UCP, Inc. - FORM 10-Q - August 10, 2015

Attached files

file	filename
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

£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)	3

	Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014	4

	Condensed Consolidated Statements of Equity for the Six Months Ended June 30, 2015 and 2014	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	45

Item 4.	Controls and Procedures	45

Part II - Other Information		46

Item 1.	Legal Proceedings	46

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

Signatures		48

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.

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.

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.

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.

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

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

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

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

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.

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

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

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):



	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

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

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

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.

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

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.

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.

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

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.

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

(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.

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

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


•	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.

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.

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.

⁽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.

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.

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
Revenue	$	2,021		100.0	%	$	1,518		100.0	%
Cost of revenue	1,742			86.2	%	1,329			87.5	%
Other revenue gross and adjusted margin	$	279		13.8	%	$	189		12.5	%
Other revenue gross and adjusted margin percentage	13.8		%			12.5		%

* Percentages may not add due to rounding.


⁽¹⁾	Adjusted gross margin, adjusted homebuilding gross margin and adjusted land development gross margin are non-U.S. GAAP financial measures. These metrics have been adjusted to add back capitalized interest, and impairment and abandonment charges. We use adjusted gross margin information as a supplemental measure when evaluating our operating performance.

We believe this information is meaningful, because it isolates the impact that leverage and non-cash impairment and abandonment charges have on gross margin. However, because adjusted gross margin information excludes interest expense and impairment and abandonment charges, all of which have real economic effects and could materially impact our results, the utility of adjusted gross margin information as a measure of our operating performance is limited. In addition, other companies may not calculate gross margin information in the same manner that we do.

Accordingly, adjusted gross margin information should be considered only as a supplement to gross margin information as a measure of our performance. The table above provides a reconciliation of adjusted gross margin numbers to the most comparable U.S. GAAP financial measure.

The decrease in our homebuilding gross margin percentage was primarily due to increased cost of sales-homebuilding during the three months ended June 30, 2015, as compared to the three months ended June 30, 2014. The increased cost of sales-homebuilding during the three month period in 2015 over the prior year period was primarily attributable to a change in the mix of selling communities period over period, as our current portfolio of selling communities had a relatively higher cost basis than the homes we sold during the 2014 period including higher interest costs. With the exclusion of the interest costs in the adjusted homebuilding gross margin percentage, the decrease in the gross margin percentage over the comparable period last year was not as significant.

The decrease in our land development gross margin percentage for the three months ended June 30, 2015, as compared to the same period in 2014 was primarily attributable to increased cost of land development. The increased cost of land development was primarily attributable to a higher cost basis in the lots we sold during the 2015 period.

Sales and Marketing, and General and Administrative Expenses

Our operating expenses for the three months ended June 30, 2015 and 2014 were as follows:



	Three Months Ended June 30,
	(In thousands)				As a percentage of Total Revenue
	2015		2014		2015		2014
Sales and marketing	$	4,357	$	3,765	8.0	%	5.9	%
General and administrative	6,453		6,909		11.8	%	10.9	%
Total sales and marketing and general and administrative	$	10,810	$	10,674	19.8	%	16.8	%

Sales and marketing expense for the three months ended June 30, 2015 increased approximately $0.6 million, or 16%, to approximately $4.4 million, as compared to approximately $3.8 million for the same period in 2014. The increase in sales and marketing expense was primarily attributable to a 11.6% increase in the number of homes delivered and a 7.4% increase in the average number of selling communities for the three months ended June 30, 2015, as compared to the same period in 2014. As a percentage of total revenue, sales and marketing expense of 8.0% during the three months ended June 30, 2015, increased from 5.9% for the comparable prior year period.

General and administrative (“G&A expense”) for the three months ended June 30, 2015 decreased by approximately $0.5 million to $6.5 million, as compared to $6.9 million for the same period in 2014. The decrease in G&A expense was largely the result of a decrease in RSU expense due to vesting of awards granted during the IPO in 2013. As of June 30, 2015, office headcount increased to 138 employees from 110 employees a year ago. As a percentage of total revenue, G&A expenses increased to 11.8% during the three month period ended June 30, 2015, as compared to 10.9% for the same period in 2014 due, in part, to a reduced land development revenue in the 2015 period relative to the same period last year.

