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EX-32.1 - EXHIBIT 32.1 - UCP, Inc.ex321_06x30x15-bogue.htm
EX-31.1 - EXHIBIT 31.1 - UCP, Inc.ex311_06x30x15-bogue.htm
EX-31.2 - EXHIBIT 31.2 - UCP, Inc.ex312_06x30x15-laherran.htm
EX-32.2 - EXHIBIT 32.2 - UCP, Inc.ex322_06x30x15-laherran.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q

SQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
£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 001-36001

UCP, Inc.

(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
90-0978085
(IRS Employer Identification No.)
99 Almaden Blvd., Suite 400, San Jose, CA 95113
(Address of principal executive offices, including Zip Code)

(408) 207-9499
(Registrant’s telephone number, including area code)

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 S  No £
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 S  No £
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
£
 
Accelerated filer
S
 
Non-accelerated filer
£
 
Smaller reporting company
£
 
(Do not check if a smaller reporting company)
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No S
On August 6, 2015, the registrant had 8,014,434 shares of Class A common stock, par value $0.01 per share outstanding and 100 shares of Class B common stock, par value $0.01 per share outstanding.





UCP, Inc.

FORM 10-Q
For the Three Months Ended June 30, 2015

TABLE OF CONTENTS
Page No.
Part I - Financial Information
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Equity for the Six Months Ended June 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014
 
 
 
 
Notes to Condensed Consolidated Financial Statements
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
Part II - Other Information
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
Signatures
 

2





UCP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except shares and per share data)
 
June 30,
2015
 
December 31,
2014
Assets
 
 
 
Cash and cash equivalents
$
38,047

 
$
42,033

Restricted cash
250

 
250

Real estate inventories
349,550

 
321,693

Fixed assets, net
1,552

 
1,571

Intangible assets, net
486

 
586

Goodwill
4,223

 
4,223

Receivables
1,180

 
1,291

Other assets
6,266

 
5,804

Total assets
$
401,554

 
$
377,451

 
 
 
 
Liabilities and equity
 
 
 
Accounts payable and accrued liabilities
$
36,227

 
$
30,733

Notes payable
84,827

 
60,901

Senior notes, net
74,630

 
74,550

Total liabilities
195,684

 
166,184

 
 
 
 
Commitments and contingencies (Note 10)


 


 
 
 
 
Shareholders’ Equity
 
 
 
Preferred stock, par value $0.01 per share, 50,000,000 authorized, no shares issued and outstanding at June 30, 2015; no shares issued and outstanding at December 31, 2014

 

Class A common stock, $0.01 par value; 500,000,000 authorized, 7,933,388 issued and outstanding at June 30, 2015; 7,922,216 issued and outstanding at December 31, 2014
79

 
79

Class B common stock, $0.01 par value; 1,000,000 authorized, 100 issued and outstanding at June 30, 2015; 100 issued and outstanding at December 31, 2014

 

Additional paid-in capital
94,632

 
94,110

Accumulated deficit
(9,442
)
 
(6,934
)
Total UCP, Inc. stockholders’ equity
85,269

 
87,255

Noncontrolling interest
120,601

 
124,012

  Total equity
205,870

 
211,267

Total liabilities and equity
$
401,554

 
$
377,451


 See accompanying notes to condensed consolidated financial statements.
 


3


UCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except shares and per share data)

Three Months Ended June 30,

Six Months Ended June 30,

2015

2014

2015

2014
REVENUE:







Homebuilding
$
50,785


$
50,010


$
93,421


$
75,456

Land development
1,920


12,075


2,040


12,249

Other revenue
2,021


1,518


2,788


1,518

Total revenue:
54,726


63,603


98,249


89,223









COSTS AND EXPENSES:











        Cost of sales - homebuilding
42,120


41,076


77,738


61,876

        Cost of sales - land development
1,543


9,241


1,548


9,387

        Cost of sales - other revenue
1,742


1,329


2,405


1,329

  Sales and Marketing
4,357


3,765


8,553


6,321

  General and Administrative
6,453


6,909


13,772


13,180

Total costs and expenses
56,215


62,320


104,016


92,093

Income (loss) from operations
(1,489
)

1,283


(5,767
)

(2,870
)
Other income, net
30


13


131


86

Net income (loss) before income taxes
(1,459
)

1,296


(5,636
)

(2,784
)
Provision for income taxes







Net income (loss)
$
(1,459
)

$
1,296


$
(5,636
)

$
(2,784
)
Net income (loss) attributable to noncontrolling interest
$
(791
)

$
1,117


$
(3,128
)

$
(467
)
Net income (loss) attributable to shareholders of UCP, Inc.
(668
)

179


(2,508
)

(2,317
)
Other comprehensive loss, net of tax







Comprehensive income (loss)
$
(1,459
)

$
1,296


$
(5,636
)

$
(2,784
)
Comprehensive income (loss) attributable to noncontrolling interest
$
(791
)

$
1,117


$
(3,128
)

$
(467
)
Comprehensive income (loss) attributable to shareholders of UCP, Inc.
$
(668
)

$
179


$
(2,508
)

$
(2,317
)








Earnings (loss) per share:







Basic
$
(0.08
)

$0.02

$
(0.32
)

$
(0.30
)
Diluted
$
(0.08
)

$0.02

$
(0.32
)

$
(0.30
)








Weighted average common shares:







Basic
7,932,037


7,835,562


7,927,708


7,827,999

Diluted
7,932,037


7,922,644


7,927,708


7,827,999


 See accompanying notes to condensed consolidated financial statements.

 

4


UCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands, except number of shares)

 
Shares of common stock outstanding
Common stock
Additional
paid-in
capital
Accumulated
deficit
Noncontrolling
interest
Total
equity
 
Class A
Class B
Class A
Class B
 
 
 
 
Balance at December 31, 2013
7,750,000

100
$
78

$

$
93,117

$
(1,941
)
$
126,462

$
217,716

Class A - issuance of common stock for RSU's, net
85,562

 

 
(460
)
 
(354
)
(814
)
Stock-based compensation expense
 
 
 
 
1,159

 
990

2,149

Net loss
 
 
 
 
 
(2,317
)
(467
)
(2,784
)
Balance at June 30, 2014
7,835,562

100

$
78

$

$
93,816

$
(4,258
)
$
126,631

$
216,267

 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
7,922,216

100

79


94,110

(6,934
)
124,012

$
211,267

Class A - issuance of common stock for RSU's, net
11,172

 

 
(9
)
 
(13
)
(22
)
Stock-based compensation expense
 
 
 
 
531

 
711

1,242

Distribution to noncontrolling interest
 
 
 
 
 
 
(981
)
(981
)
Net loss
 
 
 
 
 
(2,508
)
(3,128
)
(5,636
)
Balance at June 30, 2015
7,933,388

100

$
79

$

$
94,632

$
(9,442
)
$
120,601

$
205,870


See accompanying notes to condensed consolidated financial statements.


5


UCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

Six Months Ended June 30,

2015

2014
Operating activities





Net loss
$
(5,636
)

$
(2,784
)
  Adjustments to reconcile net loss to net cash (used in) provided by operating activities:





Stock-based compensation
1,242


2,149

Abandonment charges
2


173

Depreciation and amortization
304


268

Fair value adjustment of contingent consideration
212



Changes in operating assets and liabilities:





Real estate inventories
(27,076
)

(48,147
)
Receivables
111


155

Other assets
(711
)

(2,362
)
Accounts payable and accrued liabilities
5,280


1,915

  Net cash used in operating activities
(26,272
)

(48,633
)
Investing activities





  Purchases of fixed assets
(267
)

(536
)
  Citizens acquisition


(14,006
)
  Restricted cash


(250
)
  Net cash used in investing activities
(267
)

(14,792
)
Financing activities





  Distribution to noncontrolling interest
(981
)


  Proceeds from notes payable
59,168


37,017

  Repayment of notes payable
(35,162
)

(21,110
)
  Debt issuance costs
(450
)


  Repurchase of Class A common stock for settlement of employee withholding taxes
(22
)

(814
)
Net cash provided by financing activities
22,553


15,093

Net decrease in cash and cash equivalents
(3,986
)

(48,332
)
Cash and cash equivalents – beginning of period
42,033


87,503

Cash and cash equivalents – end of period
$
38,047


$
39,171







Non-cash investing and financing activity





Exercise of land purchase options acquired with acquisition of business
$
83


$
141

Fair value of assets acquired from the acquisition of business


$
20,258

Cash Paid for the acquisition of business


$
(14,006
)
Contingent consideration and liabilities assumed


$
6,252







Issuance of Class A common stock for vested restricted stock units
$
98


$
2,074


 See accompanying notes to condensed consolidated financial statements.


