cwd-20230630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2023


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

For the transition period from ______ to ______

Commission file number 001-41703

CALIBERCOS INC.

(Exact name of registrant as specified in its charter)


Delaware						47-2426901
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

8901 E. Mountain View Rd. Ste. 150, Scottsdale, AZ						85258
(Address of Principal Executive Offices)						(Zip Code)


			(480) 295-7600
			Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.001 par value per share	CWD	Nasdaq Capital Market

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

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. (Check one):


Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	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 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 Act). Yes ¨ No x

There were 21,249,884 shares of common stock, comprised of 13,833,470 shares of Class A Common Stock and 7,416,414 shares of Class B Common Stock of CaliberCos Inc. as of August 8, 2023.

Explanatory Note

In this report, the term “Caliber”, “we”, “us”, “our” or “the Company” refers to CaliberCos Inc.

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of the federal securities laws. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the operating results and financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, statements about:

•estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

•our estimates of the size of our market opportunities;

•our ability to effectively manage our growth;

•our ability to successfully enter new markets, manage our growth expansion and comply with any applicable laws and regulations;

•the effects of increased competition from our market competitors;

•significant disruption in, or breach in security of, our information technology systems and resultant interruptions in service and any related impact on our reputation;

•the attraction and retention of qualified employees and key personnel;

•the effectiveness of our internal controls;

•changes in laws and government regulation affecting our business;

•the impact of adverse economic conditions;

•the sufficiency of our cash and cash equivalents to meet our liquidity needs and service our indebtedness; and

•outcomes of legal or administrative proceedings.

In addition, in this report, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our Company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this report. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

You should read this report and the documents that we reference in this report and have filed with the Securities and Exchange Commission (“SEC”) as exhibits to this report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Table of Contents


						Page
Part I - Financial Information						4
Item 1. Financial Statements						4
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022						4
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2023 and 2022						6
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2023 and 2022						7
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022						9
Notes to Condensed Consolidated Financial Statements						11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations						42
Item 3. Quantitative and Qualitative Disclosures About Market Risk						60
Item 4. Controls and Procedures						61
Part II - Other Information						62
Item 1. Legal Proceedings						62
Item 1A. Risk Factors						62
Item 2. Unregistered Sales of Equity Securities						62
Item 3. Defaults Upon Senior Securities						62
Item 4. Mine Safety Disclosures						62
Item 5. Other Information						62
Item 6. Exhibit Index						63
Signatures						65

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)


	June 30, 2023		December 31, 2022
Assets
Cash	$	1,335	$	1,921
Restricted cash	2,330		23
Real estate investments, net	21,411		2,065

Due from related parties	7,675		9,646
Investments in unconsolidated entities	3,246		3,156
Operating lease - right of use assets	215		1,411

Prepaid and other assets	2,722		5,861
Assets of consolidated funds
Cash	7,220		5,736
Restricted cash	10,527		8,254
Real estate investments, net	219,834		196,177

Accounts receivable, net	1,700		2,228
Notes receivable - related parties	31,657		28,229
Due from related parties	4		15
Operating lease - right of use assets	8,780		8,769

Prepaid and other assets	10,356		5,343
Total assets	$	329,012	$	278,834

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)


	June 30, 2023		December 31, 2022
Liabilities and Stockholders’ Equity
Notes payable	$	54,964	$	14,653
Notes payable - related parties	—		365
Accounts payable and accrued expenses	7,784		6,374
Buyback obligation	—		12,391
Due to related parties	101		171
Operating lease liabilities	131		1,587

Other liabilities	560		64
Liabilities of consolidated funds
Notes payable, net	147,277		134,256
Notes payable - related parties	10,391		6,973
Accounts payable and accrued expenses	9,792		9,252
Due to related parties	129		68
Operating lease liabilities	12,419		12,461

Other liabilities	2,852		3,030
Total liabilities	246,400		201,645

Commitments and Contingencies

Preferred stock Series B, $0.001 par value; 12,500,000 shares authorized, no shares issued and outstanding as of June 30, 2023 and 1,651,302 shares issued and outstanding as of December 31, 2022	—		—
Common stock Class A, $0.001 par value; 100,000,000 shares authorized, 13,820,978 and 10,790,787 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	14		11
Common stock Class B, $0.001 par value; 15,000,000 shares authorized, 7,416,414 shares issued and outstanding as June 30, 2023 and December 31, 2022	7		7
Paid-in capital	38,979		33,108
Less treasury stock, at cost, 277,342 shares repurchased and 3,432,351 forward repurchase shares as of December 31, 2022. As of June 30, 2023, there was no treasury stock or forward repurchase shares	—		(13,626)
Accumulated deficit	(31,060)		(22,709)
Stockholders’ equity (deficit) attributable to CaliberCos Inc.	7,940		(3,209)
Stockholders’ equity attributable to noncontrolling interests	74,672		80,398
Total stockholders’ equity	82,612		77,189
Total liabilities and stockholders’ equity	$	329,012	$	278,834

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

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenues
Asset management fees	$	1,229	$	1,135	$	2,511	$	2,066
Performance allocations	12		103		2,438		2,405
Transaction and advisory fees	665		1,750		1,419		2,371
Consolidated funds – hospitality revenue	16,273		14,242		39,482		32,813
Consolidated funds – other revenue	2,266		1,451		4,117		3,328
Total revenues	20,445		18,681		49,967		42,983

Expenses
Operating costs	6,820		2,829		11,324		5,218
General and administrative	1,426		2,149		3,242		4,137
Marketing and advertising	325		765		678		1,005
Depreciation and amortization	137		7		269		16
Consolidated funds – hospitality expenses	20,749		12,685		41,032		29,826
Consolidated funds – other expenses	1,949		2,030		3,874		4,469
Total expenses	31,406		20,465		60,419		44,671

