UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017 March 31, 2021or
☐ | |
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 001-36283
The New Home Company Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 27-0560089 | |
(State or Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
6730 N Scottsdale Rd.,Suite 450
Scottsdale, Arizona 85253
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code (949) 382-7800
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.01 par value | NWHM | New York Stock Exchange | ||
Securities registered pursuant to Section12(g) of the Act: None
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
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller reporting company | |||
☒ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Registrant’s shares of common stock outstanding as of October 25, 2017: 20,876,623April 28 , 2021: 18,043,699
FORM 10-Q INDEX Page Number PART I Financial Information Item 1. Item 2. Item 3. Item 4. Part II Other Information Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6.THE NEW HOME COMPANY INC.PageNumber
PART I – FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value amounts)
March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
| Cash and cash equivalents | $ | 114,815 | $ | 107,279 | ||||
| Restricted cash | 230 | 180 | ||||||
| Contracts and accounts receivable | 5,130 | 4,924 | ||||||
| Due from affiliates | 53 | 102 | ||||||
| Real estate inventories | 351,589 | 314,957 | ||||||
| Investment in unconsolidated joint ventures | 903 | 2,107 | ||||||
| Deferred tax asset, net | 15,057 | 15,447 | ||||||
| Other assets | 51,955 | 50,703 | ||||||
Total assets | $ | 539,732 | $ | 495,699 | ||||
Liabilities and equity | ||||||||
| Accounts payable | $ | 16,970 | $ | 17,182 | ||||
| Accrued expenses and other liabilities | 44,904 | 36,210 | ||||||
| Senior notes, net | 280,291 | 244,865 | ||||||
Total liabilities | 342,165 | 298,257 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Stockholders' equity: | ||||||||
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding | 0 | 0 | ||||||
| Common stock, $0.01 par value, 500,000,000 shares authorized, 18,080,002 and 18,122,345, shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 181 | 181 | ||||||
| Additional paid-in capital | 191,068 | 191,496 | ||||||
| Retained earnings | 6,318 | 5,765 | ||||||
Total stockholders' equity | 197,567 | 197,442 | ||||||
Total liabilities and stockholders' equity | $ | 539,732 | $ | 495,699 | ||||
| September 30, | December 31, | ||||||
| 2017 | 2016 | ||||||
| (Unaudited) | |||||||
| Assets | |||||||
| Cash and cash equivalents | $ | 62,443 | $ | 30,496 | |||
| Restricted cash | 213 | 585 | |||||
| Contracts and accounts receivable | 14,446 | 27,833 | |||||
| Due from affiliates | 554 | 1,138 | |||||
| Real estate inventories | 478,541 | 286,928 | |||||
| Investment in and advances to unconsolidated joint ventures | 56,814 | 50,857 | |||||
| Other assets | 25,096 | 21,299 | |||||
| Total assets | $ | 638,107 | $ | 419,136 | |||
| Liabilities and equity | |||||||
| Accounts payable | $ | 36,078 | $ | 33,094 | |||
| Accrued expenses and other liabilities | 30,684 | 23,418 | |||||
| Unsecured revolving credit facility | — | 118,000 | |||||
| Senior notes, net | 318,452 | — | |||||
| Total liabilities | 385,214 | 174,512 | |||||
| Commitments and contingencies (Note 10) | |||||||
| Equity: | |||||||
| Stockholders' equity: | |||||||
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding | — | — | |||||
| Common stock, $0.01 par value, 500,000,000 shares authorized, 20,876,623 and 20,712,166, shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 209 | 207 | |||||
| Additional paid-in capital | 198,757 | 197,161 | |||||
| Retained earnings | 53,836 | 47,155 | |||||
| Total stockholders' equity | 252,802 | 244,523 | |||||
| Noncontrolling interest in subsidiary | 91 | 101 | |||||
| Total equity | 252,893 | 244,624 | |||||
| Total liabilities and equity | $ | 638,107 | $ | 419,136 | |||
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, 2021 2020 Revenues: Cost of Sales: Gross Margin: Home sales Land sales Fee building Pretax income (loss) Net income (loss) Earnings (loss) per share: Weighted average shares outstanding: See accompanying notes to the unaudited condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Dollars in thousands) (Unaudited) Stockholders’ Equity Three Months Ended March 31 Number of Shares of Common Stock Common Stock Additional Paid-in Capital Retained Earnings Total Stockholders’ Equity Non-controlling Interest in Subsidiary Total Equity Balance at December 31, 2019 Net loss Stock-based compensation expense Balance at March 31, 2020 Balance at December 31, 2020 Net income Stock-based compensation expense Balance at March 31, 2021 See accompanying notes to the unaudited condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Three Months Ended March 31, 2021 2020 Operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Net changes in operating assets and liabilities: Net cash provided by operating activities Investing activities: Net cash used in investing activities Financing activities: Net cash provided by (used in) financing activities Net increase in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash – beginning of period Cash, cash equivalents and restricted cash – end of period See accompanying notes to the unaudited condensed consolidated financial statements. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Organization The New Home Company Inc. (the Based on our public float of $46.0 million at June 30, 2020, we are a smaller reporting company and are subject to reduced disclosure obligations in our periodic reports and proxy statements. Basis of Presentation The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts have been eliminated upon consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles Unless the context otherwise requires, the terms Use of Estimates The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying condensed consolidated financial statements and notes. Accordingly, actual results could differ materially from these estimates. Reclassifications No items in the prior year condensed consolidated financial statements have been reclassified. Segment Reporting Accounting Standards Codification Cash and Cash Equivalents We define cash and cash equivalents as cash on hand, demand deposits with financial institutions, and short term liquid investments with a maturity date of less than three months from the date of purchase. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Restricted Cash Restricted cash of $0.2 million and The table below shows the line items and amounts of cash and cash equivalents and restricted cash as reported within the Company's condensed consolidated balance sheets for each period shown that sum to the total of the same such amounts at the end of the periods shown in the accompanying condensed consolidated statements of cash flows. Three Months Ended March 31, 2021 2020 (Dollars in thousands) Cash and cash equivalents Restricted cash Total cash, cash equivalents, and restricted cash shown in the statements of cash flows Real Estate Inventories and Cost of Sales We capitalize pre-acquisition, land, development and other allocated costs, including interest, property taxes and indirect construction costs. Pre-acquisition costs, including Land, development and other common costs are typically allocated to real estate inventories using a methodology that approximates the relative-sales-value method. Home construction costs per production phase are recorded using the specific identification method. Cost of sales for homes closed includes the estimated total construction costs of each home at completion and an allocation of all applicable land acquisition, land development and related common costs (both incurred and estimated to be incurred) based upon the relative-sales-value of the home within each project. Changes in estimated development and common costs are allocated prospectively to remaining homes in the project. In accordance with If there are indicators of impairment, we perform a detailed budget and cash flow review of the applicable real estate inventories to determine whether the estimated When estimating undiscounted Many assumptions are interdependent and a change in one may require a corresponding change to other assumptions. For example, increasing or decreasing sales absorption rates has a direct impact on the estimated per unit sales price of a home, and the level of time sensitive costs (such as indirect construction, overhead and carrying THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS If a real estate Capitalization of Interest We follow the practice of capitalizing interest to real estate inventories during the period of development and to investments in unconsolidated joint ventures, when applicable, in accordance with ASC 835, Business Combinations We account for business combinations in accordance with ASC Topic 805,Business Combinations ("ASC 805"), if the assets acquired and liabilities assumed constitute a business. For acquired companies constituting a business, we recognize the identifiable assets acquired and liabilities assumed at their acquisition-date fair values and recognize any excess of total consideration paid over the fair value of the identifiable assets as goodwill. On February 26, 2021, TNHC Colorado Inc., a wholly owned subsidiary of the Company, entered into and closed a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Christina D. Presley and CDP Holdings, LLC, as sellers pursuant to which we acquired all the membership interests of the Epic Companies, (as defined in the Purchase Agreement), a residential homebuilder based in Denver, Colorado known as Epic Homes (the “Epic Acquisition”). The Epic Acquisition purchase price was approximately $8.5 million, $6.9 million of which was paid at closing with the balance to be paid in future installments. The purchase price was funded with cash on hand and is subject to adjustment based on net book value of the Epic Companies’ assets on the date of closing and certain other obligations. This transaction was accounted for as a business combination in accordance with ASC 805. For further details, see Note 4, Real Estate Inventories. Following the consummation of the Epic Acquisition, the Company repaid approximately $23.8 million of the Epic Companies’ third-party indebtedness. Additionally, the founder and owner of the Epic Companies became an employee of the Company and runs the Colorado homebuilding operations. Goodwill In accordance with ASC Topic 350,Intangibles-Goodwill and Other (“ASC 350”), we evaluate goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances between annual tests indicate that it is more likely than not that the asset is impaired. The Company's goodwill impairment analysis takes place annually on September 30 and consists of a qualitative assessment to determine whether it is more likely than not its fair value is less than its carrying amount. If the analysis indicates that the fair value of goodwill is less than its carrying value, an impairment loss equal to the difference between the fair value and carrying value (but not to exceed the carrying value) is recognized. In conjunction with the Company's Epic Acquisition during the 2021first quarter, $2.0 million of goodwill was recorded within the Colorado homebuilding reporting segment and is included in other assets in the accompanying condensed consolidated balance sheets at March 31, 2021. At March 31, 2021, there is 0 indication that the goodwill asset is impaired and we are not aware of any significant indicators of impairment that exist for our goodwill that would require additional analysis. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Revenue Recognition The Company recognizes revenue in accordance with ASC 606,Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To do this, the Company performs the following five steps as outlined in ASC 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. Home Sales and Profit Recognition In accordance with ASC Land Sales and Profit Recognition In accordance with ASC 606, land sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. The performance obligations in land sales contracts are typically satisfied at the point in time consideration and title is transferred through escrow at closing. Total revenue is typically recognized simultaneously with transfer of title to the customer. In instances where material performance obligations may exist after the closing date, a portion of the price is allocated to each performance obligation with revenue recognized as such obligations are completed. Variable consideration, such as profit participation, may be included within the land sales transaction price based on the terms of a contract. The Company includes the estimated amount of variable consideration to which it will be entitled only to the extent it is probable that a significant reversal in the amount of cumulative revenue will not occur when any uncertainty associated with the variable consideration is subsequently resolved. Fee Building The Company enters into fee building agreements to provide services whereby it builds homes on behalf of The Company also The Company’s fee THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Variable Interest Entities The Company accounts for variable interest entities in accordance with ASC 810, Once we consider the sufficiency of equity and voting rights of each legal entity, we then evaluate the characteristics of the equity holders' interests, as a group, to see if they qualify as controlling financial interests. Our real estate joint ventures consist of limited partnerships and limited liability companies. For entities structured as limited partnerships or limited liability companies, our evaluation of whether the equity holders (equity partners other than us in each our joint ventures) lack the characteristics of a controlling financial interest includes the evaluation of whether the limited partners or non-managing members (the • Participating rights - provide the non-controlling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance. • Kick-out rights - allow the non-controlling equity holders to remove the general partner or managing member without cause. If we conclude that any of the three characteristics of a VIE are met, including if equity holders lack the characteristics of a controlling financial interest because they lack both substantive participating rights and substantive kick-out rights, we conclude that the entity is a VIE and evaluate it for consolidation under the variable interest model. If an entity is deemed to be a VIE pursuant to ASC 810, the enterprise that has both (i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb the expected losses of the entity or right to receive benefits from the entity that could be potentially significant to the VIE is considered the primary beneficiary and must consolidate the VIE. Under ASC 810, a As of Non-controlling Interest During 2013, the Company entered into a joint venture agreement with a Investments in We use the equity method to account for investments in homebuilding and land development joint ventures As of THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Under the equity method, we recognize our proportionate share of earnings and losses generated by the joint venture upon the delivery of lots or homes to third parties. Our proportionate share of intra-entity profits and losses are eliminated until the related asset has been sold by the unconsolidated joint venture to third parties. We classify cash distributions received from equity method investees using the cumulative earnings approach consistent with We review real estate inventory held by our unconsolidated joint ventures for impairment on a quarterly basis, consistent with how we review our real estate Selling and Marketing Expense Costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and Warranty and We offer warranties on our homes that generally cover various defects in workmanship or materials, or structural construction defects for one year. In addition, we While our subcontractors who perform our homebuilding work generally provide us with an indemnity for claims relating to their workmanship and materials, we also purchase general liability insurance that covers development and construction activity at each of our communities. Our subcontractors are usually covered by these programs through an owner-controlled insurance program, or "OCIP." Consultants such as engineers and architects are generally not covered by the OCIP but are required to maintain their own insurance. In general, we maintain insurance, subject to deductibles and self-insured retentions, to protect us against various risks associated with our activities, including, among others, general liability, "all-risk" property, construction defects, workers’ compensation, automobile, and employee fidelity. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish a separate reserve for warranty and for known and incurred but not reported (“IBNR”) construction defect claims based on our historical claim and expense data. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in our condensed consolidated balance sheets statements without consideration of insurance recoveries. Expected recoveries from insurance carriers are presented as warranty insurance receivables and insurance receivables within other assets in our condensed consolidated balance sheets and are recorded based on actual insurance claims and amounts determined using our construction defect claim and warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Contracts and Accounts Receivable Contracts and accounts receivable primarily represent the fees earned, but not collected, and reimbursable project costs incurred in connection with fee building agreements. The Company periodically evaluates the collectability of its contracts receivable, and, if it is determined that a receivable might not be fully collectible, an allowance is recorded for the amount deemed uncollectible. This allowance for doubtful accounts is estimated based on management’s evaluation of the contracts involved and the financial condition of its customers. Factors considered in such evaluations include, but are not limited to: (i) customer type; (ii) historical contract performance; (iii) historical collection and delinquency trends; (iv) customer credit worthiness; and (v) general economic conditions. In addition to contracts receivable, escrow receivables are included in contracts and accounts receivable in the accompanying condensed consolidated balance sheets. As of Property, Equipment and Property, equipment and Income Taxes Income taxes are accounted for in accordance with ASC 740, Each quarter we assess our deferred tax ASC 740 defines the methodology for recognizing the benefits of uncertain tax return positions as well as guidance regarding the measurement of the resulting tax benefits. These provisions require an enterprise to recognize the financial statement effects of a tax position when it is more likely than not, The Company classifies any interest and penalties related to income taxes assessed as part of the provision/benefit for income taxes. As of March 31, 2021, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation We account for share-based awards in accordance with ASC 718, Share Repurchase and Retirement When shares are retired, the Company’s policy is to allocate the excess of the repurchase price over the par value of shares acquired to both retained earnings and additional paid-in capital. The portion allocated to additional paid-in capital is determined by applying a percentage, which is determined by dividing the number of shares to be retired by the number of shares issued, to the balance of additional paid-in capital as of the retirement date. The residual, if any, is allocated to retained earnings as of the retirement date. During the three months ended March 31, 2021, the Company repurchased and retired 141,823 shares of its common stock at an aggregate purchase price of $0.8 million. During the three months ended March 31, 2020, the Company repurchased and retired 1,233,883 shares of its common stock at an aggregate purchase price of $2.2 million. The purchases were made under previously announced stock repurchase programs and the Company had remaining purchase authorization of $8.7 million as of March 31, 2021. Repurchases from January 1, 2021 through February 16, 2021, March 11, 2021 through March 31, 2021 and March 20, 2020 through March 31, 2020 were made pursuant to the Company's Rule 10b5-1 plans. All repurchased shares were returned to the status of authorized but unissued. Tax Benefit Preservation Plan On Dividends NaN dividends were paid on our common stock during the three months ended March 31, 2021 and 2020. We currently intend to retain our future earnings to finance the development and expansion of our business and, therefore, do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination to pay dividends will be Recently Issued Accounting Standards In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13,Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In In In 2. Computation of Earnings (Loss) Per Share The following table sets forth the components used in the computation of basic and diluted Three Months Ended March 31, 2021 2020 (Dollars in thousands, except per share amounts) Numerator: Net income (loss) Denominator: Basic weighted-average shares outstanding Effect of dilutive shares: Diluted weighted-average shares outstanding THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. Contracts and Accounts Receivable Contracts and accounts receivable consist of the following: March 31, December 31, 2021 2020 (Dollars in thousands) Contracts receivable: Contracts receivable Contracts receivable: Accounts receivable: Contracts and accounts receivable Billed contracts receivable represent amounts billed to customers that have yet to be collected. Unbilled contracts receivable represents the contract revenue recognized but not yet 4. Real Estate Inventories Real estate inventories are summarized as follows: March 31, December 31, 2021 2020 (Dollars in thousands) Deposits and pre-acquisition costs Land held and land under development Homes completed or under construction Model homes All of our deposits and pre-acquisition costs are Land held and land under development includes land costs and costs incurred during site development such as development, indirects, and permits. Homes completed or under construction and model homes include all costs associated with home construction, including allocated land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets) THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the three months ended March 31, 2021, the company completed the Epic Acquisition. The purchase price was approximately $8.5 million, $6.9 million of which was paid at closing with the balance to be paid in future installments, and was funded with cash on hand. This transaction was accounted for as a business combination in accordance with ASC 805. Under ASC 805, the Company recorded the acquired assets and assumed liabilities at their estimated fair values with the excess allocated to goodwill. We recorded approximately $37.0 million of real estate inventories owned, $2.0 million of goodwill, approximately $1.2 million of other assets, $24.1 million of notes payable, and approximately $7.6 million of accounts payable and other accrued liabilities. The Company determined the fair value of real estate inventories on an individual project level basis using a combination of a land residual analysis and a discounted cash flow analysis. These methods are significantly impacted by estimates relating to expected selling prices, anticipated sales pace, cost to complete estimates, and the highest and best use of projects prior to acquisition. These estimates were developed and used at the individual project level, and may vary significantly between projects. Other assets, accounts receivable, accounts payable, notes payable and accrued expenses and other liabilities were stated at historical value due to the short-term nature of these items. Goodwill represents the value the Company expects to achieve through the operational synergies and the expansion of the Company into the Colorado market. It also represents the value we expect to receive through the use of the "Epic Homes" trade name which the Company will continue to use in the Colorado market. The Company estimates that the entire $2.0 million of goodwill resulting from the Epic Acquisition will be tax deductible. Goodwill is included in the Colorado homebuilding reporting segment in Note 15. In addition, we incurred approximately $1.0 million of transaction costs In accordance with ASC 360, During the 2020first quarter, the Company terminated its option agreement for a luxury condominium project in THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. Capitalized Interest Interest is capitalized to inventory and investment in unconsolidated joint ventures during development and other qualifying activities. Interest capitalized as a cost of inventory is included in cost of sales as related homes and land parcels are closed. Interest capitalized to investment in unconsolidated joint ventures is amortized to equity in net income (loss) of unconsolidated joint ventures as related joint venture homes or lots Three Months Ended March 31, 2021 2020 (Dollars in thousands) Interest expensed Capitalized interest in beginning inventory Interest capitalized as a cost of inventory Previously capitalized interest included in project abandonment costs Capitalized interest in ending inventory Capitalized interest in beginning investment in unconsolidated joint ventures Previously capitalized interest included in equity in net income (loss) of unconsolidated joint ventures Capitalized interest in ending investment in unconsolidated joint ventures Total capitalized interest in ending inventory and investments in unconsolidated joint ventures For the three months ended March 31, 2020, the Company expensed $0.8 million in interest previously capitalized due to the abandonment of the future phases of one of its existing homebuilding communities. For more information, please refer to Note 4. For the three months ended March 31, 2020, the Company expensed $0.4 million in interest previously capitalized to investments in unconsolidated joint ventures as the result of an other-than-temporary impairment to its investment in one joint venture. For more information, please refer to Note 6. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. Investments in As of March 31, December 31, 2021 2020 (Dollars in thousands) Total assets Total liabilities Total equity Total liabilities and equity (1) Balance represents the Company's interest, as reflected in the financial records of the respective joint ventures. The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method Three Months Ended March 31, 2021 2020 (Dollars in thousands) Net income of unconsolidated joint ventures Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company reviews its investments in unconsolidated joint ventures for other-than-temporary declines in value. To the extent we deem any declines in value of our investment in unconsolidated joint ventures to be other-than-temporary, we impair our investment accordingly. For the three As a smaller reporting company, the Company is subject to the provisions of Rule 8-03(b)(3) of Regulation S-X which requires the disclosure of certain financial information for equity investees that constitute 20% or more of the Company's consolidated net income (loss). For the three months ended March 31, 2020, the loss allocation from one of the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidated net loss. For the three months ended March 31, 2021, the profit allocation from one of the Company's unconsolidated joint ventures accounted for under the equity method exceeded 20% of the Company's consolidated net income. The table below presents select combined financial information for these two joint ventures for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Revenues Cost of home and land sales Gross margin Expenses Net income Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations (1) (1) Balance represents equity in net income (loss) of unconsolidated joint ventures included in the statements of operations related to the Company's investment in the unconsolidated joint ventures. The balance may differ from the amount of profit or loss allocated to the Company as reflected in the respective joint venture's financial records primarily due to basis differences such as other-than-temporary impairment charges, interest capitalized to the Company's investment in joint ventures, and/or profit deferral from lot sales from the joint ventures to the Company. In the above table, the Company's $2.2 million loss included in equity in net income (loss) of unconsolidated joint ventures for the three months ended March 31, 2020 included a $2.3 million other-than-temporary impairment charge related to its Bedford joint venture discussed above. For the three months ended March 31, 2021 and 2020, the Company earned THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. Other Assets Other assets consist of the following: March 31, December 31, 2021 2020 (Dollars in thousands) Capitalized selling and marketing costs, net(1) Prepaid income taxes(2) Insurance receivable(3) Warranty insurance receivable(4) Prepaid expenses Right-of-use lease assets Goodwill Other (1) Capitalized selling and marketing costs includes costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model furnishings, and also includes model landscaping costs. The Company (3) At December 31, 2020, the Company recorded insurance receivables of $4.8 million which was related to expected insurance reimbursements for $1.0 million in litigation reserves related to one claim and $3.8 million of IBNR litigation reserves. During the three months ended March 31, 2021, the claim-specific litigation reserve was increased by $0.4 million, all of which is expected to be reimbursed by insurance resulting in an increase of the same amount to insurance receivables. For more information, please refer to Note 8. (4) During the three months ended March 31, 2021, the Company adjusted its warranty insurance receivable upward by $0.2 million to true-up the receivable to its estimate of qualifying reimbursable expenditures as a result of an increase of the same amount to its warranty reserve. Also during the 2021first quarter, the Company received $0.1 million in insurance reimbursements for warranty claims. 8. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: March 31, December 31, 2021 2020 (Dollars in thousands) Warranty accrual (1) Litigation reserves (2) Accrued interest Accrued compensation and benefits Completion reserve Customer deposits Lease liabilities Other accrued expenses (1) Included in the amount at March 31, 2021 and December 31, 2020 is approximately $2.6 million and $2.5 million, respectively, of warranty liabilities estimated to be recovered by our insurance policies. (2) THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS We maintain general liability insurance designed to protect us against a portion of our risk of loss from construction-related warranty and construction defect claims. Our master general liability policies which cover most of our projects allow for our warranty spend to erode our self-insured retention requirements. We establish and track separately our warranty accrual and litigation reserves for both known and IBNR construction defect claims. Our warranty accrual and litigation reserves for construction defect claims are presented on a gross basis within accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets without consideration of insurance recoveries. Expected recoveries from insurance carriers are tracked separately between warranty insurance receivables and insurance receivables related to litigated claims and are presented within other assets in the accompanying condensed consolidated balance sheets. Our warranty accrual and related estimated insurance recoveries are based on historical warranty claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our warranty accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Our litigation reserves for both known and IBNR future construction defect claims based on historical claim and expense data, and expected recoveries from insurance carriers are recorded based on actual insurance claims and amounts determined using our construction defect claim accrual estimates, our insurance policy coverage limits for the applicable policy years and historical recovery rates. Because of the inherent uncertainty and variability in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated. Changes in our warranty accrual are detailed in the table set forth below: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Ending warranty accrual for homebuilding projects Ending warranty accrual for fee building projects Total ending warranty accrual (1) THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 9. Senior Notes and Unsecured Revolving Credit Facility Indebtedness consisted of the following: March 31, December 31, 2021 2020 (Dollars in thousands) 7.25% Senior Notes due 2025, net Unsecured revolving credit facility Total Indebtedness 2022 Notes On March 17,2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2022 (the "Existing Notes") During the three months ended March 31, 2020, the Company repurchased and retired approximately $4.8 million in face value of the 2022 Notes for a cash payment of approximately $4.8 million. The Company recognized a loss on early extinguishment of debt of $0.1 million and wrote off approximately $46,000 of unamortized discount, premium and debt issuance costs associated with the 2022 Notes retired. As discussed below, the 2022 Notes were redeemed in full on November 12, 2020. 2025 Notes On October 28, 2020, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2025 (the “Original 2025 Notes”), in a private placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act of 1933 (the "Securities Act") and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 100% of their face amount, which represents a yield to maturity of 7.25%. Net proceeds from the THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS sell assets, incur liens, create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets, enter into transactions with affiliates, create unrestricted subsidiaries, and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of exceptions and qualifications as set forth in the Indenture. On or after October 15, 2022, the Company may redeem all or a portion of the 2025 Notes upon not less than 15 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of the principal amount on the redemption date) set forth below plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the 12-month period, as applicable, commencing on October 15 of the years as set forth below: In addition, any time prior to October 15, 2022, the Company may, at its option on one or more occasions, redeem the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2025 Notes (including any additional notes that may be issued in the future under the Indenture) issued prior to such date at a redemption price (expressed as a percentage of principal amount) of 107.25%, plus accrued and unpaid interest, if any, to the redemption date, with an amount equal to the net cash proceeds from one or more equity offerings by the Company. If the Company experiences a change of control triggering event (as described in the Indenture), holders of the 2025 Notes will have the right to require the Company to repurchase all or a portion of the 2025 Notes at 101% of their principal amount thereof on the date of repurchase, plus accrued and unpaid interest, if any, to the date of repurchase. The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal of and accrued interest on such 2025 Notes to be declared due and payable. In addition, if the 2025 Notes are assigned an investment grade rating by certain rating agencies and no default or event of default has occurred or is continuing, certain covenants related to the 2025 Notes would be suspended. If the rating on the 2025 Notes should subsequently decline to below investment grade, the suspended covenants would be reinstated. The 2025 Notes and the guarantees are the Company’s and the Guarantor’s senior unsecured obligations. The 2025 Notes and the guarantees rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future unsecured senior debt, including borrowings under the Company's Credit Facility, and senior in right of payment to all of the Company’s and the Guarantors’ existing and future subordinated debt. The 2025 Notes and the guarantees will be effectively subordinated to any of the Company’s and the Guarantors’ existing and future secured debt. The 2025 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's The New Home Company Inc. operates as a holding company and all of its homebuilding construction, fee building, development and sales activities are conducted through its subsidiaries. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Credit On Amounts outstanding under the Credit Agreement accrue interest at a rate The Credit Facility also provides for a $30.0 million sublimit for letters of credit, subject to conditions set forth in the Credit Agreement. As of March 31, 2021 and December 31, 2020 the Company had 0 outstanding letters of credit issued under the Credit Facility. Debt issuance costs for the Credit Facility, which totaled $1.3 million and $1.5 million as of March 31, 2021 and December 31, 2020, respectively, are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement. Other Notes Payable On April 15, 2020, TNHC Realty and Construction, Inc., a wholly-owned operating subsidiary of the Company, received approval and funding pursuant to a promissory note evidencing an unsecured loan in the amount of approximately $7.0 million (the "Loan") under the Paycheck Protection Program (the "PPP"). The PPP was established under the CARES Act and is administered by the U.S. Small Business Administration ("SBA"). The Company intended to use the Loan for qualifying expenses in accordance with the terms of the CARES Act. On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the In conjunction with the Epic Acquisition during the 2021first quarter, the Company recorded notes payable of $24.1 million related to Epic Companies’ third-party indebtedness. The Company immediately repaid $23.8 million of this amount following the completion of the Epic Acquisition transaction during February 2021. One of the entities acquired in the Epic Acquisition had a PPP loan that was outstanding as of the closing of the Epic Acquisition. The majority of the $0.3 million PPP loan was forgiven during the 2021first quarter and NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 10. Fair Value Disclosures ASC 820 • 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 Fair Value of Financial Instruments The following table presents an estimated fair value of the Company's March 31, 2021 December 31, 2020 Carrying Amount Fair Value Carrying Amount Fair Value (Dollars in thousands) 7.25% Senior Notes due 2025, net (1) (1) The carrying value for the 2025 Notes, as presented at March 31, 2021, is net of unamortized premium of $1.0 million, and unamortized debt issuance costs of $5.7 million. The carrying value for the 2025 Notes, as presented at December 31, 2020, is net of unamortized debt issuance costs of $5.1 million. The unamortized unamortized premium and debt issuance costs are not factored into the estimated fair value. The Company considers the carrying value of cash and cash equivalents, restricted cash, contracts and accounts receivable, accounts payable, and accrued expenses and other liabilities to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due from affiliates is not determinable due to the related party nature of such amounts. Non-Recurring Fair Value Adjustments Nonfinancial assets and liabilities include items such as real estate inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 11. Commitments and Contingencies From time-to-time, the Company is involved in various legal matters arising in the ordinary course of As an owner and developer of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of The Company accounts for contracts deemed to contain a lease under ASC 842,Leases. At the THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three months ended March 31, 2021 and 2020, lease costs and cash flow information for leases with terms in excess of one year was as follows: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Lease cost: Net lease cost (1) Other Information: (1) Amount does not include the cost of short-term leases with terms of less than one year which totaled approximately $0 and $0.1 million for the three months ended March 31, 2021and 2020, respectively, or the benefit from a sublease agreement of one of our office spaces which totaled approximately $61,000 and $59,000 for the three months ended March 31, 2021 and 2020, respectively. Future lease payments under our operating leases are as follows (dollars in thousands): Total lease payments(1) (1) Lease payments include options to extend lease terms that are reasonably certain of being exercised. (2) Our leases do not provide a readily determinable implicit rate. Therefore, we utilized our incremental borrowing rate for such leases to determine the present value of lease payments at the lease commencement date. There were no legally binding minimum lease payments for leases signed but not yet commenced at March 31, 2021 and December 31,2020. (3) The weighted average remaining lease term and weighted average incremental borrowing rate used in calculating our lease liabilities were 3.9years and 4.7%, respectively at March 31, 2021. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 12. Related Party Transactions During the three The Company has entered into agreements with its unconsolidated joint ventures to provide management services related to the underlying projects (collectively referred to as the One member of the Company's board of directors beneficially owns more than 10% of the Company's outstanding common stock through an affiliated entity, IHP Capital Partners VI, LLC ("IHP"), and is also affiliated with In its ordinary course of business, the Company enters into agreements to purchase lots from unconsolidated land development joint ventures of which it is a member. In accordance with ASC The Company’s land purchase agreement with On June 18, 2015, the Company entered into an agreement that effectively transitioned Joseph Davis' role within the Company from that of Chief Investment Officer to that of a non-employee consultant to the Company effective June 26, 2015 On THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During In the first quarter 2018, the Company entered into an option agreement to purchase lots in phased takedowns with its Bedford joint venture with profit participation and master marketing fees due to seller as outlined in the contract. At the time of the initial agreement in 2018, the Bedford joint venture was affiliated with The Company sold its interest in the Bedford joint venture to its partner during the 2020third quarter. Pursuant to the agreement, the purchase price was $5.1 million for the sale of the Company's partnership interest. During the three months ended March 31, 2020, the Company recorded a $2.3 million other-than-temporary impairment charge to its investment in the Bedford joint venture reflecting the expected sale of its joint venture investment for less than its current carrying value. The sale agreement, among other things, allowed for a continuation of the Company's option to purchase 13. Stock-Based Compensation The Company's 2014 Long-Term Incentive Plan (the The number of shares of our common stock At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and stock options, restricted stock unit awards and performance share unit awards under the 2016 Incentive Plan. As of THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company’s common stock option activity as of and for the Three Months Ended March 31, 2021 2020 Number of Shares Weighted-Average Exercise Price per Share Number of Shares Weighted-Average Exercise Price per Share Outstanding Stock Option Activity Outstanding, beginning of period Granted Exercised Forfeited Outstanding, end of period Exercisable, end of period A summary of the Company’s restricted stock unit activity as of and for the Three Months Ended March 31, 2021 2020 Number of Shares Weighted-Average Grant-Date Fair Value per Share Number of Shares Weighted-Average Grant-Date Fair Value per Share Restricted Stock Unit Activity Outstanding, beginning of period Granted Vested Forfeited Outstanding, end of period THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The expense related to the Company's stock-based compensation programs, included in general and administrative expense in the accompanying condensed consolidated statements of operations, was as follows: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Expense related to: Stock options Restricted stock units The following table presents details of the assumptions used to calculate the weighted-average grant date fair value of common stock options granted by the Company in each period: Three Months Ended March 31, 2021 2020 Expected term (in years) Expected volatility Risk-free interest rate Expected dividends Weighted-average grant date fair value per share We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards are valued based on the closing price of our common stock on the date of grant. Compensation expense for restricted stock unit awards is recognized using the straight-line method over the requisite service period. Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs. At THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 14. Income Taxes For the three months ended March 31, 2021, the Company recorded an income tax provision of $0.5 million which included a $0.3 million discrete provision. The Company's effective tax rate for the three months ended March 31, 2021 differs from the federal statutory rate primarily due to the discrete provision related to estimated blended state tax rate updates and stock compensation, as well as state income tax rates and tax credits for energy efficient homes. For the three months ended March 31, 2020, the Company recorded an income tax benefit of $9.9 million. The Company's effective tax rate for the three months ended March 31, 2020 differs from the federal statutory rate due to discrete items, state income tax rates and tax credits for energy efficient homes. The 2020first quarter discrete items totaled an $8.1 million benefit, $5.8 million of which related to the $14.0 million project abandonment costs recorded during the three months ended March 31, 2020 and a $2.1 million benefit related to the CARES Act signed into law on March 27, 2020. For more information on the abandonment costs, please refer to Note 4. The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. The Company recognized a $2.1 million discrete benefit related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate which are now available to be carried back to tax years with a 35% federal statutory rate. The components of our deferred tax asset, net are as follows: March 31, December 31, 2021 2020 (Dollars in thousands) Deferred tax asset, net 15. Segment Information The Company’s operations are Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached Corporate unallocated assets consists primarily of cash, prepaid taxes and our deferred tax asset. For cash management efficiency and yield maximization reasons, cash is held at the corporate level. All cash is held for the benefit of the subsidiaries that comprise the homebuilding and fee building segments, and all operating cash flow is generated by these subsidiaries. The majority of our prepaid taxes and deferred tax asset are recorded at the corporate level as The New Home Company Inc. is the tax-filing entity for the subsidiaries structured as pass-through entities. Taxable income or loss and the resulting payment of income taxes is driven by the activities of the Company's subsidiaries. All other corporate assets comprise less than 3% of the Company's consolidated total assets. The assets of our fee building segment primarily consist of cash, restricted cash and contracts and accounts receivable. THE NEW HOME COMPANY INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The reportable segments follow the same accounting policies as our consolidated financial statements described in Note 1. Operational 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 was as follows: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Homebuilding revenues: California home sales California land sales Arizona home sales Total homebuilding revenues Fee building revenues, including management fees Total revenues Homebuilding pretax income (loss): California Arizona Total homebuilding pretax income (loss) Fee building pretax income, including management fees Total pretax income (loss) March 31, December 31, 2021 2020 (Dollars in thousands) Homebuilding assets: California Arizona Total homebuilding assets Fee building assets Corporate unallocated assets Total assets (1) Includes $1.0 million of transaction costs, $0.8 million of which was tail insurance premiums and $0.2 million in professional fees, related to the acquisition of Epic Homes that were expensed currently in the period of acquisition. In addition, the Colorado pretax loss includes $0.3 million in additional cost of sales related to purchase accounting adjustments. 16. Supplemental Disclosure of Cash Flow Information The following table presents certain supplemental cash flow information: Three Months Ended March 31, 2021 2020 (Dollars in thousands) Supplemental disclosures of cash flow information Interest paid, net of amounts capitalized Income taxes paid Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 a global pandemic. We continue to • Risks related to our business, including among other things: ◦ our geographic concentration primarily in ◦ shortages of or increased prices for labor, land or raw materials used in housing construction; ◦ increases in our cancellation rate; ◦ a large proportion of our fee building revenue being dependent upon one ◦ increased costs, delays in land development or home construction and reduced consumer demand resulting from adverse weather conditions ◦ because of the seasonal nature of our business, our quarterly operating results fluctuate; ◦ we may be unable to obtain suitable bonding for the development of our housing projects; ◦ inflation could adversely affect our business and financial results; ◦ a major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage; ◦ negative publicity or poor relations with the residents of our communities could negatively impact sales, which could cause our revenues or results of operations to decline; • Risks related to laws and regulations, including among other things: ◦ changes in tax laws can increase the after-tax cost of owning a home, and further tax law changes or government fees could adversely affect demand for the homes we build, increase our costs, or negatively affect our operating results; ◦ new and existing laws and regulations, including environmental laws and regulations, or other governmental actions may increase our expenses, limit the number of homes that we can build or delay the completion of our projects or otherwise negatively impact our operations; ◦ changes in global or regional climate conditions and legislation relating to energy and climate change could increase our costs to construct homes; • Risks related to financing and indebtedness, including among other things: ◦ difficulty in obtaining sufficient capital could prevent us from acquiring land for our developments or ◦ our level of indebtedness may adversely affect our financial position and ◦ the illiquid nature of ◦ our ◦ potential future downgrades of our ◦ interest expense on debt we incur may limit our cash available to fund our growth strategies; ◦ we may be unable to repurchase the 2025 Notes upon a change of control as required by the Indenture; • Risks related to our organization and structure, including ◦ our ◦ the potential costly impact termination of employment agreements with members of our management that may prevent a change in control of the Company; ◦ our charter and bylaws could prevent a third party from acquiring us or limit the price that investors might be willing to pay for shares of our common stock; • Risks related to ownership of our common stock, including among other things: ◦ the price of our common stock is subject to volatility and our trading volume is relatively low; ◦ if securities or industry analysts do not publish, or cease publishing, research or reports about us, our business or our market, or if they change their recommendations regarding our common stock adversely, our stock price and trading volume could decline; ◦ we do not intend to pay dividends on our common stock for the foreseeable future; ◦ certain stockholders have rights to cause our Company to undertake securities offerings; ◦ our senior notes rank senior to our common stock upon bankruptcy or ◦ certain large stockholders own a significant percentage of our shares and exert significant influence over us; and ◦ there is no assurance that the existence of a stock repurchase plan will enhance shareholder value. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to The forward-looking statements in this quarterly report on Form 10-Q speak only as of the date of this quarterly report on Form 10-Q, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. This quarterly report on Form 10-Q includes certain non-GAAP measures, including Adjusted EBITDA, Adjusted EBITDA margin percentage, ratio of Adjusted EBITDA to total interest incurred, adjusted net income (loss), adjusted net income (loss) per diluted share, net debt, ratio of net debt-to-capital, general and administrative costs excluding acquisition transaction costs, general and administrative costs excluding acquisition transaction costs as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding acquisition transaction costs, selling, marketing and general and administrative costs excluding acquisition transaction costs as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before Three Months Ended March 31, 2021 2020 (Dollars in thousands) Revenues: Home sales Land sales Fee building, including management fees Cost of Sales: Home sales Land sales Fee building Gross Margin: Home sales Land sales Fee building Home sales gross margin Land sales gross margin Fee building gross margin Selling and marketing expenses General and administrative expenses Equity in net income (loss) of unconsolidated joint ventures Interest expense Project abandonment costs Loss on early extinguishment of debt Other income (expense), net Pretax income (loss) (Provision) benefit for income taxes Net income (loss) Earnings (loss) per share: Basic Diluted Interest incurred Adjusted EBITDA(1) Adjusted EBITDA margin percentage(1) LTM(2) Ended March 31, 2021 2020 Interest incurred Adjusted EBITDA(1) Ratio of Adjusted EBITDA to total interest incurred (1) 1.7x 1.5x (1) Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred are non-GAAP measures. Adjusted EBITDA margin percentage is calculated as a percentage of total revenue. Management believes that Adjusted EBITDA LTM(2) Ended Three Months Ended March 31, March 31, 2021 2020 2021 2020 (Dollars in thousands) Add: Less: Total Revenue Interest incurred Ratio of Adjusted LTM(2) EBITDA to total interest incurred 1.7x 1.5x (2) "LTM" indicates amounts for the trailing 12 months. Overview During the 2021 first quarter, the Company made significant progress with growing its backlog, improving its gross margins and expanding into a new market through its acquisition of Colorado based homebuilder, Epic Homes. In connection with the acquisition, the Company assumed backlog of 102 homes valued at approximately $100 million as of the closing date on February 26, 2021, and assumed control of 294 owned and controlled lots, including three active communities and one soon-to-be-opened community. The Company started the year on a strong note as robust housing demand Total revenues for the The The Company has been actively evaluating new land opportunities to rebuild its * Three Months Ended March 31, 2021 2020 (Dollars in thousands, except per share amounts) Net income (loss) Acquisition transaction costs, net of tax Abandoned project costs and joint venture impairment, net of tax Noncash deferred tax asset remeasurement Adjusted net income (loss) Earnings (loss) per share: Basic Diluted Adjusted earnings (loss) per share: Basic Diluted Weighted average shares outstanding for adjusted earnings (loss) per share: Basic Diluted Abandoned projects costs related to Arizona luxury condominium community Joint venture impairment related to joint venture exit Acquisition transaction costs Less: Related tax benefit Acquisition transaction costs, abandoned project costs and joint venture impairment, net of tax Market Conditions and COVID-19 Impact While the broader economic recovery following the nationwide COVID-19 related shutdown is ongoing, our business generally was only impacted from mid-March of 2020 through mid-second quarter 2020 when economic conditions in our markets started to improve. The Company has recently experienced very strong demand for its homes. This resurgence in demand began in the back half of the 2020 second quarter, following a significant drop in sales at the end of the 2020 first quarter through mid-second quarter 2020 as a result of the initial impact of the COVID-19 pandemic. The demand for new and existing homes is dependent on a variety of demographic and economic factors, including job and wage growth, household formation, consumer confidence, mortgage financing, interest rates, stability and growth in the equity markets, and overall housing affordability. We attribute the recent higher levels of demand to a number of factors, including low interest rates, a continued undersupply of homes, consumers’ increased focus on the importance of home, and a general desire for more indoor and outdoor space. We believe these factors will continue to support demand in the near term but recognize our year-over-year order improvement is not necessarily indicative of future results due to various factors including seasonality, anticipated community openings and closeouts, and continued uncertainty surrounding the economic and housing market environments due to the impacts of the ongoing COVID-19 pandemic and the related COVID-19 control responses. The economy in the United States has continued to improve in the 2021 first quarter with millions of American receiving COVID-19 vaccines and states and municipalities increasingly reopening. However, this favorable outlook could be affected materially by adverse developments, if any, related to the COVID-19 pandemic, including new or more restrictive public health requirements recommended or imposed by federal, state and local authorities. Until the COVID-19 pandemic has been resolved as a public health crisis, it retains the potential to cause further and more severe disruption of global and national economies, cause political uncertainty and civil unrest, and diminish consumer confidence, all of which could impact the U.S. housing market and our business, including our net orders, backlog and revenues. In addition, we are continuing to see building material cost pressures, particularly with respect to lumber, that could negatively impact our margins in future periods. Despite these challenges, and other factors, which may individually or in combination slow or reverse the current housing recovery from the COVID-19 pandemic-induced disruptions, we believe we are well-positioned to operate effectively through the present environment. Results of Operations Net New Home Orders Three Months Ended March 31, Increase/(Decrease) 2021 2020 Amount Net new home orders: Southern California Northern California Colorado Total net new home orders Monthly sales absorption rate per community: (1) Southern California Northern California Arizona Colorado Total monthly sales absorption rate per community (1) Cancellation rate N/A Selling communities at end of period: Southern California Northern California Arizona Colorado N/A Total selling communities Average selling communities: Southern California Northern California Arizona Colorado Total average selling communities (1) Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period. Net new home orders for the Monthly absorption The Company experienced modest cancellation activity with a Backlog As of March 31, 2021 2020 % Change Homes Dollar Value Average Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California Northern California Total Backlog reflects the number of homes, net of cancellations, for which we have entered into In Southern California, the total backlog dollar value increased year-over-year primarily as a result of a 23% increase in ending backlog units for the 2021 first quarter, partially offset by a 7% decrease in average selling price. The mix of homes in Southern California ending backlog in the prior year included approximately 12% of homes with average selling prices over $1.8 million, related to a higher-priced second move up community and one luxury community in Orange County which were closed out as of December 31, 2020. Northern California ending backlog units increased 120% year-over-year due to a In Arizona, the year-over-year increase in homes in backlog dollar value was