Dream Finders Homes, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2021

 

OR

For the transition period from _________ to _________.

 

Commission file number 001-39916

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DREAM FINDERS HOMES, INC.

(Exact name of registrant as specified in its charter)

(904) 644-7670

(Registrant’s Telephone Number, Including Area Code)

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

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

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

 

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

 

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

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

As of August 10, 2021, there were 32,295,329 shares of the registrant’s Class A common stock, par value $0.01 per share, issued and outstanding and 60,226,153 shares of the registrant’s Class B common stock, par value $0.01 per share, issued and outstanding.

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PART I. FINANCIAL INFORMATION

 

 

DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY 

(Unaudited)

		Redeemable Preferred Units Mezzanine								Redeemable Common Units Mezzanine								Common Units Members'								Total Non-Controlling Interests				Total Equity
		Units				Amount				Units				Amount				Units				Amount
Balance at March 31, 2020			49,549			$	53,435,881				7,010			$	16,701,798				76,655			$	61,476,244			$	30,091,204			$	161,705,127
Unit compensation			-				-				-				-				-				223,750				-				223,750
Contributions			-				-				-				-				-				-				1,789,482				1,789,482
Contributions from non-controlling interests			-				-				-				-				-				-				-				-
Conversion of units			-				-				-				-				-				-				-				-
Redemptions			(1,000	)			(1,000,000	)			-				-				-				-				-				(1,000,000	)
Distributions			-				(344,592	)			-				-				-				(1,809,469	)			(1,237,665	)			(3,391,726	)
Net income (loss)			-				1,943,190				-				817,339				-				8,963,572				766,902				12,491,003
Balance at June 30, 2020			48,549			$	54,034,479				7,010			$	17,519,137				76,655			$	68,854,097			$	31,409,923			$	171,817,636

The accompanying notes are an integral part of these condensed consolidated financial statements.

DREAM FINDERS HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(Unaudited)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Nature of Business

Dream Finders Homes, Inc. (the “Company” or “DFH, Inc.”) was incorporated in the State of Delaware on September 11, 2020. The Company was formed for the purpose of completing an initial public offering (“IPO”) of its common stock and related transactions in order to carry on the business of Dream Finders Holdings LLC, a Florida limited liability company (“DFH LLC”), as a publicly-traded entity. Pursuant to a corporate reorganization and completion of the IPO on January 25, 2021, the Company became a holding company for DFH LLC and its subsidiaries.

In connection with the IPO, and pursuant to the terms of the Agreement and Plan of Merger by and among DFH, Inc., DFH LLC and DFH Merger Sub LLC, a Delaware limited liability company and direct, wholly owned subsidiary of DFH, Inc., DFH Merger Sub LLC merged with and into DFH LLC with DFH LLC as the surviving entity (the “Merger”). As a result of the Merger, all of the outstanding non-voting common units and Series A Preferred Units of DFH LLC converted into 21,255,329 shares of Class A common stock of DFH, Inc., all of the outstanding common units of DFH LLC converted into 60,226,153 shares of Class B common stock of DFH, Inc. and all of the outstanding Series B Preferred Units and Series C Preferred Units of DFH LLC remained outstanding as Series B Preferred Units and Series C Preferred Units of DFH LLC, as the surviving entity in the Merger. We refer to this and certain other related events and transactions, as the “Corporate Reorganization”.

DFH, Inc. successfully completed its IPO of 11,040,000 shares of Class A common stock (which included full exercise of the over-allotment option) at an IPO price of $13.00 per share. Shares of the Company’s Class A common stock began trading on the NASDAQ Global Select Market under the ticker symbol “DFH” on January 21, 2021, and the IPO closed on January 25, 2021. The Company is the sole manager of DFH LLC and owns 100% of the voting membership interest in DFH LLC.