6



UCP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
 
1.    Organization, Basis of Presentation and Summary of Significant Accounting Policies

As used in this report, unless the context otherwise requires or indicates, references to “the Company”, “we”, “our” and “UCP” refer to UCP, Inc. and its consolidated subsidiaries including UCP, LLC.
 
Business Description and Organizational Structure of the Company:

Company’s Business
The Company is a homebuilder and land developer with land acquisition and entitlement expertise in California, Washington State, North Carolina, South Carolina, and Tennessee.

Company’s History

The Company’s operations began in 2004 and principally focused on acquiring land, entitling and developing it for residential construction, and selling residential lots to third-party homebuilders. In 2010, the Company formed Benchmark Communities, LLC, its wholly owned homebuilding subsidiary, to design, construct and sell high quality single-family homes. On April 10, 2014 the Company completed its acquisition of the assets and liabilities of Citizens Homes, Inc. (“Citizens”), used in the purchase of real estate and the construction and marketing of residential homes in North Carolina, South Carolina and Tennessee (the “Citizens Acquisition”) in order to position the Company to expand its operations into markets located in those states.

The Company is a holding company, whose principal asset is its interest in UCP, LLC, the subsidiary through which it directly and indirectly conducts its business. As of June 30, 2015, the Company held a 42.8% economic interest in UCP, LLC and PICO Holdings, Inc. (“PICO”), a NASDAQ-listed, diversified holding company, held the remaining 57.2% economic interest in UCP, LLC.
Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts have been eliminated upon consolidation.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2015. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of the Company’s results for the interim periods presented. These consolidated and segment results are not necessarily indicative of the Company’s future performance.

As an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, the Company has taken advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. The Company could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of the July 23, 2013 completion of its IPO, although a variety of circumstances can cause it to lose its status earlier.
       
Use of Estimates in Preparation of Financial Statements:
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s condensed consolidated financial statements relate to the assessment of real estate impairments, valuation of assets and liabilities acquired, warranty reserves, income taxes and contingent liabilities. While

7



management believes that the carrying value of such assets and liabilities are appropriate as of June 30, 2015 and December 31, 2014, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
 
Related Party Transactions:

As of June 30, 2015, PICO holds an economic and voting interest in our Company equal to approximately 57.2%. The Company is party to certain agreements with PICO, including an Exchange Agreement (pursuant to which PICO has the right to cause the Company to exchange PICO’s interests in UCP, LLC for shares of the Company’s Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications), an Investor Rights Agreement (pursuant to which PICO has certain rights, including the right to nominate two individuals for election to the Company’s board of directors for as long as PICO owns at least a 25% voting interest in the Company) and a Tax Receivable Agreement (pursuant to which PICO is entitled to 85% of any cash savings in U.S. federal, state and local income tax that the Company actually realizes as a result of any increase in tax basis caused by PICO’s exchange of UCP, LLC interests for shares of the Company’s Class A common stock and Transition Services Agreement (pursuant to which PICO provided the Company with accounting, human resources and information technology functions through July 31, 2015. The balance due to PICO pursuant to Transition Services Agreement was approximately $186,000 and $757,000, which is included in accounts payable and accrued liabilities on the balance sheet as of June 30, 2015 and December 31, 2014, respectively. The Company also entered into a Registration Rights Agreement with PICO, with respect to the shares of its Class A common stock that it may receive in exchanges made pursuant to the Exchange Agreement.

Segment Reporting:

As a result of Citizens Acquisition in April 2014, the Company evaluated the ongoing management of its homebuilding and land development operations. Based on this evaluation, the Company has segmented its operating activities into two geographical regions and currently has homebuilding reportable segments in the West and Southeast and a land development reportable segment in the West. As such all segment information for the three and six months ended June 30, 2014 has been reclassified and is shown under the West homebuilding and land development reportable segments.

In accordance with the applicable accounting guidance, the Company considered similar economic and other characteristics, including geography, product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land acquisition results and underlying supply and demand in determining its reportable segments.

Cash and Cash Equivalents and Restricted Cash:

Cash and cash equivalents include highly liquid instruments purchased with original maturities of three months or less.

Our cash items that are restricted as to withdrawal or usage include deposits of $250,000 as of June 30, 2015 and December 31, 2014. The balance as of June 30, 2015 and at December 31, 2014 was related to funds deposited with financial institutions as collateral for credit card agreements.

Capitalization of Interest:

The Company capitalizes interest to real estate inventories during the period of development. Interest capitalized as a cost of real estate inventories is included in cost of sales-homebuilding or cost of sales-land development as related homes or real estate are sold. To the extent the Company’s debt exceeds the cost of the related asset under development, the Company expenses that portion of the interest incurred. Qualifying assets include projects that are actively selling or under development.

Real Estate Inventories and Cost of Sales:

The Company capitalizes pre-acquisition costs, the purchase price of real estate, development costs and other allocated costs, including interest, during development and home construction. Applicable costs incurred after development or construction is substantially complete are charged to sales and marketing or general and administrative, as appropriate. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of sales when the Company determines continuation of the related project is not probable.

Land, development and other common costs are typically allocated to real estate inventories using the relative-sales-value method. Direct home construction costs are recorded using the specific identification method. Cost of sales-homebuilding includes

8



the allocation of construction costs of each home and all applicable land acquisition, real estate development, capitalized interest, and related common costs based upon the relative-sales-value of the home. Changes to estimated total development costs subsequent to initial home closings in a community are generally allocated on a relative-sales-value method to remaining homes in the community. Cost of sales-land development includes land acquisition and development costs, capitalized interest, impairment charges, abandonment charges for projects that are no longer economically viable, and real estate taxes.

Abandonment charges during the three months ended June 30, 2015 and 2014 were $0 and $140,000, respectively, and were $2,000 and $173,000 during the six months ended June 30, 2015 and 2014, respectively. Abandonment charges are included in cost of sales in the accompanying condensed consolidated statement of operations and comprehensive income (loss) for the respective period. These charges were related to the Company electing not to proceed with one or more land acquisitions after due diligence.

Real estate inventories are stated at cost, unless the carrying amount is determined not to be recoverable, in which case real estate inventories are written down to fair value.

All real estate inventories are classified as held until the Company commits to a plan to sell the real estate, the real estate can be sold in its present condition, is being actively marketed for sale, and it is probable that the real estate will be sold within the next twelve months. Completed homes are included in real estate inventories in the accompanying consolidated balance sheets at the lower of cost or market value.

Impairment of Real Estate Inventories:

The Company evaluates an impairment loss when conditions exist where the carrying amount of real estate is not fully recoverable and exceeds its fair value. Indicators of impairment include, but are not limited to, significant decreases in local housing market values and selling prices of comparable homes, significant decreases in gross margins and sales absorption rates, costs in excess of budget, and actual or projected cash flow losses. The Company prepares and analyzes cash flows at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets, which we have determined as the community level.

If events or circumstances indicate that the carrying amount may be impaired, such impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective real estate inventories. Such losses, if any, are reported within cost of sales for the period. No such losses were recorded during the three and six months ended June 30, 2015 and 2014.

When estimating undiscounted future cash flows of its real estate assets, the Company makes various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available on the market, pricing and incentives being offered by its or other builders in other communities, and future sales price adjustments based on market and economic trends; (ii) expected sales pace and cancellation rates based on local housing market conditions, competition and historical trends; (iii) costs incurred to date and expected to be incurred, including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction costs, and selling and marketing costs; (iv) alternative product offerings that may be offered that could have an impact on sales pace, sales price and/or building costs; and (v) alternative uses for the property.

Purchase Accounting and Business Combinations

Assets acquired and the liabilities assumed as part of a business combination are recognized separately from goodwill at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Estimates and assumptions are used to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. Management may refine these estimates during the measurement period which may be up to one year from the acquisition date. As a result, during the measurement period, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company's consolidated statements of operations and comprehensive income or loss. The fair value adjustment of the estimated contingent consideration was an $8,000 decrease for the three month period ended June 30, 2015. The total fair value adjustment of the

9



estimated contingent consideration was $212,000 for the six month period ended June 30, 2015, resulting in the total contingent consideration obligation of $3,737,000 at June 30, 2015.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable.