due to the division opening seven new communities in 2020. All seven new communities have average selling prices within the $300,000 to $550,000 range, as compared to prior year backlog units for Arizona which were comprised of homes from two high-end, closed-out communities where the average price of homes in backlog was $1.7 million at March 31, 2020. In Colorado, the 113 homes in backlog as of Lots Owned and Controlled As of March 31, Increase/(Decrease) 2021 2020 Amount Lots Owned: Southern California Northern California Arizona Total Lots Controlled:(1) Southern California Northern California Arizona Total Total Lots Owned and Controlled - Wholly Owned Fee Building Lots(2) (1) Includes lots that we control under purchase and sale agreements or option agreements with refundable and nonrefundable deposits that are subject to customary conditions and have not yet closed. There can be no assurance that such acquisitions will occur. (2) Lots owned by third party property owners for which we perform general contracting or construction management services. The Company's wholly owned lots owned and controlled The decrease in fee building lots at Home Sales Revenue and New Homes Delivered Three Months Ended March 31, 2021 2020 % Change Homes Dollar Value Average Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California Northern California Total New home deliveries increased The decrease in home sales revenue was primarily driven by Southern California, where homes sales revenue was down 40% year-over-year as a result of a 24% decrease in homes delivered due to Homebuilding Gross Margin Homebuilding gross margin for the Three Months Ended March 31, 2021 % 2020 % (Dollars in thousands) Home sales revenue Cost of home sales Homebuilding gross margin Add: Interest in cost of home sales Adjusted homebuilding gross margin(1) — (1) Adjusted homebuilding Land Sales During the three months ended Fee Building In the 2021 first quarter, fee building revenues decreased The cost of fee building decreased Selling, General and Administrative Expenses Three Months Ended As a Percentage of March 31, Home Sales Revenue 2021 2020 2021 2020 (Dollars in thousands) Selling and marketing expenses General and administrative expenses ("G&A") Total selling, marketing and G&A ("SG&A") During the SG&A Equity in Net Income (Loss) of Unconsolidated Joint Ventures As of The Company's Interest Expense During the three months ended Project Abandonment Costs During the prior year 2020 first quarter, the Company terminated its option agreement for a luxury condominium project in Scottsdale, Arizona due to lower demand levels experienced at this community, substantial investment required to build out the remainder of the project, uncertainty associated with the economic impacts of COVID-19, and the opportunity to recognize a tax benefit from the resulting net operating loss carrybacks. As a result of this strategic decision made in the 2020 first quarter to forgo developing the balance of the property, we recorded a project abandonment charge of $14.0 million related to the capitalized costs, including interest, associated with the portion of the project that was abandoned. Loss on Early Extinguishment of Debt During the prior year period ended March 31, 2020, the Company repurchased and retired approximately $4.8 million of its 7.25% Senior Notes due 2022 for a cash payment of approximately $4.8 million. The Company recognized a loss on early extinguishment of debt of $0.1 million Provision/Benefit for Income Taxes For the For the three months ended March 31, 2020, the Company recorded an income tax benefit of $9.9 million. The Company's effective tax rate for the three months ended March 31, 2020, differs from the federal statutory rate due to discrete items, state income tax rates and tax credits for energy efficient homes. The 2020 first quarter discrete items totaled an $8.1 million benefit, $5.8 million of which related to the $14.0 million project abandonment costs recorded during the quarter and a $2.1 million benefit related to the CARES Act signed into law on March 27, 2020. The CARES Act allows companies to carry back net operating losses generated in 2018 through 2020 for five years. The Company recognized a $2.1 million discrete benefit in the 2020 first quarter related to the remeasurement of deferred tax assets originally valued at a 21% federal statutory tax rate Liquidity and Capital Resources Overview Our principal sources of capital for the Cash flows for each of our communities depend on their stage in the development cycle, and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, and construction of model homes, roads, utilities, general landscaping and other amenities. Because these costs are a component of our real estate inventories and not recognized in our consolidated statement of operations until a home is delivered, we incur significant cash outlays prior to our recognition of earnings. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash During the three months ended March 31, 2021, we generated cash flows from operating activities of $2.5 million. Also during the 2021 first quarter, the Company completed a tack-on offering of its 2025 Notes generating proceeds of $36.1 million. We ended the During the three months ended March 31, 2021, the Company completed the sale of $35 million in aggregate principal amount of its 7.25% Senior Notes due 2025 (the "Additional 2025 Notes"). The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to maturity of 6.427%. As of We intend to utilize both debt and equity as part of our ongoing financing strategy, coupled with redeployment of cash flows from We intend to finance future acquisitions and developments with what we believe to be the most advantageous source of capital available to us at the time of the transaction, which may include unsecured corporate level debt, property-level debt, and other public, private or bank debt, land banking arrangements, or common and preferred equity. While the COVID-19 pandemic continues to create uncertainty as to general economic and housing market conditions for 2021 and beyond, we The 2025 Notes On On or after October 15, 2022, the Year Redemption Price 2022 103.625% 2023 101.813% 2024 100.000% The 2025 Notes contain certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on incurring or guaranteeing additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. March 31, 2021 Financial Conditions Actual Requirement As of Credit Facility On As of March 31, 2021 Covenant Financial Covenants Actual Requirement (Dollars in thousands) (1) So long as the Company is in compliance with the interest coverage test (see Note 2 below), the minimum unencumbered liquid assets that the Company must maintain as of the quarter end measurement date is $10 million. (2) If the The Credit Facility contains customary events of default, The Credit Agreement also provides for a $30.0 million sublimit for letters of credit, subject to conditions set forth in the Credit Agreement. As of March 31, 2021, the Company had no outstanding letters of credit issued under the Credit Agreement. Debt issuance costs for the Credit Agreement, which totaled $1.3 million as of March 31, 2021 are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement. Letters of Credit and Surety Bonds In connection with the development of our communities, we are frequently required to provide performance, maintenance, and other bonds and letters of credit in support of our related obligations with respect to such developments. The amount of such obligations outstanding at any time varies in accordance with our pending development activities. In the event any such bonds or letters of credit are drawn upon, we would be obligated to reimburse the issuer of such surety bonds or letters of credit. The following table summarizes our letters of credit and surety bonds as of the dates indicated: March 31, December 31, 2021 2020 (Dollars in thousands) Letters of credit(1) Surety bonds(2) Total outstanding letters of credit and surety bonds (1) As of March 31, 2021, there is a $30.0 million sublimit for letters of credit available under our Credit Facility. Stock Repurchase Program On November 18, 2020, the Company’s Board of Directors (the “Board”) authorized a new stock repurchase program pursuant to which the Company may purchase up to $10.0 million of shares of its common stock (the “New Repurchase Program”). Repurchases of the Company’s common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The New Repurchase Program does not obligate the Company to repurchase any particular amount or number of shares of common stock, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases, if any, will be determined by the Company’s management at its discretion and be based on a variety of factors, such as the market price of the Company’s common stock, corporate and contractual requirements, general market and economic conditions and legal requirements. During the three months ended March 31, 2021, the Company repurchased and retired 141,823 shares of its common stock at an aggregate purchase price of $0.8 million, or $5.32 per share. Repurchases made from January 1, 2021 through February 16, 2021 and March 11, 2021 through March 31, 2021 were made pursuant to the Company's Rule 10b5-1 plans. All repurchased shares were returned to the status of authorized but unissued. We believe that debt-to-capital ratios provide useful information to the users of our financial statements regarding our financial position and leverage. Net debt-to-capital ratio is a non-GAAP financial measure. See the table below reconciling this non-GAAP measure to debt-to-capital ratio, the nearest GAAP equivalent. March 31, December 31, 2021 2020 (Dollars in thousands) Total debt, net of unamortized premium and debt issuance costs Equity Total capital Total debt, net of unamortized premium and debt issuance costs Less: Cash, cash equivalents and restricted cash Equity (1) The ratio of debt-to-capital is computed as the quotient obtained by dividing total debt, net of unamortized premium and debt issuance costs by (2) The ratio of net debt-to-capital is computed as the quotient obtained by dividing net debt (which is total debt, net of unamortized premium and debt issuance costs less cash, cash equivalents and restricted cash to the extent necessary to reduce the debt balance to zero) by total Cash Flows — For the • • Off-Balance Sheet Arrangements and Contractual Obligations Option Contracts In the ordinary course of business, we enter into land option contracts in order to procure lots for the construction of our homes. We are subject to customary obligations associated with entering into contracts for the purchase of land and improved lots. These purchase contracts typically require a cash deposit and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property and development entitlements. We also utilize option contracts with land sellers and financial intermediaries as a method of acquiring land in staged takedowns, to help us manage the financial and market risk associated with land holdings, to reduce the use of funds from our corporate financing sources, and to enhance our return on capital. Option contracts generally require a Our utilization of land option contracts is dependent on, among other things, the availability of land sellers willing to enter into option arrangements, the availability of capital to financial intermediaries to finance the development of optioned lots, general housing market conditions, and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions. Joint Ventures We enter into land development and homebuilding joint ventures from time to time as means of: • leveraging our capital base • accessing larger lot positions • expanding our market opportunities • managing financial and market risk associated with land holdings These joint ventures have historically obtained secured acquisition, development and/or construction financing which reduces the use of funds from our corporate financing sources. As of March 31, 2021, we held membership interests in Inflation Our homebuilding and fee building segments 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 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 Critical Accounting Policies The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates if conditions are significantly different in the future. Our critical accounting Recently Issued Accounting Standards The portion of Note 1 to the accompanying notes to unaudited condensed consolidated financial statements under the heading "Recently Issued Accounting Standards" included in this quarterly report on Form 10-Q is incorporated herein by reference. Quantitative and Qualitative Disclosures About Market Risk This item has been omitted as we qualify as a smaller reporting company as defined by Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives. In designing At the end of the period being reported upon, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of Changes in Internal Controls There was no change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are involved in various claims, legal and regulatory proceedings, and litigation arising in the ordinary course of As of the None. Issuer Purchases of Equity Securities Approximate dollar value of Total number of shares that may shares purchased yet be purchased Total number of shares purchased as part of publicly under the plans or Average price paid per share announced plans or programs(1) programs (in thousands)(1) January 1, 2021 to January 31, 2021 (2) February 1, 2021 to February 28, 2021 (2) March 1, 2021 to March 31, 2021 (2) (1) On November 19, 2020, the Company announced that the Board of Directors (the “Board”) authorized a stock repurchase program pursuant to which the Company may purchase up to $10.0 million of shares of its common stock (the “New Repurchase Program”). Repurchases of the Company’s common stock may be made in open-market transactions, effected through a broker-dealer at prevailing market prices, in privately negotiated transactions, in block trades, or by other means in accordance with federal securities laws, including pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The Board did not fix any expiration date for the New Repurchase Program. (2) Repurchases made from January 1, 2021 through February 16, 2021 and March 11, 2021 through March 31, 2021 were done pursuant to Rule 10b5-1 plans entered into by the Company which cover the periods from December 16, 2020 to February 16, 2021 and March 11, 2021 to April 30, 2021. None. Not applicable. None. 101* The following materials from The New Home Company Inc.’s 101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. * Filed herewith ** Furnished herewith. The information in Exhibits 32.1 and 32.2 shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall they be deemed incorporated by reference in any filing under the Securities Act, 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. The New Home Company Inc. By: /s/ Leonard S. Miller President and Chief Executive Officer By: /s/ John M. Stephens John M. Stephens Executive Vice President and Chief Financial Officer Date: THE NEW HOME COMPANY INC. Home sales $ 93,855 $ 95,659 Land sales 0 147 Fee building, including management fees 5,301 36,227 99,156 132,033 Home sales 77,848 84,722 Land sales 0 147 Fee building 5,197 35,497 83,045 120,366 16,007 10,937 0 0 104 730 16,111 11,667 Selling and marketing expenses (6,654 ) (7,466 ) General and administrative expenses (8,271 ) (6,023 ) Equity in net income (loss) of unconsolidated joint ventures 174 (1,937 ) Interest expense (354 ) (718 ) Project abandonment costs (68 ) (14,036 ) Loss on early extinguishment of debt 0 (123 ) Other income (expense), net 66 223 1,004 (18,413 ) (Provision) benefit for income taxes (451 ) 9,937 $ 553 $ (8,476 ) Basic $ 0.03 $ (0.42 ) Diluted $ 0.03 $ (0.42 ) Basic 18,109,015 19,951,825 Diluted 18,420,631 19,951,825 (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Revenues: Home sales $ 114,622 $ 125,142 $ 280,957 $ 246,281 Fee building, including management fees from unconsolidated joint ventures of $1,324, $1,539, $3,755 and $6,251, respectively 43,309 52,761 146,107 125,726 157,931 177,903 427,064 372,007 Cost of Sales: Home sales 95,992 105,799 238,545 211,859 Home sales impairments — — 1,300 — Fee building 41,808 50,832 141,633 120,063 137,800 156,631 381,478 331,922 Gross Margin: Home sales 18,630 19,343 41,112 34,422 Fee building 1,501 1,929 4,474 5,663 20,131 21,272 45,586 40,085 Selling and marketing expenses (6,860 ) (6,055 ) (18,237 ) (14,577 ) General and administrative expenses (6,465 ) (6,468 ) (17,150 ) (17,476 ) Equity in net income of unconsolidated joint ventures 99 488 606 4,428 Other income (expense), net 69 (195 ) 34 (590 ) Income before income taxes 6,974 9,042 10,839 11,870 Provision for income taxes (2,656 ) (3,465 ) (4,168 ) (4,718 ) Net income 4,318 5,577 6,671 7,152 Net (income) loss attributable to noncontrolling interest — (30 ) 10 90 Net income attributable to The New Home Company Inc. $ 4,318 $ 5,547 $ 6,681 $ 7,242 Earnings per share attributable to The New Home Company Inc.: Basic $ 0.21 $ 0.27 $ 0.32 $ 0.35 Diluted $ 0.21 $ 0.27 $ 0.32 $ 0.35 Weighted average shares outstanding: Basic 20,876,315 20,711,952 20,839,507 20,675,233 Diluted 20,999,673 20,797,731 20,949,499 20,764,480 THE NEW HOME COMPANY INC. 20,096,969 $ 201 $ 193,862 $ 38,584 $ 232,647 $ 112 $ 232,759 — 0 0 (8,476 ) (8,476 ) 0 (8,476 ) — 0 589 0 589 0 589 Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans (58,098 ) 0 (303 ) 0 (303 ) 0 (303 ) Shares issued through stock plans 152,177 1 (1 ) 0 0 0 0 Repurchase of common stock (1,233,883 ) (12 ) (2,221 ) 0 (2,233 ) 0 (2,233 ) 18,957,165 $ 190 $ 191,926 $ 30,108 $ 222,224 $ 112 $ 222,336 18,122,345 $ 181 $ 191,496 $ 5,765 $ 197,442 $ 0 $ 197,442 — 0 0 553 553 0 553 — 0 645 0 645 0 645 Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans (61,552 ) 0 (317 ) 0 (317 ) 0 (317 ) Shares issued through stock plans 161,032 1 (1 ) 0 0 0 0 Repurchase of common stock (141,823 ) (1 ) (755 ) 0 (756 ) 0 (756 ) 18,080,002 $ 181 $ 191,068 $ 6,318 $ 197,567 $ 0 $ 197,567 (Unaudited) Stockholders’ Equity Noncontrolling Interest in Subsidiary Total Equity Number of Shares ofCommonStock Common Stock AdditionalPaid-inCapital Retained Earnings TotalStockholders’Equity Balance at December 31, 2015 20,543,130 $ 205 $ 194,437 $ 26,133 $ 220,775 $ 922 $ 221,697 Net income (loss) — — — 7,242 7,242 (90 ) 7,152 Noncontrolling interest distribution — — — — — (725 ) (725 ) Stock-based compensation expense — — 2,602 — 2,602 — 2,602 Shares net settled with the Company to satisfy minimum employee personal income tax liabilities resulting from share based compensation plans (62,467 ) — (647 ) — (647 ) — (647 ) Excess tax provision from stock-based compensation — — (97 ) — (97 ) — (97 ) Shares issued through stock plans 231,289 2 (2 ) — — — — Balance at September 30, 2016 20,711,952 $ 207 $ 196,293 $ 33,375 $ 229,875 $ 107 $ 229,982 Balance at December 31, 2016 20,712,166 $ 207 $ 197,161 $ 47,155 $ 244,523 $ 101 $ 244,624 Net income (loss) — — — 6,681 6,681 (10 ) 6,671 Stock-based compensation expense — — 2,086 — 2,086 — 2,086 Shares net settled with the Company to satisfy minimum employee personal income tax liabilities resulting from share based compensation plans (55,962 ) — (590 ) — (590 ) — (590 ) Shares issued through stock plans 220,419 2 100 — 102 — 102 Balance at September 30, 2017 20,876,623 $ 209 $ 198,757 $ 53,836 $ 252,802 $ 91 $ 252,893 THE NEW HOME COMPANY INC. $ 553 $ (8,476 ) Deferred taxes 390 914 Amortization of stock-based compensation 645 589 Project abandonment costs 68 14,036 Equity in net (income) loss of unconsolidated joint ventures (174 ) 1,937 Depreciation and amortization 1,256 1,845 Loss on early extinguishment of debt 0 123 Contracts and accounts receivable (102 ) 345 Due from affiliates 49 130 Real estate inventories 5,554 27,130 Other assets 337 (11,804 ) Accounts payable (2,876 ) (4,006 ) Accrued expenses and other liabilities (3,194 ) (5,462 ) 2,506 17,301 Purchases of property and equipment (43 ) (125 ) Contributions to unconsolidated joint ventures 0 (2,057 ) Distributions of capital from unconsolidated joint ventures 1,378 1,100 Cash paid for acquisition, net of cash acquired (6,477 ) 0 (5,142 ) (1,082 ) Proceeds from senior notes 36,138 0 Repurchases of senior notes 0 (4,827 ) Repayment of notes payable (23,848 ) 0 Payment of debt issuance costs (995 ) 0 Repurchases of common stock (756 ) (2,233 ) Tax withholding paid on behalf of employees for stock awards (317 ) (303 ) 10,222 (7,363 ) 7,586 8,856 107,459 79,431 $ 115,045 $ 88,287 (Unaudited) Nine Months Ended September 30, 2017 2016 Operating activities: Net income $ 6,671 $ 7,152 Adjustments to reconcile net income to net cash used in operating activities: Deferred taxes (54 ) 1,181 Amortization of equity based compensation 2,086 2,602 Excess income tax provision from stock-based compensation — 97 Distributions of earnings from unconsolidated joint ventures 1,588 1,931 Inventory impairments 1,300 — Equity in net income of unconsolidated joint ventures (606 ) (4,428 ) Deferred profit from unconsolidated joint ventures 560 541 Depreciation 344 381 Abandoned project costs 238 498 Net changes in operating assets and liabilities: Restricted cash 372 11 Contracts and accounts receivable 13,448 2,717 Due from affiliates 504 91 Real estate inventories (179,607 ) (159,778 ) Other assets (3,766 ) (4,894 ) Accounts payable 2,859 11,927 Accrued expenses and other liabilities (6,257 ) (6,430 ) Due to affiliates — (293 ) Net cash used in operating activities (160,320 ) (146,694 ) Investing activities: Purchases of property and equipment (145 ) (379 ) Cash assumed from joint venture at consolidation 995 2,009 Contributions and advances to unconsolidated joint ventures (21,296 ) (7,707 ) Distributions of capital and repayment of advances to unconsolidated joint ventures 13,650 13,977 Interest collected on advances to unconsolidated joint ventures 468 — Net cash provided by (used in) investing activities (6,328 ) 7,900 Financing activities: Borrowings from credit facility 72,000 193,000 Repayments of credit facility (190,000 ) (38,000 ) Proceeds from senior notes 324,465 — Borrowings from other notes payable — 343 Repayments of other notes payable — (15,636 ) Payment of debt issuance costs (7,382 ) (1,064 ) Cash distributions to noncontrolling interest in subsidiary — (725 ) Minimum tax withholding paid on behalf of employees for stock awards (590 ) (647 ) Excess income tax provision from stock-based compensation — (97 ) Proceeds from exercise of stock options 102 — Net cash provided by financing activities 198,595 137,174 Net increase (decrease) in cash and cash equivalents 31,947 (1,620 ) Cash and cash equivalents – beginning of period 30,496 45,874 Cash and cash equivalents – end of period $ 62,443 $ 44,254 THE NEW HOME COMPANY INC.“Company”"Company"), a Delaware corporation, and its subsidiaries are primarily engaged in all aspects of residential real estate development, including acquiring land and designing, constructing and selling homes in California, Arizona and Arizona.Colorado.(“GAAP”("GAAP") for interim financial information and with the instructions to Form 10-Q10-Q and Article 10 of Regulation S-XS-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K10-K for the fiscal year ended December 31, 2016.2020. The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring entries) necessary for the fair presentation of our results for the interim period presented. Results for the interim periodperiods are not necessarily indicative of the results to be expected for the full year.year due to seasonal variations and other factors, such as the effects of the novel coronavirus ("COVID-19") and its impact on our future results. “we”"we", “us”"us", “our”"our" and “the Company”"the Company" refer to the Company and its wholly owned subsidiaries, on a consolidated basis.(“ASC”("ASC") 280, (“ ("ASC 280”280") established standards for the manner in which public enterprises report information about operating segments. The Company's reportable segments are Arizona homebuilding, California homebuilding, Colorado homebuilding and fee building. In accordance with ASC 280, we have determined that our California homebuilding divisionreportable segment aggregates the Southern California and our fee building division are ourNorthern California homebuilding operating segments which are also our reportable segments.based on the similarities in long-term economic characteristics.8$0.6$0.2 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects. $ 114,815 $ 87,863 230 424 $ 115,045 $ 88,287 non-refundablenonrefundable land deposits, are expensed to other income (expense), netproject abandonment costs if we determine continuation of the prospective project is not probable.Accounting Standards Codification ("ASC") ASC 360, (“ ("ASC 360”360"), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is writtenTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSdown to its fair value. We review each real estate asset on a periodicquarterly basis or whenever indicators of impairment exist. Real estate assets include projects actively selling and projects under development or held for future development. 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 or sales absorption rates, costs significantly in excess of budget, and actual or projected cash flow losses.remainingfuture undiscounted future cash flows of the project are more or less than the asset’s carrying value. If the undiscounted estimated future undiscounted cash flows are more thanexceed the asset’s carrying value, no impairment adjustment is required. However, if the undiscounted estimated future undiscounted cash flows are less than the asset’s carrying value then the asset is impaired. If the asset is deemed impaired, andit is written down to its fair value.value in accordance with ASC 820,Fair Value Measurements and Disclosures ("ASC 820"). estimated future cash flows of a project, we make various assumptions, including: (i) expected sales prices and sales incentives to be offered, including the number of homes available, pricing and incentives being offered by us or other builders in other projects, 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 expended to date and expected to be incurred including, but not limited to, land and land development costs, home construction costs, interest costs, indirect construction and overhead 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. costs), and selling and marketing costs (such as model maintenance costs and advertising costs). Depending on the underlying objective of the project, assumptions could have a significant impact on the projected cash flow analysis. For example, if our objective is to preserve operating margins, our cash flow analysis will be different than if the objective is to increase the velocity of sales. These objectives may vary significantly from project to project and change over time.9assets are consideredasset is deemed impaired, the impairment adjustments areis calculated by determining the amount the asset's carrying value exceeds its fair value.value in accordance with ASC 820. We calculate the fair value of real estate projects usinginventories considering a land residual value analysis orand a discounted cash flow analysis. Under the land residual value analysis, we estimate what a willing buyer would pay and what a willing seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a market rate operating margin and return. Under the discounted cash flow method, the fair value is determined by calculating the present value of future cash flows using a risk adjusted discount rate. CriticalSome of the critical assumptions that are included as part of these analysesinvolved with measuring the asset's fair value include estimating future housing revenues, sales absorption rates, land development and construction costs, and related carrying costs (including future capitalized interest), and all direct selling and marketingother applicable project costs. This evaluation and the assumptions used by management to determine future estimated cash flows and fair value require a substantial degree of judgment, especially with respect to real estate projects that have a substantial amount of development to be completed, have not started selling or are in the early stages of sales, or are longer in duration. Actual revenues, costs and time to complete and sell a community could vary from these estimates which could impact the calculation of fair value of the asset and the corresponding amount of impairment that is recorded in our results of operations. For the ninethree months ended September 30, 2017,March 31, 2021 and 2020, Company recorded 0 home sales impairment charges. In cases where we recorded an impairment charge of $1.3decide to abandon a project, we will fully expense all costs capitalized to such project and will expense and accrue any additional costs that we are contractually obligated to incur. For the three months ended March 31, 2021 and 2020, $0.1 million relating to one communityand $14.0 million in Southern California. For additional detail regarding the impairment charge, please see Note 4.project abandonment costs were incurred, respectively. (“ ("ASC 835”835"). Interest capitalized as a cost component of real estate inventories is included in cost of home sales as related homes or lots are sold. To the extent interest is capitalized to investment in unconsolidated joint ventures, it is included as a reduction of equity in net income from(loss) of unconsolidated joint ventures when the related homes or lots are sold to third parties. In instances where the Company purchases land from an unconsolidated joint venture, the pro rata share of interest capitalized to investment in unconsolidated joint ventures is added to the basis of the land acquired and recognized as a cost of sale upon the delivery of the related homes or land to a third-party buyer. To the extent our debt exceeds our qualified assets as defined in ASC 835, we expense a portion of the interest incurred by us. Qualified assets represent projects that are actively selling or under development as well as investments in unconsolidated joint ventures accounted for under the equity method until such equity investees begin their principal operations.10360, revenue from606, home sales and other real estate sales are recorded and a profitrevenue is recognized when our performance obligations within the respective homesunderlying sales contracts are closed underfulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the full accrual method. Home sales and other real estate sales are closed when all conditions of escrow are met, including delivery of the home or other real estate asset, title passes, appropriate consideration is receivedhomebuyer, and collection of associated receivables, if any,the purchase price is reasonably assured. Sales incentives are recorded as a reduction of revenues when the respective home is closed. The profit we record is based on the calculation of cost of sales, which is dependent on our allocation of costs, as described in more detail above in the section entitled “Real"Real Estate Inventories and Cost of Sales.”" When it is determined that the earnings process is not complete, the salerelated revenue and related profit are deferred for recognition in future periods.third-partythird-party property owners. The third-partythird-party property owner funds all project costs incurred by the Company to build and sell the homes. The Company primarily enters into cost plus fee contracts where it charges third-partythird-party property owners for all direct and indirect costs plus a negotiated management fee. For these types of contracts, the Company recognizes revenue based on the actual total costs it has expended plus the applicable management fee. The management fee is typically a per-unit fixed fee or based on a percentage of the cost or home sales revenue of the project, depending on the terms of the agreement with the third-partythird-party property owner. For these types of contracts, the Company recognizes revenue based on the actual total costs it has incurred plus the applicable fee. In accordance with ASC 605, Revenue Recognition (“ASC 605”), revenues from606, we apply the percentage-of-completion method, using the cost-to-cost approach, as it most accurately measures the progress of our efforts in satisfying our obligations within the fee building services are recognized using a cost-to-cost approach in applying the percentage-of-completion method.agreements. 