The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for a complete set of financial statements. As such, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission on March 30, 2021.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of DFH LLC, its wholly owned subsidiaries and the Company’s investments that qualify for consolidation treatment (see Note 9). All intercompany accounts and transactions have been eliminated in consolidation. There are no other components of comprehensive income not already reflected in net and comprehensive income on our Condensed Consolidated Statements of Comprehensive Income.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all adjustments that are of a normal recurring nature and necessary for the fair presentation of our results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the valuation and impairment of goodwill, impairment of inventories and business combination estimates. Actual results could differ materially from those estimates.

Accounts Receivable

Accounts receivable are included on the Condensed Consolidated Balance Sheets and consist primarily of closing proceeds in transit. Of the total $51,021,302 balance, $32,273,654 is related to proceeds in transit from various title companies. The accounts receivable balance is typically received in the first week of the subsequent month.

 

Other Assets

Contingent Consideration

In connection with the acquisition of Village Park Homes, LLC (“VPH”) in May 2019, the Company recorded contingent consideration based on estimated pre-tax income of the acquired entity for fiscal years 2019, 2020, 2021 and 2022. In connection with the acquisition H&H Constructors of Fayetteville, LLC (“H&H”) in October 2020 (Note 2), the Company recorded contingent consideration based on estimated pre-tax income of the acquired entity for the fourth quarter of 2020, fiscal years 2021, 2022, 2023 and the fourth quarter of 2024. The measurement of contingent consideration was based on projected cash flows such as revenues, gross margin, overhead expenses and pre-tax income and discounted back using the discounted cash flow method. The Company recorded the fair value of the contingent consideration as a liability on the respective acquisition dates. The estimated earn-out payments are subsequently remeasured to fair value at each reporting date based on the estimated future earnings of the acquired entities. The contingent consideration for each acquisition is scheduled to be paid out each year subsequent to the anniversary of the respective acquisition closing date.

As of June 30, 2021 and December 31, 2020, the Company remeasured contingent consideration related to the acquisition of VPH and adjusted the liability to $7,308,764 and $6,847,524, respectively, based on revised pre-tax income forecasts as of the balance sheet date. The Company recorded contingent consideration adjustments resulting in $76,932 of expense and $316,772 of income for the three months ended June 30, 2021 and 2020, and $461,240 of expense and $316,772 of income for the six months ended June 31, 2021 and 2020, respectively. These adjustments are included in other expenses related to contingent consideration revaluations on the Condensed Consolidated Statements of Comprehensive Income.

The Company measured contingent consideration related to the acquisition of H&H on October 5, 2020, which approximated the value at December 31, 2020. As of June 30, 2021 and December 31, 2020, the Company recorded contingent consideration for the H&H acquisition of $19,801,716 and $16,310,000, respectively. The Company recorded contingent consideration adjustments resulting in $3,900,048 and $0 of expense for the three months ended June 30, 2021 and 2020, and $4,698,485 and $0 of expense for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, total contingent consideration on the Consolidated Balance Sheets is $27,110,480. The Company’s contingent consideration related to acquisition earn-out payments is based on a percentage of pre-tax net and comprehensive income achieved by the acquired entity, and as such, is revised accordingly. The payment of the H&H earn-out is subject to certain minimum earnings thresholds which must be met by H&H before an earn-out payment occurs.

Maximum potential exposure for contingent consideration is not estimable based on the contractual terms of the contingent consideration agreements, which allow for a percentage payout based on a potentially unlimited range of pre-tax income. In April 2021, the Company paid $1,206,769 in contingent consideration to H&H. There were no other payments of contingent consideration for the six months ended June 30, 2021 and 2020, respectively.

 

Variable Interest Entities

The Company participates in joint ventures that conduct land acquisition, land development and/or other homebuilding activities in various markets where the Company’s homebuilding operations are located.  The Company’s investments in these joint ventures may create a variable interest in a variable interest entity (“VIE”), depending on the contractual terms of the arrangement. Additionally, the Company, in the ordinary course of business, enters into contracts with third parties and unconsolidated entities for the ability to acquire rights to land for the construction of homes. Under these contracts, the Company typically makes a specified payment or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price. Consideration paid for these contracts is recorded as lot deposits on the Consolidated Balance Sheets.