Consolidated funds - gain on sale of real estate investments	—		—		—		21,530

Other income (loss), net	546		(3)		1,065		216

Interest income	96		3		194		3
Interest expense	(1,261)		(175)		(2,092)		(344)
Net (loss) income before income taxes	(11,580)		(1,959)		(11,285)		19,717
Provision for income taxes	—		—		—		—
Net (loss) income	(11,580)		(1,959)		(11,285)		19,717
Net (loss) income attributable to noncontrolling interests	(5,854)		(1,499)		(4,352)		19,628
Net (loss) income attributable to CaliberCos Inc.	(5,726)		(460)		(6,933)		89
Basic net (loss) income per share attributable to common stockholders	$	(0.29)	$	(0.03)	$	(0.37)	$	0.01
Diluted net (loss) income per share attributable to common stockholders	$	(0.29)	$	(0.03)	$	(0.37)	$	0.01
Weighted average common shares outstanding:
Basic	19,612		17,791		18,901		17,873
Diluted	19,612		17,791		18,901		19,750

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

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(AMOUNTS IN THOUSANDS)


	Preferred Stock			Common Stock						Paid in Capital		Treasury Stock		Accumulated Deficit		Noncontrolling Interests		Total Stockholders’ Equity
				Class A			Class B
	Shares	Par Value		Shares	Par Value		Shares	Par Value
Balances as of December 31, 2022	1,651	$	—	10,791	$	11	7,416	$	7	$	33,108	$	(13,626)	$	(22,709)	$	80,398	$	77,189


Repurchases of common stock	—	—		(42)	—		—	—		—		—		—		—		—

Equity based compensation	—	—		—	—		—	—		702		—		—		—		702
Contributions from noncontrolling interest holders	—	—		—	—		—	—		—		—		—		7,629		7,629
Redemptions of noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(295)		(295)
Distributions to noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(1,752)		(1,752)
Consolidation of VIEs	—	—		—	—		—	—		—		—		—		(20,805)		(20,805)
Deconsolidation of VIEs	—	—		—	—		—	—		—		—		—		9,539		9,539
Retirement of treasury stock	—	—		—	—		—	—		—		1,418		(1,418)		—		—
Net (loss) income	—	—		—	—		—	—		—		—		(1,207)		1,502		295
Balances as of March 31, 2023	1,651	$	—	10,749	$	11	7,416	$	7	$	33,810	$	(12,208)	$	(25,334)	$	76,216	$	72,502

Issuance of common stock, net of issuance costs	—	—		1,200	1		—	—		3,247		—		—		—		3,248

Conversions of preferred stock	(1,651)	—		1,651	2		—	—		—		—		—		—		2
Equity based compensation	—	—		221	—		—	—		1,922		—		—		—		1,922
Contributions from noncontrolling interest holders	—	—		—	—		—	—		—		—		—		6,787		6,787
Redemptions of noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(995)		(995)
Distributions to noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(1,482)		(1,482)


Elimination of buyback obligation	—	—		—	—		—	—		—		12,208		—		—		12,208
Net loss	—	—		—	—		—	—		—		—		(5,726)		(5,854)		(11,580)
Balances as of June 30, 2023	—	$	—	13,821	$	14	7,416	$	7	$	38,979	$	—	$	(31,060)	$	74,672	$	82,612

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(AMOUNTS IN THOUSANDS)


	Preferred Stock			Common Stock						Paid in Capital		Treasury Stock		Accumulated Deficit		Noncontrolling Interests		Total Stockholders’ Equity
				Class A			Class B
	Shares	Par Value		Shares	Par Value		Shares	Par Value
Balances as of December 31, 2021	1,650	$	—	10,523	$	10	7,416	$	7	$	29,249	$	(13,626)	$	(24,729)	$	58,782	$	49,693

Issuance of common stock	—	—		10	—		—	—		62		—		—		—		62


Equity based compensation expense	—	—		—	—		—	—		64		—		—		—		64
Contributions from noncontrolling interest holders	—	—		—	—		—	—		—		—		—		5,926		5,926
Redemptions of noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(200)		(200)
Distributions to noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(870)		(870)
Consolidation of VIEs	—	—		—	—		—	—		—		—		—		4,029		4,029
Deconsolidation of VIEs	—	—		—	—		—	—		—		—		—		(16,781)		(16,781)

Net income	—	—		—	—		—	—		—		—		549		21,127		21,676
Balances as of March 31, 2022	1,650	$	—	10,533	$	10	7,416	$	7	$	29,375	$	(13,626)	$	(24,180)	$	72,013	$	63,599

Issuance of common stock	—	—		494	1		—	—		3,249		—		—		—		3,250


Equity based compensation expense	—	—		—	—		—	—		137		—		—		—		137
Contributions from noncontrolling interest holders	—	—		—	—		—	—		—		—		—		10,637		10,637
Redemptions of noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(1,410)		(1,410)
Distributions to noncontrolling interest holders	—	—		—	—		—	—		—		—		—		(1,122)		(1,122)
Consolidation of VIEs	—	—		—	—		—	—		—		—		—		(165)		(165)


Net loss	—	—		—	—		—	—		—		—		(460)		(1,499)		(1,959)
Balances as of June 30, 2022	1,650	$	—	11,027	$	11	7,416	$	7	$	32,761	$	(13,626)	$	(24,640)	$	78,454	$	72,967

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

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)


	Six Months Ended June 30,
	2023		2022
Cash Flows From Operating Activities
Net (loss) income	$	(11,285)	$	19,717
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	258		16
Non-cash lease expense and gain on lease extinguishment	(290)		—
Non-cash performance allocations	(2,382)		—
Equity-based compensation	2,624		201




Amortization of above-market/below market leases and straight-line rent, net	108		—
Amortization of deferred financing costs	(15)		—
Changes in operating assets and liabilities:

Due from related parties	637		1,257
Prepaid expenses, right-of-use assets and other assets	3,198		(1,038)
Accounts payable and accrued expenses	1,405		(204)
Due to related parties	(70)		(610)
Lease liabilities and other liabilities	359		(455)
Adjustments to reconcile net income to net cash from operating activities of consolidated funds:
Depreciation	5,134		4,648
Non-cash lease expense	(53)		—
Gain on the disposition of real estate	—		(21,530)
Loss (gain) on extinguishment of debt	2		(3,131)
Gain on derivative instruments	(30)		—
Loss on disposal of furniture, fixtures and equipment	413		—
Impairment	—		182
Amortization of advanced key money	(37)		(38)
Amortization of above-market/below market leases and straight-line rent, net	(244)		(38)
Amortization of deferred financing costs	737		326
Changes in operating assets and liabilities of consolidated funds:
Accounts receivable, net	1,267		(63)
Due from related parties	11		97
Prepaid expenses, right-of use assets and other assets	(4,617)		(209)
Accounts payable and accrued expenses	(773)		(200)
Due to related parties	266		598
Lease liabilities and other liabilities	(82)		1,463
Net cash provided by operating activities	(3,459)		989

Cash Flows From Investing Activities
Investments in real estate assets	(127)		(128)
Acquisition of real estate assets	(19,472)		—

Investments in unconsolidated entities	(90)		(686)
Funding of notes receivable - related party	(980)		—
Payment received on notes receivable - related party	480		—

CALIBERCOS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(AMOUNTS IN THOUSANDS)


	Six Months Ended June 30,
	2023		2022
Cash Flows From Investing Activities of consolidated funds
Consolidation of VIEs	12,927		1,393
Deconsolidation of VIEs	(12,418)		(16,882)
Investments in real estate assets	(10,223)		(28,375)
Acquisition of real estate assets	(6,643)		—
Proceeds from the sale of real estate assets	—		30,672
Funding of notes receivable - related party	(8,309)		(4,067)
Payment received on notes receivable - related party	1,935		191
Net cash used in investing activities	(42,920)		(17,882)
Cash Flows From Financing Activities
Payment of deferred financing costs	$	(253)	$	—
Proceeds from notes payable	42,816		6,585
Repayments of notes payable	(2,237)		(868)
Proceeds from notes payable - related parties	4,000		—
Repayments of notes payable - related parties	(4,365)		(35)

Proceeds from the issuance of common stock, net of issuance costs	3,248		12
Payments of treasury stock - buyback obligation	(183)		(157)

Cash Flows From Financing Activities of consolidated funds

Payment of deferred financing costs	(2,515)		(241)
Proceeds from notes payable	60,535		23,315
Repayments of notes payable	(57,687)		(16,969)
Proceeds from notes payable - related parties	3,239		10,455
Repayments of notes payable - related parties	(4,633)		(7,757)
Contributions from noncontrolling interest holders	14,416		16,563
Redemptions of noncontrolling interests	(1,290)		(1,610)
Distributions to noncontrolling interest holders	(3,234)		(1,992)
Net cash provided by financing activities	51,857		27,301
Net Change in Cash and Restricted Cash	5,478		10,408
Cash and Restricted Cash at Beginning of Period	15,934		16,532
Cash and Restricted Cash at End of Period	$	21,412	$	26,940

Reconciliation of Cash and Restricted Cash
Cash at beginning of period	$	7,657	$	8,378
Restricted cash at beginning of period	8,277		8,154
Cash and restricted cash at beginning of period	15,934		16,532

Cash at end of period	8,555		15,580
Restricted cash at end of period	12,857		11,360
Cash and restricted cash at end of period	$	21,412	$	26,940

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

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Organization and Liquidity

Organization

CaliberCos Inc., a Delaware corporation, and its consolidated subsidiaries (collectively, the “Company”, “Caliber”, “we”, “our”, and “us”), is an alternative asset manager of private syndication and direct investment real estate funds and provider of a full suite of traditional real estate services. The Company was formed in November 2014, and originally began as Caliber Companies, LLC, an Arizona limited liability company, which commenced operations in January 2009. We also provide various support services to the investments we manage including fund formation services, lending support, construction and development management, and real estate brokerage. Our business is organized into three reportable segments: Fund Management, Development, and Brokerage. As of June 30, 2023, we had operations in Alaska, Arizona, Colorado, and Texas.

In general, our private equity real estate funds are organized as operating partnerships, in which multiple unrelated passive investors own partnership interests. In addition, we are designated as the manager and/or general partner of the partnership. Depending on the legal structure and arrangements between us and the funds, we may or may not consolidate the partnerships for financial reporting purposes. For funds in which we are determined to be the controlling party or primary beneficiary for financial reporting purposes, the fund is consolidated, and the passive investors’ ownership is presented as noncontrolling interest in the accompanying condensed consolidated financial statements. For funds in which we are not determined to be the controlling party for financial reporting purposes, the fund is not consolidated, and any fees earned from the fund are included in fund management revenue in the accompanying condensed consolidated financial statements. See Note 2 – Summary of Significant Accounting Policies for more detail.

Liquidity

The Company, through guarantees of loans held by its consolidated funds, has five separate loans outstanding with maturity dates within the 12-month period subsequent to when these financial statements were issued with outside lenders totaling $28.8 million at June 30, 2023. Management is actively managing the potential amendments to the applicable loan agreements to include additional extension options, pay off or refinancing of these facilities. Management believes that we will be able to enter into new financing arrangements with third-party lenders. See Note 6 – Notes Payable for additional details.

Note 2 – Summary of Significant Accounting Policies

Accounting Policies of the Company

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries, which include variable interest entities (“VIEs”) where we are considered the primary beneficiary and voting interest entities (“VOEs”), where we have determined that we have a controlling financial interest, under the “Consolidations” Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) (Topic 810). The equity and net income or loss attributable to noncontrolling interests in subsidiaries is shown separately in the accompanying condensed consolidated balance sheets, statements of operations, and statements of changes in stockholders’ equity. All intercompany balances and transactions have been eliminated in consolidation.