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 labor and other direct costs incurred, plus the portion of the management fee it has earned to date. In the course of providing itsfee building services, the Company routinely subcontracts for services and incurs other direct costs on behalf of the property owners. These costs are passed through to the property owners and, in accordance with GAAP, are included in the Company’s revenuerevenues and cost of revenue.sales.enters into fee buildingprovides construction management and management contractscoordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures where itventures. In certain contracts, the Company also provides construction supervisionproject management and administrative services. For most services provided, the Company fulfills its related obligations as welltime-based measures, according to the input method guidance described in ASC 606. Accordingly, revenue is recognized on a straight-line basis as the Company's efforts are expended evenly throughout the performance period. The Company may also have an obligation to manage the home or lot sales process or warranty service as part of providing sales and marketing services,services. The Company's obligation to manage the home or lot sales and does not bear financial risks for any services provided. In accordancemarketing process is considered fulfilled when related homes or lots close escrow, as these events represent milestones reached according to the output method guidance described in ASC 606. Accordingly, revenue is recognized in the period that the corresponding lots or homes close escrow. Costs associated with ASC 605, revenues from these services are recognized over a proportional performance method or completed performance method. Under ASC 605, revenue is earned as incurred. The Company's obligations related to warranty services are providedconsidered fulfilled when the services are rendered with the revenue and costs associated with those services recognized in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of performance cannot be determined. Costs are recognized asperiod incurred. Revenue recognition for any portion of the fees earned from these services that are contingent upon a financial threshold or specific event is deferred until the threshold is achieved or the event occurs.buildingbuilding revenues have historically been concentrated with a small number of customers. For the three and nine months ended September 30, 2017 March 31, 2021 and 2016, 2020, one customer comprised 97%comprised 34% and 98%, 97%, 97%, and 95%respectively, of fee building revenue respectively.and a separate customer comprised 62% and 0%, respectively, of fee building revenue. The balance of the fee building revenues primarily represented management fees primarily earned from unconsolidated joint ventures.ventures and third-party customers. As of September 30, 2017March 31, 2021 and December 31, 2016, one2020, 1 customer comprised 81%8% and 87%35% of contracts and accounts receivable, respectively, and a separate fee building customer comprised 12% and 25%, respectively, with the balance of contracts and accounts receivable primarily representing escrow receivables from home sales.11 (“ ("ASC 810”810"). Under ASC 810, a variable interest entity (“VIE”("VIE") is created when: (a) the equity investment at risk in the entity is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties, including the equity holders; (b) the entity’s equity holders as a group either (i) lack the direct or indirect ability to make decisions about the entity, (ii) are not obligated to absorb expected losses of the entity or (iii) do not have the right to receive expected residual returns of the entity; or (c) the entity’s equity holders have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of the equity holder with disproportionately few voting rights.THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSnoncontrollingnon-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:Participating rights - provide the noncontrolling equity holders the ability to direct significant financial and operational decision made in the ordinary course of business that most significantly influence the entity's economic performance.Kick-out rights - allow the noncontrolling equity holders to remove the general partner or managing member without cause.non-refundablenonrefundable deposit paid to an entity may be deemed to be a variable interest that will absorb some or all of the entity’s expected losses if they occur. Our land purchase and lot option deposits generally represent our maximum exposure to the land seller if we elect not to purchase the optioned property. In some instances, we may also expend funds for due diligence, development and construction activities with respect to optioned land prior to takedown. Such costs are classified as real estate inventories, which we would have to write off should we not exercise the option. Therefore, whenever we enter into a land option or purchase contract with an entity and make a non-refundablenonrefundable deposit, a VIE may have been created. At March 31, 2021, the Company had outstanding nonrefundable cash deposits of $10.1 million pertaining to land option contracts and purchase contracts.September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we perform ongoing reassessments of whether we are the primary beneficiary of a VIE.Noncontrollingthird-partythird-party property owner. In accordance with ASC 810, the Company analyzed this arrangement and determined that it was not a VIE; however, the Company determined it was required to consolidate the joint venture as the Company has a controlling financial interest with the powers to direct the major decisions of the entity. AsDuring the third quarter of September 30, 20172020, the Company and its partner dissolved the joint venture, and as of March 31, 2021 and December 31, 2016,2020, the third-partythird-party investor had an equity balance of $0.1 million and $0.1 million, respectively. $0. and Advances to Unconsolidated Joint Venturesthat qualifywhen any of the following situations exist: 1) the joint venture qualifies as VIEs wherea VIE and we are not the primary beneficiary, and other entities that2) we do not control the joint venture but have the ability to exercise significant influence over theits operating and financial policies, of the investee. The Company also uses the equity method whenor 3) we function as the managing member or general partner of the joint venture and our joint venture partner has substantive participating rights or where we can be replaced by our venture partnerreplace us as managing member or general partner without cause.September 30, 2017,March 31, 2021, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under the equity method of accounting.12Accounting Standards Update ("ASU") No. 2016-15, ASC 230,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"("ASC 230"). Under the cumulative earnings approach, distributions received are considered returns on investment and shall beare classified asTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTScash inflows from operating activities unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed cumulative equity in earnings. When such an excess occurs, the current-period distribution up to this excess is considered a return of investment and shall be classified as cash inflows from investing activities. Our ownership interests in our unconsolidated joint ventures vary, but are generally less than or equal to 35%. The accounting policies of our joint ventures are consistent with those of the Company.inventories.inventories as described in more detail above in the section entitled "Real Estate Inventories and Cost of Sales." We also review our investments in and advances to unconsolidated joint ventures for evidence of other-than-temporary declines in value.value in accordance with ASC 820. To the extent we deem any portion of our investment in and advances to unconsolidated joint ventures as not recoverable, we impair our investment accordingly. For the three and nine months ended September 30, 2017 March 31, 2021 and 2016, no impairments2020, the Company recorded other-than-temporary, noncash impairment charges of $0 and $2.3 million, respectively, related to our investment in and advances tounconsolidated joint ventures. Joint venture impairment charges are included in equity in net income (loss) of unconsolidated joint ventures were recorded.in the accompanying condensed consolidated statements of operations. Sellingmarketing costs incurred to sell real estate projectsmodel landscaping and furnishings are capitalized to other assets in the accompanying condensed consolidated balance sheets if theyunder ASC 340,Other Assets and Deferred Costs ("ASC 340"). These costs are reasonably expecteddepreciated to be recovered from the sale of the project or from incidental operations, and are incurred for tangible assets that are used directly through the selling period to aid in the sale of the project or services that have been performed to obtain regulatory approval of sales. These capitalizable selling and marketing costs include, but are not limited to, model home design, model home decor and landscaping, and sales office/design studio setup.expenses generally over the shorter of 30 months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, are expensed in the period incurredas incurred.included in selling and marketing expense in the accompanying condensed consolidated statements of operations.Warranty AccrualLitigation Accruals generally provide a more limited warranty, which generally ranges from a minimum of two years up to the period covered by the applicable statute of repose, that covers certain defined construction defects. Estimated future direct warranty costs are accrued and charged to cost of sales in the period when the related homebuilding revenues are recognized. Amounts are accrued based upon the Company’s historical claim and expense rates. In addition, the Company has received warranty payments from third-partythird-party property owners for certain of its fee building projects that have since closed-out where the Company has the contractual risk of construction. These payments are recorded as warranty accruals. We assess the adequacy of our warranty accrual on a quarterly basis and adjust the amounts recorded if necessary. Our warranty accrual is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets and adjustments to our warranty accrual are recorded through cost of sales.home sales or as an offset to warranty insurance receivables when covered by insurance.13September 30, 2017March 31, 2021 and December 31, 2016, no2020, 0 allowance was recorded related to contracts and accounts receivable.EquipmentCapitalized Selling and Marketing Costsequipmentcapitalized selling and marketing costs are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheetssheets. Property and equipment are depreciated to general and administrative expenses using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are stated at cost and are amortized to general and administrative expenses using the straight-line method generally over the shorter of either their estimated useful lives or the term of the lease.THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Capitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter of either 30 months or the actual estimated life of the selling community. (“ ("ASC 740”740"). The consolidated provision for, or benefit from, income taxes is calculated using the asset and liability method, under which deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.Deferredassets are evaluated on a quarterly basisasset to determine if adjustmentswhether all or any portion of the asset is more likely than not (defined as a likelihood of more than 50%) unrealizable under ASC 740. We are required to theestablish a valuation allowance are required.for any portion of the tax asset we conclude is more likely than not unrealizable. In accordance with ASC 740, we assess the determination of whether a valuation allowance for deferred tax assets is necessary requires an analysis of both positive and negative evidence regarding realization of the deferred tax assets and should be established based on the consideration of all available evidence using a “more likely than not” standardevidence. Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with respectnet operating losses and tax credit carryforwards and the available tax planning alternatives, to whether deferred tax assets will be realized.the extent these items are applicable, and the availability of net operating loss carrybacks under certain circumstances. The ultimate realization of deferred tax assets depends primarily on the generation of future taxable income during the periods in which the differences become deductible.deductible, as well as the ability to carryback net operating losses in the event that this option becomes available. The value of our deferred tax assets will depend on applicable income tax rates. Judgment is required in determining the future tax consequences of events that have been recognized in our consolidated financial statements and/or tax returns. Differences between anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated financial statements. At March 31, 2021 and December 31, 2020, based on our analysis of all available positive and negative evidence, and other relevant factors, we did not establish a valuation allowance except for $20,000 recorded against a capital loss. Please refer to Note 14 for more information. (defined as a likelihood of more than 50%), based on the technical merits, that the position will be sustained upon examination. In addition, these provisions provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The evaluation of whether a tax position meets the more-likely-than-notmore-likely-than-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. At March 31, 2021, the Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements.14 (“ ("ASC 718”718") and. ASC 505-50, Equity – Equity Based Payments to Non-Employees (“ASC 505-50”).ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in a company's financial statements. ASC 718 requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans.June 26, 2015, May 8, 2020, the Company entered into an agreement that transitioned Joseph Davis' role withina Tax Benefit Preservation Plan between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (as amended from Chief Investment Officertime to a non-employee consultanttime, the “Tax Plan”) to help preserve the value of certain deferred tax benefits, including those generated by net operating losses and certain other tax attributes. The Company has been able to carryback its federal net operating losses realized during 2020 to offset U.S. federal income taxes paid in the past five years due to the Company. On February 16, 2017,tax law changes arising from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). As a result, the Board determined not to extend or renew the Tax Plan. The original expiration date of the Tax Plan was May 7, 2021; however, in March 2021, the Board determined to accelerate the expiration of the Tax Plan by amending it to allow its expiration to occur on March 29, 2021. Accordingly, the preferred share purchase rights under the Tax Plan (the "Rights") which were previously dividended to holders of record of the shares of common stock of the Company entered into an agreement that transitioned Wayne Stelmar's role withinrelated to the Series A Junior Participating Preferred Stock of the Company from Chief Investment Officer to a non-employee consultant expired as of the close of business on March 29, 2021 and non-employee director. Per the agreements, Mr. Davis' and Mr. Stelmar's outstanding equity awards will continue to vest in accordance with their original terms. Under ASC 505-50, if an employee becomes a non-employee and continues to vest in an awardno person has any rights pursuant to the award's original terms, that awardTax Plan or the Rights. treatedat the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, compliance with Delaware law, restrictions contained in any financing instruments, including but not limited to, our unsecured credit facility and senior notes indenture, and such other factors as our board of directors deem relevant.award"incurred loss" approach to a non-employee prospectively, provided new "expected credit loss" methodology. The FASB followed up with ASU 2019-04,Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments in April 2019, ASU 2019-05,Financial Instruments - Credit Losses (Topic 326), in May 2019, ASU 2019-11,Codification Improvements to Topic 326, Financial Instruments - Credit Losses in November 2019, and ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) in February 2020 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, and requires full retrospective application upon adoption. During November 2019, the individualFASB issued ASU 2019-10,Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates that provides for additional implementation time for smaller reporting companies with the standard being effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is requiredpermitted. As a smaller reporting company, we are not adopting the requirements of ASU 2016-13 for the year beginning January 1, 2021, however we do not anticipate a material impact to continue providing services to the employer (such as consulting services). Based on the terms and conditions of both Mr. Davis' and Mr. Stelmar's consulting agreements noted above, we account for their share-based awards in accordance with ASC 505-50. ASC 505-50 requires that these awards be accounted for prospectively, such that the fair value of the awards will be re-measured at each reporting date until the earlier of (a) the performance commitment date or (b) the date the services required under the transition agreement with Mr. Davis or Mr. Stelmar have been completed. ASC 505-50 requires that compensation cost ultimately recognized in the Company'sour consolidated financial statements be the sumas a result of (a) the compensation cost recognized during the periodadoption.15Beginning January 1, 2017, the Company adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of ASU 2016-09 had no effect on beginning retained earnings or any other components of equity or net assets. The Company has elected to apply the amendments in ASC 2016-09 related to the presentation of excess income tax provisions on the statement of cash flows using a prospective transition method resulting in no adjustment to the classification of the prior year excess income tax provision from stock-based compensation in the accompanying condensed consolidated statement of cash flows.Recently Issued Accounting StandardsThe Company qualifies as an “emerging growth company” pursuant to the provisions of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. As previously disclosed, the Company has chosen, irrevocably, to “opt out” of such extended transition period, and as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. Additionally, ASU 2014-09 supersedes existing industry specific accounting literature relating to how a company expenses certain selling and marketing costs. In August 2015, December 2019, the FASB issued ASU No. 2015-14, Revenue fromContracts with Customers2019-12,Income Taxes (Topic 606): Deferral of740)-Simplifying the Effective DateAccounting for Income Taxes ("ASU 2019-12"), which delayed the effective date of ASU 2014-09 by one year. As a public company, ASU 2014-09is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for ourfiscal years, and for interim and annual reporting periods within those fiscal years, beginning after December 15, 2017, 2020. The Company adopted the provisions of ASU 2019-12 effective January 1, 2021 and at that time, we expect to adopt the new standard under the modified retrospective approach.Under the modified retrospective approach, we will recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In anticipation of this adoption, we have developed an implementation plan and are working to identify significant changesexperienced no impact to our financial statements and accounting policies. At this time, we do not believe the adoption of ASU 2014-09 will have a material impact on the amount of our revenues. We will continue to evaluate the impact that adoption of ASU 2014-09 will have on the timing of recognition of our revenues. Although we are still evaluating the accounting for selling and marketing costs under the new standard, adoption of ASU 2014-09 may impact the timing of recognition and classification of certain capitalized selling and marketing costs we incur to obtain sales contracts from our customers. Currently, these costs are capitalized and amortized to selling and marketing expenses as homes are delivered. Upon adoption of ASU 2014-09, portions of these costs directly attributable to a home that are determined to be recoverable, may be reclassified. The adoption of ASU 2014-09 by our unconsolidated joint ventures may impact the timing of recognition of income or loss allocations from these entities. We continue to evaluate the impact the adoption may have on other aspects of our business and on ourcondensed consolidated financial statements and disclosures.as a result of adoption.February 2016, January 2020, the FASB issued ASU No. 2016-02, Leases2020-01,Investments - Equity Securities (Topic 842) (“ASU 2016-02”321). ASU 2016-02 will require organizations that lease assets (referred to as “lessees”) to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under ASU 2016-02, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Lessor accounting remains substantially similar to current GAAP. In addition, disclosures of leasing activities are to be expanded to include qualitative along with specific quantitative information. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method. The Company's lease contracts primarily consist of rental agreements for office space and copiers or printers where we are the lessee. The Company has begun the process of evaluating these lease contracts and believes all would be considered operating leases. Upon adoption, we expect to add a right-of-use asset and a lease liability to our consolidated balance sheet. The Company will recognize lease expense on a straight-line basis, consistent with our current policy for office rent. We are evaluating the impact of ASU 2016-02 and the potential effects it will have on our consolidated financial statements.In March 2016, the FASB issued ASU No. 2016-07, Investments-, Investments - Equity Method and Joint Ventures: SimplifyingVentures (Topic 323), and Derivative and Hedging (Topic 815) ("ASU 2020-01"). ASU 2020-01 clarifies the Transition tointeraction of the Equity Method of Accounting ("ASU 2016-07"), which eliminates the requirement to applyaccounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Our adoptionin Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The standard is effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years. The Company adopted the provisions of ASU 2016-07 on 2020-01 effective January 1, 2017 did not have an effect on2021 and experienced no impact to our condensed consolidated financial statements.statements as a result of adoption.August 2016, October 2020, the FASB issued ASU 2016-15. 2020-10,Codification Improvements ("ASU 2016-152020-10"). The amendments in ASU 2020-10 contain improvements to the Codification by including disclosure guidance for appropriate disclosure and ensuring that all guidance that requires or provides guidance on how certain cash receipts and cash payments arean option for an entity to be presented and classifiedprovide information in the statementnotes to financial statements is codified in the Disclosure Section of cash flows. ASU 2016-15 isthe Codification. The amendments are effective for interim and annual reporting periodspublic entities in fiscal years beginning after December 15, 2017, and early adoption is permitted. We do not expect2020, including interim periods within those fiscal years. The Company adopted the adoptionprovisions of ASU 2016-152020-10effective January 1, 2021 and experienced no impact to have a material effect on our condensed consolidated financial statements and disclosures.In November 2016, the FASB issued ASU No. 2016-18, Statementas a result of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18")adoption. ASU 2016-16 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generallyTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSdescribed as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The guidance is not expected to have a material impact on our consolidated financial statements.In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for transactions, including acquisitions or dispositions, which occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material effect on the Company’s consolidated financial statements.In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017-05"). ASU 2017-05 clarifies the guidance for derecognition of nonfinancial assets and in-substance nonfinancial assets when the asset does not meet the definition of a business and is not a not-for-profit activity. ASU 2017-05 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but entities are required to adopt ASU 2017-05 at the same time they adopt ASU 2014-09. We expect to adopt the new standard under the modified retrospective approach. Under the modified retrospective approach, we will recognize the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. We are still evaluating the effects ASU 2017-05 will have on our consolidated financial statements. We expect that adoption may decrease our accrued expenses and other liabilities due to certain non-financial assets that were previously exchanged for a noncontrolling interest in an unconsolidated joint venture.In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting ("ASU 2017-09").The guidance provides clarity and reduces diversity in practice and cost and complexity when accounting for a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. The adoption of ASU 2017-09 is not expected to have a material impact on our consolidated financial statements. THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS2020:earningsloss per share for the three and nine months ended September 30, 2017 March 31, 2021 and 2016: $ 553 $ (8,476 ) 18,109,015 19,951,825 Stock options and unvested restricted stock units 311,616 0 18,420,631 19,951,825 Basic earnings (loss) per share $ 0.03 $ (0.42 ) Diluted earnings (loss) per share $ 0.03 $ (0.42 ) Antidilutive stock options and unvested restricted stock units not included in diluted earnings (loss) per share 1,397,559 1,785,826 16 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands, except per share amounts) Numerator: Net income attributable to The New Home Company Inc. $ 4,318 $ 5,547 $ 6,681 $ 7,242 Denominator: Basic weighted-average shares outstanding 20,876,315 20,711,952 20,839,507 20,675,233 Effect of dilutive shares: Stock options and unvested restricted stock units 123,358 85,779 109,992 89,247 Diluted weighted-average shares outstanding 20,999,673 20,797,731 20,949,499 20,764,480 Basic earnings per share attributable to The New Home Company Inc. $ 0.21 $ 0.27 $ 0.32 $ 0.35 Diluted earnings per share attributable to The New Home Company Inc. $ 0.21 $ 0.27 $ 0.32 $ 0.35 Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share 831,270 845,331 838,572 866,139 September 30, December 31, 2017 2016 (Dollars in thousands) Contracts receivable: Costs incurred on fee building projects $ 141,633 $ 178,103 Estimated earnings 4,474 8,404 146,107 186,507 Less: amounts collected during the period (134,400 ) (162,203 ) Contracts receivable $ 11,707 $ 24,304 Contracts receivable: Billed $ — $ — Unbilled 11,707 24,304 11,707 24,304 Accounts receivable: Escrow receivables 2,666 3,385 Other receivables 73 144 Contracts and accounts receivable $ 14,446 $ 27,833 Costs incurred on fee building projects $ 5,197 $ 79,583 Estimated earnings 104 1,420 5,301 81,003 Less: amounts collected during the period (4,152 ) (77,861 ) $ 1,149 $ 3,142 Billed $ 0 $ 0 Unbilled 1,149 3,142 1,149 3,142 Escrow receivables 3,581 1,782 Other receivables 400 0 $ 5,130 $ 4,924 billable pursuant to contract terms or administratively not invoiced. All unbilled receivables as of September 30, 2017 and DecemberMarch 31, 20162021 are expected to be billed and collectedTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSwithin 30 days. Accounts payable at September 30, 2017March 31, 2021 and December 31, 2016 includes $10.6 2020 includes $0.8million and $22.8$2.6 million, respectively, related to costs incurred under the Company’s fee building contracts. and Capitalized Interest September 30, December 31, 2017 2016 (Dollars in thousands) Deposits and pre-acquisition costs $ 41,262 $ 38,723 Land held and land under development 75,179 98,596 Homes completed or under construction 336,229 93,628 Model homes 25,871 55,981 $ 478,541 $ 286,928 $ 14,542 $ 12,202 120,930 127,807 174,086 133,567 42,031 41,381 $ 351,589 $ 314,957 non-refundable,nonrefundable, except for refundable deposits of $0.1 million and $4.1$0.1 million as of September 30, 2017March 31, 2021 and