Estate and Construction Materials:

 

For the three months ended March 31, 2020 and 2019, revenues from contracts with customers are summarized by product category as follows:

 

   

March 31, 2020

(unaudited)

   

March 31, 2019

(unaudited)

 
Real Estate   $ 9,904,600     $ 4,244,000  
Construction Materials     36,400       22,500  
Total Revenue   $ 9,941,000     $ 4,266,500  

 

For the years ended December 31, 2019 and 2018, revenues from contracts with customers are summarized by product category as follows:

 

   December 31, 2019  

As restated

December 31, 2018

 
Real Estate  $30,683,400   $5,290,000 
Construction Materials   270,100    440,300 
Total Revenue  $30,953,500   $5,730,300

 

Contract Asset and Contract Liabilities

 

Based on our real estate contracts, when a certified closing statement is received, our performance obligations have been satisfied, at which point the payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606. There are no accounts receivable relating to these contracts as amounts are fully paid at closing of the property.

 

Based on our Construction Material sales activity, net trade accounts receivables are generated and were $11,800 and $52,000 as of December 31,2019 and 2018, respectively.

 

Cost of Sales

 

Land acquisition costs are allocated to each lot based on the size of the lot comparing to the total size of all lots in a project. Development cost and capitalized interest are allocated to lots sold based on the area method.

 

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

 

Advertising

 

Costs for designing, producing, and communicating advertising are expensed as incurred. Advertising expense for the three months ended March 31, 2020 and 2019 was $7,500 and $670, respectively.

 

Costs for designing, producing, and communicating advertising are expensed as incurred. Advertising expense for the years ended December 31, 2019 and 2018 was $67,500 and $8,500, respectively.

 

Leases

 

In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842) which amended guidance for lease arrangements to increase transparency and comparability by providing additional information to users of financial statements regarding an entity’s leasing activities. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as ASC 842. The revised guidance seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for substantially all lease arrangements.

 

On January 1, 2019, we adopted ASC 842 using the modified retrospective approach and recognized a right of use (“ROU”) asset and liability in the condensed consolidated balance sheet in the amount of $474,200 related to the operating lease for office and warehouse space. Results for the year ended December 31, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the legacy accounting guidance under ASC Topic 840, Leases.

 

As part of the adoption we elected the practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to:

 

  1. Not separate non-lease components from lease components and instead to account for each separate lease component and the non-lease components associated with that lease component as a single lease component.
     
  2. Not to apply the recognition requirements in ASC 842 to short-term leases.
     
  3. Not record a right of use asset or right of use liability for leases with an asset or liability balance that would be considered immaterial.

 

(For March 31,2020 and March 31,2019 financial statements, refer to Note 10, Leases for additional disclosures required by ASC 842. For December 31, 2019 and 2018 financial statements, refer to Note 12, Leases for additional disclosures required by ASC 842.)

 

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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.

 

We recognize 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.

 

As of February 15, 2014, we had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, we did not pay federal corporate income taxes on our taxable income. Instead, our stockholders were liable for individual federal income taxes on their respective shares.

 

Effective November 29, 2018, we converted from a Washington Limited Liability Company (S corporation) to a Washington Profit Corporation. As of that date, we have been taxed as a C corporation at the entity level.

 

Recent Accounting Pronouncements

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that restricted cash and cash equivalents be included as components of total cash and cash equivalents as on the statement of cash flows. ASU 2016-18 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and a retrospective transition method is required. This guidance did not impact financial results but resulted in a change in the presentation of restricted cash and restricted cash equivalents within the statement of cash flows. We adopted this guidance in 2018.

 

On February 25, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update No. 2016-02, Leases (Topic 842) (the Update). This ASU requires an entity to recognize a right-of-use asset (“ROU”) and lease liability for all leases with terms of more than 12 months. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective for us on January 1, 2019, with early adoption permitted. The adoption has been reflected in ROU asset and liability on the Balance Sheet.