Pursuant to Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 810 and subtopics related to the consolidation of variable interest entities, the Company analyzes its joint ventures under the variable interest model to determine if such are required to be consolidated in the Company’s condensed consolidated financial statements. The accounting standard requires a VIE to be consolidated by a company if that company is determined to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: 1) the power to direct the activities that most significantly impact the VIE’s performance, and 2) the obligation to absorb losses and rights to receive the returns from the VIE that would be potentially significant to the VIE. See Note 9 for a description of the Company’s joint ventures, including those that were determined to be VIEs, and the related accounting treatment. Management determines whether the Company is the primary beneficiary of a VIE at the time it becomes involved with a VIE and reconsiders that conclusion continually. To make this determination, management considers factors such as whether the Company should direct finance, determine or limit the scope of the entity, sell or transfer property, direct development or direct other operating decisions.

 

Joint ventures for which the Company is not identified as the primary beneficiary are accounted for as equity method investments. The Company and its unconsolidated joint venture partners make initial and/or ongoing capital contributions to these unconsolidated joint ventures, typically on a pro rata basis, according to each party’s respective equity interests. The obligations to make capital contributions are governed by each such unconsolidated joint venture’s respective operating agreement and related governing documents. Partners in these unconsolidated joint ventures are unrelated homebuilders, land developers or other real estate entities.

 

For distributions received from these unconsolidated joint ventures, the Company has elected to use the cumulative earnings approach for the Condensed Consolidated Statements of Cash Flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized are treated as returns on investment within operating cash flows and those in excess of that amount are treated as returns of investment within investing cash flows.

 

The Company typically has obtained options to acquire portions of the land held by the unconsolidated joint ventures in which the Company currently participates. When an unconsolidated joint venture sells land to the Company, the Company defers recognition of its share of such unconsolidated joint venture’s earnings (losses) until the Company recognizes revenues on the corresponding home sale. At that time, the Company accounts for the earnings (losses) as a reduction (increase) to the cost of purchasing the land from the unconsolidated joint venture.

 

The Company shares in the earnings (losses) of these unconsolidated joint ventures generally in accordance with its respective equity interests. In some instances, the Company recognizes earnings (losses) that differ from its equity interest in the unconsolidated joint venture. This typically arises from the Company’s deferral of the unconsolidated joint venture’s earnings (losses) from land sales to the Company.

 

Non-Controlling Interests

The equity interests in DFH Leyden LLC, DFH Amelia LLC, DFH Clover LLC, DFH Leyden II LLC, DFH MOF Eagle Landing LLC, DCE DFH JV LLC, DFH Capitol LLC, DFC Mandarin Estates LLC, DFC East Village LLC, DFC Wilford LLC, DFC Amelia Phase III LLC, DFC Sterling Ranch LLC and DFC Grand Landings LLC have been reflected as non-controlling interests in the Consolidated Balance Sheets. Income attributable to these non-controlling interests are presented in the Condensed Consolidated Statements of Comprehensive Income as net income attributable to non-controlling interests.

 

Income Taxes

We are a corporation subject to income taxes in the United States. Our proportional share of the Company’s subsidiaries’ provisions are included in our condensed consolidated financial statements. Our deferred income tax assets and liabilities are computed for differences between the asset and liability method and financial statement amounts that will result in taxable or deductible amounts in the future. We compute deferred balances based on enacted tax laws and applicable rates for the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized for deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine we would be able to realize our deferred tax assets for which a valuation allowance had been recorded, then we would adjust the deferred tax asset valuation allowance, which would reduce our provision for income taxes. We evaluate the tax positions taken on income tax returns that remain open and positions expected to be taken on the current year tax returns to identify uncertain tax positions. Unrecognized tax benefits on uncertain tax positions are recorded on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is more than 50 percent likely to be realized is recognized. Interest and penalties related to unrecognized tax benefits are recorded in income tax benefit. We have no uncertain tax positions that qualify for inclusion in our condensed consolidated financial statements. See “Note 10—Income Taxes.”