Other Income

Other income for the three months ended June 30, 2015 increased by $17,000 to $30,000 as a result of commissions on the sale of Tennessee homes unrelated to UCP, as compared to $13,000 for the three months ended June 30, 2014.

Provision for Income Taxes

As a result of the analysis of all available evidence as of June 30, 2015 and 2014, we continued to record a full valuation allowance on our net deferred tax assets. Consequently, we reported no income tax benefit for the three month periods ended June 30, 2015 and 2014. If our assumptions change and we believe we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on our deferred tax assets will be recognized as a reduction of future income tax expense. If the assumptions do not change, in each period we could record an additional valuation allowance on any increases in the deferred tax assets.

Net Income or Loss and Income or Loss per Share

As a result of the foregoing factors, our net loss for the three month period ended June 30, 2015 was $1.5 million, as compared to net income of $1.3 million for the prior year period. The net loss attributable to UCP, Inc. was $0.7 million, or $0.08 per share, for the three month period ending June 30, 2015, and the net income attributable to UCP, Inc. was $0.2 million, or $0.02 per share for the three month period ended June 30, 2014.

Reporting Segments

As a result of the Citizens Acquisition in April 2014, the Company evaluated the ongoing management of its homebuilding and land development operations to ensure that resources were appropriately allocated to maximize its overall results. Based on this evaluation, the Company has identified its operating activities into two geographical regions, West and Southeast. As such, all segment information for the period ended June 30, 2014 has been reclassified and is shown under the West homebuilding and land development reportable segments. See Note 11 “Segment Information” to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table presents financial information related to reporting segments for the year indicated (in thousands):



	Three Months Ended June 30,						Three Months Ended June 30,
	June 30, 2015						June 30, 2014
	Revenues		Gross Margin		GM %		Revenues		Gross Margin		GM %
Homebuilding
West	$	35,746	$	6,299	17.6	%	$	41,306	$	7,423	18.0	%
Southeast	15,039		2,366		15.7	%	8,704		1,511		17.4	%
Homebuilding	50,785		8,665		17.1	%	50,010		8,934		17.9	%
Land development (a)	1,920		377		19.6	%	12,075		2,834		23.5	%
Corporate and unallocated (b)	2,021		279		13.8	%	1,518		189		12.5	%
Total	$	54,726	$	9,321	17.0	%	$	63,603	$	11,957	18.8	%

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

(b) Corporate and unallocated includes revenues from construction management services provided by the Company related to its April 2014 Citizens Acquisition and is not attributable to the homebuilding or land development operations.

Homebuilding Operations

The following table presents information concerning revenues, homes delivered and average selling price for the homebuilding operations by our operating segments:



	Homebuilding Revenue		Percentage of Total Homebuilding Revenue		Homes Delivered	Percentage of Total Homes Delivered		Average Selling Price
For the three months ended	(in thousands)
June 30, 2015
West	$	35,746	70.4	%	85	55.2	%	$	421
Southeast	15,039		29.6	%	69	44.8	%	$	218
Total	$	50,785	100.0	%	154	100.0	%	$	330

June 30, 2014
West	$	41,306	82.6	%	101	73.2	%	$	409
Southeast	8,704		17.4	%	37	26.8	%	$	235
Total	$	50,010	100	%	138	100.0	%	$	362

For the quarter ended June 30, 2015, our West Operating Segment accounted for approximately 70.4% of our total homebuilding revenue, compared to our Southeast Operating Segment which accounted for approximately 29.6% of our total homebuilding revenue. This was caused mainly by the higher number of homes delivered in the West Operating Segment, as compared to the Southeast Operating Segment which was added after June 30, 2014 as a result of our Citizens Acquisition. Additionally, the average selling price for the homes sold in the West was higher than in the Southeast. Prior to the April 2014 Citizens Acquisition, all homebuilding revenues were attributed to our West Operating Segment.

Land Development Operations

The following table presents a summary of selected financial and operational data for our land development operations where all revenue was attributed to our West Operating Segment. There were no land sales in our Southeast Operating Segment.