December 31, 2016,2020, respectively. include all.17associated with home construction, including land, development, indirects, permits, materialsrelated to the Epic Acquisition, which are included in general and labor.administrative expenses in the accompanying condensed consolidated statements of operations. Following the consummation of the Epic Acquisition, the Company repaid approximately $23.8 million of the Epic Companies’ third-party indebtedness. As of March 31, 2021, the purchase price accounting reflected in the accompanying condensed financial statements is preliminary and is based upon estimates and assumptions that may be subject to change within the measurement period (up to one year from the acquisition date pursuant to ASC 805). All net assets and operations acquired in this transaction are included in the Colorado homebuilding reporting segment in Note 15. The supplemental pro forma information for revenue and earnings of the Company as though the business combination had occurred as of January 1, 2020 has not been presented as this pro forma information was not deemed material for the periods ended March 31, 2021 or 2020.Property, Plant and Equipment (“ASC 360”), inventory is stated at cost, unless the carrying amount is determined not to be recoverable, in which case inventory is written down to its fair value. We review each real estate asset at the community level,community-level on a quarterly basis or whenever indicators of impairment exist. For the ninethree months ended September 30, 2017,March 31, 2021 and 2020, the Company recognized 0 real estate-related impairments of $1.3 millionimpairments. cost of sales resulting in a decreaseScottsdale, Arizona. Due to the lower demand levels experienced at this community coupled with the substantial investment required to build out the remainder of the same amountproject, the Company decided to income before income taxes for our homebuilding segment. Fair value forabandon the homebuildingfuture acquisition, development, construction and sale of future phases of the project impaired duringthat were under option. In accordance with ASC 970-360-40-1, the ninecapitalized costs related to the project are expensed and not allocated to other components of the project that the Company did develop. For the three months ended September 30, 2017 was calculated under a discounted cash flow model. The following table summarizes inventory impairmentsMarch 31, 2020, the Company recorded duringan abandonment charge of $14.0 million representing the three and nine months ended September 30, 2017 and 2016: Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in Thousands) Inventory impairments: Home sales $ — $ — $ 1,300 $ — Total inventory impairments $ — $ — $ 1,300 $ — Remaining carrying value of inventory impaired at period end $ — $ — $ 11,310 $ — Number of projects impaired during the period — — 1 — Total number of projects subject to periodic impairment review during the year (1)26 24 26 24 (1) Represents the peak number of real estate projectscapitalized costs that we had during each respective period. The number of projects outstanding at the end of each periodmay be less than the number of projects listed herein.The home sales impairments of $1.3 millionaccumulated related to homes completed or under construction for one active homebuilding community locatedthe portion of the project that was abandoned. This charge is included within project abandonment costs in Southern California. This community was experiencing a slow monthly sales absorptionthe accompanying condensed consolidated statements of operations.18rate, and the Company determined that additional incentives were required to sell the remaining homes and lots at estimated aggregate sales prices that would be lower than its previous carrying value.close.close, or in instances where lots are sold from the unconsolidated joint venture to the Company, the interest is added to the land basis and included in cost of sales when the related lots or homes are sold to third-party buyers. Interest expense is comprised of interest incurred but not capitalized and is reported as interest expense in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2017 March 31, 2021 and 20162020 interest incurred, capitalized and expensed was as follows: Interest incurred $ 5,331 $ 6,380 Interest capitalized to inventory (4,977 ) (5,662 ) $ 354 $ 718 $ 22,053 $ 26,397 4,977 5,662 Previously capitalized interest included in cost of home and land sales (4,027 ) (6,146 ) 0 (761 ) $ 23,003 $ 25,152 $ 0 $ 541 0 (448 ) 0 93 $ 23,003 $ 25,245 Capitalized interest as a percentage of inventory 6.5 % 6.3 % Interest included in cost of home sales as a percentage of home sales revenue 4.2 % 6.5 % Capitalized interest as a percentage of investment in unconsolidated joint ventures 0 % 0.3 % 19 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Interest incurred $ 6,780 $ 2,273 $ 15,217 $ 5,243 Interest capitalized to inventory (6,232 ) (2,273 ) (13,982 ) (5,243 ) Interest capitalized to investments in unconsolidated joint ventures (548 ) — (1,235 ) — Interest expensed $ — $ — $ — $ — Capitalized interest in beginning inventory $ 10,821 $ 5,449 $ 6,342 $ 4,190 Interest capitalized as a cost of inventory 6,232 2,273 13,982 5,243 Capitalized interest acquired from unconsolidated joint venture at consolidation 76 — 76 — Previously capitalized interest included in cost of sales (2,448 ) (1,306 ) (5,719 ) (3,017 ) Capitalized interest in ending inventory $ 14,681 $ 6,416 14,681 6,416 Capitalized interest in beginning investment in unconsolidated joint ventures 687 — — — Interest capitalized to investments in unconsolidated joint ventures 548 — 1,235 — Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon consolidation (76 ) — (76 ) — Previously capitalized interest included in equity in net income of unconsolidated joint ventures (5 ) — (5 ) — Capitalized interest in ending investments in unconsolidated joint ventures 1,154 — 1,154 — Total capitalized interest in ending inventory and investments in unconsolidated joint ventures $ 15,835 $ 6,416 $ 15,835 $ 6,416 Capitalized interest as a percentage of inventory 3.1 % 1.7 % 3.1 % 1.7 % Interest included in cost of sales as a percentage of home sales revenue 2.1 % 1.0 % 2.0 % 1.2 % Capitalized interest as a percentage of investments in and advances to unconsolidated joint ventures 2.0 % — % 2.0 % — % 5.and Advances to Unconsolidated Joint VenturesSeptember 30, 2017March 31, 2021 and December 31, 2016,2020, the Company had ownership interests in 11 and 13, respectively,nine unconsolidated joint ventures with ownership percentages that generally ranged from 5%10% to 35%50%. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method arewere as follows: September 30, December 31, 2017 2016 (Dollars in thousands) Cash and cash equivalents $ 27,380 $ 33,683 Restricted cash 15,003 8,374 Real estate inventories 409,633 386,487 Other assets 3,283 1,664 Total assets $ 455,299 $ 430,208 Accounts payable and accrued liabilities $ 34,452 $ 28,706 Notes payable 89,664 97,664 Total liabilities 124,116 126,370 The New Home Company's equity 50,593 46,857 Other partners' equity 280,590 256,981 Total equity 331,183 303,838 Total liabilities and equity $ 455,299 $ 430,208 Debt-to-capitalization ratio 21.3 % 24.3 % Debt-to-equity ratio 27.1 % 32.1 % As of September 30, 2017 and December 31, 2016, the Company had advances outstanding of approximately $5.1 million and $4.0 million, respectively, to these unconsolidated joint ventures, which were included in the notes payable balances of the unconsolidated joint ventures in the table above. The advances relate to an unsecured promissory note entered into on October 31, 2016 and amended on February 3, 2017 with Encore McKinley Village LLC ("Encore McKinley"), an unconsolidated joint venture of the Company. The note bears interest at 10% per annum and matures on October 31, 2017, with the right to extend to October 31, 2018 at the borrower's election. Cash and cash equivalents $ 15,539 $ 16,709 Restricted cash 250 611 Real estate inventories 0 3,172 Other assets 1,145 1,834 $ 16,934 $ 22,326 Accounts payable and accrued liabilities $ 12,898 $ 13,487 Notes payable 0 0 12,898 13,487 The New Home Company's equity(1) 903 2,107 Other partners' equity 3,133 6,732 4,036 8,839 $ 16,934 $ 22,326 arewere as follows: Revenues $ 5,353 $ 31,647 Cost of sales and expenses 5,152 30,285 $ 201 $ 1,362 $ 174 $ (1,937 ) 20October 15, 2025. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Revenues $ 45,889 $ 34,464 $ 107,680 $ 146,525 Cost of sales and expenses 45,463 32,047 108,772 130,147 Net income (loss) of unconsolidated joint ventures $ 426 $ 2,417 $ (1,092 ) $ 16,378 Equity in net income of unconsolidated joint ventures reflected in the accompanying consolidated statements of operations $ 99 $ 488 $ 606 $ 4,428 and nine months ended September 30, 2017 March 31, 2021 and 2016,2020, the Company recorded other-than-temporary, noncash impairment charges of $0 and $2.3 million, respectively. The 2020 impairment charge related to our investment in the Arantine Hills Holdings LP ("Bedford") joint venture and is included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. During the 2020first quarter, the Company agreed in principle to sell its interest in this joint venture to our partner for less than its carrying value. This transaction closed during the 2020third quarter. Pursuant to our agreement to sell our interest, the purchase price was $5.1 million for the sale of our partnership interest and we have an option to purchase at market up to 30% of the total lots from the masterplan community. $ 504 $ 4,624 0 3,065 $ 504 $ 1,559 0 961 $ 504 $ 598 $ 252 $ (2,226 ) $1.3 million, $3.8 million, $1.5$0.1 million and $6.3$0.4 million, respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note 11 to the unaudited condensed consolidated financial statements.12.21In August 2017, we acquired the remaining outside equity interestthe cost basis of our previous investment in unconsolidated joint ventures related to this joint venture, remeasured at fair value, are included in real estate inventories as of September 30, 2017.During the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture (Larkspur) allocated $0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $0.3 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.During June 2016, our LR8 Investors LLC unconsolidated joint venture (LR8) made its final distributions, allocated $0.5 million of income to the Company from a reduction in warranty reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the remaining warranty reserve, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $1.1 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.6. September 30, December 31, 2017 2016 (Dollars in thousands) Capitalized selling and marketing costs(1)$ 12,539 $ 10,101 Deferred tax asset, net 8,488 8,434 Property and equipment, net of accumulated depreciation 658 857 Prepaid expenses 3,411 1,907 $ 25,096 $ 21,299 $ 6,137 $ 5,895 27,349 27,866 5,166 4,816 2,589 2,480 5,511 6,331 2,886 2,997 2,000 0 317 318 $ 51,955 $ 50,703 (1)amortized $1.8 million, $5.1 million, $1.6 depreciated $1.2 million and $4.0$1.8 million of capitalized selling and marketing project costs to selling and marketing expenses during the three and nine months ended September 30, 2017 March 31, 2021 and 2016,2020, respectively.(2) The amount at March 31, 2021 includes approximately $26.9 million of expected federal income tax refunds due to the Company for net operating loss carrybacks. THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS7. $ 7,438 $ 7,276 6,434 5,641 8,782 3,172 3,191 7,106 4,575 5,683 7,834 2,898 3,112 3,180 3,538 1,254 $ 44,904 $ 36,210 At December 31, 2020, litigation reserves of $5.6 million were recorded related to construction defect claim reserves which consisted of $1.0 million for a claim-specific reserve and $4.6 million for IBNR construction defect claims. During the 2021first quarter, the Company increased its claim-specific reserve by $0.4 million and recorded estimated insurance receivables of the same amount as the self-insured retention deductible has been met for this claim. Also during the three months ended March 31, 2021, the Company recorded $0.4 million of additional IBNR reserves within litigation reserves. 22 September 30, December 31, 2017 2016 (Dollars in thousands) Warranty accrual $ 5,531 $ 4,931 Accrued compensation and benefits 5,284 6,786 Accrued interest 13,076 648 Completion reserve 2,258 1,355 Income taxes payable 1,669 7,147 Deferred profit from unconsolidated joint ventures 396 957 Other accrued expenses 2,470 1,594 $ 30,684 $ 23,418 Beginning warranty accrual for homebuilding projects 7,269 $ 7,195 Warranty provision for homebuilding projects 465 421 Warranty payments for homebuilding projects (706 ) (780 ) Adjustment to warranty accrual(1) 403 0 7,431 6,836 Beginning warranty accrual for fee building projects 7 28 Warranty provision for fee building projects 0 0 Warranty efforts for fee building projects 0 0 7 28 $ 7,438 $ 6,864 During the three months ended March 31, 2021, the Company recorded an adjustment of $0.2 million to increase its warranty accrual for homebuilding projects. The Company also recorded a corresponding increase of the same amount to its warranty insurance receivable included in other assets in the condensed consolidated balance sheets at March 31, 2021. The adjustment for the three months ended March 31, 2021 also includes $0.2 million of warranty reserves related to the Epic Acquisition. 23 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Beginning warranty accrual for homebuilding projects $ 5,076 $ 4,874 $ 4,608 $ 3,846 Warranty provision for homebuilding projects 411 369 1,013 1,174 Warranty assumed from joint venture at consolidation — — 358 469 Adjustment to warranty accrual — (1,065 ) — (1,065 ) Warranty payments for homebuilding projects (279 ) (168 ) (771 ) (414 ) Ending warranty accrual for homebuilding projects 5,208 4,010 5,208 4,010 Beginning warranty accrual for fee building projects 323 331 323 335 Warranty provision for fee building projects — — — — Warranty efforts for fee building projects — (6 ) — (10 ) Ending warranty accrual for fee building projects 323 325 323 325 Total ending warranty accrual $ 5,531 $ 4,335 $ 5,531 $ 4,335 8.Notes payable $ 280,291 $ 244,865 0 0 $ 280,291 $ 244,865 September 30, December 31, 2017 2016 (Dollars in thousands) 7.25% Senior Notes due 2022, net $ 318,452 $ — Senior unsecured revolving credit facility — 118,000 Total Notes Payable $ 318,452 $ 118,000 The carrying amount of our senior notes listed above is net of the unamortized discount of $2.3 million, unamortized premium of $1.9 million, and $6.1 million of debt issuance costs that are amortized to interest costs over the respective terms of the notes.THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, in a private placement.. The Existing Notes were issued at an offering price of 98.961% of their face amount, which representsrepresented a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional Notes" and, together, with the Existing Notes, the "2022 Notes"). The Additional Notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represented a yield to maturity of 6.438%. Existingoffering of the Original 2025 Notes, together with cash on hand, were used to repayredeem all borrowingsof the outstanding under2022 Notes at a redemption price of 101.813% of the Company’s senior unsecured revolving credit facilityprincipal amount thereof, plus accrued and unpaid interest to the redemption date. On February 24, 2021, the Company completed a tack-on private placement offering through the sale of an additional $35 million in aggregate principal amount of the 7.25% Senior Notes Due 2025 ("Additional 2025 Notes" and together, with the remainderOriginal 2025 Notes, the "2025 Notes"). The Additional 2025 Notes were issued at an offering price of 103.25% of their face amount, which represents a yield to be used for general corporate purposes. Net proceeds frommaturity of 6.427%. The carrying amount of the Additional2025 Notes listed above at March 31, 2021 is net of unamortized premium of $1.0 million and unamortized debt issuance costs of $5.7 million. The carrying amount of the 2025 Notes listed above at December 31, 2020 is net of unamortized debt issuance costs of $5.1 million. Unamortized premium and debt issuance costs are used for working capital, land acquisitionamortized and general corporate purposes. Interestcapitalized to interest costs using the effective interest method. Pursuant to the indenture governing our 2025 Notes (the "Indenture"), interest on the Existing2025 Notes and the Additional Notes (together the "Original Notes") will be paid semiannually in arrears on April 115 and October 1, which commenced October 1, 2017 and15 of each year, commencing on April 15, 2021. The 2025 Notes will mature on April 1, 2022. In accordance with its obligations under two registration rights agreements executed in connection with the private placements of the Original Notes, on September 8, 2017, the Company completed an exchange offer of the Original Notes for an equal principal amount of 7.25% Senior Notes due 2022 (the "Notes") which terms are identical in all material respects to the Original Notes except that the Notes are registered under the Securities Act of 1933, as amended (the "Securities Act") and are freely tradeable in accordance with applicable law. The2025 Notes are general senior unsecured obligations that rank equally in right of payment to all existing and future senior indebtedness, including borrowings under the Company's senior unsecured revolving credit facility. The Notes containIndenture contains certain restrictive covenants, including a limitation on additional indebtedness and a limitation on restricted payments. Restricted payments include, among other things, dividends, investments in unconsolidated entities, and stock repurchases. Under the limitation on incurring or guaranteeing additional indebtedness, we are permitted to incur specified categories of indebtedness but are prohibited, aside from those exceptions, from incurring further indebtedness if we do not satisfy either a leverage condition or an interest coverage condition. Exceptions to the limitation include, among other things, ( 1) borrowings of up to $260 million under existing or future bank credit facilities of up to the greater of (i) $100 million and (ii) 20% of our consolidated tangible assets, ( 2) non-recourse indebtedness, and ( 3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 20172021 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of up to the greater of $15 million.million and 3% of our consolidated tangible assets. The Indenture contains certain other covenants, among other things, the ability of the Company and its restricted subsidiaries to issue certain equity interests, make payments in respect of subordinated indebtedness, make certain investments,24Year Redemption Price 2022 103.625% 2023 101.813% 2024 100.000% 100%wholly owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture provides that the guarantee of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a "Restricted Subsidiary" (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an "Unrestricted Subsidiary" (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the Indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5% of consolidated tangible assets, no such release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company or any other Guarantor so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture.See Note 16 for information aboutAt March 31,2021 and December 31, 2020, all of the Company's subsidiaries were 100% owned subsidiaries and Guarantors. The New Home Company Inc. has no independent assets or operations and the guarantees of its subsidiaries are full unconditional and supplemental financial statementjoint and several. For more information about our guarantor subsidiaries groupregarding the Company's assets and non-guarantor subsidiaries group.operations, please see Note 15.25Facility") is with a bank group. FacilitySeptember 27, 2017, October 30, 2020, the Company entered into a ModificationCredit Agreement (the “Modification”“Credit Agreement” or “Credit Facility”) to itswith JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The Credit Facility. The Modification, among other things, (i) extends the maturity date of theAgreement provides for a $60 million unsecured revolving credit facility, to September 1, 2020, (ii) decreases (A) the total commitmentsmaturing April 30, 2023. The Credit Agreement also provides that, under the facility to $200 million from $260 million and (B) the accordion feature to $300 million from $350 million, (iii) revises certain financial covenants, including the tangible net worth, minimum liquidity, and interest coverage tests, in addition to providing relief on compliance with the interest coverage test so long ascircumstances, the Company maintains cash equalmay increase the aggregate principal amount of revolving commitments up to not less than the trailing twelve month consolidated interest incurred, and (iv) adds certain wholly owned subsidiaries as guarantors.an aggregate of $100 million. As of September 30, 2017, March 31, 2021 and December 31, 2020, we had no outstanding borrowings under the credit facility. Interest is payable monthly and is chargedCredit Facility. of 1-monthequal to either, at the Company’s election, LIBOR plus a margin ranging from 2.25%of 3.50% to 3.00%4.50% per annum, or base rate plus a margin of 2.50% to 3.50%, in each case depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter.ratio. As of September 30, 2017, March 31, 2021, the interest rate under the Credit Facility for the LIBOR-based rate was 3.98%. Pursuant to5.00% The covenants of the Credit Facility,Agreement include customary negative covenants that, among other things, restrict the Company is requiredCompany’s ability to maintainincur secured indebtedness, grant liens, repurchase or retire its senior unsecured notes, and make certain acquisitions, investments, asset dispositions and restricted payments, including stock repurchases. In addition, the Credit Agreement contains certain financial covenants, as defined inincluding requiring that the Credit Facility, includingCompany to maintain (i) a minimumconsolidated tangible net worth; (ii) maximumworth not less than $150 million plus 50% of the cumulative consolidated net income for each fiscal quarter commencing on or after June 30, 2020, (ii) a net leverage ratios;ratio not greater than 60%, (iii) a minimum liquidity covenant;of at least $10 million, and (iv) a minimum fixed chargean interest coverage ratio based on EBITDA (as detailed inno less than 1.75 to 1 or, if this test is not met, to maintain unrestricted cash equal to not less than the Credit Facility) totrailing 12 month consolidated interest incurred. The Credit Agreement includes customary events of default, and customary rights and remedies upon the occurrence of any event of default thereunder, including rights to accelerate the loans and terminate the commitments thereunder. As of September 30, 2017, March 31, 2021, the Company was in compliance with all financial covenants. For more informationfinancial covenants, please see Part I, Item 2, "Management's Discussionqualification requirements for a PPP loan. On April 24, 2020, out of an abundance of caution, the Company elected to repay the Loan and Analysisinitiated a repayment of Financial Conditionthe full amount of the Loan to the lender.Resultsthe remainder was repaid from an escrow account that was created for the benefit of Operations - Liquidity and Capital Resources - Senior Unsecured Revolving Credit Facility."the PPP lender prior to closing. 9.Fair Value Measurements and Disclosures, defines fair value as the price that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:••senior notes.2025 Notes. The estimated value is based on2025 Notes are classified as Level 2 inputs, which and primarily reflect estimated prices for our Notes obtained from outside pricing sources. September 30, 2017 December 31, 2016 Carrying Amount Fair Value Carrying Amount Fair Value (dollars in thousands) 7.25% Senior Notes due 2022, net (1)$ 318,452 $ 335,563 $ — $ — $ 280,291 $ 296,400 $ 244,865 $ 256,875 (1) The carrying value for the Senior Notes, as presented, is net of the unamortized discount of $2.3 million, unamortized premium of $1.9 million, and $6.1 million of debt issuance costs. The unamortized discount, unamortized premium and debt issuance costs are not factored into the estimated fair value. The Company determined that the fair value estimate of its unsecured revolving credit facility is classified as Level 3 within the fair value hierarchy. The Company had no outstanding balance on the revolving credit facility at September 30, 2017, and the estimated fair value of the outstanding revolving credit facility balance at December 31, 2016 approximated the carrying value due to the short-term nature of LIBOR contracts.ninethree months ended September 30, 2017, March 31, 2020, the Company recognized a real estate-relatedan other-than-temporary impairment adjustmentto its investment in unconsolidated joint ventures of $1.3 million$2.3 million. The impairment related to one homebuilding community.our agreement in principle to sell our interest in our Bedford joint venture to our partner for less than its current carrying value. This sale closed during the 2020third quarter. The impairment adjustment was made using Level 32 inputs and assumptions. The carrying valueFor more information on the investment in unconsolidated joint ventures impairment, please refer to Note 6.2710.business.business, including warranty and construction defect litigation. These claims and legal proceedings are of a nature that we believe are normal and incidental to a homebuilder. We make provisions for loss contingencies when they are probable and the amount of the loss can be reasonably estimated. Such provisions are assessed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. At December 31, 2020, our litigation reserves for construction defect claims totaled $5.6 million which consisted of $1.0 million for a claim-specific reserve and $4.6 million for IBNR construction defect claims. During the three months ended March 31, 2021, the Company increased its claim-specific reserve $0.4 million and recorded an additional $0.4 million toward its reserve for IBNR construction defect claims resulting in a total $6.4 million litigation reserve at March 31, 2021. As of December 31, 2020, the Company's insurance receivable was $4.8 million, partially offsetting the related litigation reserves, based on our estimates of meeting the self-insured retention deductibles. During the three months ended March 31, 2021, the Company increased its estimated insurance receivable by $0.4 million to offset the claim-specific reserve adjustment made to the litigation reserve during the quarter resulting in a total $5.2 million insurance receivable at March 31, 2021. Due to the inherent uncertainty and judgement used in these assumptions, our actual costs and related insurance recoveries could differ significantly from amounts currently estimated. Please refer to Note 1, Note 7 and Note 8 for more information on litigation reserves for construction defect claims and related insurance recoveries. In view of the inherent unpredictability of litigation, we generally cannot predict their ultimate resolution, related timing or eventual loss. At this time, we do not believe that our loss contingencies, individually or in the aggregate, are material to our consolidated financial statements.THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSconditions of real estate in the vicinity of the Company’s real estate and other environmental conditions of which the Company is unaware with respect to the real estate could result in future environmental liabilities.The Company has provided credit enhancements in connection with joint venture borrowings in the form of LTV maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of the unconsolidated joint ventures whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the share of the liability apportioned to us. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of September 30, 2017 and December 31, 2016, $46.4 million and $56.0 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $8.0 million and $8.6 million, respectively, as of September 30, 2017 and December 31, 2016. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion agreements. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion agreements to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from “bad boy acts” of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.September 30, 2017March 31, 2021 and December 31, 2016,2020, the Company had outstanding surety bonds totaling $48.8totaling $43.9 million andand $44.0 million, respectively. The estimated remaining costs to complete of such improvements as of September 30, 2017March 31, 2021 and December 31, 20162020 were $17.2 $18.2 million and $15.7$16.3 million, respectively. The beneficiaries of the bonds are various municipalities, homeowners associations, and other organizations. 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.On May 6, 2015,Company entered intoinception of a letterlease, or if a lease is subsequently modified, we determine whether the lease is an operating or financing lease. Our lease population is fully comprised of credit facility agreementoperating leases and includes leases for certain office space and equipment for use in our operations. For all leases with an expected term that allowsexceeds one year, right-of-use lease assets and lease liabilities are recorded within our condensed consolidated balance sheets. The depreciable lives of right-of-use lease assets are limited to the Companyexpected term which would include any renewal options we expect to exercise. The exercise of lease renewal options is generally at our discretion and certain affiliated unconsolidated joint ventures to issue up to $5.0 million in letters of credit. The agreement includes an option to increase this amount to $7.5 million, subject to certain conditions. As of September 30, 2017, our affiliated unconsolidated joint ventures had $1.8 million in outstanding letters of credit issued under this facility and the Company had no obligations associated with such outstanding JV letters of credit.During the 2017 third quarter, the Company amended a joint venture agreement pursuant to which it, among other things, agreed to acquire approximately 400 lots in Phase 1 of the joint venture project and posted a $5.1 million non-refundable deposit for the acquisition of such lots. The agreement allows for the Company to enter the property in advance of the closing date to perform certain improvements, which it expects to beginwe expect that in the 2018 second quarter. If the Company does not acquire the lots, it is obligated to reimburse the joint venture for these improvement costs. At this time, the Company estimatesnormal course of business, leases that the total cost for these improvementsexpire will be $17.0 million.renewed or replaced by other leases. Our lease agreements do not contain any residual value guarantees or material restrictive covenants. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the right-of-use lease assets and lease liabilities and are expensed as incurred. Right-of-use lease assets are included in other assets and totaled $2.9 million and $3.0 million, respectively, at March 31, 2021 and December 31, 2020. Lease liabilities are recorded in accrued expenses and other liabilities and totaled $3.1 million and $3.2 million, respectively, at March 31, 2021 and December 31, 2020.28 Lease costs included in general and administrative expenses $ 260 $ 311 Lease costs included in real estate inventories 63 97 Lease costs included in selling and marketing expenses 29 39 $ 352 $ 447 Lease cash flows (included in operating cash flows)(1) $ 298 $ 498 Remaining for 2021 891 2022 754 2023 631 2024 588 2025 479 Thereafter 0 $ 3,343 Less: Interest(2) 231 Present value of lease liabilities(3) $ 3,112 29 and nine months ended September 30, 2017 March 31, 2021 and 2016,2020, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling $1.8 million, $5.8 million, $2.6$0.2 million and $7.0$1.2 million, respectively. As of September 30, 2017March 31, 2021 and December 31, 2016, $0.3 million 2020, $17,000 and $0.2$0.1 million, respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to suchsuch costs.“Management Agreements”"Management Agreements"). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the three and nine months ended September 30, 2017 March 31, 2021 and 2016,2020, the Company earned $1.3 million, $3.8 million, $1.5$0.1 million and $6.3$0.4 million,THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSrespectively, in management fees, which have been recorded as fee building revenues in the accompanying condensed consolidated statements of operations. As of September 30, 2017March 31, 2021 and December 31, 2016, $0.1 million and $0.6 million, respectively, 2020, $36,000 of management fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.an entityentities that hashave investments in two of the Company's unconsolidated joint ventures. A separate memberventures, TNHC Meridian Investors LLC (which is owner of the Company's board of directors is also affiliated with ananother entity, that has investments in three of the Company's unconsolidated joint ventures. As of September 30, 2017, theTNHC Newport LLC, which entity owned our "Meridian" project) and TNHC Russell Ranch LLC ("Russell Ranch"). The Company's investment in these fivetwo joint ventures was $0.1 million at March 31, 2021 and $0.1 million at December 31, 2020. During the 2020second quarter, the Company made the decision to exit the Russell Ranch joint venture due to the low expected financial returns relative to future capital requirements and related risks. The Company determined that the value of its investment in Russell Ranch declined beyond its current carrying value and recorded a $20.0 million other-than-temporary impairment charge to write off its investment balance and record its estimated remaining costs to complete during the 2020second quarter. The joint venture completed the sale of Phases 2 and 3, its remaining developable lots, to a third-party purchaser during the 2020fourth quarter that resulted in the Company recording income of $4.5 million to equity in income (loss) of unconsolidated joint ventures, totaled $28.1 million. Duringpartially offsetting the 2017 other-than-temporary impairment recorded during the 2020second quarter, one of these quarter. The members agreed upon and distributed proceeds from the sale to the members less a reserve amount which is maintained by the joint venture agreements was amended to increaseaddress close out matters, such as warranty, contingent liabilities, remaining Phase 1 infrastructure improvements, and common amenity operations until turnover to homeowners’ association. Due to the Company's funding obligation by $4.0 million overjoint venture's close out status, the existing contribution cap. During the 2017 third quarter, the Company amended another one of these joint venture agreements pursuantmembers confirmed that no further preferred return would accrue or be payable and future distributions would be made 50% to which it, among other things, agreedIHP and 50% to acquire approximately 400 lots in Phase 1 of the project. At September 30, 2017, the Company had a $5.1 million non-refundable deposit outstanding related to this purchase.TL Fab LP, an affiliate of one of the Company's non-employee directors, was engaged by the Company and some of its unconsolidated joint ventures as a trade contractor to provide metal fabrication services. For the three and nine months ended September 30, 2017 and 2016, the Company incurred $0.1 million, $0.4 million, $32,000 and $0.2 million, respectively, for these services. The Company's unconsolidated joint ventures incurred $0.1 million, $0.7 million, $0.1 million and $0.5 million, respectively, for these services. Of these costs, $4,000 and $33,000 was due to TL Fab LP from the Company at September 30, 2017 and December 31, 2016, respectively, and $134,000 and $14,000 was due to TL Fab LP from the Company's unconsolidated joint ventures at September 30, 2017 and December 31, 2016, respectively.TNHC.360-20, ("ASC 360-20"), the Company defers its portion of the underlying gain from the joint venture's sale of these lots.lots to the Company. When the Company purchases lots directly from the joint venture, the deferred gain is recorded as a reduction to the Company's land basis on the purchased lots. In certain instances, a third party may purchase lots from our unconsolidated joint ventures with the intent to finish the lots. Then, the Company has an option to acquire these finished lots from the third party. In these instances, the Company defers its portion of the underlying gain and records the deferred gain as deferred profit from unconsolidated joint ventures included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. Once the lot is purchased by the Company, the pro-rata share of the previously deferred profit is recorded as a reduction to the Company's land basis in the purchased lots. In both instances,this instance, the gain is ultimately recognized when the Company delivers lots to third-partythird-party home buyers at the time of the home closing. In the instance where the Company no longer has an interest in the unconsolidated joint venture, the deferred gain related to lots purchased from the joint venture is recognized upon the Company's exit of the venture. At September 30, 2017 March 31, 2021 and December 31, 2016, $0.321, 2020, $0.1 million and $0.6 million, respectively, of deferred gain from lot sale transactions is included in accrued expenses and other liabilities inwith the accompanying condensed consolidated balance sheets as deferred profit fromTNHC-HW Cannery LLC ("Cannery") unconsolidated joint ventures. In addition, at September 30, 2017 and December 31, 2016, $0.7 million and $0.7 million, respectively, of deferred gain from lot sale transactionsventure remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets.oneCannery provides for reimbursements of its unconsolidated joint ventures, TNHC-HW Cannery LLC ("TNHC-HW Cannery"), requires profit participation payments due upon the closing of each home. Payment amounts are calculated based upon a percentage of estimated net profits and are due every 90 days after the first home closing.certain fee credits. During the ninethree months ended September 30, 2017,March 31, 2020 and 2021, the Company was refunded $0.2 million from TNHC-HW Cannerynot reimbursed for profit participation overpayments from prior periods due to a modification of the underlying calculation related to profit participation, and as of September 30, 2017, no profit participation was due to TNHC-HW Cannery. Also per the purchase agreement, the Company is due $0.1 million inany fee credits from TNHC-HW Cannery LLC at September 30, 2017 which is included in due from affiliates in the accompanying condensed consolidated balance sheets.Cannery. As of March 31, 2021 and December 31, 2016, $0.2 million of profit participation overpayments and $0.1 million2020, $0 in fee credits was due to the Company from TNHC-HW Cannery and included in due from affiliates in the accompanying consolidated balance sheets.Cannery. ("("Transition Date"). Mr. Davis is party to that certain Investor Rights Agreement filed as an exhibit to this Form 10-Q Report. As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services. Mr. Davis is expected to work approximately, but not more than, 20 consulting hours per month. For his services, he isMr. Davis was compensated $5,000 per month through June 26, 2019 when his contract was amended to extend its term one year and reduce his scope of services and compensation to $1,000 per month. His current agreement terminatesMr. Davis' contract was amended on JulyJune 26, 2018 with the option 2020 to extend the agreement term one year if mutually consented to by the parties. Either party may terminate the agreement at any time for any or no reason.with monthly compensation remaining $1,000 per month. At September 30, 2017, March 31, 2021, no fees were due to Mr. Davis for his consulting services. Additionally, the Company entered into a construction agreement effective September 7, 2017, with The Joseph and Terri Davis Family Trust Dated August 25, 1999 ("Davis Family Trust") of which Joseph Davis is a trustee. The agreement is aTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSfee building contract pursuant to which the Company will act in the capacity of a general contractor to build a single family detached home on land owned by the Davis Family Trust. For its services, the Company will receive a contractor's fee and the Davis Family Trust will reimburse the Company's field overhead costs.June 29, 2015, the Company formed a new unconsolidated joint venture and received capital credit in excess of our contributed land basis. As a result, the Company recognized $1.6 million in equity in net income of unconsolidated joint ventures and deferred $0.4 million in profit from unconsolidated joint ventures related to this transaction for the year ended December 31, 2015. During the three and nine months ended September 30, 2017, $0.1 million and $0.2 million, respectively, of the previously deferred revenue was recognized as equity in net income of unconsolidated joint ventures, and at September 30, 2017, $0.1 million remained unrecognized and included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.On January 15, 2016, the Company entered into an assignment and assumption of membership interest agreement (the “Buyout Agreement”) for its partner's interest in the TNHC San Juan LLC unconsolidated joint venture. Per the terms of the Buyout Agreement, the Company contributed $20.6 million to the joint venture, and the joint venture made a liquidating cash distribution to our partner for the same amount in exchange for its membership interest. Prior to the buyout, the Company accounted for its investment in TNHC San Juan LLC as an equity method investment. After the buyout, TNHC San Juan LLC is now a wholly owned subsidiary of the Company.During June 2016, our LR8 Investors LLC unconsolidated joint venture (LR8) made its final distributions, allocated $0.5 million of income to the Company from a reduction in warranty reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, accounts receivable, accounts payable, and accrued liabilities, including the remaining warranty reserve, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $1.1 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.As of September 30, 2017 and December 31, 2016, the Company had advances outstanding of approximately $5.1 million and $4.0 million, respectively, to an unconsolidated joint venture, Encore McKinley Village. The note bears interest at 10% per annum and matures on October 31, 2017, with the right to extend to October 31, 2018. For the three and nine months ended September 30, 2017, the Company earned $0.1 million and $0.4 million in interest income on the unsecured promissory note which is included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. As of September 30, 2017 and December 31, 2016, $3,000 and $44,000 of interest income was due to the Company and included in due from affiliates in the accompanying condensed consolidated balance sheets.On February 17, 2017 (the "Transition Date"), 14, 2019, the Company entered into a consulting agreement that transitioned Mr. Stelmar'sThomas Redwitz's role from that of Chief Investment Officer to a non-employee consultant to the Company. While an employee of the Company Mr. Stelmar served as an employee director of the Company's Board of Directors. The agreement also provides that effective upon Mr. Stelmar's termination of employment, he shall become a non-employee director and shall receive the compensation and be subject to the requirements of a non-employee director pursuant to the Company's policies. March 1, 2019. For his consulting services, Mr. Stelmar will beRedwitz was compensated $16,800$10,000 per month for a term of one year from the Transition Date with the optionmonth. The agreement originally was set to extend the agreement one yearexpire on each anniversaryMarch 1, 2020 and was extended upon mutual consent of the Transition Date if mutually consentedparties on a month to by the parties. Either party may terminate the agreement at any time for any or no reason. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award will continue month basis to vest in accordance with its original terms based on his continued provisiona reduced consulting fee of consulting services rather than continued employment.$5,000 per month. At September 30, 2017, March 31, 2021, no fees were due to Mr. StelmarRedwitz for his consulting services.30the 2017 second quarter, our Larkspur Land 8 Investors LLC unconsolidated joint venture (Larkspur) allocated $0.1 million of income to the Company from a reduction in cost to complete reserves, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our outside equity partner exited the joint venture. Upon the change in control, we were required to consolidate this venture as a wholly owned subsidiary and the Company assumed the cash, other assets, and accrued liabilities, including warranty and the remaining costs to complete reserves, of the joint venture. As part of this transaction, and in accordance with ASC 805, Business Combinations, the Company also recognized a gain of $0.3 million, which was included in equity in net income of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, due to the purchase of our JV partner's interest for less than its carrying value.In April 2017,2018, the Company entered into an agreement with an affiliate of IHP to purchase land fromin a master-plan community in Arizona for an affiliateestimated purchase price of an entity that owns more than 10%$3.8 million plus profit participation and marketing fees pursuant to contract terms. As of December 31, 2019, IHP was no longer affiliated with this development. The Company began taking down these lots during 2020. The Company took down approximately 24% and 0% of the Company'slots during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and December 31, 2020, the Company had an outstanding, common stocknonrefundable deposit of $0.1 million and is$0.2 million, respectively, related to this contract. The Company paid 0 master marketing fees to the seller during the three months ended March 31, 2021 and 2020, and has paid $22,000 in master marketing fees to date. onea former member of the Company's board of directors. The agreement allowsdirectors, and subsequently during the 2020third quarter, the Company sold its interest in this partnership to its joint venture partner. Prior to 2020,the Company had taken down all lots pursuant to this agreement, and for the three months ended March 31, 2021 and 2020, the Company paid $0 and $9,000 in master marketing fees to the seller, respectively. During the fourth quarter 2018, the Company entered into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns with profit participation and master marketing fees due to the seller pursuant to the agreement. As of December 31, 2020, the Company had taken down all the lots pursuant to this agreement, and for the three months ended March 31, 2021 and 2020, the Company paid $38,000 and $25,000 in master marketing fees to the seller, respectively. approximately 92 lots in Northern California in a phased takedownTHE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSfor a total purchase price of $16.1 million. As of September 30, 2017, the Company has taken down four lots and has a $0.5 million non-refundable deposit outstanding on the remaining lots.In August 2017, we acquired the remaining outside equity interest of our DMB/TNHC LLC (Sterling at Silverleaf) unconsolidated joint venture. The Company paid $2.6 millionmarket up to our joint venture partner and upon the change of control was required to consolidate this venture as it is now a wholly-owned subsidiary30% of the Company. There was no remeasurement gain or loss on our unconsolidated interest prior tototal lots from the change in control. The purchase consideration and the cost basis of our previous investment in unconsolidated joint ventures related to this joint venture are included in real estate inventories as of September 30, 2017.venture.12.“2014"2014 Incentive Plan”Plan"), was adopted by our board of directors in January 2014. The 2014 Incentive Plan provides for the grant of equity-based awards, including options to purchase shares of common stock, stock appreciation rights, restricted and unrestricted stock awards, restricted stock units and performance awards. The 2014 Incentive Plan will automatically expire on the tenth anniversary of its effective date.that are authorized to be issued under the 2014 Incentive Plan is 1,644,875 shares. To the extent that shares of the Company's common stock subject to an outstanding option, stock appreciation right, stock award or performance award granted under the 2014 Incentive Plan or any predecessor plan 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 common stock generally shall again be available under the 2014 Incentive Plan."2016"2016 Incentive Plan"). The 2016 Incentive Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and other stock- or cash-based awards. Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2016 Incentive Plan. The On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan authorizeswhich increased the number of shares authorized for issuance ofunder the plan from 800,000 shares of common stock, subject to certain limitations.2,100,000 shares. The amended and restated 2016 Incentive Plan will expire on February 23, 2026.April 4, 2028.September 30, 2017, 32,830March 31, 2021, 338 shares remain available for grant under the 2014 Incentive Plan and 122,300 shares remain available for grant under the 2014 Incentive Plan and 464,928 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock-basedstock option awards may not be less than the market value of the Company's common stock on the date of grant. The fair value for stock options is established at the date of grant using the Black-Scholes model for time-based vesting awards. The Company's stock optionoptions, restricted stock unit awards, and restricted stockperformance share unit awards typically vest over a one year to three year years period and the stock options expire ten years from the date of grant.31ninethree months ended September 30, 2017 March 31, 2021 and 20162020 is presented below: Nine Months Ended September 30, 2017 2016 Number of Shares Weighted-Average Exercise Price per Share Number of Shares Weighted-Average Exercise Price per Share Stock Option Activity Outstanding, beginning of period 835,786 $ 11.00 840,298 $ 11.00 Granted — $ — — $ — Exercised (9,288 ) $ 11.00 — $ — Forfeited — $ — (4,512 ) $ 11.00 Outstanding, end of period 826,498 $ 11.00 835,786 $ 11.00 Exercisable, end of period 826,498 $ 11.00 44,442 $ 11.00 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1,220,695 $ 9.18 1,068,017 $ 9.78 0 $ 0 161,479 $ 5.36 0 $ 0 0 $ 0 0 $ 0 0 $ 0 1,220,695 $ 9.18 1,229,496 $ 9.20 1,029,950 $ 9.86 901,829 $ 10.52 ninethree months ended September 30, 2017 March 31, 2021 and 20162020 is presented below: 704,890 $ 5.11 592,116 $ 6.36 363,198 $ 5.39 241,556 $ 5.36 (161,032 ) $ 6.86 (152,177 ) $ 9.45 0 $ 0 (428 ) $ 11.68 907,056 $ 4.91 681,067 $ 5.32 32 Nine Months Ended September 30, 2017 2016 Number of Shares Weighted-Average Grant-Date Fair Value per Share Number of Shares Weighted-Average Grant-Date Fair Value per Share Restricted Stock Unit Activity Outstanding, beginning of period 474,989 $ 10.66 308,386 $ 14.20 Granted 343,933 $ 10.84 414,045 $ 10.05 Vested (211,131 ) $ 10.75 (231,289 ) $ 14.22 Forfeited (26,194 ) $ 10.82 (11,796 ) $ 12.10 Outstanding, end of period 581,597 $ 10.72 479,346 $ 10.66 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Expense related to: Stock options $ — $ 300 $ 11 $ 747 Restricted stock units 780 560 2,075 1,855 $ 780 $ 860 $ 2,086 $ 2,602 $ 91 $ 64 554 525 $ 645 $ 589 N/A 6.0 N/A 41.8 % N/A 1.4 % N/A 0 N/A $ 2.24 September 30, 2017, March 31, 2021, the amount of unearned stock-based compensation currently estimated to be expensed through 20202024 is $4.6$3.8 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.82.1 years. If there are any modifications or cancellations of the underlying unvested awards, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.3313. Income TaxesFor the three months ended September 30, 2017 and 2016, the Company recorded a provision for income taxes of $2.7 million and $3.5 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded a provision for income taxes of $4.2 million and $4.7 million, respectively. Included in the nine month period for 2016 is an allocation of income from LR8 of $0.5 million due to a reduction in the warranty reserve and a $1.1 million gain from the closeout of LR8 due to the purchase of our JV partner's interest for less than its carrying value, which resulted in a provision for income taxes of $0.6 million for the nine month period ended September 30, 2016 and did not impact our effective tax rate. The effective tax rate for the three and nine months ended September 30, 2017 and 2016 differs from the 35% federal statutory tax rate due to state income taxes partially offset by the tax benefit of production activities.Each quarter we assess our deferred tax asset to determine whether all or any portion of the asset is more likely than not unrealizable under ASC 740. We are required to establish a valuation allowance for any portion of the asset we conclude is more likely than not unrealizable. Our assessment considers, among other things, the nature, frequency and severity of prior cumulative losses, forecasts of future taxable income, the duration of statutory carryforward periods, our utilization experience with operating loss and tax credit carryforwards and the planning alternatives, to the extent these items are applicable.The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. The Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements, nor has the Company been assessed interest or penalties by any major tax jurisdictions related to any open tax periods. Net operating loss carryforwards $ 5,808 $ 5,808 Tax credit carryforwards 2,479 2,401 Reserves and accruals 2,877 2,870 Share based compensation 1,512 1,441 Inventory 2,663 3,142 Investments in joint ventures 1,081 1,226 Other 96 26 Depreciation and amortization (655 ) (653 ) Right-of-use lease asset (804 ) (814 ) $ 15,057 $ 15,447 14.organizedorganized into two4 reportable segments: threehomebuilding segments (Arizona, California and Colorado) and fee building. In determining the most appropriate reportable segments, we considered similar economic and other characteristics, including product types, average selling prices, gross margins, production processes, suppliers, subcontractors, regulatory environments, land acquisition results,position, and underlying demand and supply in accordance with ASC Topic 280, Segment Reporting.280. Our California homebuilding reportable segment aggregates the Southern California and Northern California homebuilding operating segments.homes. homes and may sell land. Our fee building operations build homes and manage construction and sales related activities on behalf of third-partythird-party propertyowners and our joint ventures. In addition,While our Corporatecorporate operations conduct no independent construction, development, sales or land acquisition activities, our corporate operations develop and implement strategic initiatives and support our operating segments by centralizing key administrative functions such as accounting, finance and treasury, information technology, insurance and risk management, litigation, marketing and human resources. A portion of the expenses incurred by Corporatecorporate are allocated to the fee building segment primarily based on its respective percentage of revenues. The assets of our fee buildingrevenues and to each homebuilding segment primarily consist of cash, restricted cashbased on its respective investment in unconsolidated joint ventures and accounts receivable.real estate inventories balances. The majority ofof our Corporatecorporate personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance of any unallocated Corporatecorporate expenses and assets are included inallocated within our homebuilding segment.reportable segments. 34 $ 83,214 $ 83,280 0 147 7,698 12,379 Colorado home sales 2,943 0 93,855 95,806 5,301 36,227 $ 99,156 $ 132,033 $ 3,887 $ (4,451 ) (1,623 ) (14,692 ) Colorado(1) (1,364 ) 0 900 (19,143 ) 104 730 $ 1,004 $ (18,413 ) $ 305,740 $ 295,340 74,872 70,457 Colorado 50,502 0 431,114 365,797 1,783 3,756 106,835 126,146 $ 539,732 $ 495,699 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Revenues: Homebuilding $ 114,622 $ 125,142 $ 280,957 $ 246,281 Fee building, including management fees 43,309 52,761 146,107 125,726 Total $ 157,931 $ 177,903 $ 427,064 $ 372,007 Income before income taxes: Homebuilding $ 5,473 $ 7,113 $ 6,365 $ 6,207 Fee building, including management fees 1,501 1,929 4,474 5,663 Total $ 6,974 $ 9,042 $ 10,839 $ 11,870 September 30, December 31, 2017 2016 (Dollars in thousands) Assets: Homebuilding $ 625,300 $ 393,095 Fee building 12,807 26,041 Total $ 638,107 $ 419,136 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS15. $ 0 $ 0 $ 0 $ 0 Supplemental disclosures of non-cash transactions Assets acquired related to business combination, net of cash acquired $ 33,326 $ 0 Liabilities assumed and incurred related to business combination, net of $280 PPP loan forgiven $ 33,046 $ 0 35 Nine Months Ended September 30, 2017 2016 (Dollars in thousands) Supplemental disclosures of cash flow information Interest paid, net of amounts capitalized $ — $ — Income taxes paid $ 9,700 $ 8,270 Supplemental disclosures of non-cash transactions Assets assumed from unconsolidated joint ventures $ 3,877 $ 46,811 Liabilities and equity assumed from unconsolidated joint ventures $ 4,872 $ 47,197 16. Supplemental Guarantor InformationThe Company's 7.25% Senior Notes due 2022 (the "Notes") are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries (collectively, the "Guarantors"). The guarantees are full and unconditional. The Indenture governing the Notes provides that the guarantees of a Guarantor will be automatically and unconditionally released and discharged: (1) upon any sale, transfer, exchange or other disposition (by merger, consolidation or otherwise) of all of the equity interests of such Guarantor after which the applicable Guarantor is no longer a “Restricted Subsidiary” (as defined in the Indenture), which sale, transfer, exchange or other disposition is made in compliance with applicable provisions of the Indenture; (2) upon the proper designation of such Guarantor as an “Unrestricted Subsidiary” (as defined in the Indenture), in accordance with the Indenture; (3) upon request of the Company and certification in an officers’ certificate provided to the trustee that the applicable Guarantor has become an "Immaterial Subsidiary" (as defined in the indenture), so long as such Guarantor would not otherwise be required to provide a guarantee pursuant to the Indenture; provided that, if immediately after giving effect to such release the consolidated tangible assets of all Immaterial Subsidiaries that are not Guarantors would exceed 5.0% of consolidated tangible assets, no such release shall occur, (4) if the Company exercises its legal defeasance option or covenant defeasance option under the Indenture or if the obligations of the Company and the Guarantors are discharged in compliance with applicable provisions of the Indenture, upon such exercise or discharge; (5) unless a default has occurred and is continuing, upon the release or discharge of such Guarantor from its guarantee of any indebtedness for borrowed money of the Company and the Guarantors so long as such Guarantor would not then otherwise be required to provide a guarantee pursuant to the Indenture; or (6) upon the full satisfaction of the Company’s obligations under the Indenture; provided that in each case if such Guarantor has incurred any indebtedness in reliance on its status as a Guarantor in compliance with applicable provisions of the Indenture, such Guarantor’s obligations under such indebtedness, as the case may be, so incurred are satisfied in full and discharged or are otherwise permitted to be incurred by a Restricted Subsidiary (other than a Guarantor) in compliance with applicable provisions of the Indenture. The Company has determined that separate, full financial statements of the Guarantors would not be material to investors and, accordingly, supplemental financial information for the guarantors is presented.As the guarantees were made in connection with the first and second quarter 2017 offering of notes, the Guarantors’ condensed financial information is presented as if the guarantees existed during the period presented. If any subsidiaries are released from the guarantees in future periods, the changes are reflected prospectively.THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS September 30, 2017 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Assets Cash and cash equivalents $ 37,378 $ 24,861 $ 204 $ — $ 62,443 Restricted cash — 213 — — 213 Contracts and accounts receivable 20 15,609 6 (1,189 ) 14,446 Intercompany receivables 108,012 — — (108,012 ) — Due from affiliates — 554 — — 554 Real estate inventories — 478,541 — — 478,541 Investment in and advances to unconsolidated joint ventures — 56,814 — — 56,814 Investment in