 

Equity-Based Compensation

Certain individuals on our executive-level management team are eligible for equity-based compensation, which is awarded according to the terms of individual contracts with those managers. The Company records compensation cost for stock awarded to employees in return for employee service. The cost is measured at the grant-date fair value of the award and recognized as compensation expense over the employee service period, which is normally the vesting period. The Company does not estimate forfeitures. In the event of forfeitures, the compensation expense recognized would be adjusted.

 

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU 2020-04, Reference Rate Report (Topic 848), which provides practical expedients and exceptions for applying GAAP when modifying contracts and hedging relationships that use LIBOR as a reference rate. In addition, these amendments are not applicable to contract modifications made and hedging relationship entered into or evaluated after December 31, 2022. We do not anticipate a material increase in interest rates from our creditors as a result of the shift away from LIBOR as a reference rate, and we are currently evaluating the impact of the shift and this guidance on our financial statements and disclosures.

 

 

On October 5, 2020, the Company acquired 100% of the issued and outstanding membership interests in H&H, an operative homebuilder, for a purchase price of $44,096,448, net of $1,710,275 in purchase price reduction related to customary closing adjustments. To fund the acquisition, the Company obtained a $20,000,000 bridge loan from Boston Omaha Corporation, LLC, with an interest rate of 14% per annum maturing on May 1, 2021, paid cash of $9,496,723 and agreed to pay contingent consideration estimated in the amount of $16,310,000 if H&H met certain financial metrics.

Accordingly, the Company recognized the excess purchase price over the fair value of the net assets acquired as goodwill of $16,357,450. The goodwill arising from the acquisition consists largely of synergies and economies of scale from H&H’s operating footprint, which includes owned properties, increased future revenue and earnings from organic growth, new business opportunities and strategic initiatives. Transaction costs were not material and were expensed as incurred.

 

The business combination was accounted for under the acquisition method, and the acquisition has been included in the Company’s consolidated results of operations since the date of acquisition. The fair value of assets acquired includes cash of $10,956,359, other assets of $8,253,966, tradename of $2,660,000, inventories of $143,817,075 and liabilities assumed of $137,949,737, including $116,894,907 of construction lines of credit.

 

On January 31, 2021, the Company completed the acquisition of Century Homes from Tavistock Development Company. The Company paid $35,500,000 to acquire 134 units under construction and 229 finished lots on which the Company expects to begin construction during 2021 and 2022. The Company evaluated the Century Homes acquisition for significance under SEC Rule 3-05, and determined the acquisition did not meet the significance threshold.

The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and have been presented as if the H&H and Century Homes acquisitions had occurred on January 1, 2020. This unaudited pro forma information should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had occurred on that date, nor of the results that may be obtained in the future.

 

		For the Three Months Ended June 30,								For the Six Months Ended June 30,
Unaudited Pro Forma		2021				2020				2021			2020
Total revenue		$	365,276,101			$	275,723,212			715,419,060			$	522,924,452
Net and comprehensive income attributable to Dream Finders Homes, Inc.		$	28,573,881			$	15,034,154			45,016,495			$	22,312,843

 

On January 25, 2021, the Company entered into a $450,000,000 syndicated credit facility with Bank of America, N.A. (the “Credit Agreement”), and subsequently repaid $340,000,000 in outstanding debt, including the $20,000,000 bridge loan with Boston Omaha Corporation, LLC, and terminated all then-existing construction lines of credit. Under the Credit Agreement, the Company has the option to enter into Base Rate or LIBOR Rate contracts. The interest is payable based on the contract terms and is variable dependent on the Company’s debt to capitalization ratio, and applicable interest rates in the market (LIBOR Rate, Prime Rate, etc.).

As of June 30, 2021, the cumulative maximum availability under the Credit Agreement was $450,000,000, and the aggregate outstanding balance was $365,000,000. As of December 31, 2020, the Company had 34 lines of credit with cumulative maximum availability of $762,979,000, and an aggregate outstanding balance of $289,878,716.