Goodwill and Other Intangible Assets:
 

The purchase price of an acquired company is allocated between the net tangible assets and intangible assets of the acquired business with the residual purchase price recorded as goodwill. The determination of the value of the assets acquired and liabilities assumed involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

Acquired intangible assets with determinable useful lives are amortized on a straight-line basis over the estimated remaining useful lives, ranging from six months to five years, or added to the value of the land when an option intangible is used to purchase the related land, or expensed in the period when the option is cancelled. Acquired intangible assets with contractual terms are generally amortized over their respective contractual lives. When certain events or changes in operating conditions occur, an impairment assessment is performed for the intangible assets. Goodwill is not amortized, but is evaluated annually for impairment, or more frequently if events or circumstances indicate that goodwill may be impaired. As of June 30, 2015, acquired intangibles, including goodwill, relate to the Citizens Acquisition, which was completed on April 10, 2014.

Fixed Assets, Net:

Fixed assets are carried at cost, net of accumulated depreciation.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets.  Computer software and hardware are depreciated over three years, office furniture and fixtures are depreciated over seven years, vehicles are depreciated over five years and leasehold improvements are depreciated over the shorter of their useful life or lease term and range from one to three years.  Maintenance and repairs are charged to expense as incurred, while significant improvements are capitalized.  Depreciation expense is included in general and administrative expenses in the accompanying condensed consolidated statement of operations and comprehensive loss.
         
Receivables:

Receivables include amounts due from buyers of homes sold and from utility companies for reimbursement of costs. At June 30, 2015 and December 31, 2014, the Company had no allowance for doubtful accounts recorded.


Other Assets:

The detail of other assets is set forth below (in thousands):

 
June 30, 2015
 
December 31, 2014
Customer deposits in escrow
$
1,626

 
$
503

Prepaid expenses
2,492

 
3,129

Other deposits
321

 
336

Other
1,827

 
1,836

  Total
$
6,266

 
$
5,804

 


10



Homebuilding, Land Development Sales and Other Revenues and Profit Recognition:

In accordance with Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 360 - Property, Plant, and Equipment, revenue from home sales and other real estate sales are recorded and any profit is recognized when the respective sales are closed. Sales are closed when all conditions of escrow are met, title passes to the buyer, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured and the Company has no continuing involvement with the sold asset. The Company does not offer financing to any buyers. Sales price incentives are accounted for as a reduction of revenues when the sale is recorded. If the earnings process is not complete, the sale and any related profits are deferred for recognition in future periods. Any profit recorded is based on the calculation of cost of sales, which is dependent on an allocation of costs.

In addition to homebuilding and land development, with the completion of the Citizens Acquisition, the Company now provides construction management services pursuant to which it builds homes on behalf of property owners. Revenue from providing these services is included in other revenues in the consolidated statement of operations and comprehensive income or loss. The property owners fund all project costs incurred by the Company to build the homes. The Company primarily enters into “cost plus fee” contracts where it charges property owners for all direct and indirect costs plus a negotiated management fee. The management fee is typically a fixed fee, based on a percentage of the cost or home sales revenue of the project, depending on the terms of the agreement with the property owners. In accordance with ASC Topic 605, Revenue Recognition, revenues from construction management services are recognized based upon a cost-to-cost approach in applying the percentage-of-completion method. Under this approach, revenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. The total estimated cost plus the management fee represents the total contract value. The Company recognizes revenue based on the actual costs incurred, plus the portion of the management fee it has earned to date. In the course of providing construction management services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are included in the Company’s cost of revenue in the consolidated statement of operations and comprehensive income or loss.

Stock-Based Compensation:

Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the period in which the awards vest in accordance with applicable guidance under ASC 718.

Warranty Reserves:

Estimated future direct warranty costs are accrued and charged to cost of sales-homebuilding in the period in which the related homebuilding revenue is recognized. Amounts accrued are based upon estimates of the amount the Company expects to pay for warranty work. The Company assesses the adequacy of its warranty reserves on a quarterly basis and adjusts the amounts recorded, if necessary. Warranty reserves are included in accounts payable and accrued liabilities in the accompanying condensed consolidated balance sheets.

A summary of changes in warranty reserves are detailed in the table set forth below (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Warranty reserves, beginning of period
$
1,774

 
$
694

 
$
1,509

 
$
608

Warranty reserves accrued
382

 
361

 
675

 
491

Warranty expenditures
(7
)
 
(31
)
 
(35
)
 
(75
)
Warranty reserves, end of period
$
2,149

 
$
1,024

 
$
2,149

 
$
1,024



Consolidation of Variable Interest Entities:

The Company enters into purchase and option agreements for the purchase of real estate as part of the normal course of business. These purchase and option agreements enable the Company to acquire real estate at one or more future dates at pre-determined prices. The Company believes these acquisition structures reduce its financial risk associated with real estate acquisitions and holdings and allow the Company to better manage its cash position.


11



Based on the relevant accounting guidance, the Company concluded that when it enters into a purchase agreement to acquire real estate from an entity, a variable interest entity (“VIE”), may be created. The Company evaluates all option and purchase agreements for real estate to determine whether they are a VIE. The applicable accounting guidance requires that for each VIE, the Company assess whether it is the primary beneficiary and, if it is, the Company would consolidate the VIE in its condensed consolidated financial statements in accordance with ASC Topic 810 - Consolidations, and reflect such assets and liabilities as “Real estate inventories not owned.”

In order to determine if the Company is the primary beneficiary, it must first assess whether it has the ability to control the activities of the VIE that most significantly impact its economic performance. Such activities include, but are not limited to, the ability to determine the budget and scope of land development work, if any; the ability to control financing decisions for the VIE; the ability to acquire additional land into the VIE or dispose of land in the VIE not under contract with us; and the ability to change or amend the existing option contract with the VIE. If the Company is not determined to control such activities, the Company is not considered the primary beneficiary of the VIE. If the Company does have the ability to control such activities, the Company will continue its analysis by determining if it is also expected to absorb a potentially significant amount of the VIE’s losses or, if no party absorbs the majority of such losses, if the Company will benefit from a potentially significant amount of the VIE’s expected gains.

In substantially all cases, creditors of the entities with which the Company has option agreements have no recourse against the Company and the maximum exposure to loss on the applicable option or purchase agreements is limited to non-refundable option deposits and any capitalized pre-acquisition costs. Some of the Company’s option or purchase deposits may be refundable to the Company if certain contractual conditions are not performed by the party selling the lots. The Company did not consolidate any land under option irrespective of whether a VIE was or was not present at June 30, 2015 or December 31, 2014.

Price Participation Interests:

Certain land purchase contracts and other agreements include provisions for additional payments to the sellers. These additional payments are contingent on certain future outcomes, such as, selling homes above a certain preset price or achieving an internal rate of return above a certain preset level. These additional payments, if triggered, are accounted for as cost of sales when they become due, however, they are neither fully determinable, nor due, until the transfer of title to the buyer is complete. Accordingly, no liability is recorded until the sale is complete.

Income Taxes:

The Company’s provision for income tax expense includes federal and state income taxes currently payable and those deferred because of temporary differences between the income tax and financial reporting basis of the Company’s assets and liabilities.  The liability method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred income taxes in income in the period in which the change is enacted.

In assessing the realization of deferred income taxes, the Company considered whether it is more likely than not that any deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of sufficient future taxable income during the period in which temporary differences become deductible. If it is more likely than not that some or all of the deferred income tax assets will not be realized, a valuation allowance is recorded. The Company considered many factors when assessing the likelihood of future realization of its deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future transactions, the carry-forward periods available to the Company for tax reporting purposes and availability of tax planning strategies. These assumptions require significant judgment about future events. These judgments are consistent with the plans and estimates that the Company uses to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company considered three years of cumulative operating income or loss of the Company and its predecessor.

As a result of the analysis of all available evidence as of June 30, 2015 and December 31, 2014, the Company recorded a full valuation allowance on its net deferred tax assets.  Consequently, the Company reported no income tax benefit for the three or six month period ended June 30, 2015 or for the comparable periods in 2014. If the Company’s assumptions change and the Company believes that it will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be recognized as a reduction of future income tax expense.  If the assumptions do not change, each period the Company could record an additional valuation allowance on any increases in the deferred tax assets.

The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not be recognized

12



unless it has a greater than 50% likelihood of being sustained. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense.