 

In May 2014, the FASB issued accounting standard update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under previous guidance. This may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

 

In July 2015, the FASB approved the proposal to defer the effective date of ASU 2014-09 standard by one year. Early adoption was permitted after December 15, 2016, and the standard became effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations (ASU No. 2016-08), accounting for licenses of intellectual property and identifying performance obligations (ASU No. 2016-10), narrow-scope improvements and practical expedients (ASU No. 2016-12) and technical corrections and improvements to ASU 2014-09 (ASU No. 2016-20) in its new revenue standard. We reviewed customer contracts, applied the five-step model of the new standard to our contracts, and compared the results to our current accounting practices. The adoption of this standard required increased disclosures related to the disaggregation of revenue.

 

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In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740) – Amendments to SEC paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 118.” ASU 2018-05 amends the Accounting Standards Codification to incorporate various SEC paragraphs pursuant to the issuance of SAB 118, which addresses the application of generally accepted accounting principles in situations when a registrant does not have necessary information available, prepared, or analyzed (including computation) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act. The ASU does not have material impact on us.

 

Effective January 1, 2019, upon the adoption of ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), equity-classified share-based payment awards issued to nonemployees will be measured at grant date fair value similarly to those of employees (see Recently Adopted Accounting Pronouncements). Prior to the adoption of ASU 2018-07, and for the year ending December 31, 2018, compensation expense for share-based awards granted to nonemployees was recognized over the period during which services were rendered by such nonemployees until completed. At the end of each financial reporting period prior to completion of the service, the fair value of these awards was remeasured using the then-current fair value of our common shares and updated assumption inputs in the Black-Scholes option-pricing model, as applicable. After the adoption of ASU 2018-07, equity-classified share-based payment awards issued to nonemployees are no longer revalued as the equity instruments vest. ASU 2018-07 also allows entities to use the expected term to measure nonemployee options or elect to use the contractual term as the expected term, on an award-by-award basis.

 

Impairment of Long-Lived Assets

 

We review long-lived assets for impairment whenever events or circumstances indicate that the carrying value of such assets may not be fully recoverable. Impairment is present when the sum of undiscounted estimates future cash flow expected to result from use of the assets is less than carrying value. If impairment is present, the carrying value of the impaired asset is reduced to its fair value. Fair value is determined based on discounted cash flow or appraised values, depending on the nature of the assets. As of March 31, 2020, and December 31, 2019, there were no impairment losses recognized for long-lived assets As of December 31, 2019 and 2018, there were no impairment losses recognized for long-lived assets.

 

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 an initial public offering registration statement;
  an exemption to provide less than five years of selected financial data in an initial public offering registration statement;
  an exemption from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act 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 firm 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 prospectus may be different than the information you may receive from other public companies in which you hold equity interests.

 

We would cease to be an “emerging growth company” upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of this offering, (ii) the first fiscal year after our annual gross revenues are $1.0 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 $700,000,000 as of the end of the second quarter of that fiscal year.

 

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OUR BUSINESS

 

Our Company

 

We are a real estate development company involved in all aspects of the land development cycle including, land acquisition, entitlements, construction of project infrastructure, home building, marketing, sales, and management of various residential projects in Western Washington’s Puget Sound region. We have active or recently sold out residential communities in Gig Harbor, Bremerton, Silverdale, Bainbridge Island, Belfair, and Allyn, Washington. Our business strategy is focused on the acquisition of land to develop property for the construction and sale of residential lots, home communities, and multi-family properties within a 30 to 60-minute commute to the Seattle metro employment corridor and our planned entry into other similar markets elsewhere in the United States.

 

Our product and service portfolios provide value by offering developed residential properties to large real estate developers and providing affordable new homes to single family buyers through an on-demand supply of commuter oriented single-family lots with flexible and customizable contemporary home plans. In addition, our ability to acquire and develop single and multi-family rental properties that can either be held by us or sold to regional and national companies further strengthens our product offering. With over $5,000,000 in heavy equipment, our development infrastructure division is able to efficiently create a diverse range of residential communities and improved lots in a cost-effective manner. We believe that the wide variety of lots, home plans, and finishing options coupled with a historic low inventory of residential and multi-family housing in our principal geographic area and our targeted areas for expansion provide us with a diverse product portfolio and an opportunity to increase our overall market share.