	Land development Revenue		Lots sold
Three months ended June 30, 2015
West	$	1,920	106
Southeast	—		—
Total	$	1,920	106

Three months ended June, 30, 2014
West	$	12,075	149
Southeast	—		—
Total	$	12,075	149

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

Consolidated Financial Data



	Six Months Ended June 30,
	2015			2014			Change
	(in thousands)
Revenue:
Homebuilding	$	93,421		$	75,456		$	17,965
Land development	2,040			12,249			(10,209		)
Other	2,788			1,518			1,270
Total	98,249			89,223			9,026
Cost of Sales:
Home Building	77,738			61,876			15,862
Land Development	1,548			9,387			(7,839		)
Other	2,405			1,329			1,076
Gross Margin	16,558			16,631			(73		)
Expenses:
Sales and marketing	8,553			6,321			2,232
General and administrative	13,772			13,180			592
Income from operations	(5,767		)	(2,870		)	(2,897		)
Other income (expense)	131			86			45
Net income (loss)	$	(5,636	)	$	(2,784	)	$	(2,852	)

Select Operating Metrics



	Six Months Ended June 30,
	2015		2014		Change
Net new home orders ⁽¹⁾	460		217		243
Cancellation rate ⁽²⁾	8.0	%	5.7	%	2.3	%
Average selling communities during period ^{(3) (a)}	27		19		8


⁽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.

The increase in net new home orders was primarily due to having 27 average selling communities during the six months ended June 30, 2015, as compared to 19 during the six months ended June 30, 2014. The increase in the number of new home orders was attributable to the increase in backlog (units) for the six month period ended June 30, 2015, as compared to the similar period during 2014.

Our cancellation rate for the six months ended June 30, 2015 was 8.0%, as compared to 5.7% for the six months ended June 30, 2014.

Revenue



	Six Months Ended June 30,
	2015		2014		Change
	(in thousands except homes delivered and lots sold)
Homebuilding
Revenue	$	93,421	$	75,456	$	17,965		23.8	%
Homes delivered (units)	276		190		86			45.3	%
Average selling price	$	338	$	397	$	(59	)	(14.8	)%
Average cost of sales	$	282	$	326	$	(44	)	(13.5	)%

Land development
Revenue	$	2,040	$	12,249	$	(10,209	)	(83.3	)%
Lots sold (units)	114		151		(37		)	(24.5	)%
Average selling price	$	18	$	81	$	(63	)	(77.7	)%
Average cost of sales	$	14	$	62	$	(48	)	(77.4	)%

Other revenue
Revenue	$	2,788	$	1,518	$	1,270		83.7	%

Total revenue	$	98,249	$	89,223	$	9,026		10.1	%

Total revenue for the six months ended June 30, 2015 increased by $9.0 million, or 10.1%, to $98.2 million, as compared to $89.2 million for the six months ended June 30, 2014. The increase in revenue was primarily the result of increased home deliveries during the 2015 period attributable to several factors, including an increased number of selling communities and favorable sales pace at certain of those communities. The increase in total revenue was moderated by a decrease in land development revenue, as more fully described below.

Homebuilding Revenue

Revenue from homebuilding for the six months ended June 30, 2015 increased by $18.0 million, or 23.8%, to $93.4 million, as compared to $75.5 million for the six months ended June 30, 2014. The increase was primarily the result of an increase in the number of homes delivered to 276 during the 2015 period, as compared to 190 during the 2014 period, partially offset by a decrease in the average selling price of homes to approximately $338,000 during the 2015 period, as compared to approximately $397,000 during the 2014 period. Increased unit deliveries resulted in incremental revenue of approximately $34.1 million, which was partially offset by $16.3 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 six months ended June 30, 2015 decreased by $10.2 million, or 83.3%, as compared to $12.2 million for the six months ended June 30, 2014. While the decrease was partially attributable to a decrease in the number of finished lots sold to 114 during the 2015 period, as compared to 151 lots during the 2014 period, the decrease was primarily attributable to selling lots in markets with lower land values during the 2015 period, as compared to the 2014 period.

Other Revenue

Other revenue for the six months ended June 30, 2015 and 2014 was approximately $2.8 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.