Noncontrolling Interest:

The Company reports the share of its results of operations that is attributable to other owners of its consolidated subsidiaries that are less than wholly-owned, as noncontrolling interest in the accompanying condensed consolidated financial statements.  In the condensed consolidated statements of operations and comprehensive loss, the income or loss attributable to the noncontrolling interest is reported separately, and the accumulated income or loss attributable to the noncontrolling interest, along with any changes in ownership of the subsidiary, is reported as a component of total equity. 
       
Recently Issued Accounting Standards:

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements—Going Concern (“ASU 2014-15”), which requires management to assess a company’s ability to continue as a going concern for each of its interim and annual reporting periods and to provide related footnote disclosures in certain circumstances. Disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern. Substantial doubt is deemed to exist when it is probable that the company will be unable to meet its obligations within one year from the financial statement issuance date. ASU 2014-15 is effective for the Company beginning December 15, 2016, and, at that time the Company will adopt the new standard and perform a formalized going concern analysis for each reporting period. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance. This ASU also supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In July 2015, the FASB approved a one year deferral for ASU 2014-09, which is effective for the Company for annual reporting periods beginning after December 15, 2017 and, at that time the Company may adopt the new standard under the full retrospective approach or the modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on its consolidated financial statements and disclosures.

In January 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates the concept of extraordinary items from GAAP. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for the Company for periods beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year adoption. The adoption of ASU 2015-01 is not expected to have a material impact on the Company’s future condensed consolidated financial statements or disclosures

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”), which simplifies consolidation accounting. In addition to reducing the number of consolidation models, the new standard places more emphasis on risk of loss when determining a controlling financial interest, reduces the frequency of application of related party guidance and changes the consolidation conclusions for public and private companies that make use of limited partnerships or variable interest entities. ASU 2015-02 is effective for the Company for periods beginning after December 15, 2015. Early adoption is permitted including adoption in an interim period.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which simplifies the presentation of debt issuance costs in the financial statements. Under ASU 2015-03, issue costs shall be

13



reported in the balance sheet as a direct deduction from the related debt liability and the amortization of the debt issue costs shall be reported as interest expense. ASU 2015-03 is effective for the Company for periods beginning after December 15, 2015. The Company is currently evaluating the impact the adoption of ASU 2015-03 will have on its future consolidated financial statements and disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), as part of its simplification initiative. Under the ASU, inventory is measured at the “lower of cost and net realizable value,” which would eliminate two other options that currently exist for “market.” No other changes were made under the current guidance on inventory measurement. ASU 2015-11 is effective for the Company for interim and annual periods beginning December 15, 2016. Early adoption is permitted and should be applied prospectively. The Company is currently evaluating the method and impact the adoption of ASU 2015-11 will have on its future consolidated financial statements and disclosures.

2.    Loss per share

Basic loss per share of Class A common stock is computed by dividing net loss attributable to UCP, Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings or loss per share of Class A common stock is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any Class A common stock equivalents using the treasury method, if dilutive. The Company’s restricted stock units (“RSUs”) and stock options (“Options”) are considered Class A common stock equivalents for this purpose. No incremental common stock equivalents were included in calculating diluted loss per share because such inclusion would be anti-dilutive given the net loss attributable to UCP, Inc.’s Class A common stockholders for the three and six months ended June 30, 2015 and June 30, 2014.

Basic and diluted net loss per share of Class A common stock for the three and six months ended June 30, 2015 have been computed as follows (in thousands, except share and per share amounts):
 
 
Three months ended June 30, 2015
 
Three months ended June, 30, 2014
 
Six months ended June 30, 2015
 
Six months ended June 30, 2014
Numerator
 
 
 
 
 
 
 
Net income (loss) attributable to shareholders of UCP, Inc.
$
(668
)
 
$
179

 
$
(2,508
)
 
$
(2,317
)
 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding - basic
7,932,037


7,835,562


7,927,708


7,827,999









Effect of dilutive securities:







   Restricted stock units


87,082





   Stock options







Total shares for purpose of calculating diluted net income (loss) per share
7,932,037


7,922,644


7,927,708


7,827,999









Earnings (loss) per share:







   Net income (loss) per share of Class A common stock - basic
$
(0.08
)

$
0.02


$
(0.32
)

$
(0.30
)
   Net income (loss) per share of Class A common stock - diluted
$
(0.08
)

$
0.02


$
(0.32
)

$
(0.30
)

3.    Real Estate Inventories
 
Real estate inventories consisted of the following (in thousands):

14



  
June 30, 2015
 
December 31, 2014
Deposits and pre-acquisition costs
$
3,586

 
$
2,955

Land held and land under development
236,123

 
235,809

Homes completed or under construction
90,715

 
70,804

Model homes
19,126

 
12,125

   Total
$
349,550

 
$
321,693

 
Model homes and homes completed or under construction include all costs associated with home construction, including land, development, indirect costs, permits and fees, and vertical construction. Land under development includes costs incurred during site development, such as land, development, indirect costs and permits. As of June 30, 2015, the Company had $4.5 million of deposits pertaining to land purchase contracts for 1,405 lots with an aggregate purchase price of approximately $75.4 million, net of deposits. At December 31, 2014, the Company deposits for land purchase contracts aggregated $2.4 million for 925 lots with an aggregate purchase price of $49.6 million, net of deposits. At June 30, 2015 and December 31, 2014, the Company had completed homes included in inventories of approximately $32.0 million and $28.8 million, respectively.

Interest Capitalization
 
Interest is capitalized on real estate inventories during development. Interest capitalized is included in cost of sales in the Company’s condensed consolidated financial statements of operations and comprehensive loss as related sales are recognized. For the three months ended June 30, 2015 and 2014, the Company incurred interest of approximately $2,798,000 and $467,000, respectively, and for the six months ended June 30, 2015 and 2014, the Company incurred interest approximately of $5,427,000 and $877,000, respectively, which was capitalized in each respective period. Amounts capitalized to home inventory and land inventory were as follows (in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Interest expense capitalized as cost of home inventory
$
2,280

 
$
412

 
$
4,435

 
$
760

Interest expense capitalized as cost of land inventory
518

 
55

 
992

 
117

Total interest expense capitalized
2,798

 
467

 
5,427

 
877

Previously capitalized interest expense included in cost of sales - homebuilding
(1,000
)
 
(1,035
)
 
(1,924
)
 
(1,473
)
Previously capitalized interest expense included in cost of sales - land development
(49
)
 
(3
)
 
(49
)
 
(3
)
Net activity of capitalized interest
1,749

 
(571
)
 
3,454

 
(599
)
Capitalized interest expense in beginning inventory
9,004

 
6,310

 
7,299

 
6,338

Capitalized interest expense in ending inventory
$
10,753

 
$
5,739

 
$
10,753

 
$
5,739


4.    Fixed Assets, Net
 
Fixed assets consisted of the following (in thousands): 
  
June 30, 2015
 
December 31, 2014
Computer hardware and software
$
1,906

 
$
1,698

Office furniture, equipment and leasehold improvements
819

 
763

Vehicles
83

 
79

      Total
2,808

 
2,540

Accumulated depreciation
(1,256
)
 
(969
)
Fixed assets, net
$
1,552

 
$
1,571

 
Depreciation expense for the three months ended June 30, 2015 and 2014 was $147,000 and $97,000, respectively, and for the six months ended June 30, 2015 and 2014 was $287,000 and $184,000, respectively, and is recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income (loss).

5.    Business Combination

Contingent Consideration

15




The change in estimated fair value of the contingent consideration consisted of the following (in thousands):
 
Contingent Consideration
Initial fair value, April 10, 2014
$
4,644

Balance at June 30, 2014
$
4,644

 
Contingent Consideration
Balance at December 31, 2014
$
3,525

Change in fair value
212

Balance at June 30, 2015
$
3,737


The contingent consideration arrangement requires the Company to pay up to a maximum of $6 million of additional consideration based upon the newly acquired Citizens’ business achievement of various pre-tax net income performance milestones (“performance milestones”) over a five year period commencing on April 1, 2014. Payout calculations are made based on calendar year performance except for the 6th payout calculation which will be calculated based on the achievement of performance milestones from January 1, 2019 through March 25, 2019. Payouts are to be made on an annual basis. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $6 million. The fair value of the contingent consideration of $3.7 million at June 30, 2015 was estimated based on applying the income approach and a weighted probability of achievement of the performance milestones. The estimated fair value of the contingent consideration was calculated by using a Monte Carlo simulation. The measurement is based on significant inputs that are not observable in the market, which ASC Topic 820 - Fair Value Measurements, refers to as Level 3 inputs. Key assumptions include: (1) forecast adjusted net income over the contingent consideration period; (2) risk-adjusted discount rate reflecting the risk inherent in the forecast adjusted net income; (3) risk-free interest rates; (4) volatility of adjusted net income; and (5) the Company’s credit spread. The risk adjusted discount rate for adjusted net income was 12.7% plus the applicable risk-free rate resulting in a combined discount rate ranging from 12.5% to 13.5% over the contingent consideration period. The Company’s volatility rate of 22.3% and a credit spread of 9.17% were applied to forecast adjusted net income over the contingent consideration period. See Note 8 Fair Value Disclosures.