 

Since 2015, we have grown quickly, doubling revenues in our first three years of business. During 2018, we focused resources on the development of three residential subdivisions. For the year ended December 31, 2019, our total revenues were $30,953,500 and our back log of fully executed contracts for the sale of developed residential lots and single-family homes was approximately $14,850,000.

 

We utilize heavy equipment to develop raw land and through this process to create residential subdivisions. The equipment is primarily used for land clearing, public and private road improvements, installation of wet utilities such as sewer, water, and storm sewer lines in addition to construction of dry utilities lines for power, gas, phone, and cable service providers.

 

As of the date of this prospectus, we owned and controlled six Western Washington residential communities containing over 350 lots in various stages of development as follows:

 

Kitsap County, Washington

 

  1. Valley View Estates, a 49-lot subdivision
  2. Settler’s Field, a 51-lot subdivision
  3. Port Washington Park, a 36-lot subdivision
  4. Soundview Estates, a 240-lot subdivision

 

Pierce County, Washington

 

  5. Saylor View Estates, a 10-lot subdivision

 

Mason County, Washington

 

  6. Lakeland Village, 7 infill lots

 

All four residential communities in Kitsap County, Washington and the 7 infill lots in Mason County, Washington are 100% owned by us. We have a 51% ownership interest in Saylor View Estates.

 

As of the date of this prospectus, we have sold all ten lots in Saylor View Estates. The other four residential communities in Kitsap County, Washington are still in operation. The infill lots in Mason County, Washington are currently under construction and are anticipated to be completed in the third and fourth quarters of 2020.

 

Our recently completed projects include the sale of our third and final home in the Battle Point development in Bainbridge Island, Washington in March of 2018. In addition, we sold our second and final home in the New Brooklyn project in Bainbridge Island, Washington in the third quarter of 2019.

 

In February 2020, we entered into an agreement with Olympic for the purchase of 98 residential lots in Bremerton, Washington for $3,430,000. The closing of the Olympic Acquisition is contingent upon the completion of this offering and we intend to use a portion of the proceeds to pay the purchase price. Sterling Griffin, our Chief Executive Officer and President, owns 50% of Olympic, and as a result, Mr. Griffin has an interest in the purchase price for the Olympic Acquisition being paid. We requested an independent third-party valuation of the Olympic purchase from Colliers International Valuation & Advisory Services, who determined that the as-is market value of the subject property’s fee simple interest was $3,430,000 as of May 15, 2020.

 

We seek to maximize our return on capital and reduce our risk exposure associated with holding land inventories by developing projects both for our single-family and multi-family lot inventory and for the sale of permitted or developed lots to regional and national builders. To further reduce our exposure, we focus on projects with targeted life cycles of approximately 24 to 36 months from the beginning of construction of the first home to close out of the community.

 

The core of our business plan is to acquire and develop land strategically, based on our understanding of population growth patterns, entitlement restrictions, and infrastructure development. We focus on locations within our markets with convenient access to metropolitan areas that are generally characterized by diverse economic and employment bases and increasing populations. We believe these conditions create strong demand for new housing, and these locations represent what we believe to be attractive opportunities for long-term growth.

 

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As part of our operational strategy, we plan to develop or acquire technology platforms that will provide for both the efficient sourcing of subcontractors and suppliers and increase the distribution and sale of our residential and multi-family lots and home product inventory across all mediums.

 

We have been operating in Western Washington’s Puget Sound region since our founding in 2014. We were formed as a Washington limited liability company in February 2014, converted into a Washington corporation on October 1, 2018, and amended our name to Harbor Custom Development on August 1, 2019. We own the registered trademark of “Harbor Custom Homes” in the United States. Our principal executive offices are located at 11505 Burnham Dr. Suite 301, Gig Harbor, Washington 98332. Our main telephone number is (253) 649-0636. Our website is www.harborcustomdev.com. The information contained on, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus. 

 

Business Strategy and Competitive Strengths

 

Our business strategy is focused on land acquisition for single and multi-family residential development, including entitlements, construction, marketing, sale, and management of residential housing in Western Washington’s Puget Sound region with a plan to expand into other similarly situated commuter markets in the United States. In addition, our ability to offer permitted and developed lots to third parties differentiates us from our competition and provides us with a source of revenue that is not tied to home sales.