Gross Margin and Adjusted Gross Margin



	Six Months Ended June 30,
	2015			%		2014			%
	(Dollars in thousands)
Consolidated Adjusted Gross Margin
Revenue	$	98,249		100.0	%	$	89,223		100.0	%
Cost of Sales	81,691			83.1	%	72,592			81.4	%
Gross Margin	16,558			16.9	%	16,631			18.6	%
Add: interest in cost of sales	1,973			2.0	%	1,476			1.8	%
Add: impairment and abandonment charges	2			—	%	173			0.2	%
Adjusted Gross Margin⁽¹⁾	$	18,533		18.9	%	$	18,280		20.5	%
Consolidated Gross margin percentage	16.9		%			18.6		%
Consolidated Adjusted gross margin percentage	18.9		%			20.5		%

Homebuilding Adjusted Gross Margin
Homebuilding revenue	$	93,421		100.0	%	$	75,456		100.0	%
Cost of home sales	77,738			83.2	%	61,876			82.0	%
Homebuilding gross margin	15,683			16.8	%	13,580			18.0	%
Add: interest in cost of home sales	1,924			2.1	%	1,473			2.0	%
Add: impairment and abandonment charges	—			—	%	—			—	%
Adjusted homebuilding gross margin⁽¹⁾	$	17,607		18.8	%	$	15,053		19.9	%
Homebuilding gross margin percentage	16.8		%			18.0		%
Adjusted homebuilding gross margin percentage	18.8		%			19.9		%

Land Development Adjusted Gross Margin
Land development revenue	$	2,040		100.0	%	$	12,249		100.0	%
Cost of land development	1,548			75.9	%	9,387			76.6	%
Land development gross margin	492			24.1	%	2,862			23.4	%
Add: interest in cost of land development	49			2.4	%	3			—	%
Add: Impairment and abandonment charges	2			0.1	%	173			1.4	%
Adjusted land development gross margin⁽¹⁾	$	543		26.6	%	$	3,038		24.8	%
Land development gross margin percentage	24.1		%			23.4		%
Adjusted land development gross margin percentage	26.6		%			24.8		%

Other Revenue Gross and Adjusted Margin
Revenue	$	2,788		100.0	%	$	1,518		100.0	%
Cost of revenue	2,405			86.3	%	1,329			87.5	%
Other revenue gross and adjusted margin	$	383		13.7	%	$	189		12.5	%
Other revenue gross and adjusted margin percentage	13.7		%			12.5		%

* Percentages may not add due to rounding.


⁽¹⁾	Adjusted gross margin, adjusted homebuilding gross margin and adjusted land development gross margin are non-U.S. GAAP financial measures. These metrics have been adjusted to add back capitalized interest, and impairment and abandonment charges. We use adjusted gross margin information as a supplemental measure when evaluating our operating performance.

The decrease in our homebuilding gross margin percentage was primarily due to increased cost of sales-homebuilding during the six months ended June 30, 2015, as compared to the six months ended June 30, 2014. The increased cost of sales-homebuilding during the six month period in 2015 over the prior year period was primarily attributable a change in the mix of selling communities period over period, as our current portfolio of selling communities had a relatively higher cost basis than the homes we sold during the 2014 period, including slightly higher interest costs. With the exclusion of the interest costs in the adjusted homebuilding gross margin percentage, the decrease in the gross margin percentage over the comparable period last year was 0.10%.

The increase in our land development gross margin percentage for the six months ended June 30, 2015, as compared to the same period in 2014 was primarily attributable to the decreased cost of land sold during the period. The decreased cost of land development was primarily attributable to a lower cost basis in the lots we sold during the 2015 period. With the exclusion of the interest and abandonment charges in the adjusted gross margin percentage, our adjusted land development gross margin percentage increased to 26.6% from 24.8% period-over-period.

Sales and Marketing, and General and Administrative Expenses

Our operating expenses for the six months ended June 30, 2015 and 2014 were as follows:



	Six Months Ended June 30,
	(In thousands)				As a percentage of Total Revenue
	2015		2014		2015		2014
Sales and marketing	$	8,553	$	6,321	8.7	%	7.1	%
General and administrative	13,772		13,180		14.0	%	14.8	%
Total sales and marketing and general and administrative	$	22,325	$	19,501	22.7	%	21.9	%

Sales and marketing expense for the six months ended June 30, 2015 increased approximately $2.2 million, or 35.3%, to approximately $8.6 million, as compared to approximately $6.3 million for the same period in 2014. The increase in sales and marketing expense was primarily attributable to a 45.3% increase in the number of homes delivered and a 42.1% increase in the average number of selling communities for the six months ended June 30, 2015, as compared to the same period in 2014. These increases also led to an increase in the headcount of sales and marketing personnel. As a percentage of total revenue, sales and marketing expense of 8.7% during the six months ended June 30, 2015, increased from 7.1% for the comparable prior year period.