Variable Interest Entities

We determine if an entity is a VIE based on several factors, including whether the equity holders, as a group, lack the characteristics of a controlling financial interest. We analyze any investments in VIEs to determine if we are the primary beneficiary. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in a VIE.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Determining which reporting entity, if any, has a controlling financial interest in a VIE is primarily a qualitative analysis focused on identifying which reporting entity has both (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment. We consolidate any VIEs for which we are the primary beneficiary and we disclose our maximum exposure to loss related to the consolidated VIEs. See Note 3 – VIEs for more detail.

Voting Interest Entities

Entities that do not qualify as VIEs are generally assessed for consolidation as VOEs. For VOEs, we consolidate an entity if we have a controlling financial interest. We have a controlling financial interest in a VOE if (i) for legal entities other than partnerships, we own a majority voting interest in the entity or, for limited partnerships and similar entities, we own a majority of the entity’s kick-out rights through voting limited partnership interests and (ii) non-controlling shareholders or partners do not hold substantive participating rights, and no other conditions exist that would indicate that we do not control the entity.

Interim Unaudited Financial Data

Our condensed consolidated financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements, including notes, are unaudited, exclude some of the disclosures required for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2022.

Use of Accounting Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are made and evaluated on an ongoing basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates.

Reclassification

On January 17, 2023, the Company’s board of directors approved an amendment to its certificate of incorporation to effect a 1-for-1.6820384 reverse stock split of Class A common stock, Class B common stock and Series B preferred stock. The reverse stock split was effected on January 17, 2023. Certain prior period amounts have been updated to reflect the reverse stock split including share and per share amounts and additional paid-in-capital amounts on the condensed consolidated statement of equity for each of the three months ended March 31, 2022 and June 30, 2022.

Cash

Cash includes cash in bank accounts. The Company deposits cash with several high-quality financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Company (“FDIC”) up to an insurance limit of $250,000. At times, the Company’s cash balances may exceed FDIC limits. Although the Company bears risk on amounts in excess of those insured by the FDIC, it has not experienced and does not anticipate any losses due to the high quality of the institutions where the deposits are held.

Restricted Cash

Restricted cash consists of held in escrow accounts by contractual agreement with lenders as part of financial loan covenant requirements.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Investments in Unconsolidated Entities

If an entity is not a VIE, our determination of the appropriate accounting method with respect to our investments in limited liability companies and other investments is based on voting control. For our managing member interests in limited liability companies, we are presumed to control (and therefore consolidate) the entity, unless the other limited partners have substantive rights that overcome this presumption of control. These substantive rights allow the limited partners to remove the general partner with or without cause or to participate in significant decisions made in the ordinary course of the entity’s business. We account for our non-controlling investments in these entities under the equity method. Our investments in unconsolidated subsidiaries in which we have the ability to exercise significant influence over operating and financial policies, but do not control, or entities which are VIE in which we are not the primary beneficiary are accounted for under the equity method. The equity method of accounting requires the investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the equity method investment’s earnings and distributions. Our share of the earnings or loss from equity method investments is included in other income (expenses), net on the accompanying condensed consolidated statements of operations.

Our determination of the appropriate accounting treatment for an investment in a subsidiary requires judgment of several factors including the size and nature of our ownership interest and the other owners’ substantive rights to make decisions for the entity. If we were to make different judgments or conclusions as to the level of our control or influence, it could result in a different accounting treatment. Consolidating an investment generally would have no impact on our net income or stockholders’ deficit attributable to CaliberCos Inc. in any accounting period, but a different treatment would impact individual income statement and balance sheet line items, as consolidation would effectively “gross up” our statement of operations and balance sheet.

As of June 30, 2023 and December 31, 2022, the carrying amount of our investments in unconsolidated entities was $3.2 million. In certain situations, the Company has invested only a nominal amount of cash, or no cash at all, into a venture. As the manager of the venture, we are entitled to 15.0% – 35.0% of the residual cash flow produced by the venture after the payment of any priority returns. Under the equity method, impairment losses are recognized upon evidence of other-than-temporary losses of value. For the three and six months ended June 30, 2023 and 2022, the Company had no impairment losses related to its investments in unconsolidated entities.

Depreciation and Amortization Expense

Depreciation expense includes costs associated with the purchase of furniture and equipment and office leasehold improvements which are recorded at cost. Furniture and equipment costs are depreciated using the straight-line method over the estimated useful life of the asset, generally three to seven years beginning in the first full month the asset is placed in service. Office leasehold improvements are amortized using the straight-line method over the shorter of the respective estimated useful life or the lease term.

Impairment of Long-Lived Assets

Real estate and other long-lived assets to be held and used are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is determined not to be recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we make an assessment of its recoverability by comparing the carrying amount to our estimate of the undiscounted net future cash flows resulting from the use of the asset, excluding interest charges. If the carrying amount exceeds the aggregate undiscounted future cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the asset.

For the three and six months ended June 30, 2023 and 2022, the Company had no impairment losses related to its real estate and other long-lived assets.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

Substantially all of the Company’s revenues are generated from the management, ownership and/or operations of real estate assets located in Alaska, Arizona, Colorado, and Texas. The Company mitigates the associated risk by:

•diversifying our investments in real estate assets across multiple asset types, including hospitality, commercial, single-family, multi-family, and self-storage properties;

•diversifying our investments in real estate assets across multiple geographic locations including different markets and sub-markets in which our real estate assets are located;

•diversifying our investments in real estate assets across assets at differing points of stabilization, and in varying states of cash flow optimization; and

•maintaining financing relationships with a diversified mix of lenders (differing size and type), including large national banks, local community banks, private equity lenders, and insurance companies.

Noncontrolling Interests in Consolidated Real Estate Partnerships

We report the unaffiliated partners’ interests in the net assets of our consolidated real estate partnerships as noncontrolling interests within the accompanying condensed consolidated statements of changes in stockholders’ equity. Noncontrolling interests consist of equity interests held by limited partners in consolidated real estate partnerships. We attribute to noncontrolling interests their share of income or loss of the consolidated partnerships based on their proportionate interest in the results of operations of the partnerships, including their share of losses even if such attribution results in a deficit noncontrolling interest balance within our equity and partners’ capital accounts.