 

Home and Finished Lot Sales

 

We sold three homes in 2017 and four homes in 2018 and had no finished lot sales in either year. In 2019, we sold 45 homes and 61 finished lots. The 61 finished lots represented 24% of our 2019 revenue. We are a general contractor and supervise the construction of our homes utilizing subcontractors. Our subcontractors are licensed, bonded and are typically paid for their completed work by the tenth day of the month for their invoices submitted by the 25th day of the previous month.

 

Our strategy is driven by the following:

 

Provide Superior Quality and Homeowner Experience and Service

 

Our core operating philosophy is to provide a positive, memorable experience to our homeowners through active engagement in the building process and provide our customers with customization options to suit their lifestyle needs, and enhancing communication, knowledge, and satisfaction. We engineer our homes for energy-efficiency, which is aimed at reducing the homeowner’s environmental impact and energy costs.

 

We seek to maximize customer satisfaction by offering affordable homes that are built with quality materials and craftsmanship, exhibit distinctive design and floor plans, emphasize energy efficiency, and are situated in premium locations. Our competitive edge in the selling process focuses on the home’s features, design, and available customizing options. We believe that our homes generally offer higher quality and more distinctive designs within a defined price range or category than those built by our competitors. Our goal is not just to build houses, but rather to create desirable communities through superior design and execution.

 

After a buyer finalizes the personalization process of selecting a lot, house plan, and interior finishes, our rapid construction process begins. We meet the needs of new home purchasers across multiple communities and price points by maintaining a substantial inventory of ready to build lots and designer home plans. Further, our business model enables buyers to overcome the significant inventory and pricing challenges in high growth metropolitan markets. We provide new home buyers the opportunity to purchase higher quality personalized homes at competitive pricing and in a rapid timeframe.

 

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Expansion into New and Complementary Markets

 

We intend to explore expansion opportunities in other parts of the United States. Our strategy in this regard will be to expand first into similar market niches in areas where we perceive an ability to exploit a competitive advantage. The expansion may be affected through either organic growth or acquisitions of homebuilders operating in those new markets. We have initially identified the Portland, Oregon; Denver, Colorado; and along the I-95 corridor in Georgia and South Carolina, including Myrtle Beach, Charleston, and Hilton Head markets as potential expansion opportunities because we view such areas as having unique demographic features, including higher than average anticipated growth in population and income. However, we will consider other areas in the U.S. that meet our criteria and provide significant growth opportunities.

 

Adherence to Our Core Operating Principles to Drive Consistent Long-Term Performance

 

We seek to maximize shareholder value over the long-term, and therefore operate our business to mitigate risks from market downturns and position ourselves to capitalize on real estate market upturns. This management approach includes the following elements:

 

  leveraging our management team’s significant experience, extensive relationships, and strong reputation with local market participants to operate and grow our business;
     
  balancing decentralized, local, day-to-day decision-making responsibility with centralized corporate oversight;
     
  centralizing management approval of all land acquisitions and dispositions through an asset management committee that operates according to stringent underwriting requirements;
     
  ensuring all team members understand the organization’s strategy and the goals of the business and have the tools to contribute to our success;
     
  attracting and retaining top talent through a culture in which team members are encouraged to contribute to our success and are given the opportunity to recognize their full potential; and
     
  maintaining a performance-based corporate culture committed to the highest standards of integrity, ethics, and professionalism.

 

Focus on Efficient Operations

 

In connection with all of our projects, we strive to control costs through a stringent budget plan. We start by preparing a detailed budget for all cost categories as part of our due diligence. We closely monitor the budget throughout the process by continuing to revisit and update the budget on an ongoing basis. Virtually all components of our homes are provided by subcontractors. Much effort is expended to assure that scopes of work are complete and inclusive. Contract variances and extras are closely scrutinized for appropriateness. At the sale and closing of each home in a project, we compare the estimated and final margin of that house with the most recent budget to determine any negative variances so that we can adjust in order to better control costs on future homes in the project. We believe our disciplined process of setting realistic budgets and expectations, monitoring, and evaluating them and making any necessary adjustments to correct deviations going forward enables us to prudently control our costs.