During the first quarter of 2015, the Company revised its estimate of the probable amount of contingent consideration due to Citizens based on projections for various pretax performance milestones required to earn the contingent consideration through the end of the contingent consideration period. As a result, the Company’s contingent consideration liability and general and administrative expense increased in the accompanying condensed consolidated balance sheet and statement of operations and comprehensive loss by $212,000 to reflect the increase in estimated contingent consideration liability.

Intangible Assets

Other purchased intangible assets consisted of the following (in thousands): 
 
June 30, 2015
 
December 31, 2014
 
Beginning Balance
Accumulated Amortization(Use)
Ending Balance
 
Beginning Balance
Accumulated Amortization (Use)
Ending Balance
Architectural plans
$
170

$
(43
)
$
127

 
$
170

$
(26
)
$
144

Land option
583

(224
)
359

 
583

(141
)
442

Trademarks and trade names
110

(110
)

 
110

(110
)

 
$
863

$
(377
)
$
486

 
$
863

$
(277
)
$
586

 

Amortization expense for the three months ended June 30, 2015 and 2014 related to the architectural plans and trademarks and trade names intangibles was approximately $8,500 and $84,000, respectively, and for the six months ended June 30, 2015 and 2014 was $17,000 and $84,000, respectively. The architectural plans intangible amortization period is 5.0 years. Amortization expense is recorded in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss. Additionally, land options of $10,000 and $83,000 and were used to purchase land and were capitalized to real estate inventories during the three and six months ended June 30, 2015, as compared to $141,000 for both the three and six months ended

16



June 30, 2014. Future estimated amortization expense related to the architectural plans intangibles over the next five years is as follows (in thousands):

 
December 31,

2015
$
17

2016
34

2017
34

2018
34

2019
8

Total
$
127




17



6.    Accounts Payable and Accrued Liabilities
 
Accounts payable and accrued liabilities consisted of the following (in thousands): 
  
June 30, 2015
 
December 31, 2014
Accrued expenses
$
16,041

 
$
22,281

Contingent consideration
3,737

 
3,525

Accounts payable
12,780

 
1,975

Accrued payroll liabilities
1,520

 
1,443

Warranty reserves (Note 1)
2,149

 
1,509

   Total
$
36,227

 
$
30,733



7.    Notes Payable and Senior Notes
 
The Company enters into acquisition, development and construction debt agreements to purchase and develop real estate inventories and for the construction of homes, which are secured primarily by the underlying real estate. Certain of the loans are funded in full at the initial loan closing and others are revolving facilities under which the Company may borrow, repay and redraw up to a specified amount during the term of the loan. Acquisition debts are due at various dates but are generally repaid when lots are released from the loans based upon a specific release price, as defined in each respective loan agreement, or the loans are refinanced at current prevailing rates. The construction and development debt is required to be repaid with proceeds from home closings based upon a specific release price, as defined in each respective loan agreement. Certain of the construction and development debt agreements include provisions that require minimum loan-to-value ratios. During the term of the loan, the lender may require the Company to obtain a third-party written appraisal of the underlying real estate collateral. If the appraised fair value of the collateral securing the loan is below the specified minimum, the Company may be required to make principal payments in order to maintain the required loan-to-value ratios. As of June 30, 2015 and December 31, 2014, the lenders have not requested, and the Company has not obtained, any such appraisals. As of June 30, 2015, the Company had approximately $172.5 million available in loan commitments of which approximately $86.1 million was available to us. At June 30, 2015 and December 31, 2014, the weighted average interest rate on the Company’s outstanding debt was 6.12% and 6.56%, respectively. Interest rates charged under variable rate debt are based on LIBOR or Prime rate indexes plus a margin rate ranging from 0.25% to 3.75%.

On October 21, 2014, the Company completed the private offering of $75.0 million in aggregate principal amount of 8.5% Senior Notes due 2017 (the “Senior Notes”). The net proceeds from the offering were approximately $72.5 million, after paying the debt issuance costs and offering expenses. The net proceeds from the offering were used for general corporate purposes, including to provide financing for the construction of homes, acquisition of entitled land, development of lots and working capital.

The Senior Notes were issued under an Indenture, dated as of October 21, 2014 (the “Indenture”), by the Company and Wilmington Trust, National Association, as trustee. The Senior Notes bear interest at 8.5% per annum, payable on March 31, June 30, September 30 and December 31 of each year. The Senior Notes mature on October 21, 2017, unless earlier redeemed or repurchased.

As of June 30, 2015, the Company was in compliance with the applicable financial covenants under the Indenture.

18



Notes payable and Senior notes consisted of the following (in thousands):

 
June 30, 2015
 
December 31, 2014
  Variable Interest Rate:
 
 
 
Interest rate of 3.94% to 4.19%, payments due through 2015
17,462

 
20,156

Interest rates of 3.18% to 3.94%, payments due through 2016
40,985

 
25,239

Interest rate of 3.66% to 3.94%, payments due through 2017
20,105

 
6,984

Interest rate of 5%, payments due through 2015
2,476

 
3,990

Interest rate of 5.5%, payments due through 2016
233

 
966

 
 
 
 
  Fixed Interest Rate:
 
 
 
Interest rate of 5%, payments due through 2015
1,962

 
1,962

Interest rate of 10%, payments due through 2017
1,604

 
1,604

  Total notes payable
84,827

 
60,901

  Senior notes, net
74,630

 
74,550

     Total notes payable and senior notes
$
159,457

 
$
135,451


  At June 30, 2015, principal maturities of notes payable and senior notes for the years ending December 31 are as follows (in thousands):

2015
$
21,900

2016
41,217

2017
96,340

Thereafter

  Total
$
159,457



8.    Fair Value Disclosures
 
The accounting guidance regarding fair value disclosures defines fair value as the price that would be received for selling an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in accordance with ASC Topic 820 - Fair Value Measurements, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date
Level 3—Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date


Estimated Fair Value of Financial Instruments Not Carried at Fair Value:

As of June 30, 2015 and December 31, 2014, the fair values of cash and cash equivalents, accounts payable and receivable approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the

19



Company’s debt is based on cash flow models discounted at current market interest rates for similar instruments, which are based on Level 3 inputs. There were no transfers between fair value hierarchy levels during the three months ended June 30, 2015 and for the year ended December 31, 2014.

The following presents the carrying value and fair value of the Company’s financial instruments which are not carried at fair value (in thousands):

 
June 30, 2015
 
December 31, 2014
 
Carrying Value
 
Estimated Fair
Value
 
Carrying Value
 
Estimated Fair
Value
Notes Payable
$
84,827

 
$
87,315

 
$
60,901

 
$
62,976

Senior Notes
74,630

 
84,750

 
74,550

 
87,167

   Total Debt
$
159,457

 
$
172,065

 
$
135,451

 
$
150,143



Estimated Fair Value of Contingent Consideration
The contingent consideration arrangement relating to Citizens Acquisition requires the Company to pay up to a maximum of $6.0 million of additional consideration based on achievement of performance milestones over a five year period. The estimated fair value of the contingent consideration of $3.7 million as of June 30, 2015 was estimated based on applying the income approach and a weighted probability of achieving the performance milestones, which are based on Level 3 inputs. See Note 5 for a description of the level 3 inputs used in determining fair value of contingent consideration. Significant increases or decreases in any of the unobservable inputs in isolation or in the aggregate would result in a significantly lower (higher) fair value measurement to our contingent consideration as of June 30, 2015 and December 31, 2014. There were no transfers between fair value hierarchy levels during the six months ended June 30, 2015 and for the year ended December 31, 2014.



9.    Stock-Based Compensation

The Company’s long-term incentive plan (“LTIP”) was adopted in July 2013 and provides for the grant of equity-based awards, including options to purchase shares of Class A common stock, Class A stock appreciation rights, Class A restricted stock, Class A restricted stock units and performance awards. The LTIP automatically expires on the tenth anniversary of its effective date. The Company’s board of directors may terminate or amend the LTIP at any time, subject to any stockholder approval required by applicable law, rule or regulation.