subsidiaries 429,469 — — (429,469 ) — Other assets 10,222 14,874 — — 25,096 Total assets $ 585,101 $ 591,466 $ 210 $ (538,670 ) $ 638,107 Liabilities and equity Accounts payable $ 270 $ 35,808 $ — $ — $ 36,078 Accrued expenses and other liabilities 13,577 18,189 107 (1,189 ) 30,684 Intercompany payables — 108,012 — (108,012 ) — Senior notes, net 318,452 — — — 318,452 Total liabilities 332,299 162,009 107 (109,201 ) 385,214 Stockholders' equity 252,802 429,457 12 (429,469 ) 252,802 Noncontrolling interest in subsidiary — — 91 — 91 Total equity 252,802 429,457 103 (429,469 ) 252,893 Total liabilities and equity $ 585,101 $ 591,466 $ 210 $ (538,670 ) $ 638,107 December 31, 2016 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Assets Cash and cash equivalents $ 16,385 $ 13,842 $ 269 $ — $ 30,496 Restricted cash — 585 — — 585 Contracts and accounts receivable 30 29,774 — (1,971 ) 27,833 Intercompany receivables 73,972 — — (73,972 ) — Due from affiliates — 1,138 — — 1,138 Real estate inventories — 286,928 — — 286,928 Investment in and advances to unconsolidated joint ventures — 50,857 — — 50,857 Investment in subsidiaries 268,411 — — (268,411 ) — Other assets 9,381 11,918 — — 21,299 Total assets $ 368,179 $ 395,042 $ 269 $ (344,354 ) $ 419,136 Liabilities and equity Accounts payable $ 167 $ 32,900 $ 27 $ — $ 33,094 Accrued expenses and other liabilities 5,489 19,763 108 (1,942 ) 23,418 Intercompany payables — 73,972 — (73,972 ) — Due to affiliates — 29 — (29 ) — Unsecured revolving credit facility 118,000 — — — 118,000 Total liabilities 123,656 126,664 135 (75,943 ) 174,512 Stockholders' equity 244,523 268,378 33 (268,411 ) 244,523 Noncontrolling interest in subsidiary — — 101 — 101 Total equity 244,523 268,378 $ 134 (268,411 ) 244,624 Total liabilities and equity $ 368,179 $ 395,042 $ 269 $ (344,354 ) $ 419,136 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 2017 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Revenues: Home sales $ — $ 114,622 $ — $ — $ 114,622 Fee building — 43,309 — — 43,309 — 157,931 — — 157,931 Cost of Sales: Home sales — 95,992 — — 95,992 Fee building 364 41,444 — — 41,808 364 137,436 — — 137,800 Gross Margin: Home sales — 18,630 — — 18,630 Fee building (364 ) 1,865 — — 1,501 (364 ) 20,495 — — 20,131 Selling and marketing expenses — (6,860 ) — — (6,860 ) General and administrative expenses (350 ) (6,115 ) — — (6,465 ) Equity in net income of unconsolidated joint ventures — 99 — — 99 Equity in net income of subsidiaries 4,695 — — (4,695 ) — Other income (expense), net 127 (58 ) — — 69 Income before income taxes 4,108 7,561 — (4,695 ) 6,974 Benefit (provision) for income taxes 210 (2,866 ) — — (2,656 ) Net income 4,318 4,695 — (4,695 ) 4,318 Net (income) loss attributable to noncontrolling interest in subsidiary — — — — — Net income attributable to The New Home Company Inc. $ 4,318 $ 4,695 $ — $ (4,695 ) $ 4,318 Three Months Ended September 30, 2016 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Revenues: Home sales $ — $ 125,142 $ — $ — $ 125,142 Fee building — 52,761 — — 52,761 — 177,903 — — 177,903 Cost of Sales: Home sales — 105,791 8 — 105,799 Fee building 540 50,292 — — 50,832 540 156,083 8 — 156,631 Gross Margin: Home sales — 19,351 (8 ) — 19,343 Fee building (540 ) 2,469 — — 1,929 (540 ) 21,820 (8 ) — 21,272 Selling and marketing expenses — (6,053 ) (2 ) — (6,055 ) General and administrative expenses (3,566 ) (2,902 ) — — (6,468 ) Equity in net income of unconsolidated joint ventures — 488 — — 488 Equity in net income of subsidiaries 8,230 — — (8,230 ) — Other income (expense), net (22 ) (173 ) — — (195 ) Income (loss) before income taxes 4,102 13,180 (10 ) (8,230 ) 9,042 Benefit (provision) for income taxes 1,445 (4,910 ) — — (3,465 ) Net income (loss) 5,547 8,270 (10 ) (8,230 ) 5,577 Net income attributable to noncontrolling interest in subsidiary — — (30 ) — (30 ) Net income (loss) attributable to The New Home Company Inc. $ 5,547 $ 8,270 $ (40 ) $ (8,230 ) $ 5,547 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2017 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Revenues: Home sales $ — $ 280,957 $ — $ — $ 280,957 Fee building — 146,107 — — 146,107 — 427,064 — — 427,064 Cost of Sales: Home sales — 238,514 31 — 238,545 Home sales impairments — 1,300 — — 1,300 Fee building 1,449 140,184 — — 141,633 1,449 379,998 31 — 381,478 Gross Margin: Home sales — 41,143 (31 ) — 41,112 Fee building (1,449 ) 5,923 — — 4,474 (1,449 ) 47,066 (31 ) — 45,586 Selling and marketing expenses — (18,237 ) — — (18,237 ) General and administrative expenses (1,504 ) (15,646 ) — — (17,150 ) Equity in net income of unconsolidated joint ventures — 606 — — 606 Equity in net income of subsidiaries 8,389 — — (8,389 ) — Other income (expense), net 171 (137 ) — — 34 Income (loss) before income taxes 5,607 13,652 (31 ) (8,389 ) 10,839 Benefit (provision) for income taxes 1,074 (5,242 ) — — (4,168 ) Net income (loss) 6,681 8,410 (31 ) (8,389 ) 6,671 Net loss attributable to noncontrolling interest in subsidiary — — 10 — 10 Net income (loss) attributable to The New Home Company Inc. $ 6,681 $ 8,410 $ (21 ) $ (8,389 ) $ 6,681 Nine Months Ended September 30, 2016 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Revenues: Home sales $ — $ 241,124 $ 5,157 $ — $ 246,281 Fee building — 125,881 — (155 ) 125,726 — 367,005 5,157 (155 ) 372,007 Cost of Sales: Home sales — 207,213 4,646 — 211,859 Fee building 1,506 118,557 — — 120,063 1,506 325,770 4,646 — 331,922 Gross Margin: Home sales — 33,911 511 — 34,422 Fee building (1,506 ) 7,324 — (155 ) 5,663 (1,506 ) 41,235 511 (155 ) 40,085 Selling and marketing expenses — (13,891 ) (686 ) — (14,577 ) General and administrative expenses (10,032 ) (7,444 ) — — (17,476 ) Equity in net income of unconsolidated joint ventures — 4,428 — — 4,428 Equity in net income of subsidiaries 14,678 — — (14,678 ) — Other income (expense), net (61 ) (542 ) (142 ) 155 (590 ) Income (loss) before income taxes 3,079 23,786 (317 ) (14,678 ) 11,870 Benefit (provision) for income taxes 4,163 (8,881 ) — — (4,718 ) Net income (loss) 7,242 14,905 (317 ) (14,678 ) 7,152 Net loss attributable to noncontrolling interest in subsidiary — — 90 — 90 Net income (loss) attributable to The New Home Company Inc. $ 7,242 $ 14,905 $ (227 ) $ (14,678 ) $ 7,242 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2017 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Net cash used in operating activities $ (20,466 ) $ (135,368 ) $ (65 ) $ (4,421 ) $ (160,320 ) Investing activities: Purchases of property and equipment (46 ) (99 ) — — (145 ) Cash assumed from joint venture at consolidation — 995 — — 995 Contributions and advances to unconsolidated joint ventures — (21,296 ) — — (21,296 ) Contributions to subsidiaries from corporate (207,849 ) — — 207,849 — Distributions of capital from subsidiaries 50,759 — — (50,759 ) — Distributions of capital from unconsolidated joint ventures — 13,650 — — 13,650 Interest collected on advances to unconsolidated joint ventures $ — $ 468 $ — $ — $ 468 Net cash used in investing activities $ (157,136 ) $ (6,282 ) $ — $ 157,090 $ (6,328 ) Financing activities: Proceeds from senior notes 324,465 — — — 324,465 Borrowings from credit facility 72,000 — — — 72,000 Repayments of credit facility (190,000 ) — — — (190,000 ) Payment of debt issuance costs (7,382 ) — — — (7,382 ) Contributions to subsidiaries from corporate — 207,849 — (207,849 ) — Distributions to corporate from subsidiaries — (55,180 ) — 55,180 — Minimum tax withholding paid on behalf of employees for stock awards (590 ) — — — (590 ) Proceeds from exercise of stock options 102 — — — 102 Net cash provided by financing activities $ 198,595 $ 152,669 $ — $ (152,669 ) $ 198,595 Net increase (decrease) in cash and cash equivalents 20,993 11,019 (65 ) — 31,947 Cash and cash equivalents – beginning of period 16,385 13,842 269 — 30,496 Cash and cash equivalents – end of period $ 37,378 $ 24,861 $ 204 $ — $ 62,443 THE NEW HOME COMPANY INC.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Nine Months Ended September 30, 2016 NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM (Dollars in thousands) Net cash (used in) provided by operating activities $ (16,393 ) $ (122,367 ) $ 3,293 $ (11,227 ) $ (146,694 ) Investing activities: Purchases of property and equipment (175 ) (204 ) — — (379 ) Cash assumed from joint venture at consolidation — 2,009 — — 2,009 Contributions and advances to unconsolidated joint ventures — (7,707 ) — — (7,707 ) Contributions to subsidiaries from corporate (179,004 ) — — 179,004 — Distributions of capital from subsidiaries 41,573 725 — (42,298 ) — Distributions of capital and repayment of advances to unconsolidated joint ventures — 13,977 — — 13,977 Net cash (used in) provided by investing activities $ (137,606 ) $ 8,800 $ — $ 136,706 $ 7,900 Financing activities: Borrowings from senior notes and credit facility 193,000 — — — 193,000 Repayments of credit facility (38,000 ) — — — (38,000 ) Borrowings from other notes payable — — 343 — 343 Repayments of other notes payable — (13,135 ) (2,501 ) — (15,636 ) Payment of debt issuance costs (1,064 ) — — — (1,064 ) Cash distributions to noncontrolling interest in subsidiary — — (725 ) — (725 ) Contributions to subsidiaries from corporate — 179,004 — (179,004 ) — Distributions to corporate from subsidiaries — (52,800 ) (725 ) 53,525 — Minimum tax withholding paid on behalf of employees for stock awards (647 ) — — — (647 ) Excess income tax provision from stock-based compensation (97 ) — — — (97 ) Net cash provided by (used in) financing activities $ 153,192 $ 113,069 $ (3,608 ) $ (125,479 ) $ 137,174 Net decrease in cash and cash equivalents (807 ) (498 ) (315 ) — (1,620 ) Cash and cash equivalents – beginning of period 18,129 27,140 605 — 45,874 Cash and cash equivalents – end of period $ 17,322 $ 26,642 $ 290 $ — $ 44,254 17. Subsequent EventsOn October 23, 2017, the Company acquired the remaining outside equity interest of our TNHC Tidelands LLC ("Tidelands") unconsolidated joint venture. TNHC Tidelands is the owner of an actively selling project in Northern California (the "Tidelands Project"). The Company paid $13.6 million to our joint venture partner for its interest and paid off the $4.1 million remaining balance on the joint venture's construction loan. Following the purchase, the Tidelands Project is a wholly owned active selling community of the Company.Item 2. of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements contained in this quarterly report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, and potential adverse impacts of the COVID-19 pandemic are forward-looking statements. These forward-looking statements are frequently accompanied by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “goal,” “plan”"believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "goal," "plan," "could," "can," "seeks," "might," "should," and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, financial needs, and financial needs.the potential adverse impacts due to COVID-19.“Risk Factors”"Risk Factors" and Part II, Item 7, “Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in our annual report on Form 10-K for the year ended December 31, 20162020 and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" of this quarterly report on 10-Q. The following factors, among others, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements:and economic impacts resulting from the measures enacted to contain this outbreak as the impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the situation on its financial condition, liquidity, operations, suppliers, customers, industry, and workforce; however, the Company is not able to estimate all the effects the COVID-19 outbreak will have on its results of operations, financial condition or liquidity for the year-ended December 31, 2021. Risks relatedstatements.ourbe uncertain of the full magnitude or duration of the business including among other things:◦ adverse impacts to our business due to the COVID-19 pandemic, including long-term economic impacts; ◦California;California and Arizona and the availability of land to acquire and our ability to acquire such land on favorable terms or at all;◦ mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs; ◦ the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;conditions ◦ availabilitythe illiquid nature of landreal estate investments and the inventory risks related to acquire and declines in value of such investments which may result in significant impairment charges; ◦ our ability to acquire such land on favorable terms or at all;execute our business strategies is uncertain;◦the illiquid nature of real estate investments;◦economic changes either nationally or in the markets in which we operate, including declines in employment, volatility of mortgage interest rates and inflation;◦ the degree and nature of our competition; ◦ inefficient or ineffective allocation of capital could adversely affect or operations and/or stockholder value if expected benefits are not realized; ◦ delays in the development of communities or a reduction in sales absorbtion levels; ◦ a reduction in our sales absorption levels may force us to incur and absorb additional community-level costs; customer;customer and the termination of this contract; regulatory approval delays, or other events outside our control;◦ construction defect, product liability, warranty, and warrantypersonal injury claims, including the cost and availability of insurance;◦ employment-related liabilities with respect to our contractors' employees; ◦ we may not be able to generate sufficient taxable income to fully realize our net deferred tax asset or an ownership change could limit our operating loss carryforwards; ◦ failure to comply with privacy laws or information systems interruption or breach in security;security that releases personal identifying information or other confidential information;Risks related to laws and regulations, including among other things:◦changesthe failure or inability to comply with, governmental lawsincrease costs and regulations; including environmental laws and regulations;◦mortgage financing, as well as our customer’s ability to obtain such financing, interest rate increases or changes in federal lending programs;◦the timing of receipt of regulatory approvals and the opening of projects;◦the impact of recent accounting standards;◦our retention of suitable contractors and subcontractors at reasonable rates;Risks related to financing and indebtedness, including among other things:◦Volatility and uncertaintydelays in the credit marketscompletion of our development projects;broader financial markets;prevent us from fulfilling our debt obligations, and we may incur additional debt in the future;our liquidity and availability, terms and deployment capital;◦issues concerning our joint venture partnerships, in which we have less than a controlling interest;leverage, interest expense, debt service obligationscurrent financing arrangements contain and our future financing arrangements will likely contain restrictive covenants related to our operations inoperations;current or future financing arrangements,credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us;under among other things:unsecured credit facility and our senior notes;Risks related to our structure and ownership of our common stock, including among other things:◦availability of qualified personnel and our ability to retaindependence on our key personnel;◦ that we are eligible to take advantage of reduced disclosure and governance requirements because of our status as an emerging growth company with a limited operating history;smaller reporting company; ◦◦liquidation.liquidation;time.time, such as COVID-19. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this quarterly report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.impairments, homebuilding gross margin before impairments percentage, adjusted homebuilding gross margin,interest in cost of home sales), adjusted homebuilding gross margin percentage and homebuilding gross margin and margin percentage before purchase accounting adjustments. For a reconciliation of adjusted net debt,income (loss) and adjusted net income (loss) per diluted share to the ratiocomparable GAAP measures, please see "--Overview." For a reconciliation of net debt-to-capital,adjusted homebuilding gross margin (or homebuilding gross margin before interest in cost of home sales), adjusted homebuilding gross margin percentage, and homebuilding gross margin and margin percentage before purchase accounting adjustments to the comparable GAAP measures please see "-- Results of Operations - Homebuilding Gross Margin." For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest incurred. For a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin percentage, the ratio of Adjusted EBITDA to total interest incurred homebuilding gross margin before impairments, and homebuilding gross margin before impairments percentage to the comparable GAAP measures please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations -"-- Selected Financial Information." For a reconciliation of adjusted homebuilding gross margin and adjusted homebuilding gross margin percentage to homebuilding gross margin under GAAP please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Homebuilding Gross Margin." For a reconciliation of net debt and ratio of net debt-to-capital to the comparable GAAP measures, please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations -"-- Liquidity and Capital Resources - Debt-to-Capital Ratios." For a reconciliation of general and administrative costs excluding acquisition transaction costs, general and administrative expenses excluding acquisition transaction costs as a percentage of homes sales revenue, selling, marketing and general and administrative expenses excluding acquisition transaction costs and selling, marketing and general and administrative expenses excluding acquisition transaction costs as a percentage of home sales revenue, please see "-- Results of Operations - Selling, General and Administrative Expenses." 38 $ 93,855 $ 95,659 — 147 5,301 36,227 99,156 132,033 77,848 84,722 — 147 5,197 35,497 83,045 120,366 16,007 10,937 — — 104 730 16,111 11,667 17.1 % 11.4 % N/A — % 2.0 % 2.0 % (6,654 ) (7,466 ) (8,271 ) (6,023 ) 174 (1,937 ) (354 ) (718 ) (68 ) (14,036 ) — (123 ) 66 223 1,004 (18,413 ) (451 ) 9,937 $ 553 $ (8,476 ) $ 0.03 $ (0.42 ) $ 0.03 $ (0.42 ) $ 5,331 $ 6,380 $ 8,163 $ 6,981 8.2 % 5.3 % $ 22,887 $ 27,438 $ 38,507 $ 41,536 Adjusted EBITDA margin percentage (1) 8.1 % 6.1 % 39 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Revenues: Home sales $ 114,622 $ 125,142 $ 280,957 $ 246,281 Fee building, including management fees from unconsolidated joint ventures of $1,324, $1,539, $3,755 and $6,251, respectively 43,309 52,761 146,107 125,726 157,931 177,903 427,064 372,007 Cost of Sales: Home sales 95,992 105,799 238,545 211,859 Home sales impairments — — 1,300 — Fee building 41,808 50,832 141,633 120,063 137,800 156,631 381,478 331,922 Gross Margin: Home sales 18,630 19,343 41,112 34,422 Fee building 1,501 1,929 4,474 5,663 20,131 21,272 45,586 40,085 Home sales gross margin 16.3 % 15.5 % 14.6 % 14.0 % Home sales gross margin before impairments (1)16.3 % 15.5 % 15.1 % 14.0 % Fee building gross margin 3.5 % 3.7 % 3.1 % 4.5 % Selling and marketing expenses (6,860 ) (6,055 ) (18,237 ) (14,577 ) General and administrative expenses (6,465 ) (6,468 ) (17,150 ) (17,476 ) Equity in net income of unconsolidated joint ventures 99 488 606 4,428 Other income (expense), net 69 (195 ) 34 (590 ) Income before income taxes 6,974 9,042 10,839 11,870 Provision for income taxes (2,656 ) (3,465 ) (4,168 ) (4,718 ) Net income 4,318 5,577 6,671 7,152 Net (income) loss attributable to noncontrolling interest — (30 ) 10 90 Net income attributable to The New Home Company Inc. $ 4,318 $ 5,547 $ 6,681 $ 7,242 Interest incurred $ 6,780 $ 2,273 $ 15,217 $ 5,243 Adjusted EBITDA(2)$ 10,248 $ 11,855 $ 21,508 $ 15,871 Adjusted EBITDA margin percentage 6.5 % 6.7 % 5.0 % 4.3 % LTM(3) Ended September 30, 2017 2016 Interest incurred $ 17,458 $ 6,670 Adjusted EBITDA(2) $ 48,781 $ 41,766 Adjusted EBITDA margin percentage (2) 6.5 % 7.4 % Ratio of Adjusted EBITDA to total interest incurred (2) 2.8x 6.3x (1)Home sales gross margin before impairments (also referred to as homebuilding gross margin before impairments) is a non-GAAP measure. The table below reconciles this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent. Three Months Ended September 30, Nine Months Ended September 30, 2017 % 2016 % 2017 % 2016 % (Dollars in thousands) Home sales revenue $ 114,622 100.0 % $ 125,142 100.0 % $ 280,957 100.0 % $ 246,281 100.0 % Cost of home sales 95,992 83.7 % 105,799 84.5 % 239,845 85.4 % 211,859 86.0 % Homebuilding gross margin 18,630 16.3 % 19,343 15.5 % 41,112 14.6 % 34,422 14.0 % Add: Home sales impairments — — % — — % 1,300 0.5 % — — % Homebuilding gross margin before impairments(1)$ 18,630 16.3 % $ 19,343 15.5 % $ 42,412 15.1 % $ 34,422 14.0 % (2)which is a non-GAAP measure, assists investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies' respective capitalization, interest costs, tax position, inventory impairments and inventory impairments.other non-recurring items. Due to the significance of the GAAP components excluded, Adjusted EBITDA should not be considered in isolation or as an alternative to net income (loss), cash flows from operations or any other performance measure prescribed by GAAP. The table below reconciles net income (loss), calculated and presented in accordance with GAAP, to Adjusted EBITDA, Adjusted EBITDA margin percentage and ratio of Adjusted EBITDA to total interest incurred.EBITDA. Three Months Ended September 30, Nine Months EndedSeptember 30, LTM(3) Ended September 30, 2017 2016 2017 2016 2017 2016 (Dollars in thousands) Net income $ 4,318 $ 5,577 $ 6,671 $ 7,152 $ 20,445 $ 19,365 Add: Interest amortized to cost of sales and other expense 2,453 1,306 5,719 3,017 8,033 4,698 Provision for income taxes 2,656 3,465 4,168 4,718 12,474 11,976 Depreciation and amortization 108 130 344 381 474 505 Amortization of equity-based compensation 780 860 2,086 2,602 2,955 3,761 Cash distributions of income from unconsolidated joint ventures — 836 1,588 1,931 3,399 9,894 Non-cash impairments and abandonments 32 169 1,538 498 5,120 582 Less: Gain from notes payable principal reduction — — — — (250 ) — Equity in income of unconsolidated joint ventures (99 ) (488 ) (606 ) (4,428 ) (3,869 ) (9,015 ) Adjusted EBITDA $ 10,248 $ 11,855 $ 21,508 $ 15,871 $ 48,781 $ 41,766 Total Revenue $ 157,931 $ 177,903 $ 427,064 $ 372,007 $ 749,513 $ 566,633 Adjusted EBITDA margin percentage 6.5 % 6.7 % 5.0 % 4.3 % 6.5 % 7.4 % Interest incurred $ 6,780 $ 2,273 $ 15,217 $ 5,243 $ 17,458 $ 6,670 Ratio of Adjusted EBITDA to total interest incurred 2.8x 6.3x Net income (loss) $ 553 $ (8,476 ) $ (23,840 ) $ (14,490 ) Interest amortized to cost of sales excluding impairment charges, and interest expensed 4,381 6,864 25,036 29,246 Provision (benefit) for income taxes 451 (9,937 ) (16,199 ) (13,088 ) Depreciation and amortization 1,256 1,845 6,132 8,146 Amortization of stock-based compensation 645 589 2,253 2,283 Cash distributions of income from unconsolidated joint ventures — — 110 114 Severance charges — — 1,091 — Acquisition transaction costs 983 — 983 — Noncash inventory impairments and abandonments 68 14,036 19,130 24,325 (Gain) loss on early extinguishment of debt — 123 7,131 (624 ) Equity in net (income) loss of unconsolidated joint ventures (174 ) 1,937 16,680 5,624 Adjusted EBITDA $ 8,163 $ 6,981 $ 38,507 $ 41,536 $ 99,156 $ 132,033 $ 474,534 $ 682,534 Adjusted EBITDA margin percentage 8.2 % 5.3 % 8.1 % 6.1 % $ 5,331 $ 6,380 $ 22,887 $ 27,438 (3)40Solid buyerfor new homescontinued through the first quarter across all of our regions and resulted in California continued into the 2017 third quarter. Neta 114% increase in net new orders were up 27% year-over-year andin the dollar value of our backlog was $330.6 million, a 14%2021 first quarter to 283 homes. The increase over the prior year third quarter. This increasein net new home orders was driven primarily by a 120% increase in our monthly sales absorption rate, with the 2021 first quarter monthly sales absorption pace of 2.54.4 representing the highest reported monthly sales perabsorption pace in the Company's history. While the Company’s affordable product offerings continue to grow as a percentage of its total community offerings, new home demand was evident across all product segments and contributed to ending the 2021 first quarter with a strong level of the number of homes in backlog, up 273% as compared to the end of the 2020 first quarter (up 208% excluding backlog related to Colorado). The increase in sales pace and improved pricing power experienced in the 2021 first quarter, as well as the prior two quarters, provided opportunities for meaningful price increases at many of the Company’s communities which represents a 47% improvement over ourhelped offset recent increases in construction costs and contribute to an increase in gross margin. The Company's gross margin percentage for the 2021 first quarter improved 570 basis points to 17.1% as compared to 11.4% in the prior year period. Additionally, our average selling price decreased from $2.1 million to $1.4 million as we continued to execute on our strategy to diversify our home offerings by including more affordably-priced product.Our net income2017 third2021 first quarter was $4.3were $99.2 million or $0.21 per diluted share, compared to $5.5$132.0 million or $0.27 per diluted share, in the prior year period. The year-over-year decrease in revenues was driven largely by an 85% decrease in fee building revenue as a result of a decrease in construction activity at fee building communities in Irvine, California. Net income for the 2021 first quarter was $0.6 million, or $0.03 per diluted share, compared to a net loss of $8.5 million, or $(0.42) per diluted share for the 2020 first quarter. The year-over-year increase in net income was primarily dueattributable to a 8% declinethe 570 basis point improvement in home sales revenue,gross margin percentage for the 2021 first quarter compared to the prior year period, and a 120 basis point increase$16.3 million reduction in selling and marketing expenses as a percent of home sales revenues, and decreases in fee building revenueproject abandonment and joint venture income. impairment charges. Adjusted net income for the 2021 first quarter, after excluding transaction costs and the remeasurement impact to the deferred tax asset related to the acquisition of Epic Homes, was $1.5 million*, or $0.08 per diluted share*, compared to an adjusted net loss of $1.1 million*, or ($0.05) per diluted share*, for the 2020 first quarter after excluding $16.3 million in pretax charges and a $2.1 million net deferred tax asset revaluation benefit.decrease in home sales revenue was attributable to a decline in average selling price primarily due to a product mix shift, as our home closing deliveries increased 40% year-over-year. Partially offsetting these items, our homebuilding gross margin increased 80 basis points to 16.3% and 190 basis points to 18.4%* when excluding interest in costCompany generated operating cash flow of sales.As a result of$2.5 million for the strong sales absorption pace during the2021 first nine months of 2017 coupled with the timing of new community openings and project close-outs, our wholly-owned community count decreased to 12 at the end of the 2017 third quarter, which was consistent with our expectations. We opened four new communities during the 2017 third quarter and anticipate opening five new communities in the 2017 fourth quarter, all of which are expected to be priced below $750,000.The Company ended the quarter with $62$114.8 million in cash and cash equivalents and had no debtborrowings outstanding under its $200 million unsecured revolving credit facility,facility. The Company also completed a $35 million tack-on offering of our 2025 Senior Notes during the 2021 first quarter that were issued at an effective yield of 6.427%. At March 31, 2021, the Company had a debt-to-capital ratio of 55.7%,58.7% and a net debt-to-capitaldebt-to capital ratio of 50.3%45.5%*. In addition,, which represented a 330-basis point improvement compared to the 2020 first quarter. The Company improvedalso repurchased 141,823 shares of our common stock during the 2021 first quarter for $0.8 million. lot portfolio by growingpipeline. The Company plans to execute a balanced approach of acquiring new land positions where it believes such investments will yield results that meet its wholly-owned lot count by 39%investment criteria and improve our operating metrics to 2,203 lots, of which over 60% were controlled through option contracts.generate positive shareholder returns, all while appropriately managing its financial position.Adjusted homebuilding gross margin (or homebuilding gross margin excluding interest in cost of sales)Adjusted net income (loss), adjusted net income (loss) per diluted share, and netnet debt-to-capital ratio are non-GAAP measures. For a reconciliation of adjusted net income (loss) and adjusted net income (loss) per diluted share to the appropriate GAAP measures, please see Item 2, "Management's Discussion and Analysisthe table below. For a reconciliation of Financial Condition and Results of Operations - Homebuilding Gross Margin." and "Management's Discussion and Analysis of Financial Condition and Results of Operations -net debt-to-capital to the appropriate GAAP measure, please see "-- Liquidity and Capital Resources - Debt-to-Capital Ratios." $ 553 $ (8,476 ) 781 — — 9,505 175 (2,114 ) $ 1,509 $ (1,085 ) $ 0.03 $ (0.42 ) $ 0.03 $ (0.42 ) $ 0.08 $ (0.05 ) $ 0.08 $ (0.05 ) 18,109,015 19,951,825 18,420,631 19,951,825 $ — $ 14,000 — 2,287 983 — (202 ) (6,782 ) $ 781 $ 9,505 % 57 62 (5 ) (8 )% 129 68 61 90 % Arizona 82 2 80 4,000 % 15 — 15 N/A 283 132 151 114 % 3.8 1.9 1.9 100 % 5.2 2.3 2.9 126 % 3.9 0.4 3.5 875 % 5.0 — N/A N/A 4.4 2.0 2.4 120 % 8 % 16 % (8 )% 5 11 (6 ) (55 )% 8 10 (2 ) (20 )% 7 1 6 600 % 3 — 3 23 22 1 5 % 5 11 (6 ) (55 )% 8 10 (2 ) (20 )% 7 2 5 250 % 1 — 1 N/A 21 22 (1 ) (5 )% 43 Three Months Ended
September 30, Increase/(Decrease) Nine Months Ended