 

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Our Markets

 

Our business strategy is focused on the acquisition of land for development purposes and the design, construction, and sale of residential lots and single-family homes in the rapidly growing Puget Sound region of Western Washington, with further expansion planned into other markets in United States.

 

The Western Washington Economy and Housing Market

 

The Puget Sound Region encompasses the Greater Seattle Metro area and enjoys one of the strongest economies in the nation. “Per capita gross domestic product adjusted for inflation, was nearly $81,000 in 2017. That compares with $61,000 in San Diego, $63,000 in Minneapolis-St. Paul and $45,000 in Phoenix Median Household income in King County was $83,571 in 2017, far above the National Average of $57,652,” reported in the Seattle Times on May 3, 2019 by Jon Talton. On March 3, 2020, the Commercial Bureau of Real Estate (CBRE) reported that, according to the U.S. Census Bureau, the City of Seattle added over 11,000 high-income renting households between 2012 and 2017. This 163% increase was the largest of any major city in the country over that five-year span.

 

On January 7, 2020, The News Tribune reports the findings of Atlas Van Lines newly released annual report showing, “Washington state was second only to Idaho with its percentage of inbound moves as compared to outbound ones…” and that “Washington state also made the list among Top 10 international origins and destinations.” “The inventory of single-family homes (excluding condos) is especially tight in several counties, notably Thurston (-54%), King (-41.4%), Pierce (-40%), Snohomish (-36.1%), and Kitsap (-34.3%),” NWMLS said in a news release accompanying the report. “This market is unlike any market I’ve seen in the South Sound over the past 40 years. Too many buyers chasing too few properties,” said Dick Beeson, principal managing broker at RE/MAX Northwest in Gig Harbor in the NWMLS release.

 

Ronald Brownstein, on Nov. 16, 2017, in The Atlantic reported, “thirty-one Fortune 500 companies now operate research and engineering hubs in Seattle, up from seven in 2010.” In 2019, the Puget Sound Business Journal reported that Seattle has the second most jobs that start out with a six-figure annual salary – including new graduates and people new to the workforce. Over the last decade, Seattle has added 220,000 jobs driven by industry giants like Boeing, Microsoft, and Amazon. Jon Talton in the Seattle Times (May 3, 2019), writes that the big three, Boeing, Microsoft, and Amazon, “employ 166,000 in well-paid, high skilled jobs.” In addition to the big three, other Fortune 500 companies founded and headquartered in the greater Seattle area are Starbucks, Nordstrom, Costco, Alaska Air Group, Expedia, Weyerhaeuser, Paccar, and smaller companies like Eddie Bauer, Zillow, REI, T-Mobile, and many more. Deena Zaidi in the Puget Sound Business Journal Demand (July 19, 2019) finds that, “As of January, the demand in Seattle for workers with tech related skills was 68,975 job openings. By June 2019, the open positions reached 107,398.” For the US News, Levi Pulkkinen (May 14, 2019) wrote, “Washington’s gross domestic product growth rate – 5.7 percent in 2019, the highest in the nation – is largely thanks to tech expansion, which has driven up real estate values.”

 

The significant industry and population growth in the Seattle Metro region over the last decade, coupled with low housing supply, has driven area real estate prices to unprecedented levels. For example, in 2017, the Seattle Metro Area grew by 157 residents per day and ended the year with 20% fewer homes on the market. As a result, it is no surprise that Standard & Poor’s Case-Shiller National Home Price Index showed Seattle home prices rose 12.7% from Nov. 2016 to Nov. 2017, outpacing the national average of 6.2%. Similarly, Zillow reported in 2018 that Seattle home values had gone up 17.0% over the past year. The continued flow of new job seekers in the Puget Sound Region has led to significant competition over a limited inventory of housing creating a textbook case of low supply and high demand in Western Washington. The mad scramble for affordable housing has priced many local buyers and new arrivals out of the Seattle marketplace to lower priced inventory in adjoining counties. For example, Tacoma, the main metropolitan city of Pierce County, was the hottest housing market in the country during the month of May. Reflecting on the trend, Paul Roberts in the Seattle Times (May 25, 2019) reports, the “median home in Tacoma was on the market just eight days — the shortest period of any U.S. metro” for 2019.