Our indebtedness as of December 31, 2020, was fully collateralized by homes under construction and, to a much smaller extent, finished lots. Under the Credit Agreement, the funds available are unsecured and availability under the borrowing base is calculated based on work-in-progress inventory.

The Credit Agreement and the Company’s construction lines of credit consist of the following: 

 

			As of June 30,								As of December 31,
Renewal Date	Payment Terms		2021				2021 Effective Rate				2020				2020 Effective Rate
January 25, 2024	Interest is payable based on the Applicable Rate per the Credit Agreement			365,000,000				3.97	%			-				-
November 30, 2019	Interest is payable monthly, at the greater of Prime rate or 4.25%			-				-				545,350				4.25	%
November 30, 2019	Interest is payable monthly at the greater of the Prime rate plus 1.00% or 5.50%			-				-				540,565				5.50	%
February 9, 2021	Interest is payable monthly at 3.40% plus 30-day LIBOR			-				-				390,000				4.06	%
March 31, 2021	Interest is payable monthly at 9.50%			-				-				269,030				10.33	%
April 30, 2021	Interest is payable monthly at the greater of the Prime rate plus 0.50% or 3.75%			-				-				11,923,342				6.53	%
April 30, 2021	Interest is payable monthly at the Prime rate plus 0.50%			-				-				3,521,203				3.93	%
May 10, 2021	Interest is payable monthly at the greater of Prime rate plus 0.50% or 4.25%			-				-				7,391,080				6.39	%
June 12, 2021	Interest is payable monthly at 3.00% plus 3-month LIBOR			-				-				14,457,573				3.96	%
June 30, 2021	Interest is payable monthly at the greater of 3.50% plus 30-day LIBOR or 4.50%			-				-				17,290,107				4.80	%
June 30, 2021	Interest is payable monthly at 3.75% + 1-month LIBOR			-				-				13,318,374				4.37	%
August 25, 2021	Interest is payable monthly at the Prime rate plus 0.75%			-				-				1,486,800				3.81	%
September 30, 2021	Interest is payable monthly at 3.00% plus 3-month LIBOR.			-				-				62,127,292				3.91	%
October 1, 2021	Interest is payable monthly at the greater of 4.50% or 3.90% plus 1-month LIBOR.			-				-				11,863,043				6.42	%
October 2, 2021	Interest is payable monthly at the greater of 4.00% or 3.75% plus 1-month LIBOR			-				-				4,361,201				7.75	%
October 2, 2021	Interest is payable monthly at the greater of the Prime rate plus 1.00% or 5.00%			-				-				14,525,422				5.00	%
October 5, 2021	Interest is payable monthly at 4.50% plus 1-month LIBOR			-				-				11,227,212				5.03	%
October 25, 2021	Interest is payable monthly at the Prime rate plus 0.50%			-				-				861,909				4.77	%
November 2, 2021	Interest is payable monthly at the greater of the Prime rate plus 0.75% or 4.50%			-				-				8,034,458				6.01	%
December 15, 2021	Interest is payable monthly at the greater of the Prime rate plus 0.50% or 5.00%			-				-				2,205,715				4.24	%
December 18, 2021	Interest is payable monthly at 3.00% plus 30-day LIBOR			-				-				8,468,565				4.17	%
December 18, 2021	Interest is payable monthly at 3.95% plus 1-month LIBOR			-				-				9,558,836				6.00	%
December 31, 2021	Interest is payable monthly at 9.00%			-				-				1,821,515				10.33	%
December 31, 2021	Interest is payable monthly at 9.50%			-				-				259,157				10.33	%
April 1, 2022	Interest is payable monthly at 9.50%.			-				-				2,925,686				10.33	%
April 20, 2022	Interest is payable monthly at 9.50%			-				-				639,437				10.33	%
April 30, 2022	Interest is payable monthly at 9.50%.			-				-				1,028,131				10.33	%
October 5, 2022	Interest is payable monthly at the greater of the Prime rate plus 0.50% or 4.00%			-				-				5,828,931				4.00	%
October 20, 2022	Interest is payable monthly at the greater of 4.00% or 2.75% plus 3-month LIBOR			-				-				11,289,202				4.51	%
October 20, 2022	Interest is payable monthly at the greater of 4.50% or 3.90% plus 3-month LIBOR			-				-				13,408,970				6.62	%
June 19, 2023	Interest is payable monthly at the greater of 4.00% or 2.75% plus 3-month LIBOR.			-				-				8,790,640				4.15	%
June 19, 2023	Interest is payable monthly at the greater of 4.00% or the Prime rate plus 0.50%.			-				-				23,737,991				4.92	%
November 6, 2023	Interest is payable monthly at the greater of the Prime rate plus 0.38% or 3.65%			-				-				4,043,089				4.64	%
December 31, 2023	Interest is payable monthly at the greater of the Prime rate plus 0.50% or 4.00%			-				-				894,300				4.00	%
Various	Interest is payable monthly at the greater of the Prime rate or 5.00%.			-				-				11,351,056				5.02	%
Total lines of credit outstanding			$	365,000,000							$	290,385,182
Less: Debt issuance costs from lines of credit				(3,883,992	)							(506,466	)
Lines of credit, net			$	361,116,008							$	289,878,716