G&A expense for the six months ended June 30, 2015 increased by approximately $0.6 million to $13.8 million , as compared to $13.2 million for the same period in 2014. The increase in G&A expense was the result of an increase in payroll and related expenses. As of June 30, 2015, office headcount increased to 138 employees, as compared to 110 as of June 30, 2014. As a percentage of total revenue, G&A expenses increased to 14.0% during the six months ended June 30, 2015, as compared to 14.8% for the same period in 2014 due to a higher revenue base in the 2015 period relative to the increase in G&A expense.

Other Income

Other income for the six months ended June 30, 2015 increased by $45,000 to $131,000 as a result of commissions on the sale of certain homes in the Southeast unrelated to UCP, as compared to $86,000 for the six months ended June 30, 2014.

Provision for Income Taxes

As a result of the analysis of all available evidence as of June 30, 2015 and 2014, we continued to record a full valuation allowance on our net deferred tax assets. Consequently, we reported no income tax benefit for the six month period ended June 30, 2015and 2014. If our assumptions change and we believe we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on our deferred tax assets will be recognized as a reduction of future income tax expense. If the assumptions do not change, in each period we could record an additional valuation allowance on any increases in the deferred tax assets.

Net Income or Loss and Income or Loss per Share

As a result of the foregoing factors, our net loss for the six month period ended June 30, 2015 six months period ended was $5.6 million, as compared to a net loss of $2.8 million for the prior year period. The net loss attributable to UCP, Inc. was $2.5 million , or $0.32 per share, for the six month period ended June 30, 2015, and $2.3 million, or $0.30 per share for the six month period ended June 30, 2014.

Reporting Segments

As a result of the 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 classified its operating activities into two geographical regions, West and Southeast. As such, all segment information for the period ended June 30, 2014 has been reclassified and is shown under the West homebuilding and land development reportable segments. See Note 11 “Segment Information” to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table presents financial information related to reporting segments for the year indicated (in thousands):



	Six Months Ended June 30,						Six Months Ended June 30,
	June 30, 2015						June 30, 2014
	Revenues		Gross Margin		GM %		Revenues		Gross Margin		GM %
Homebuilding
West	$	68,974	$	12,111	17.6	%	$	66,752	$	12,069	18.1	%
Southeast	24,447		3,571		14.6	%	8,704		1,511		17.4	%
Homebuilding	93,421		15,682		16.8	%	75,456		13,580		18.0	%
Land development (a)	2,040		492		24.1	%	12,249		2,862		23.4	%
Corporate and unallocated (b)	2,788		384		13.8	%	1,518		189		12.5	%
Total	$	98,249	$	16,558	16.9	%	$	89,223	$	16,631	18.6	%

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

Homebuilding Operations

The following table presents information concerning revenues, homes delivered and average selling price for the homebuilding operations by our operating segments:



	Homebuilding Revenue		Percentage of Total Homebuilding Revenue		Homes Delivered	Percentage of Total Homes Delivered		Average Selling Price
For the six months ended	(in thousands)
June 30, 2015
West	$	68,974	73.8	%	163	59.1	%	$	423
Southeast	24,447		26.2	%	113	40.9	%	$	216
Total	$	93,421	100.0	%	276	100.0	%	$	330

June 30, 2014
West	$	66,752	88.5	%	153	80.5	%	$	436
Southeast	8,704		11.5		37	19.5	%	$	235
Total	$	75,456	100.0	%	190	100.0	%	$	397

For the six months ended June 30, 2015, our West Operating Segment accounted for approximately 73.8% of our total homebuilding revenue, compared to our Southeast Operating Segment which accounted for approximately 26.2% of our total homebuilding revenue. This was caused mainly by the higher number of homes delivered in the West Operating Segment, as compared to the Southeast Operating Segment which was added after June 30, 2014 as a result of our Citizens Acquisition. Additionally, average selling price for the homes sold in the West was higher than in the Southeast. Prior to 2014, all homebuilding revenues were attributed to our West Operating Segment.

Land Development Operations



	Land development Revenue		Lots sold
Six months ended June 30, 2015
West	$	2,040	114
Southeast	—		—
Total	$	2,040	114

Six months ended June 30, 2014
West	$	12,249	151
Southeast	—		—
Total	$	12,249	151

Liquidity and Capital Resources

Our principal uses of capital for the three and six months ended June 30, 2015 were funding our operating expenses, investing activities (principally acquiring and developing land, and building homes) and repaying liabilities. Our principal sources of liquidity were cash on hand, cash provided by operations and cash provided by financing activities (such as mortgage financing, notes issuance and construction and development financing). As of June 30, 2015, we had approximately $38.0 million of cash and cash equivalents.