 

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Rather than living in downtown Seattle or King County, new hires are increasingly locating in surrounding counties, i.e., Snohomish, Pierce, and Kitsap, because each are vastly more affordable to purchase a single-family home. United States Census Bureau data shows that among the nation’s more than 3,100 counties, the county south of Seattle, Pierce, and the county north of Seattle, Snohomish, respectively had the first and second largest net increases of people moving from another county within the U.S. in 2016. As a result, home prices are reflecting these job driven patterns of movement. In Tacoma, home appreciation rose 14.9% in the second quarter of 2018 compared to a year ago, according to a new report from the Federal Housing Finance Agency. The third-highest year-over-year increase among the 245 metro areas listed. Several other Pacific Northwest metro areas were in the top 10 for year-over-year home appreciation increases; the Bellingham Herald (Aug 24, 2018) reported Bremerton in fourth at 14.4%, Seattle in sixth at 13.7%, Bellingham was eighth at 13.1%, and Wenatchee ninth at 12.6%.

 

Correlation between Seattle Metro Area job, population, and home-price growth

 

 

Strategy Driven by Affordability Dilemma and Commuter-County Phenomenon

 

A Seattle Times business report in February 2018 found that the Seattle Metro Area housing market reached unprecedented highs, exceeding $700,000 for single family homes in King County and caused an increasing number of prospective buyers to look to neighboring Snohomish, Pierce, and Kitsap Counties in search of lower cost housing.

 

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The decision for most new home buyers is simple. In exchange for commuting 30 to 60 minutes to work, they can save approximately 40% to 50% in housing costs for similar or often higher quality product in neighboring counties. For example, Kitsap buyers paid a median price of $344,500 in 2018 and the median closed home sale price for Pierce County was $355,000 and $470,000 for Snohomish.

 

Of these prime counties surrounding the Seattle Metropolitan Area and King County, Kitsap holds the greatest potential for real estate acquisition and development. Gene Balk (Dec. 23, 2018) in the Seattle Times found that recently released United States Census Bureau county-to-county migration data showed that “Kitsap County is – for the first time – a top 5 destination for folks leaving King County.” This translates to an estimated 2,261 people per year and “a 29 percent increase from the 2010 data release.”

 

 

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Kitsap County:

 

Kitsap County is located directly west of Seattle on the Kitsap Peninsula, across Puget Sound. Kitsap County is the 6th largest County in Washington State, with a population of over 260,000. In 2018, a comprehensive assessment of the accessibility to designated outdoor spaces and activities at the county level ranked Kitsap County 5th in the U.S. Not only does Kitsap County have outdoor lifestyle in abundance, Kitsap County residents can easily access the high-tech job market in Seattle using high-speed passenger only ferries and/or conventional car ferries that serve the cities of Kingston, Bainbridge Island, Bremerton, and Port Orchard. The 220-seat, passenger-only fast ferry from Bremerton to Seattle, cuts commuting time in half to 30 minutes. A recent survey finds that the median rider age is 49 and holds a well-paid professional position. The Puget Sound Business Journal (Sep. 9, 2018) reports that many upscale commuters who bought new homes in Kitsap are staying put on weekends.

 

Seattle - Bremerton Conventional Ferry

 

 

Newly Established Seattle / Bremerton Fast Ferry

 

 

Land acquisition and single-family home construction in Kitsap County is a focal point for us because it currently represents the greatest untapped potential in Washington State. Sean Meyers (Sep 19, 2018) for the Puget Sound Business Journal reports, “spurred by a 30% uptick in employment since 2011, Kitsap County’s housing shortage has been particularly acute and developers are beginning to seize opportunities.” Like Seattle, Kitsap is starting to feel the pressures of low inventory compounded by population increases as reported by Arla Shephard Bull in the Kitsap Sun, March 15, 2019. As reported by the Puget Sound Business Journal on March 5, 2020, the combination of limited inventory and solid demand sent the median price of a single-family home in Kitsap County up 18.1% in February 2020 compared to February 2019, according to the Northwest Multiple Listing Service.