The vertical lines of credit that were paid in full during 2021 (in connection with the Company entering into the Credit Agreement), are no longer active and the Company does not intend to renew these facilities. The outstanding balance in the vertical lines of credit were payable upon the delivery of the collateralized individual homes to end-home buyers.

 

The Credit Agreement contains restrictive covenants and financial covenants. The Company was in compliance with all debt covenants as of June 30, 2021 and December 31, 2020. The Company expects to remain in compliance with all debt covenants over the next twelve months.

 

Notes payable consisted of the following as of June 30, 2021 and December 31, 2020:

 

							As of June 30,								As of December 31,
Maturity Date					Payment Terms		2021				2021 Effective Rate				2020				2020 Effective Rate
May 1, 2021					Interest is payable monthly at 14.00%		$	-				-			$	20,000,000				14.00	%
February 28, 2022			(1	)	Non-interest bearing			1,056,000				0.00	%			832,000				0.00	%
April 1, 2022			(1	)	Interest is payable monthly at 12.50%			717,642				12.50	%			1,735,161				12.50	%
July 31, 2022			(1	)	Interest is payable monthly at 9.25%			2,274,889				9.25	%			3,984,174				9.25	%
March 25, 2023			(1	)	Interest is payable monthly at 5.00%			-				-				3,101,947				5.00	%
Total notes payable							$	4,048,531							$	29,653,282
Less: Debt issuance costs from notes payable								-								(15,444	)
Notes payable, net of discount							$	4,048,531							$	29,637,838

(1) These notes payable relate to our consolidated joint ventures and are non-recourse to the Company.

 

Included within notes payable as of December 31, 2020, is a $20,000,000 bridge loan from Boston Omaha Corporation, LLC, which was utilized to fund a portion of the purchase price of the H&H Homes acquisition (Note 2). This note was paid off in January 2021.

 

The principal balance on all notes payable is payable upon the sale of project specific collateral, and is collateralized by a real estate mortgage and a limited guarantee ensuring project completeness and the nonexistence of fraudulent acts.

 

During the six months ended June 30, 2021 and 2020, there were no material changes in the contractual maturities of our notes payable.

 

 

Inventories consist of entitled  raw land, finished lots, and construction in process (“CIP”), including capitalized interest. Raw land is purchased with the intent to develop such land into finished lots. Finished lots are held with the intent of building and selling a home. The asset is owned by the Company either as a result of developing purchased raw land or purchasing developed lots. CIP represents the homebuilding activity associated with both homes to be sold and speculative homes. CIP includes the cost of the developed lot as well as all of the direct costs incurred to build the home. The cost of the home is expensed on a specific identification basis when the home is closed to the end customer.