The terms of the partnership agreements generally require the partnerships to be liquidated following the sale of the underlying real estate assets. As the general partner in these partnerships, we ordinarily control the execution of real estate sales and other events that could lead to the liquidation, redemption or other settlement of noncontrolling interests. The terms of certain partnership agreements outline differing classes of equity ownership, some of which are redeemable by the partnership at the partnership manager’s discretion.

Revenue Recognition

In accordance with the ASC 606, Revenue from Contracts with Customers (“ASC 606”), management applies the five-step framework in determining the timing and amount of revenue to recognize. This framework requires an entity to: (i) identify the contract(s) with customers, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. The Company’s revenues primarily consist of fund management and transaction and advisory fees.

Fund Management

Asset management fees generated from the funds are generally based on 1.0% to 1.5% of the unreturned capital contributions in a particular fund and include reimbursement for costs incurred on behalf of the fund, including an allocation of certain overhead costs. The Company earns an asset management fee of 0.70% of the Caliber Hospitality Trust’s (as defined in Note 3 – VIEs) enterprise value and is reimbursed for certain costs incurred on behalf of the Caliber Hospitality Trust. These customer contracts require the partnership to provide management services, representing a performance obligation that the partnership satisfies over time.

Performance allocations are an arrangement in which we are entitled to an allocation of investment returns, generated within the investment funds which we manage, based on a contractual formula. We typically receive 15.0% to 35.0% of all cash distributions from (i) the operating cash flow of each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of preferred capital contributions; and (ii) the cash flow resulting from the sale or refinance of any real estate assets held by each fund, after payment to the related fund investors of any accumulated and unpaid priority preferred returns and repayment of initial preferred capital contributions. Our funds’ preferred returns range from 6.0% to 12.0%, typically 6.0% for common equity or 10.0% to 12.0% for preferred equity, which does not participate in profits. Performance allocations are related to services which have been provided and are recognized when it is determined that they are no longer probable of significant reversal, which is generally satisfied when an underlying fund investment is realized or sold.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Transaction and Advisory Fees

Revenues from contracts with customers includes fixed fee arrangements with related party affiliates to provide certain associated activities which are ancillary to and generally add value to the assets we manage, such as set-up and fund formation services associated with marketing, soliciting, and selling member interests in the affiliated limited partnerships, brokerage services, construction and development management services, loan placement and guarantees. The recognition and measurement of revenue is based on the assessment of individual contract terms. For performance obligations satisfied at a point in time, there are no significant judgments made in evaluating when the customer obtains control of the promised service.

For performance obligations satisfied over time, significant judgment is required to determine how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on appropriate measurement of the Company’s progress under the contract; and whether constraints on variable consideration should be applied due to uncertain future events. Transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Variable consideration is included in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The Company’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of its anticipated performance and all information that is reasonably available to the Company. Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

Set-up services are a one-time fee for the initial formation, administration, and set-up of the private equity real estate fund. These fees are recognized at the point in time when the performance under the contract is complete.

Fund formation fees are earned at a point in time at a fixed rate based on the amount of capital raised into certain managed funds. Services include marketing, offering, registration, and ultimately raising capital.

Accounts Receivable

Accounts receivable primarily consists of reimbursable expenses from third-party development projects. The Company continually reviews receivables and determines collectability by taking into consideration the history of past write-offs, collections, current credit conditions, payment history, and the financial condition of the related third-party service providers. In the event that the collectability of a receivable is uncertain, the Company will record an increase in the allowance for doubtful accounts. Amounts that are determined to be uncollectible with a high degree of certainty are written-off through bad debt expense, which is included in operating costs on the accompanying condensed consolidated statements of operations. The Company did not record an allowance for doubtful accounts as of June 30, 2023 and December 31, 2022.

Related Parties

In the normal course of business, the Company enters into transactions with related parties. Related parties include affiliates of the entity, entities under common control of the Company, significant stockholders and executive management and members of their immediate families, and other parties that can significantly influence the management and operating policies of the Company.

Leases

Lessor

At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions to determine the proper lease classification. When the terms of a lease effectively transfer control of the underlying asset, the lease is classified as a sales-type lease. When a lease does not effectively transfer control of the underlying asset to the lessee, but the Company obtains a guarantee for the value of the asset from a third party, the Company classifies the lease as a direct financing lease. All other leases are classified as operating leases. The Company did not have any sales-type or direct financing leases as of June 30, 2023. For operating leases with minimum scheduled rent increases, the consolidated funds recognize rental revenue on a straight-line basis, including the effect of any free rent periods, over the lease term when collectability of lease payments is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company identified two separate lease components as follows: i) land lease component, and ii) single property lease component comprised of building, land improvements and tenant improvements. The Company’s leases also contain provisions for tenants to reimburse the consolidated funds for maintenance and other property operating expenses, which are considered to be non-lease components. The Company elected the practical expedient to combine lease and non-lease components and the non-lease components will be included with the single property lease component as the predominant component.

Lessee

To account for leases for which the Company is the lessee, contracts must be analyzed upon inception to determine if the arrangement is, or contains, a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lease classification tests and measurement procedures are performed at the lease commencement date.

The lease liability is initially measured as the present value of the lease payments over the lease term, discounted using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the lessee’s incremental borrowing rate is used. The incremental borrowing rate is determined based on the estimated rate of interest that the lessee would pay to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. The lease term is the noncancelable period of the lease and includes any renewal and termination options the Company is reasonably certain to exercise. The lease liability balance is amortized using the effective interest method. The lease liability is remeasured when the contract is modified, upon the resolution of a contingency such that variable payments become fixed or if the assessment of exercising an extension, termination or purchase option changes.

The right-of-use (“ROU”) asset balance is initially measured as the lease liability amount, adjusted for any lease payments made prior to the commencement date, initial direct costs, estimated costs to dismantle, remove, or restore the underlying asset and incentives received.