 

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Kitsap County’s economy is bolstered by substantial military spending. The Puget Sound Naval Shipyard is the U.S. Navy’s largest on the West Coast, has over 40,000 full-time defense and civilian support jobs, receives $1.6 billion annually in direct expenditure by the Department of Defense, and generates a total economic impact of $6.1 billion for the county The Department of Navy recently announced its upgraded fiscal year 2019 budget, calling for 11 new ships and extension of the service lives for 11 more many of which will require retrofitting and maintenance in Kitsap County, along with high skilled jobs needed to accomplish those mandates.

 

The USS Nimitz, the largest aircraft carrier in the American fleet, is homeported in Bremerton and has a compliment of over 5,000 naval personnel. Due to increased military spending and in turn creation of more high-skilled jobs, Kitsap County has a significant need for single-family homes.

 

Kitsap Naval Shipyard, Bremerton WA

 

 

Unlike Seattle and King County, housing prices in Kitsap County have a much greater range of affordability. As of 2019, the average home selling price in Kitsap County was $355,000, almost 50% lower than King County’s $667,000 average. Kitsap is also comparatively less developed than King County, enabling acquisition of low-cost land for the development of single-family home communities. With low home inventory, high population increases, and low cost of land, we believe we are ideally positioned to serve the market by rapidly developing sub-divisions in multiple locations at price points that target the majority of new home buyers.

 

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Our Products

 

We offer a wide range of developed single-family lots and high-quality homes in our markets, with luxury features that are customizable to the consumer. We strive to maintain appropriate consumer product and price level diversification. We target what we believe to be the most profitable consumer groups for each of our locations while attempting to diversify so that our land portfolio is not overly concentrated in any one group. Our ability to build at multiple price points enables us to adjust readily to changing consumer preferences and affordability. We generally market our homes to entry-level and first- and second time move-up buyers through targeted product offerings in each of the communities in which we operate. We determine the profile of buyers in a given development, and design neighborhoods and homes with the specific needs of those buyers in mind. We also use measures of market-specific supply and demand to determine which consumer groups will be the most profitable in a specific land location, and then target those groups.

 

Land Acquisition and Development Process

 

We execute an integrated business model to monetize land during four distinct stages of the development cycle. As a result, we mitigate risk by providing multiple exit points for our real estate assets.

 

  Sale of Entitled Land – Property sold following the controlling jurisdiction’s approval of a permitted residential or other use.
     
  Sale of Finished Lots - Property sold after infrastructure completed including all roads, sidewalks, and utilities.
     
  Sale of Completed Building Product – Property sold following construction of a single - family home or apartment.
     
 

Conversion of Inventory to Rental Property – Homes or apartments constructed held for revenue generation and appreciation.

 

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

 

  review of the status of entitlements and other governmental processing, including title reviews;
     
  complete due diligence on the land parcel prior to committing to the acquisition;
     
  prepare detailed budgets for all cost categories;
     
  complete environmental reviews and third-party market studies;
     
  utilize options, if necessary; and
     
  employ centralized control of approval over all acquisitions through a land committee process.

 

Before purchasing large land tracts, we also engage outside engineers and consultants to help review the proposed acquisition and design the homes and community planned to be located there.

 

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Homebuilding, Marketing and Sales Process

 

Our philosophy is to provide a positive, memorable experience to our homeowners by actively engaging them in the building process and by enhancing communication, knowledge, and satisfaction. We provide our customers with customization options to suit their lifestyle needs and have developed a number of home designs with features such as outdoor living spaces, one-story living and first floor master bedroom suites to appeal to universal design needs. We also engineer our homes for energy-efficiency, which is aimed at reducing impact on the environment and lowering energy costs to our homebuyers.

 

We sell our homes through independent real estate brokers. However, we may develop an in-house sales force which would work from sales offices located in model homes close to or in each community. Sales representatives and independent brokers assist potential buyers by providing them with basic floor plans, price information, development and construction timetables, tours of model homes and the selection of options. Our personnel, along with subcontracted marketing and design consultants, carefully design the exterior and interior of each home to coincide with the lifestyles of targeted homebuyers.