The number of shares of the Company’s Class A common stock authorized under the LTIP was 1,834,300 shares. To the extent that shares of the Company’s Class A common stock subject to an outstanding Option, stock appreciation right, stock award or performance award granted under the LTIP are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or the settlement of such award in cash, then such shares of the Company’s Class A common stock generally shall again be available under the LTIP, subject to certain exceptions. As of June 30, 2015, 1,235,203 shares were available for issuance under the LTIP.

On February 26, 2014, the Company granted an aggregate of 58,334 RSUs and 166,081 Options under the LTIP to certain of its executive employees. The RSUs and Options granted were subject to the following vesting schedule: a) 10% vest on the first anniversary of the grant date, b) 20% vest on second anniversary of the grant date, c) 30% vest on the third anniversary of the grant date, and d) 40% vest on the fourth anniversary of the grant date. The RSUs granted to certain members of the Company’s board of directors will vest on the first anniversary of the grant date. The RSUs granted to the Company’s employees during the year ended December 31, 2013 are subject to the following vesting schedule: a) one-third vested on December 31, 2013, b) one-third vested on the first anniversary of the grant date and c) one-third will vest on the second anniversary of the grant date. The RSUs granted to certain members of the Company’s board of directors vested on the first anniversary of the grant date. During the three months ended June 30, 2015 , 1,237 RSUs and 71,429 Options under the LTIP were granted to certain members of the Company’s board of directors and an executive employee.
 

20



During the three and six months period ended June 30, 2015, 8,227 and 13,480 RSUs were vested respectively. During the three and six months period ended June 30, 2015, 0 RSUs were forfeited. For both the three and six months period ended June 30, 2015, 14,961stock options were vested. During the three and six months period ended June 30, 2015, 0 stock options were forfeited.

During the three and six months ended June 30, 2015, the Company recognized $610,000 and $1.2 million of stock-based compensation expense, respectively, which was included in general and administrative expenses in the accompanying condensed consolidated statement of operations and other comprehensive loss. During the three and six months ended June 30, 2014, the Company recognized $1.1 million and $2.1 million of stock based compensation expense, respectively.

The following table summarizes the Options activity for the six months ended June 30, 2015:

 
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value (in thousands)(1)
Outstanding at December 31, 2014
149,605

16.20

9.16
Options granted
71,429

$
8.97

2.82
Options vested
(14,961
)

Options exercised


Options forfeited


Outstanding at June 30, 2015
206,073

$
13.73

6.63

(1) The aggregate intrinsic value is calculated as the amount by which the fair value of the underlying stock exceeds the exercise price of the Option. The fair value of the Company’s Class A common stock as of June 30, 2015 was $7.58 per share.

The Company used the Black-Scholes option pricing model to determine the fair value of stock options. The assumptions used to estimate the fair value of Options during the three month period ended June 30, 2015 were as follows:
Expected term
7 years

Expected volatility %
34.16
%
Risk free interest rate %
1.82
%
Dividend yield %

    
Options vested and exercisable as of June 30, 2015 were 14,961.

The following table summarizes the RSU activity for the six months ended June 30, 2015:
 
Shares
 
Weighted Average Grant Date Fair Value (per share)
Non-vested at December 31, 2014
190,440

 
$15.31
Granted
1,237

 
$7.98
Vested
(13,480
)
 
 
Forfeited

 
 
Non-vested at June 30, 2015
178,197

 
$14.70
    
       

Unrecognized compensation cost for RSUs and Options issued under the LTIP was $1.4 million (net of estimated forfeitures) as of June 30, 2015; approximately $629,000 of the unrecognized compensation costs related to RSUs and $777,000 related to stock options. The expense is expected to be recognized over a weighted average period of 2.2 years for the RSUs and 2.7 years for the Options.



21



10.    Commitments and Contingencies
 
Lawsuits, claims and proceedings have been or may be instituted or asserted against the Company in the normal course of business, including actions brought on behalf of various classes of claimants. The Company is also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, employment practices and environmental protection. As a result, the Company is subject to periodic examinations or inquiries by agencies administering these laws and regulations.
 
The Company records a reserve for potential legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. The accrual for these matters is based on facts and circumstances specific to each matter and the Company revises these estimates when necessary.
 
In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, the Company generally cannot predict their ultimate resolution, related timing or any eventual loss. If the evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, disclosure of the nature with an estimate of possible range of losses or a statement that such loss is not reasonably estimable is made. The Company is not involved in any material litigation nor, to the Company's knowledge, is any material litigation threatened against it. At June 30, 2015 and December 31, 2014, the Company did not have any accruals for asserted or unasserted matters.

The Company is evaluating the impact of recent regulatory action under the federal Endangered Species Act on a project that we are developing in Washington State. Recent regulatory action involving the listing of a certain species of gopher as “threatened” under the federal Endangered Species Act may adversely affect this project, for example by imposing new restrictions and requirements on our activities there and possibly delaying, halting or limiting, our development activities. However, an estimate of the amount of impact cannot be made as there is not enough information to do so due to the lack of clarity regarding any restrictions that may be imposed on our development activities or other remedial measures that we may be required to make. Accordingly, no liability has been recorded at June 30, 2015. The Company will continue to assess the impact of this regulatory action and will record any future liability as additional information becomes available.
 
The Company obtains surety bonds from third parties in the normal course of business to ensure completion of certain infrastructure improvements at its projects. The beneficiaries of the bonds are various municipalities. As of June 30, 2015 and December 31, 2014, the Company had outstanding surety bonds totaling $49.4 million and $38.0 million, respectively. In the event that any such surety bond issued by a third party is called because the required improvements are not completed, the Company could be obligated to reimburse the issuer of the bond.

The Company leases some of its offices under non-cancellable operating leases that expire at various dates through 2019. Rent expense for the periods ended June 30, 2015 and 2014 was approximately $628,000 and $539,000, respectively.

Future minimum payments under all operating leases for the years ending December 31 are as follows (in thousands):
2015
$
544

2016
942

2017
945

2018
883

2019
359

Thereafter
159

Total
$
3,832



22



11.    Segment Information
 
The Company operates in three segments: homebuilding, which is further segmented into West and Southeast regions as well as a land development segment.

Segment
State
Homebuilding
 
   West
California, Washington
   Southeast
North Carolina, South Carolina, Tennessee
Land development
California, Washington, North Carolina, South Carolina, Tennessee

Each reportable segment includes real estate of similar economic characteristics, including similar historical and expected future long-term gross margin percentages, product types, geography, production processes and methods of distribution.

The reportable segments follow the same accounting policies as the consolidated financial statements described in Note 1. Operating results of each reportable segment are not necessarily indicative of the results that would have been achieved had the reportable segment been an independent, stand-alone entity during the periods presented.


23



Financial information relating to reportable segments is as follows (in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
Revenues
 
Gross Margin
 
Revenues
 
Gross Margin
 
Revenues
 
Gross Margin
 
Revenues
 
Gross Margin
Homebuilding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     West
$
35,746

 
$
6,299

 
$
41,306

 
$
7,423

 
$
68,974

 
$
12,111

 
$
66,752

 
$
12,069

     Southeast
15,039

 
2,366

 
8,704

 
1,511

 
24,447

 
3,571

 
8,704

 
1,511

         Homebuilding
50,785

 
8,665

 
50,010

 
8,934

 
93,421

 
15,682

 
75,456

 
13,580

Land development (a)
1,920

 
377

 
12,075

 
2,834

 
2,040

 
492

 
12,249

 
2,862

Corporate and unallocated (b)
2,021

 
279

 
1,518

 
189

 
2,788

 
384

 
1,518

 
189

        Total
$
54,726

 
$
9,321

 
$
63,603

 
$
11,957

 
$
98,249

 
$
16,558

 
$
89,223

 
$
16,631


(a) Land development operations for all the periods presented were in the West region.

(b) Corporate and unallocated includes revenues from construction management services which relate to our Citizens Acquisition and is not attributable to the homebuilding and land development operations.

The Company evaluates the performance of the operating segments based upon gross margin. “Gross Margin” is defined as operating revenues less cost of sales (cost of construction and acquisition, interest, abandonment, impairment and other cost of sales related expenses). Corporate sales, general and administrative expense and other non-recurring gains or losses are reflected within overall corporate expenses as this constitutes the Company’s primary business objective - supporting all segments. Corporate expenses are not particularly identifiable to any one segment.