For the foreseeable future, we expect our principal uses of cash to be similar to what they have been in the past. We anticipate funding future capital requirements in a manner similar to our historical funding. For a description of our outstanding indebtedness as of June 30, 2015, see Note 7 “Debt” to our Condensed Consolidated Financial Statements.

We believe that we have access to sufficient capital resources to fund our business for at least the next twelve months. We generally have the ability to defer future investment activity, such as developing land or building additional homes for sale, until such time as we have adequate capital resources available to us.

Our funding strategy contemplates the use of debt and equity financing and the reinvestment of cash from operations. We seek to manage our balance sheet in a manner that provides us with flexibility to access various types of financing, such as equity capital, secured debt and unsecured debt financing. We intend to finance future acquisitions and developments with the most advantageous source of capital available to us at the time of the transaction, which may include a combination of common and preferred equity, secured and unsecured corporate level debt, property-level debt and mortgage financing and other public, private or bank debt.

Senior Notes

On October 21, 2014, we completed a private offering of $75.0 million in aggregate principal amount of 8.5% Senior Notes due 2017. The Senior Notes were issued under an Indenture, dated as of October 21, 2014 (the “Indenture”), by and among us, the guarantors named therein 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.

The Senior Notes are guaranteed on an unsecured senior basis by each of our subsidiaries (the “Subsidiary Guarantors”). The Senior Notes and the guarantees are our and the Subsidiary Guarantors’ senior unsecured obligations and rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future senior unsecured debt and senior in right of payment to all of our and the Subsidiary Guarantors’ future subordinated debt. The Senior Notes and the guarantees are effectively subordinated to any of our and the Subsidiary Guarantors’ existing and future secured debt, to the extent of the value of the assets securing such debt.

We may redeem the Senior Notes, in whole but not in part, at any time at a price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a “make-whole” premium. Upon the occurrence of a change of control, we must offer to repurchase the Senior Notes for cash at a price equal to 101% of the principal amount of the Senior Notes to be repurchased plus accrued and unpaid interest to, but excluding, the repurchase date. Under the Indenture, a “change of control” generally means (i) any person or group of related persons acquires more than 35% of our voting stock or (ii) we transfer all or substantially all of our consolidated assets to any person or group of related persons, in each case other than PICO and its affiliates.

The Indenture provides for customary “events of default” which could cause, or permit, the acceleration of the Senior Notes. Such events of default include: (i) a default in any payment of principal or interest on the Senior Notes; (ii) failure to comply with certain covenants contained in the Indenture; (iii) defaults under certain other indebtedness or the acceleration of certain other indebtedness prior to maturity; (iv) the failure to pay certain final judgments; and (vi) certain events of bankruptcy or insolvency.

The Indenture limits our and our subsidiaries’ ability to, among other things, incur or guarantee additional unsecured and secured indebtedness (provided that we may incur indebtedness so long as our ratio of indebtedness to consolidated tangible assets (on a pro forma basis) would be equal to or less than 45% and provided that the aggregate amount of secured debt may not exceed the greater of $75 million or 30% of our consolidated tangible assets); pay dividends and make certain investments and other restricted payments; acquire unimproved real property in excess of $75 million per fiscal year or in excess of $150 million over the term of the Senior Notes, except to the extent funded with subordinated obligations or the proceeds of equity issuances; create or incur certain liens; transfer or sell certain assets; and merge or consolidate with other companies or transfer or sell all or substantially all of our consolidated assets.

Additionally, the Indenture requires us to: (i) maintain at least $50 million of consolidated tangible assets not subject to liens securing indebtedness (the “Minimum Unlevered Asset Pool Test”); (ii) maintain a minimum net worth of at least $175 million (the “Minimum Net Worth Test”); (iii) maintain a minimum of $15 million of unrestricted cash and/or cash equivalents (the “Minimum Liquidity Test”); and (iv) not permit decreases in the amount of consolidated tangible assets by more than $25 million in any fiscal year or more than $50 million at any time after the issuance of the Senior Notes (the “Consolidated Tangible Assets Test”).