The Company’s impairment assessment for ROU assets is consistent with the impairment analysis for the Company's other long-lived assets and is reviewed quarterly.

Accounting Policies of Consolidated Funds

Accounting for Real Estate Investments

Upon the acquisition of real estate properties, a determination is made as to whether the acquisition meets the criteria to be accounted for as an asset acquisition or a business combination. The determination is primarily based on whether the assets acquired, and liabilities assumed meet the definition of a business. The determination of whether the assets acquired, and liabilities assumed meet the definition of a business includes a single or similar asset threshold. In applying the single or similar asset threshold, if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets acquired, and liabilities assumed are not considered a business. Most of our consolidated fund acquisitions meet the single or similar asset threshold, due to the fact that substantially all the fair value of the gross assets acquired is attributable to the real estate assets acquired.

Acquired real estate properties accounted for as asset acquisitions are recorded at cost, including acquisition and closing costs. Our consolidated funds allocate the cost of real estate properties to the tangible and intangible assets and liabilities acquired based on their estimated relative fair values. Our consolidated funds determine the fair value of tangible assets, such as land, building, furniture, fixtures and equipment, using a combination of internal valuation techniques that consider comparable market transactions, replacement costs and other available information and fair value estimates provided by third-party valuation specialists, depending upon the circumstances of the acquisition. Our consolidated funds determine the fair value of identified intangible assets or liabilities, which typically relate to in-place leases, using a combination of internal valuation techniques that consider the terms of the in-place leases, current market data for comparable leases, and fair value estimates provided by third-party valuation specialists, depending upon the circumstances of the acquisition.

If a transaction is determined to be a business combination, the assets acquired, liabilities assumed, and any identified intangibles are recorded at their estimated fair values on the transaction date, and transaction costs are expensed in the period incurred.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cost Capitalization and Depreciation

Our consolidated funds capitalize costs, including certain indirect costs, incurred in connection with their development and construction activities. Included in these capitalized costs are payroll costs associated with time spent by site employees in connection with capital addition activities at the asset level. Interest, property taxes and insurance are also capitalized during periods in which redevelopment, development and construction projects are in progress. Capitalization of costs, including certain indirect costs, incurred in connection with our capital addition activities, commence at the point in time when activities necessary to get the assets ready for their intended use are in progress. This includes when assets are undergoing physical construction, as well as when apartment homes are held vacant in advance of planned construction, provided that other activities such as permitting, planning and design are in progress. Our consolidated funds cease the capitalization of costs when the assets are substantially complete and ready for their intended use, which is typically when construction has been completed and apartment homes or other properties are available for occupancy. Cost of ordinary repairs, maintenance and resident turnover are charged to operating expense, as incurred.

Depreciation for all tangible real estate assets is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of our real estate assets are as follows:


Building and building improvements			15 – 40 years
Furniture, fixtures, and equipment			3 – 7 years

For the three and six months ended June 30, 2023, depreciation expense was $2.7 million and $5.1 million, respectively. For the three and six months ended June 30, 2022, depreciation expense was $2.4 million and $4.6 million, respectively.

Impairment of Long-Lived Assets

Real estate and other long-lived assets to be held and used are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is determined to not be recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, we make an assessment of its recoverability by comparing the carrying amount to our estimate of the undiscounted net future cash flows resulting from the use of the asset, excluding interest charges. If the carrying amount exceeds the aggregate undiscounted future cash flows, our consolidated funds recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the asset.

For the three and six months ended June 30, 2023 and 2022, our consolidated funds did not record an impairment loss related to its real estate and other long-lived assets.

Cash

Cash includes cash in bank accounts. The consolidated funds deposit cash with several high-quality financial institutions. These deposits are guaranteed by the FDIC up to an insurance limit of $250,000. At times, cash balances may exceed FDIC limits. Although the consolidated funds bear risk on amounts in excess of those insured by the FDIC, they have not experienced and do not anticipate any losses due to the high quality of the institutions where the deposits are held.

Restricted Cash

Restricted cash consists of tenant security deposits and cash reserves required by certain loan agreements for capital improvements and repairs. As improvements and repairs are completed, related costs incurred by the consolidated funds are funded from the reserve accounts. Restricted cash also includes cash held in escrow accounts by mortgage companies on behalf of the consolidated funds for payment of property taxes, insurance, and interest.

Consolidated Fund Revenues

In accordance with ASC 606, our consolidated funds apply the five-step framework in determining the timing and amount of revenue to recognize. This framework requires an entity to: (i) identify the contract(s) with customers, (ii) identify the performance obligations within the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations within the contract, and (v) recognize revenue when or as the entity satisfies a performance obligation. Our consolidated funds’ revenues primarily consist of hospitality revenues, rental income and interest income.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated funds – hospitality revenue

Hospitality revenues are comprised of charges for room rentals, food and beverage sales, and other hotel operating activities. Revenues are recognized as earned, which is defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues are recorded net of sales tax.

Our consolidated funds have performance obligations to provide accommodations and other ancillary services to hotel guests. As compensation for such goods and services, the consolidated funds are typically entitled to a fixed nightly fee for an agreed upon period and additional fixed fees for any ancillary services purchased. These fees are generally payable at the time the hotel guest checks out of the hotel. The consolidated funds generally satisfy the performance obligations over time and recognize the revenue from room sales and from other ancillary guest services on a daily basis, as the rooms are occupied, and the services have been rendered.

For food and beverage, revenue is recognized upon transfer of promised products or services to customers in an amount that reflects the consideration the consolidated funds received in exchange for those services, which is generally when payment is tendered at the time of sale.

The consolidated funds receive deposits for events and rooms. Such deposits are deferred and included in other liabilities on the accompanying condensed consolidated balance sheets. The deposits are credited to consolidated funds – hospitality revenue when the specific event takes place.