Reconciliation to net income (loss) is as follows (in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Gross margin
$
9,321

 
$
11,957

 
$
16,558

 
$
16,631

Sales and marketing
4,357

 
3,765

 
8,553

 
6,321

General and administrative
6,453

 
6,909

 
13,772

 
13,180

Income (loss) from operations
(1,489
)
 
1,283

 
(5,767
)
 
(2,870
)
Other income, net
30

 
13

 
131

 
86

   Net income (loss)
$
(1,459
)
 
$
1,296

 
$
(5,636
)
 
$
(2,784
)

Total assets for each of our reportable and geographic segments at June 30, 2015 and December 31, 2014, are shown in the table below (in thousands):
 
June 30, 2015
 
December 31, 2014
Homebuilding
 
 
 
      West
$
236,396

 
$
218,902

      Southeast
50,414

 
47,004

         Homebuilding
286,810

 
265,906

Land development (c)
62,740

 
55,787

Corporate and unallocated (d)
52,004

 
55,758

         Total
$
401,554

 
$
377,451


(c) Land development operations for all the periods presented were in the West region.

(d) Corporate and unallocated assets primarily include cash and cash equivalents which are maintained centrally and used according to the cash flow requirements of all reportable segments.

24




12.    Noncontrolling interest

As of the June 30, 2015, the Company holds a 42.8% economic interest in UCP, LLC and is its sole managing member; UCP, LLC is fully consolidated. In accordance with applicable accounting guidance, these transactions are accounted for at historical cost.
 
The beginning and ending balance at June 30, 2015 of the noncontrolling interest was calculated as follows (in thousands):

Beginning balance of noncontrolling interest at December 31, 2014
$
124,012

Loss attributable to noncontrolling interest
(3,128
)
Stock-based compensation attributable to noncontrolling interest
711

Stock issuance attributable to noncontrolling interest
(13
)
Distribution to noncontrolling interest
(981
)
Ending balance of noncontrolling interest at June 30, 2015
$
120,601




25



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in Management's Discussion and Analysis of Financial Condition and Results of Operations below and in other sections of this report that are forward-looking statements. All statements other than statements of historical fact included in this report are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical facts. These statements may include words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial or operating performance, our anticipated growth strategies, anticipated trends in our business and other future events or circumstances. These statements are only predictions based on our current expectations and projections about future events.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

economic changes, either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;
 
downturns in the homebuilding industry, either nationally or in the markets in which we operate;
 
continued volatility and uncertainty in the credit markets and broader financial markets;
 
our business operations;
 
changes in our business and investment strategy;
 
availability of land to acquire and our ability to acquire such land on favorable terms or at all;
 
availability, terms and deployment of capital;

our ability to successfully integrate the Citizens Acquisition;
 
disruptions in the availability of mortgage financing or increases in the number of foreclosures in our markets;
 
shortages of or increased prices for labor, land or raw materials used in housing construction;
 
delays or restrictions in land development or home construction or reduced consumer demand resulting from adverse weather and geological conditions or other events outside our control;
 
the cost and availability of insurance and surety bonds;
 
changes in, or the failure or inability to comply with, governmental laws and regulations;
 
the timing of receipt of regulatory approvals and the opening of communities;
 
the degree and nature of our competition;
 
our leverage and debt service obligations;

our future operating expenses, which may increase disproportionately to our revenue;

our ability to achieve operational efficiencies with future revenue growth;

our relationship, and actual and potential conflicts of interest, with PICO; and

26



 
availability of qualified personnel and our ability to retain our key personnel.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance, and our actual results could differ materially from those expressed in any forward-looking statement. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law. For a further discussion of these and other factors, see the “Risk Factors” disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. In light of these risks and uncertainties, the forward-looking events discussed in this report might not occur.



27



Overview

We are a homebuilder and land developer with land acquisition and entitlement expertise in California, Washington State, North Carolina, South Carolina and Tennessee. As of June 30, 2015, we owned or controlled (through executed purchase or option contracts) a total of approximately 4,667 residential lots in our West Operating Segment and approximately 2,774 lots in our Southeast Operating Segment. As of June 30, 2015, our property portfolio consisted of 85 communities in 38 cities in California, Washington State, North Carolina, South Carolina and Tennessee. We have homebuilding and land development reportable segments in our West Operating Segment and a homebuilding reportable segment in our Southeast Operating Segment.

During the three and six months ended June 30, 2015, the overall U.S. housing market continued to show signs of improvement, driven by factors such as decreasing home inventories, high affordability and improving employment in core metro areas. Individual markets continue to experience varying results, as local home inventories, affordability and employment factors strongly influence local markets. Furthermore, the local economies in larger metropolitan areas is lagging relevant to employment growth.
 
Individual markets continue to experience varying results, as numerous factors can affect the performance of an individual market; however, we believe that trends in employment, housing inventory, home affordability, interest rates and home prices have a particularly significant impact. We expect that these factors will affect our operating performance and community count. Trends in employment, housing inventory, home affordability, interest rates and home prices are the principal factors that impact our revenues and many of our costs and expenses. For example, when these trends are favorable, we expect our revenues from homebuilding and land development, as well as our related costs and expenses, to generally increase; conversely, when these trends are negative, we expect our revenue and costs and expenses to generally decline, although in each case the impact may not be immediate. When trends are favorable, we would expect to increase our community count by opening additional communities and expanding existing communities; conversely, when these trends are negative, we would expect to maintain our community count or decrease the pace at which we open additional communities and expand existing communities.
 
Our operations for the six months ended June 30, 2015 reflect our continued emphasis on growing our homebuilding operations, as evidenced by an increase in the number of average selling communities from 19 to 27, and an $18.0 million, or approximately 24%, increase in homebuilding revenue, as compared to the six months ended June 30, 2014. For the three months ended June 30, 2015, the average number of selling communities increased to 29 from 27 and homebuilding revenue increased by $0.8 million, or approximately 2%, as compared to the three months ended June 30, 2014. Our backlog at June 30, 2015 of $112.1 million was $72.3 million higher than our $39.7 million backlog at June 30, 2014. We delivered 154 homes during the second quarter of 2015, as compared to 138 homes during the same period during 2014, and our average selling price of homes decreased to approximately $330,000 during the second quarter of 2015, as compared to approximately $362,000 during the second quarter of 2014.

Our land development segment, on the other hand, saw reduced activity during the second quarter of 2015, as revenue from land development for the three months ended June 30, 2015 was $1.9 million as compared to $12.1 million for the three months ended June 30, 2014. We believe that demand for entitled or nearly entitled lots in competitive markets generally lags trends in home deliveries and the broader housing market considerations discussed above, and we expect that demand for lots in competitive markets may increase during the remainder of 2015, although no assurance can be given that this will be the case.

Our consolidated net loss was $1.5 million for the three months ended June 30, 2015, as compared to a net income of $1.3 million for the three months ended June 30, 2014.

Revenue and gross margin in our land development segment tend to be variable due to the fact that land development revenue is likely to be driven by periodic transactions that are motivated by numerous considerations, including the demand levels of other homebuilders and availability of land to meet such demand. On the other hand, revenue and gross margin in our homebuilding segment tend to be more predictable.

Our net total of lots owned decreased by 408 lots since December 31, 2014. During the second quarter of 2015, we continued to focus our efforts on community openings, management of our existing communities across all of our geographies, and realizing operating efficiencies in our regional operations and in our corporate office.
   
During the remainder of 2015, we expect to seek revenue growth from our homebuilding operations, in particular, we are focused on expanding our revenue, on a year over year basis, in the Southeast and in our Puget Sound and Southern California operations in the West. We note that our Puget Sound and Southern California operations are relatively young operations as compared to our other West regional operations and, as such, we expect increased productivity during this year from both. Additionally, we expect to buy and sell land opportunistically in select markets and seek operational efficiencies across all our regional operations and in our corporate offices.