The foregoing is only a brief description of the Senior Notes and is qualified in its entirety by reference to the Indenture.

As set forth below, as of June 30, 2015, we were in compliance with each of the Minimum Unlevered Asset Pool Test, the Minimum Net Worth Test, the Consolidated Tangible Assets Test and the Minimum Liquidity Test. Capitalized terms used in the following table shall have the meanings assigned thereto in the Indenture.



	As of June 30, 2015		Requirement
	(In thousands)
Minimum Unlevered Asset Pool Test
Consolidated Tangible Assets	$	387,597
Consolidated Tangible Assets subject to Liens (1)	$	209,141
Consolidated Tangible Assets not subject to Liens (1)	$	178,456	≥ $ 50,000

Minimum Net Worth Test
Consolidated Tangible Assets	$	387,597
Total Indebtedness	$	159,457
Net Worth	$	228,140	≥ $ 175,000

Minimum Liquidity Test
Unrestricted cash and Cash Equivalents	$	38,047	≥ $ 15,000

	(In thousands)
Consolidated Tangible Assets Test			Requirement
Consolidated Tangible Assets as of June 30, 2015	$	387,597
Consolidated Tangible Assets as of January 1, 2015	$	363,726
Increase in Consolidated Tangible Assets during 2015 (2)	$	23,871	Δ ≤ ($25,000)

Consolidated Tangible Assets as of June 30, 2015	$	387,597
Consolidated Tangible Assets as of October 21, 2014	$	293,784
Increase in Consolidated Tangible Assets since October 21, 2014 (2) (3)	$	93,813	Δ ≤ ($50,000)


(1)	“Liens,” as used in this table, means Liens other than Liens of the type described in clauses (b), (c), (e), (f), (h), (i), (j), (t), (v), (w), (x) and (y) of the definition of “Permitted Liens” under the Indenture. In general, this excludes certain Liens securing obligations that are not indebtedness for money borrowed.


(2)	We may not permit our Consolidated Tangible Assets to decrease by more than $25 million in any fiscal year or more than $50 million in the aggregate at any time after October 21, 2014 (i.e. the date of issue of the Senior Notes).

(3) Based on Consolidated Tangible Assets as of September 30, 2014, the end of the quarter immediately preceding the issue of the Senior Notes.

In addition, (i) as of June 30, 2015 no Default or Event of Default (as such terms are defined in the Indenture) had occurred under the Indenture; (ii) all Asset Dispositions (as defined in the Indenture) made under the “Asset Disposition” covenant contained in the Indenture (Section 3.10) during the three months ended June 30, 2015 were made in compliance with such covenant; and (iii) any Restricted Payments (as defined in the Indenture) made during the three months ended June 30, 2015 complied in all respects with the requirements of the “Restricted Payments” covenant contained in the Indenture (Section 3.19).

We believe that our leverage ratios provide useful information to the users of our financial statements regarding our financial position and cash and debt management. The ratio of debt-to-capital and the ratio of net debt-to-capital are calculated as follows (dollars in thousands):



	At June 30, 2015			At December 31, 2014
Debt	$	159,457		$	135,451
Equity	205,870			211,267
Total capital	$	365,327		$	346,718
Ratio of debt-to-capital	43.6		%	39.1		%
Debt	$	159,457		$	135,451
Less: cash and cash equivalents	38,047			42,033
Net debt	121,410			93,418
Equity	205,870			211,267
Total capital	$	327,280		$	304,685
Ratio of net debt-to-capital(1)	37.1		%	30.7		%

⁽¹⁾

The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is debt less cash and cash equivalents) by the sum of net debt plus stockholders’ and member's equity. The most directly comparable U.S. GAAP financial measure is the ratio of debt-to-capital. We believe the ratio of net debt-to-capital is a relevant financial measure for investors to understand the leverage employed in our operations and as an indicator of our ability to obtain financing. We reconcile this non-U.S. GAAP financial measure to the ratio of debt-to-capital in the table above. The Company’s calculation of net debt-to-capital ratio might not be comparable with other issuers or issuers in other industries.

Cash Flows - Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

The following compares our cash flows for the six months ended June 30, 2015 to the six months ended June 30, 2014:

•

Net cash used in operating activities was $22.4 million lower compared to the prior year period. The decreased net use was primarily due to a $21.1 million decrease in cash used for real estate inventory, an incremental net loss adjusted for non-cash items of $0.8 million, an increase of $3.4 million in cash used to pay accounts payable and accrued liabilities and an increase of $1.6 million in cash used for other asset purchases.