Consolidated funds – other revenue

Consolidated funds – other revenue includes rental revenue of $1.4 million and $2.3 million, for the three and six months ended June 30, 2023, respectively, and $0.7 million and $2.0 million for the three and six months ended June 30, 2022, respectively. Rental revenue includes the revenues generated primarily by the rental operations of the residential (multi-family and single-family) and commercial properties of our consolidated funds.

Upon adoption of ASC 842, Leases (“ASC 842”), effective January 1, 2022, at the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses the terms and conditions to determine the proper lease classification. When the terms of a lease effectively transfer control of the underlying asset, the lease is classified as a sales-type lease. When a lease does not effectively transfer control of the underlying asset to the lessee, but the Company obtains a guarantee for the value of the asset from a third party, the Company classifies the lease as a direct financing lease. All other leases are classified as operating leases. The consolidated funds did not have any sales-type or direct financing leases as of June 30, 2023. For operating leases with minimum scheduled rent increases, the consolidated funds recognize rental revenue on a straight-line basis, including the effect of any free rent periods, over the lease term when collectability of lease payments is probable. Variable lease payments are recognized as rental revenue in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

Prior to the adoption of ASC 842, rental revenue consisted of the amount each tenant paid in accordance with the terms of each lease and were reported on a straight-line basis over the initial noncancelable term of the lease, net of any concessions, and recognized when earned and collectability was reasonably assured. These revenues were recorded net of any sales and occupancy taxes collected from tenants. Rental revenue is not within the scope of ASC 606 and was accounted for in accordance with ASC 840 — Leases.

In addition, consolidated funds - other revenue includes interest income of $0.9 million and $1.8 million, for three and six months ended June 30, 2023, respectively, and $0.7 million and $1.3 million for the three and six months ended June 30, 2022, respectively, which is generated by a consolidated fund’s lending activity. Interest income is recognized on the accrual basis of accounting in accordance with the lending agreements over the term of the respective loan agreement.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Fund Expenses

Consolidated fund expenses consist primarily of costs, expenses and fees that are incurred by, or arise out of the operation and activities of or otherwise related to, our consolidated funds, including, without limitation, operating costs, depreciation and amortization, interest expense on debt held by our consolidated funds, gain on extinguishment of debt, gain on derivative instruments, insurance expenses, professional fees and other costs associated with administering and supporting those funds.

Accounts Receivable

Accounts receivable primarily consists of amounts due from guests or groups for hotel rooms and services provided by the hotel properties. Accounts receivable also include due, but unpaid, rental payments. Our consolidated funds continually review receivables and determine collectability by taking into consideration the history of past write-offs, collections, current credit conditions, tenant payment history, the financial condition of the tenants, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is uncertain, our consolidated funds will record an increase in the allowance for doubtful accounts. Amounts that are determined to be uncollectible with a high degree of certainty are written-off through bad debt expense, which is included in consolidated funds – hospitality expenses and consolidated funds – other expenses on the accompanying condensed consolidated statements of operations. Our consolidated funds had an immaterial amount of allowance for doubtful accounts as of June 30, 2023 and no allowance for doubtful accounts as of December 31, 2022.

Derivative Instruments

The consolidated funds record all derivative instruments on the condensed consolidated balance sheets at fair value. The accounting for changes in the fair value of the derivative and the effect on the financial statements depends on its hedge designation and whether the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. If the consolidated fund elects not to apply hedge accounting treatment, any changes in the fair value of the derivative instruments is recognized immediately in consolidated funds - hospitality expenses in the condensed consolidated statements of operations. If the derivative is designated and qualifies for hedge accounting treatment, the change in fair value of the derivative is recorded in other comprehensive income (loss).

Fair Value of Financial Instruments

The fair value of financial instruments is disclosed in accordance with ASC 825, Financial Instruments. The fair value of our financial instruments is estimated using available market information and established valuation methodologies. The estimates of fair value are not necessarily indicative of the amounts the consolidated funds could realize on disposition of the financial instruments. The use of different market assumptions and/or valuation methodologies may have a material effect on the estimated fair value amounts.

Fair Value Measurements

Fair value measurements and disclosures consist of a three level valuation hierarchy. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the ability to observe the inputs employed in the measurement using market participant assumptions at the measurement date. An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

•Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that can be accessed at the measurement date.

•Level 2 – Inputs include quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

•Level 3 – Unobservable inputs for the asset or liability. These unobservable inputs reflect assumptions about what market participants would use to price the asset or liability and are developed based on the best information available in the circumstances (which might include the reporting company’s own data)

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock, removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and also simplifies the diluted earnings per share calculation in certain areas. The amendments in ASU 2020-06 are effective for the Company for reporting periods beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted beginning after December 15, 2020. We are currently evaluating the impact of ASU 2020-06, but do not believe the adoption of this standard will have a material impact on our consolidated financial statements.

Note 3 – VIEs

During the six months ended June 30, 2023, the Company deconsolidated five hospitality funds which were contributed to the Caliber Hospitality, LP, whose sole general partner is Caliber Hospitality Trust, Inc. (the “Caliber Hospitality Trust”). During the six months ended June 30, 2022, the Company deconsolidated one VIE that sold its investment in a multi-family residential property and repaid the loan secured by the property and therefore the Company was no longer determined to be the primary beneficiary. We aggregate and report the results of operations of these VIEs in consolidated fund revenues and consolidated fund expenses within the accompanying condensed consolidated statements of operations through the date of deconsolidation.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company consolidated Caliber Hospitality, LP and the Caliber Hospitality Trust, which include activity from five previously consolidated hospitality funds and one previously unconsolidated fund during the six months ended June 30, 2023 because the Company was determined to be the primary beneficiary as it has the power to direct the activities and the obligation to absorb their losses through its guarantee of the indebtedness secured by the hospitality assets, which is significant to Caliber Hospitality Trust and Caliber Hospitality, LP. In addition, the Company consolidated West Frontier Holdco, LLC (“West Frontier”) as the Company was determined to be the primary beneficiary as we have the power to direct the activities of West Frontier and the obligation to absorb their losses through its guarantee of their indebtedness which is significant to the fund. The consolidation of the Caliber Hospitality Trust and West Frontier consisted of the following, excluding intercompany eliminations at the time of consolidation (in thousands):