 

Our independent brokers advertise directly to potential homebuyers through the Internet and in newspapers and trade publications, as well as through marketing brochures and newsletters. After building out a sales team, we will assume all marketing responsibilities.

 

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

 

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

 

Customer Relations, Quality Control and Warranty Programs

 

We pay particular attention to the product design process and carefully consider quality and choice of materials in order to attempt to eliminate building deficiencies. The quality and workmanship of the subcontractors we employ are monitored and we make regular inspections and evaluations of our subcontractors to seek to ensure our standards are met.

 

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

 

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Warranty Programs

 

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

 

Materials

 

When constructing residential housing we use various materials and components. It has typically taken us four to six months to construct a home, during which time materials are subject to price fluctuations. Such price fluctuations are caused by several factors, among them seasonal variation in availability, international trade disputes and resulting tariffs and increased demand for materials as a result of the improved housing market. The current trade dispute with China has the potential to increase our cost on certain materials such as quartz slabs for countertops, engineered hardwood used in residential flooring, and bulk framing lumber. The current COVID-19 pandemic may also impact our sourcing of materials and components from our suppliers.

 

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

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

 

COVID-19

 

On April 24, 2020, the Governor of Washington lifted the moratorium on construction of single-family low-risk construction that had been imposed on March 25, 2020. The Governor implemented several requirements builders must fulfill before construction can begin, including the creation of a COVID-19 safety plan, exposure response procedure plan, mandatory jobsite safety meetings, and other safety measures. We have implemented the requisite policies and procedures and have re-started most of our housing construction. The possibility still remains that the Governor could impose new or additional requirements or restrict or completely halt construction again depending on the development of the COVID-19 infection rate.

 

The construction re-start has alleviated much of our cash-flow and liquidity concerns, although some risk remains as some projects have fallen behind schedule during the previous construction moratorium. We may still be unable to access part of our expected construction draws from financing partners due to the approximately one-month long construction ban.

 

We have not, at this time, experienced any cancelled sales contracts, nor any material supply-chain issues related to COVID-19. As unemployment rises, the risk remains that the housing market will turn against our favor as people lose their jobs and homes go into foreclosure, leading to an increase in supply, and a decrease in demand. However, this risk is mitigated by record-low interest rates as well as a strong local economy bolstered by large companies such as Amazon, Facebook, Microsoft, and Google.

 

Seasonality

 

We experience seasonal variations in our quarterly operating results and capital requirements. Historically, new order activity is highest during the spring and summer months. As a result, we typically have more homes under construction, close more homes, and have greater revenues and operating income in the third and fourth quarters of our fiscal year. Historical results are not necessarily indicative of current or future homebuilding activities.

 

Governmental Regulation and Environmental Matters

 

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

 

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

 

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

 

Competition and Market Factors

 

We face competition in the homebuilding industry, which is characterized by relatively low barriers to entry. Homebuilders compete for, among other things, home buying customers, desirable land parcels, financing, raw materials, and skilled labor. Increased competition may prevent us from acquiring attractive land parcels on which to build homes or make such acquisitions more expensive, hinder our market share expansion or lead to pricing pressures on our homes that may adversely impact our margins and revenues. Our competitors may independently develop land and construct housing units that are superior or substantially similar to our products and because they are or may be significantly larger, have a longer operating history and have greater resources or lower cost of capital than us, may be able to compete more effectively in one or more of the markets in which we operate or plan to operate. We also compete with other homebuilders that have longstanding relationships with subcontractors and suppliers in the markets in which we operate or plan to operate and we compete for sales with individual resales of existing homes and with available rental housing.

 

Employees

 

As of the date of this prospectus, we had 40 full-time employees. None of our employees are members of a labor union or covered by a collective bargaining agreement. One of our independent contractors employs union members.

 

Facilities

 

We lease our office space (Suites 301 - 303, 11505 Burnham Dr., Gig Harbor, Washington) under a lease initiated as of December 19, 2017 for a 60-month period from March 1, 2018 through February 28, 2023.

 

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