•	Net cash used in investing activities decreased by $14.5 million due to the Citizens acquisition in the prior year period. Investing activities also decreased by $269,000 in cash used to purchase fixed assets.


•	Net cash provided by financing activities increased by $7.5 million which primarily resulted from an increase in net borrowings.

Off-Balance Sheet Arrangements and Contractual Obligations

In the ordinary course of business, we may enter into purchase or option contracts to procure lots for development and construction of homes or for sale to third-party homebuilders. We are subject to customary obligations associated with entering into contracts for the purchase of land. These contracts to purchase properties typically require a cash deposit and are generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements.

We may also utilize purchase or option contracts with land sellers as a method of acquiring land in staged takedowns to help us manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Purchase or option contracts generally require a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right to terminate our obligations under both purchase or option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller.

As of June 30, 2015, we had outstanding $4.5 million of cash deposits pertaining to purchase contracts for 1,405 lots with an aggregate remaining purchase price of approximately $75.4 million.

As of June 30, 2015, the Company had approximately $172.5 million of credit available under existing debt facilities, of which approximately $86.1 million was available to be drawn. For additional information, see Note 7, “Debt” to our condensed consolidated financial statements included elsewhere in this report.

We are often required to provide to various municipalities and other government agencies performance bonds to secure the completion of our projects and/or in support of obligations to build community improvements, such as roads, sewers, water systems and other utilities. As of June 30, 2015 and December 31, 2014, we had outstanding surety bonds totaling approximately $49.4 million and $38.0 million, respectively. If any such performance bonds are called, we would be obligated to reimburse the issuer of the performance bond. We do not believe that a material amount of any currently outstanding performance bonds will be called. Performance bonds do not have stated expiration dates. Rather, we are released from the performance bonds as the underlying performance is completed.

Inflation

Our business can be adversely impacted by inflation, primarily from higher land, financing, labor, material and construction costs. In addition, inflation can lead to higher mortgage rates, which can significantly affect the affordability of mortgage financing to home buyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we are often unable to offset cost increases with higher selling prices. Additionally, rising mortgage rates may result in a decrease in the number of homes we sell and a reduction in selling prices.

Seasonality

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

Recent Accounting Pronouncements

See Note 1, “Organization, Basis of Presentation and Summary of Significant Accounting Policies” to our condensed consolidated financial statements included elsewhere in this report regarding the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We are exposed to market risks related to fluctuations in interest rates on our outstanding variable rate debt, which consists of our secured revolving credit facility and our acquisition, construction and development loans. As of June 30, 2015, approximately $81 million of our indebtedness was subject to variable interest rates. If interest rates on our variable debt increase or decrease by 0.1 percent, our interest expense will increase or decrease by approximately $81,000, respectively. We did not hedge our exposure to changes in interest rates with swaps, forward or option contracts on interest rates, or other types of derivative financial instruments during the three months ended June 30, 2015. However, we may choose to hedge our exposure to changes in interest rates with these or other types of instruments in the future if, for example, we incur significant amounts of additional variable rate debt. We have not entered into and currently do not hold derivatives for trading or speculative purposes.

Based on the current amount and terms of our variable rate debt, we do not believe that the future changes in interest rates will have a material adverse impact on our financial position, results of operations or liquidity.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15(d)- 15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently a party to any material litigation; however, the nature of our business exposes us to the risk of claims and litigation in the normal course of business. Other than routine litigation arising in the normal course of business, we are not presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us. Although we are not currently involved in any material litigation, legal proceedings, regardless of outcome, can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. See Note 10, “Commitments and Contingencies,” to our condensed consolidated financial statements included elsewhere in this report.

Item 1A. Risk Factors

There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description
31.1		Certification of Dustin L. Bogue, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of William J. La Herran, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Dustin L. Bogue, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of William J. La Herran, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Label Linkbase Document
101.LAB		XBRL Taxonomy Extension Presentation Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		UCP, Inc.


Date:	August 10, 2015	By:	/s/	William J. La Herran

		William J. La Herran
		Chief Financial Officer
		(Principal Financial Officer and Authorized Signatory)

UCP, Inc. - FORM 10-Q - August 10, 2015

Attached files

UCP, Inc. Reports