Assets
Real estate investments, net	$	87,897
Cash	3,667
Restricted cash	9,260
Accounts receivable, net	4,348
Notes receivable - related parties	10,411
Due from related parties	40
Investments in unconsolidated entities	84,076
Operating lease - right of use assets	8,775
Prepaid and other assets	5,953
Total assets	$	214,427

Liabilities
Notes payable, net	$	80,278
Notes payable - related parties	34,786
Accounts payable and accrued expenses	7,858
Due to related parties	10,302
Operating lease liabilities	12,441
Other liabilities	2,158
Total liabilities	147,823

Stockholders’ equity	66,604
Total liabilities and stockholders’ equity	$	214,427

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2022, the Company consolidated Northsight Crossing AZ, LLC (“Northsight”) and Southpointe Fundco, LLC (“Southpointe”) because the Company was determined to be the primary beneficiary as we have the power to direct the activities of Northsight and Southpointe and the obligation to absorb their losses through its guarantee of their indebtedness which is significant to the fund. The consolidation of Northsight and Southpointe consisted of the following (in thousands) at the time of consolidation:


Assets
Real estate investments, net	$	23,611
Cash	233
Restricted cash	1,325
Prepaid and other assets	748
Total assets	$	25,917

Liabilities
Notes payable, net	$	15,824
Notes payable - related parties	5,301
Accounts payable and accrued expenses	109
Due to related parties	7
Other liabilities	688
Total liabilities	21,929

Stockholders’ equity	3,988
Total liabilities and stockholders’ equity	$	25,917

Management has determined that the equity holders in our consolidated entities, as a group, lack the power to direct the activities that most significantly impact the entity’s economic performance and/or have disproportionate voting rights relative to their equity. The Company was determined to be the primary beneficiary of each of these entities since it has the power to direct the activities of the entities and the right to absorb losses, generally in the form of guarantees of indebtedness that are significant to the individual entities.

Generally, the assets of the individual consolidated VIEs can be used only to settle liabilities of each respective individual consolidated VIEs and the liabilities of the individual consolidated VIEs are liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company. When the VIE is consolidated, we reflect the assets, liabilities, revenues, expenses and cash flows of the consolidated funds on a gross basis, and the interests in the VIEs are included in non-controlling interest in the condensed consolidated financial statements. The Company has provided financial support to certain consolidated VIEs in the form of short-term financing and guarantees of the debts of certain VIEs. In general, our maximum exposure to loss due to involvement with the consolidated VIEs is limited to the amount of capital investment in the VIE, if any, or the potential obligation to perform on the guarantee of debts.

See Note 11 – Commitments and Contingencies for additional information related to the commitments and contingencies of these VIEs.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Real Estate Investments

Real Estate Investments of the Company

Asset Acquisitions

During the six months ended June 30, 2023, the Company acquired its headquarters office building for an aggregate purchase price of $19.5 million with the acquisition being accounted for as an asset acquisition under U.S. GAAP. There were no asset acquisitions by the Company during the six months ended June 30, 2022.

The preliminary allocation of the purchase price among the assets acquired at their relative fair value as of the acquisition date, consisted of the following for the six months ended June 30, 2023 (in thousands):


	Six Months Ended June 30, 2023

Real estate investments, at cost
Land and land improvements	$	9,131
Building and building improvements	9,332
Furniture, fixtures and equipment	959

Intangible lease assets	398
Intangible lease liabilities	(348)
Total purchase price of assets acquired	$	19,472

Real Estate Investments of the Consolidated Funds

Asset Acquisitions by Consolidated Funds

During the six months ended June 30, 2023, the consolidated funds acquired one multi-family residential property for an aggregate purchase price of $6.6 million with the acquisition being accounted for as an asset acquisition under U.S. GAAP. There were no asset acquisitions by the consolidated funds during the six months ended June 30, 2022.

The allocation of the purchase price among the assets acquired at their relative fair value as of the acquisition date, consisted of the following for the six months ended June 30, 2023 (in thousands):


	Six Months Ended June 30, 2023

Real estate investments, at cost
Land and land improvements	$	599
Building and building improvements	6,044

Total purchase price of assets acquired	$	6,643

Dispositions by Consolidated Funds

During the six months ended June 30, 2023, the consolidated funds did not sell any properties. During the six months ended June 30, 2022, the consolidated funds sold its investment in one multi-family apartment building located in Phoenix, Arizona, with a cost basis of $9.1 million, resulting in a gain of $21.5 million, which is included in consolidated funds - gain on sale of real estate assets on the accompanying condensed consolidated statements of operations.

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CALIBERCOS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 5 – Prepaid and Other Assets

Prepaid and Other Assets of the Company

Prepaid and other assets consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Pursuit costs (1)	$	1,323	$	4,495
Prepaid expenses	756		704
Accounts receivable, net	113		62
Deposits	63		46





Other assets	467		554
Total prepaid and other assets	$	2,722	$	5,861

(1)

Pursuit costs represent expenses incurred related to new fund formation, primarily for professional, legal, consulting, accounting and tax services. As the funds raise equity investments and operating cash flow, as applicable, these costs are reimbursed by the respective funds to the Company. The Company assesses collectability and expenses any amounts in which collectability is not reasonably assured.

Prepaid and Other Assets of the Consolidated Funds

Prepaid and other assets of the consolidated funds consisted of the following as of June 30, 2023 and December 31, 2022 (in thousands):


	June 30, 2023		December 31, 2022
Derivative assets	$	1,761	$	1,646
Prepaid expenses	1,425		1,511
Deposits	696		742
Pursuit costs (1)	630		549
Deferred franchise fees, net	302		372
Intangibles, net	481		361