28




Results of Operations - Three Months Ended June 30, 2015 and 2014

Consolidated Financial Data
 
Three Months Ended June 30,
 
2015
 
2014
 
Change
 
(in thousands)
Revenue:
 
 
 
 

  Homebuilding
$
50,785

 
$
50,010

 
$
775

  Land development
1,920

 
12,075

 
(10,155
)
  Other
2,021

 
1,518

 
503

   Total
54,726

 
63,603

 
(8,877
)
Cost of Sales:
 
 
 
 
 
  Home Building
42,120

 
41,076

 
1,044

  Land Development
1,543

 
9,241

 
(7,698
)
  Other
1,742

 
 
 
413

   Gross Margin
9,321

 
11,957

 
(2,636
)
Expenses:
 
 
 
 
 
Sales and marketing
4,357

 
3,765

 
592

General and administrative
6,453

 
6,909

 
(456
)
Income from operations
(1,489
)
 
1,283

 
(2,772
)
Other income (expense)
30

 
13

 
17

    Net income (loss)
$
(1,459
)
 
$
1,296

 
$
(2,755
)


Select Operating Metrics

 
Three Months Ended June 30,
 
2015
 
2014
 
Change
Net new home orders (1)
206
 
133
 
73

Cancellation rate (2)
11.6
%
 
8.9
%
 
2.7
%
Average selling communities during period (3) (a)
29
 
27
 
2



 
June 30,
 
2015
 
2014
 
Change
Selling communities at end of period (a)
31

 
26

 
5

Backlog (4) (in thousands)
$
112,059

 
$
39,734

 
$
72,325

Backlog (4) (units)
274

 
124

 
150

Average sales price of backlog (in thousands)
$
409

 
$
320

 
$
89


(1) 
“Net new home orders” refers to new home sales contracts reduced by the number of sales contracts canceled during the relevant period.

(2) 
“Cancellation rate” refers to sales contracts canceled divided by sales contracts executed during the relevant period.

(3) 
“Average selling communities during the period” refers to the average number of open selling communities at the end of each month during the period.


29



(4) 
“Backlog” refers to homes under sales contracts that have not yet closed at the end of the relevant period. Sales contracts relating to homes in backlog may be canceled by the purchaser for a number of reasons, such as the prospective purchaser's inability to obtain suitable mortgage financing. Upon a cancellation, the escrow deposit is returned to the prospective purchaser (other than with respect to certain design-related deposits, which we retain). Accordingly, backlog may not be indicative of our future revenue.

(a) Active Selling Communities as of June 30, 2015 consists of those communities where we have more than 15 homes remaining to sell. Prior period community count includes all communities that were active selling homes.
 
The increase in net new home orders was primarily due increased absorption and to a lesser extent to having 29 average selling communities during the three months ended June 30, 2015 as compared to 27 during the three months ended June 30, 2014. The increase in the number of new home orders was attributable to the increase in backlog (units) for the three month period ended June 30, 2015, as compared to the similar period during 2014.

We had 31 selling communities at June 30, 2015, as compared to 26 selling communities at June 30, 2014. Our backlog value increased by $72.3 million at June 30, 2015, as compared to June 30, 2014. The increase was due to 150 more home sales contracts at June 30, 2015, as compared to June 30, 2014, which was partially offset by a $89,000 increase in average sales price of homes under sales contract, due to the regional mix of homes. Our cancellation rate for the three months ended June 30, 2015 was 11.6%, as compared to 8.9% for the three months ended June 30, 2014.


Owned and Controlled Lots

As of June 30, 2015 and December 31, 2014, we owned or controlled, pursuant to purchase or option contracts, an aggregate of 7,441 and 6,368 lots, respectively, as set forth in the tables below:
 
June 30, 2015
 
Owned
 
Controlled (1)
 
Total
West
4,089

 
578

 
4,667

Southeast
946

 
1,828

 
2,774

   Total
5,035

 
2,406

 
7,441

 
 
 
 
 
 
 
December 31, 2014
 
Owned
 
Controlled (1)
 
Total
West
4,410

 
469

 
4,879

Southeast
1,033

 
456

 
1,489

   Total
5,443

 
925

 
6,368


(1) 
Controlled lots are those subject to a purchase or option contract.



30



Revenue
 
 
Three Months Ended June 30,
 
2015
 
2014
 
Change
 
(in thousands except homes delivered and lots sold)
Homebuilding
 
 
 
 
 
 
 
Revenue
$
50,785

 
$
50,010

 
$
775

 
1.5
 %
Homes delivered (units)
154

 
138

 
16

 
11.6
 %
Average selling price
$
330

 
$
362

 
$
(32
)
 
(8.8
)%
Average cost of sales
$
274

 
$
298

 
$
(24
)
 
(8.1
)%
 
 
 
 
 
 
 
 
Land development
 
 
 
 
 
 
 
Revenue
$
1,920

 
$
12,075

 
$
(10,155
)
 
(84.1
)%
Lots sold (units)
106

 
149

 
(43
)
 
(28.9
)%
Average selling price
$
18

 
$
81

 
$
(63
)
 
(77.8
)%
Average cost of sales
$
15

 
$
62

 
$
(47
)
 
(75.8
)%
 
 
 
 
 
 
 
 
Other revenue
 
 
 
 
 
 
 
Revenue
$
2,021

 
$
1,518

 
$
503

 
33.1
 %
 
 
 
 
 
 
 
 
Total revenue
$
54,726

 
$
63,603

 
$
(8,877
)
 
(14.0
)%

Total revenue for the three months ended June 30, 2015 decreased by $8.9 million, or 14.0%, to $54.7 million, as compared to $63.6 million for the three months ended June 30, 2014. The decrease in revenue was primarily the result of decreased land sales, as compared the same period last year.
 
Homebuilding Revenue

Revenue from homebuilding for the three months ended June 30, 2015 increased by $0.8 million, or 1.5%, to $50.8 million, as compared to $50.0 million for the three months ended June 30, 2014. The increase was primarily the result of an increase in the number of homes delivered to 154 during the 2015 period, as compared to 138 homes during the 2014 period, partially offset by a decrease in the average selling price of homes to approximately $330,000 during the 2015 period, as compared to approximately $362,000 during the 2014 period. Of this revenue increase, $5.8 million related to increased units delivered offset by $4.9 million related to a decrease in average selling price. The decrease in average selling price during the 2015 period was primarily the result of a relative increase of deliveries at communities located in areas with lower home prices.
 

 
Land Development Revenue

Revenue from land development for the three months ended June 30, 2015 decreased by $10.2 million, or 84.1%, as compared to $12.1 million for the three months ended June 30, 2014. While we sold 106 finished lots during the 2015 period, as compared to 149 finished and entitled lots during the 2014 period, this decrease in revenue from land development was primarily the result of selling lots in markets with lower land values during the 2015 period.


Other Revenue

Other revenue for the three months ended June 30, 2015 and 2014 was approximately $2.0 million and $1.5 million, respectively. Other revenue is related to construction management services provided to property owners primarily under “cost plus fee” contracts, which is conducted in our Southeast operations.




31



Gross Margin and Adjusted Gross Margin

Three Months Ended June 30,

2015


%


2014


%


(Dollars in thousands)
Consolidated Adjusted Gross Margin











Revenue
$
54,726


100.0
%

$
63,603


100.0
%
Cost of Sales
45,405


83.0
%

51,646


81.2
%
Gross Margin
9,321


17.0
%

11,957


18.8
%
Add: interest in cost of sales
1,049


1.9
%

1,038


1.6
%
Add: impairment and abandonment charges


%

140


0.2
%
Adjusted Gross Margin(1)
$
10,370


18.9
%

$
13,135


20.7
%
Consolidated Gross margin percentage
17.0
%




18.8
%



Consolidated Adjusted gross margin percentage
18.9
%




20.7
%















Homebuilding Adjusted Gross Margin











Homebuilding revenue
$
50,785


100.0
%

$
50,010


100.0
%
Cost of home sales
42,120


82.9
%

41,076


82.1
%
Homebuilding gross margin
8,665


17.1
%

8,934


17.9
%
Add: interest in cost of home sales
1,000


2.0
%

1,035


2.1
%
Add: impairment and abandonment charges


%



%
Adjusted homebuilding gross margin(1)
$
9,665


19.0
%

$
9,969


19.9
%
Homebuilding gross margin percentage
17.1
%




17.9
%



Adjusted homebuilding gross margin percentage
19.0
%




19.9
%















Land Development Adjusted Gross Margin











Land development revenue
$
1,920


100.0
%

$
12,075


100.0
%
Cost of land development
1,543


80.4
%

9,241


76.5
%
Land development gross margin
377


19.6
%

2,834


23.5
%
Add: interest in cost of land development
49


2.6
%

3


%
Add: Impairment and abandonment charges


%

140


1.2
%
Adjusted land development gross margin(1)
$
426


22.2
%

$
2,977


24.7
%
Land development gross margin percentage
19.6
%




23.5
%



Adjusted land development gross margin percentage
22.2
%




24.7
%















Other Revenue Gross and Adjusted Margin