September 30, Increase/(Decrease) 2017 2016 Amount % 2017 2016 Amount % Net new home orders: Southern California 43 39 4 10 % 143 105 38 36 % Northern California 38 25 13 52 % 162 79 83 105 % Total 81 64 17 27 % 305 184 121 66 % Selling communities at end of period: Southern California 7 8 (1 ) (13 )% Northern California 5 5 — — % Total 12 13 (1 ) (8 )% Average selling communities 11 12 (1 ) (8 )% 12 11 1 9 % Monthly sales absorption rate per community (1)2.5 1.7 0.8 47 % 2.8 1.8 1.0 56 % Cancellation rate 11 % 11 % — % N/A 9 % 12 % (3 )% N/A (1) Monthly sales absorption represents the number of net new home orders divided by the number of average selling communities for the period.2017 third2021 first quarter increased 27%114% as compared to the same period in 20162020 primarily due to ana 120% increase in theour monthly sales absorption rate.rate to 4.4 net orders per community in the 2021 first quarter. The improvement2020 first quarter absorption rates were negatively impacted by slower sales activity and cancellations due to stay-at-home orders implemented related to COVID-19 during the latter part of the 2020 first quarter, fear in the overall economic markets which resulted in volatile equity markets and severe and sudden job losses. The improved demand experienced since the beginning of June 2020 steadily grew in the 2020 third and fourth quarters and continued into the 2021 first quarter with February reaching the highest monthly net order total in the Company's history at 4.8 net orders per community. We continue to attribute the higher level of demand to a number of factors, including low interest rates, an undersupply of homes, consumers’ increased focus on the importance of the home and strong equity markets. The Company also benefited from the success of its enhanced virtual selling platform from which a large portion of our net new orders were generated from during the 2021 first quarter. Home buyers continue to demonstrate an increased level of comfort with shopping for homes online allowing our sales team to identify qualified, motivated buyers and converting those leads into sales.rate was driven by solid order activity in both Southern and Northern California. Southern California experienced monthly absorptionpace at our more-affordable, entry-level product continued to out-pace the company average for the 2021 first quarter. For the 2021 first quarter, entry-level communities recorded net new orders of 2.25.3 sales per month, per actively selling community compared to 1.8 ina 2021 first quarter companywide monthly sales pace of 4.4 per community. Orders from entry-level communities grew to total approximately 58% of total net new orders for the 2021 first quarter from approximately 40% of total net new orders for the prior year period, while high buyer demand resulted inperiod.52% increase in monthly sales absorption to 2.9 sales percommunitycancellation rate of 8% for Northern Californiathe 2021 first quarter compared to 16% in the 2016 third2020 first quarter. The Company continued to experience modest cancellation rates during 2017 with cancellation rates of 11% and 9%, respectively, for the three and nine months ended September 30, 2017. We believe our cancellation rate is oneOver half of the lower rates in the industry due to many factors, including the high level of personalized options that our homebuyers select for our higher-priced product, which we believe creates an emotional attachment, and a higher proportion of affluent buyers with strong credit profiles.Net new home orders for the nine months ended September 30, 2017 were up 66% overcancellations during the prior year period 2020 first quarter occurred during the second half of the month of March, primarily due to an increase in monthly absorption rates in both Southern California and Northern California. Monthly absorption for Southern California increased to 2.4 sales per community foras a result of the nine months ended September 30, 2017 from 1.9 sales per community for the nine months ended September 30, 2016. In Northern California, the monthly absorption rate doubled to 3.4 sales per community for the nine months ended September 30, 2017 compared to 1.7 for the same period in 2016.economic impact COVID-19 had on our buyers. As of September 30, 2017 2016 % Change Homes Dollar Value Average Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California 103 $ 274,037 $ 2,661 92 $ 262,224 $ 2,850 12 % 5 % (7 )% Northern California 79 56,602 716 37 27,971 756 114 % 102 % (5 )% Total 182 $ 330,639 $ 1,817 129 $ 290,195 $ 2,250 41 % 14 % (19 )% 81 $ 61,820 $ 763 66 $ 53,934 $ 817 23 % 15 % (7 )% 231 158,628 687 105 71,082 677 120 % 123 % 1 % Arizona 224 91,872 410 3 5,141 1,714 7,367 % 1,687 % (76 )% Colorado 113 110,772 980 — — — N/A N/A N/A 649 $ 423,092 $ 652 174 $ 130,157 $ 748 273 % 225 % (13 )% a sales contractcontracts with a customer,customers, but for which we have not yet delivered the home.homes. The dollar valuenumber of homes in backlog as of March 31, 2021 was up 14% year-over-year273% as compared to $330.6 million, notwithstanding increased order activity from new communities with more relatively affordably-priced product. The increase wasthe prior year period primarily due to a 41%higher number of beginning backlog units, the 114% increase in net new orders during the quarter, a lower backlog conversion rate for the 2021 first quarter, and the assumption of 102 homes in backlog related to the acquisition of Epic Homes. Our backlog conversion rate was 36% for the 2021 first quarter as compared to 72% in the prior year period. The decrease in the 2021 conversion rate was due to a 175% increase in beginning backlog for the 2021 first quarter as a result of increased presold homes during the third and fourth quarters of 2020 due to strong demand trends across all our markets. The dollar value of backlog at the end of the 2021 first quarter was up 225% year-over-year to $423.1 million, primarily due to the higher number of homes in backlog resulting from higher sales absorption rates and the acquired backlog from Epic Homes, which was partially offset by a 19%13% decrease in average selling price of homes in backlog as the Company continues to diversify its product offerings, including its expansion into more affordable communities in Arizona.product mix shift.90% increase in orders during the 2021 first quarter and a higher number of beginning backlog units to start the quarter. The increase in the number of homes in Northern California backlog contributed to a 123% increase in backlog dollar value.September 30, 2017 compared to the prior year period was largely the resultMarch 31, 2021 were comprised of higher monthly sales absorption rates. The higher dollar value and46 homes from a first time move community in Aurora with an average selling price of homes in Southern California backlog as compared to Northern California was due to higher-pricedof approximately $592,000, and 67 homes from two second move-up communities in the Newport Coast areaBroomfield and Parker with average selling prices of Southern California where we have two coastal luxury communities where average home priceshomes in backlog range from $4.8of $1.3 million to $7.8 million.and $1.1 million, respectively. September 30, Increase/(Decrease) 2017 2016 Amount % Lots Owned: Southern California 579 287 292 102 % Northern California 268 339 (71 ) (21 )% Total 847 626 221 35 % Lots Controlled: (1) Southern California 348 693 (345 ) (50 )% Northern California 669 265 404 152 % Arizona 339 — 339 NA Total 1,356 958 398 42 % Total Lots Owned and Controlled - Wholly Owned 2,203 1,584 619 39 % Fee Building (2)815 981 (166 ) (17 )% Total Lots Owned and Controlled 3,018 2,565 453 18 % % 248 437 (189 ) (43 )% 536 588 (52 ) (9 )% 483 385 98 25 % Colorado 150 — 150 N/A 1,417 1,410 7 0 % 589 426 163 38 % 229 348 (119 ) (34 )% 125 279 (154 ) (55 )% Colorado 142 — 141 N/A 1,085 1,053 31 3 % 2,502 2,463 38 2 % 38 1,070 (1,032 ) (96 )% (1)(2)Consistent with our focus on growing our wholly owned business, the Company increased the number ofby 39%as of March 31, 2021 increased 2% year-over-year to 2,2032,502 lots, 62% of which 43% were controlled through option contracts.contracts in both periods. The increase in wholly owned lots owned and controlled was due to our planned expansion294 lots we assumed control of in Arizona where we entered into contracts on four land parcels totaling 339 aggregateconnection with the acquisition of Epic Homes in Denver, Colorado, partially offset by more deliveries in the last twelve months ended March 31, 2021 than lots as well as onecontracted during the same period and the termination of a purchase contract for 394 lots in Northern California that the Company decided to no longer pursue. The Company had reduced the level of land acquisition over the last two years as a larger development in Folsom, CA.result of its focus to generate cash flows and reduce its leverage, however, during the latter part of 2020 and into 2021, the Company has been actively evaluating new land opportunities to rebuild its pipeline.September 30, 2017March 31, 2021 as compared to the prior year period was primarily attributable to the Company delivering a substantial numberdelivery of homes into customers during the last twelve months ended September 30, 2017, offset partiallyMarch 31, 2021, and as a result of the decision made by contracts from the Company'sIrvine Pacific, previously our largest customer, awardedto wind down its fee building arrangement with the Company, which ceased in the 2017 second quarter2021 first quarter. Please see “Fee Building” section below for five new fee building communities totaling 587 lots.additional information. Three Months Ended September 30, 2017 2016 % Change Homes Dollar Value Average Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California 39 $ 79,494 $ 2,038 36 $ 105,789 $ 2,939 8 % (25 )% (31 )% Northern California 45 35,128 781 24 19,353 806 88 % 82 % (3 )% Total 84 $ 114,622 $ 1,365 60 $ 125,142 $ 2,086 40 % (8 )% (35 )% Nine Months Ended September 30, 2017 2016 % Change Homes Dollar Value Average Price Homes Dollar Value Average Price Homes Dollar Value Average Price (Dollars in thousands) Southern California 88 $ 190,696 $ 2,167 67 $ 189,996 $ 2,836 31 % — % (24 )% Northern California 114 90,261 792 64 56,285 879 78 % 60 % (10 )% Total 202 $ 280,957 $ 1,391 131 $ 246,281 $ 1,880 54 % 14 % (26 )% 52 $ 37,541 $ 722 68 $ 63,017 $ 927 (24 )% (40 )% (22 )% 70 45,673 652 29 20,264 699 141 % 125 % (7 )% Arizona 20 7,698 385 10 12,378 1,238 100 % (38 )% (69 )% Colorado 4 2,943 736 �� — — — N/A N/A N/A 146 $ 93,855 $ 643 107 $ 95,659 $ 894 36 % (2 )% (28 )% 40% during36% for the 2017 third2021 first quarter as compared to the same period in 2016.prior year period. The increase in deliveries was the result of a higher number of homes in backlog at the beginning of the period and an increase in net new home orders during the 2017 third quarter. While home deliveries were up, homebacklog. Home sales revenue decreased 8% duringfor the 2017 third quarter as compared to the prior year periodthree months ended March 31, 2021 declined 2% year-over-year, primarily due to a 35% declinethe 28% decrease in average sales price per delivery, as Northern California accounted for a larger proportion of deliverieswhich was partially offset by the increase in the 2017 period, as well as a product mix shift in our Southern California deliveries. The mix shiftdecrease in Southern California isaverage selling price for the period was consistent with the Company's strategystrategic shift to expand itsmore-affordable product portfolioand increased deliveries from the Company's Northern California and Arizona operations.include more affordably-priced homes. Thea decrease in backlog conversion rate, a lower community count and a 22% decrease in average selling price for Southern Californiadue to the prior year period including deliveries from several higher-priced, closed-out Orange County and Los Angeles communities. The decrease in home sales revenue during the 2017 third2021 first quarter for Arizona was influenced by deliveries from our higher-priced luxuryprimarily due to a 69% decrease in average sales price due to product in Newport Coast, but wasmix and, partially offset by two lower-priced communities in Irvine, CA. We expect to see a higher average sales price on a consolidated basis and in Southern California in the 2017 fourth quarter as we deliver more homes from our two Crystal Cove communities in Newport Coast, CA.New home deliveries increased 54% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The100% increase in deliveries was the result of a higher number of homes in backlog at December 31, 2016 and an increase in net newunits delivered. In Northern California, home orders during the nine month period. Home sales revenue for the nine months ended September 30, 20172021 first quarter increased 14% compared125% due to a 141% increase in homes delivered, partially offset by a 7% decrease in average selling price related to a shift in deliveries from the higher-priced Bay Area to the same periodmore-affordable Sacramento region. The Colorado division also contributed $2.9 million in 2016 primarily due tohome sales revenue from the delivery of four homes from its acquired backlog as of February 26, 2021, three of which were from a first time move community in Aurora with an increase in new home deliveries, offset partially by a 26% decline in average sales price per delivery for the period. The year-over-year decreaseof $611,000, and one delivery from a second move up community in averageBroomfield with a sales price related to increased contributions from Northern California and a product mix shift for both Southern California and Northern California as deliveries from lower-priced communities increased in proportion to total new home deliveries.of $1.1 million.2017 third2021 first quarter was 16.3%,17.1% compared to 15.5%11.4% for the 2016 third quarter.prior year period. The 80570 basis point improvement in homebuilding gross margin during the 2017 third quarter was primarily due to a change in product mix including the favorable impactshift, pricing increases and a 230 basis point decrease in interest costs included in cost of home sales. The positive product mix shift was driven by a higher percentage of our total homes sales revenue generated at more affordably-priced communities, which had higher gross margins, as well as more deliveries at one higher margin communities locatedmove-up community in Santa Clara inSacramento, California. The 2021 first quarter cost of home sales included $295,000 of purchase accounting adjustments related to the Bay Area and Newport Coast in Southern California.acquisition of Epic Homes. Excluding these adjustments, gross margin from home sales for the 2021 first quarter was 17.4%*. Adjusted homebuilding gross margin, which excludes interest in cost of home sales, the adjusted homebuilding gross margin percentageswas 21.3% and 17.9% for the three months ended September 30, 20172021 and September 30, 2016 were 18.4% and 16.5%,2020 first quarters, respectively. Adjusted homebuilding grossmargin is a non-GAAP measure. See the table below reconciling this non-GAAP financial measure to homebuilding gross margin, the nearest GAAP equivalent.Homebuilding gross margin for Excluding the nine months ended September 30, 2017 was 14.6% versus 14.0%impact of interest in cost of sales, the prior period and for the 2017 period, included a $1.3 million non-cash inventory impairment charge related to one homebuilding community in Southern California due to slow monthly sales absorption and our determination that additional incentives would be required. Excluding inventory impairment charges, homebuilding gross margin before impairments for the nine months ended September 30, 2017 was 15.1% versus 14.0% for the same period in 2016. The 110340 basis point improvement in homebuilding gross margin before impairmentsthe 2021 first quarter was primarily due tothe result of a change in product mix. Excluding home sales impairmentsmix shift and interest in cost of home sales,improved pricing power experienced over the adjustedlast three quarters. $ 93,855 100.0 % $ 95,659 100.0 % 77,848 82.9 % 84,722 88.6 % 16,007 17.1 % 10,937 11.4 % 4,027 4.2 % 6,146 6.5 % $ 20,034 21.3 % $ 17,083 17.9 % Home sales revenue $ 93,855 100.0 % $ 95,659 100.0 % Cost of home sales 77,848 82.9 % 84,722 88.6 % Homebuilding gross margin 16,007 17.1 % 10,937 11.4 % Add: Purchase accounting adjustments 295 0.3 % N/A Homebuilding gross margin before purchase accounting adjustments(1) $ 16,302 17.4 % $ 10,937 11.4 % gross margin percentages for the nine months ended September 30, 2017 and September 30, 2016 were 17.1%, and 15.2%, respectively. Homebuilding gross margin before impairments and adjusted homebuilding gross margin are non-GAAP measures. See the table below reconciling these non-GAAP financial measures to homebuilding gross margin, the nearest GAAP equivalent. Three Months Ended September 30, Nine Months Ended September 30, 2017 % 2016 % 2017 % 2016 % (Dollars in thousands) Home sales revenue $ 114,622 100.0 % $ 125,142 100.0 % $ 280,957 100.0 % $ 246,281 100.0 % Cost of home sales 95,992 83.7 % 105,799 84.5 % 239,845 85.4 % 211,859 86.0 % Homebuilding gross margin 18,630 16.3 % 19,343 15.5 % 41,112 14.6 % 34,422 14.0 % Add: Home sales impairments — — % — — % 1,300 0.5 % — — % Homebuilding gross margin before impairments(1)18,630 16.3 % 19,343 15.5 % 42,412 15.1 % 34,422 14.0 % Add: Interest in cost of home sales 2,448 2.1 % 1,306 1.0 % 5,719 2.0 % 3,017 1.2 % Adjusted homebuilding gross margin(1)$ 21,078 18.4 % $ 20,649 16.5 % $ 48,131 17.1 % $ 37,439 15.2 % (1)Homebuilding gross margin before impairments and adjustedmargin percentage (or homebuilding gross margin excluding interest in cost of homes sales) and homebuilding gross margin and margin percentage before purchase accounting adjustments are non-GAAP financial measures. We believe this information is meaningful as it isolates the impact that home sales impairmentsleverage, our cost of debt capital and leveragepurchase accounting have on homebuilding gross margin and permits investors to make better comparisons with our competitors who also break out and adjust gross margins in a similar fashion.Fee Building Three Months Ended September 30, Nine Months Ended September 30, 2017 % 2016 % 2017 % 2016 % (Dollars in thousands) Fee building revenues $ 43,309 100.0 % $ 52,761 100.0 % $ 146,107 100.0 % $ 125,726 100.0 % Cost of fee building 41,808 96.5 % 50,832 96.3 % 141,633 96.9 % 120,063 95.5 % Fee building gross margin $ 1,501 3.5 % $ 1,929 3.7 % $ 4,474 3.1 % $ 5,663 4.5 % Our fee building revenues include (i) billings to third-party land owners for general contracting services and (ii) management fees from our unconsolidated joint ventures for construction and sales management services. Cost of fee building includes (i) labor, subcontractor, and other indirect construction and development costs that are reimbursable by the land owner and (ii) general and administrative, or G&A, expenses that are attributable to fee building activities and joint venture management overhead. Besides allocable G&A expenses, there are no other material costs associated with management fees from our unconsolidated joint ventures.Billings to land owners are a function of construction activity and reimbursable costs are incurred as homes are started. The total billings and reimbursable costs are driven by the pace at which the land owner executes its development plan. Management fees from our unconsolidated joint ventures are collected over the project's life and increase as homes and lots are delivered.ForSeptember 30, 2017,March 31, 2020, the Company recognized $147,000 of deferred revenue for the remaining completed work on a land sale that initially occurred in the 2019 third quarter. The Company did not record any land sales during the three months ended March 31, 2021.18%85% from the prior year periodperiod. The decrease in fee revenues resulted primarily due tofrom a decrease in costs incurred fromconstruction activity at fee building activity resulting fromcommunities in Irvine, California. In August 2020, Irvine Pacific, previously our largest customer, made a lower number ofdecision to begin building homes under construction during the period. Included inusing their own general contractor’s license, effectively terminating our fee building arrangement with them moving forward. During the 2021 first quarter, we completed the transition of our construction management responsibilities to Irvine Pacific and the recognition of all revenues forrelated to the three months ended September 30, 2017contract. The Company is actively seeking and 2016 were (i) $42.0 million and $51.2 millionentering into new fee building opportunities with other land developers with the objective of billings to land owners, respectively, and (ii) $1.3 million and $1.5 million of management fees fromat least partially offsetting the reduction in Irvine Pacific business in future years, such as our unconsolidated joint ventures, respectively.new fee building relationship with FivePoint in Irvine, California. Our fee building revenues have historically beenconcentrated with a small number of customers. For the three months ended September 30, 2017March 31, 2021 and 2016, one customer2020, together, Irvine Pacific and FivePoint comprised 97%96% and 99% of total fee building revenue.revenue, respectively.46For the three months ended September 30, 2017,due85% in the 2021 first quarter compared to the prior year period consistent with the decrease in fee building activity, comparedand to the same period during 2016.a lesser extent, lower allocated G&A expenses. The amount of G&A expenses included in the cost of fee building was $1.9$0.2 million and $2.2$1.0 million for the three months ended September 30, 20172021 and 2016,2020 first quarters, respectively. Fee building gross margin percentage decreased to 3.5% for the three months ended September 30, 2017 from 3.7% in the prior year period. The decrease in fee building gross margins was due to lower fee revenues and a reduction in management fees received from joint ventures.For the nine months ended September 30, 2017, fee building revenues increased 16% from the prior year period primarily due to an increase in costs incurred from fee building activity resulting from a higher number of homes under construction during the period. Included in fee building revenues for the nine months ended periods were (i) $142.4 million and $119.5 million of billings to land owners, respectively, and (ii) $3.8 million and $6.3 million of management fees from our unconsolidated joint ventures, respectively. The decrease in JV management fees was primarily the result of fewer deliveries and lower land sales revenues from JV communities. For the nine months ended September 30, 2017 and 2016, one customer comprised 97% and 95% of fee building revenue, respectively.For the nine months ended September 30, 2017, cost of fee building increased due to the increase in fee building activity, compared to the same period during 2016. The amount of G&A expenses included in the cost of fee building was $6.5 million and $6.6 million for the nine months ended September 30, 2017 and 2016, respectively. Fee building gross margin percentage decreased to 3.1% for the nine months ended September 30, 2017 from 4.5% in the prior year period. The decrease in fee building gross margins was substantially due to a decrease in management fees received from joint ventures. Three Months Ended
September 30, As a Percentage of Home Sales Revenue Nine Months Ended
September 30, As a Percentage of Home Sales Revenue 2017 2016 2017 2016 2017 2016 2017 2016 (Dollars in thousands) Selling and marketing expenses $ 6,860 $ 6,055 6.0 % 4.8 % $ 18,237 $ 14,577 6.5 % 5.9 % General and administrative expenses (“G&A”) 6,465 6,468 5.6 % 5.2 % 17,150 17,476 6.1 % 7.1 % Total selling, marketing and G&A (“SG&A”) $ 13,325 $ 12,523 11.6 % 10.0 % $ 35,387 $ 32,053 12.6 % 13.0 % $ 6,654 $ 7,466 7.1 % 7.8 % 8,271 6,023 8.8 % 6.3 % $ 14,925 $ 13,489 15.9 % 14.1 % G&A $ 8,271 $ 6,023 8.8 % 6.3 % Less: Acquisition expenses (983 ) — (1.0 )% — % G&A, excluding acquisition expenses $ 7,288 $ 6,023 7.8 % 6.3 % Selling and marketing expenses $ 6,654 $ 7,466 7.1 % 7.8 % G&A, excluding acquisition expenses 7,288 6,023 7.8 % 6.3 % SG&A, excluding acquisition expenses $ 13,942 $ 13,489 14.9 % 14.1 % 2017 third2021 first quarter, our SG&A rate as a percentage of home sales revenue increasedwas 15.9% compared to 11.6% from 10.0%.14.1% in the prior year period. The 1602021 first quarter included $1.0 million in pretax acquisition related expenses, which included tail insurance expenses and professional fees, incurred in connection with our acquisition of Epic Homes. Excluding these expenses, the Company's SG&A rate for the 2021 first quarter was 14.9% as compared to 14.1% in the prior year period. The 80 basis point increase was primarily due to highera $0.8 million reduction in G&A expenses allocated to fee building cost of sales during the 2021 first quarter and an increase in incentive compensation, which was partially offset by lower amortization of capitalized selling and marketing costs related to the ramp-up of new communities, increased co-broker commissionsand advertising and model operating costs, and reduced operating leverage from an 8% decrease in home sales revenue.For the nine months ended September 30, 2017, our operation cost savings.expense ratio was 12.6%,excluding acquisition related expenses as a 40 basis point improvement from 13.0% for the same period in 2016. The improvement was largely attributable to the increase inpercentage of home sales revenue driven by an increase in newis a non-GAAP measure. See the table above reconciling this non-GAAP financial measure to SG&A as a percentage of home deliveries, andsales revenue, the nearest GAAP equivalent. We believe removing the impact of these expenses from our SG&A rate is relevant to provide investors with a lesser extent, slightly lower G&Abetter comparison to rates that do not include these expenses.September 30, 2017March 31, 2021 and 2016,2020, we had ownership interests in 11nine and 13ten unconsolidated joint ventures, respectively.respectively, none of which have active homebuilding or land development operations as of March 31, 2021. We consider a joint venture to be "active" if active homebuilding or land development activities are ongoing and the entity continues to own homebuilding lots or homes remaining to be sold. Joint ventures that are not "active" are considered "inactive" and generally only have warranty or limited close-out management and development obligations ongoing. We own interests in our unconsolidated joint ventures that generally range from 5%10% to 35% and these interests vary by entity.share of joint venture activity for the 2021 first quarter resulted in $0.2 million of pretax income as compared to a $1.9 million pretax loss for the 2020 period. The 2021 first quarter income related primarily to the release of reserves from a land development joint venture for which stated completion obligations were completed and released. In addition, we delivered the last two homes remaining within our Mountain Shadows luxury community in Paradise Valley, Arizona, which recognized total home sales revenues of $4.8 million. The Company's joint venture loss in 2020 was primarily the result of an other-than-temporary noncash impairment charge of $2.3 million related to its investment in the Bedford joint venture as the result of an agreement by the Company to sell its interest in this joint venture to its partner for less than our current carrying value which closed during the 2020 third quarter.September 30, 2017March 31, 2021 and 2020, we expensed $0.4 million and $0.7 million, respectively, of interest costs related to the portion of our debt in excess of our qualified assets in accordance with ASC 835, Interest. To the extent our debt exceeds our qualified inventory in the future, we will expense a portion of the interest related to such debt. Based on our current and expected qualified inventory levels, we do not expect to directly expense interest costs for the next several quarters.as compared to $0.5 millionand wrote off approximately $46,000 of unamortized discount, premium and debt issuance costs associated with notes retired.same period in 2016. Lower gross margins from joint venture home sales, the timing of recognition of income due to joint venture distribution waterfalls and lower land sale revenues contributed to the year-over-year decrease in the Company's share of joint venture income. The decrease in joint venture homes sales gross margin was primarily due to increased deliveries in the 2017 third quarter from four Sacramento communities with lower margins than the communities that were delivering in the 2016 third quarter, which included our higher-margin Orchard Park project in the Bay Area, which delivered its last home in the 2017 first quarter.The Company's share of joint venture income for the ninethree months ended September 30, 2017 was $0.6 million as compared to $4.4 million forMarch 31, 2021, the same period in 2016. The decrease in the Company's share of income was in large part due to the close out of an unconsolidated joint venture known as Lambert Ranch (or "LR8") in the 2016 second quarter, whichproducedCompany recorded an income allocationtax provision of $0.5 million prior to close out andwhich includes a gain of $1.1 million due to the purchase of our joint venture partner's interest for less than its carrying value. Additionally, a reduction in joint venture revenues from decreased lot sales, lower gross margins from joint venture home sales, and timing of recognition of income due to joint venture distribution waterfalls also contributed to the year-over-year decrease in the Company's share of joint venture income. The decrease in joint venture homes sales gross margin was primarily due to a mix shift in deliveries, including deliveries in the 2017 period from five Sacramento communities with lower margins that did not have deliveries in 2016 as well as the close out of our higher-margin Orchard Park project in the Bay Area, which delivered its last home in the 2017 first quarter. The decrease in the Company's share of joint venture income was partially offset by the close out of the Larkspur unconsolidated joint venture in the 2017 second quarter, which produced an income allocation of $0.1 million prior to close out and a gain of $0.3 million due to the purchase of our JV partner's interest for less than its carrying value. discrete provision. The joint venture close outs mentioned are discussed in further detail within Note 11, "Related Party Transactions," in our accompanying Condensed Consolidated Financial Statements.The following sets forth supplemental operational and financial information about our unconsolidated joint ventures. Such information is not included in our financial data for GAAP purposes, but is recognized in our results as a component of equity in net income (loss) of unconsolidated joint ventures. This data is included for informational purposes only. Three Months Ended
September 30, Nine Months Ended
September 30, Increase/(Decrease) Increase/(Decrease) 2017 2016 Amount % 2017 2016 Amount % (Dollars in thousands) Unconsolidated Joint Ventures Net new home orders 43 35 8 23 % 136 111 25 23 % New homes delivered 50 23 27 117 % 115 123 (8 ) (7 )% Average sales price of homes delivered $ 905 $ 855 $ 50 6 % $ 910 $ 858 $ 52 6 % Home sales revenue $ 45,242 $ 19,659 $ 25,583 130 % $ 104,628 $ 105,558 $ (930 ) (1 )% Land sales revenue 647 14,805 (14,158 ) (96 )% 3,052 40,967 (37,915 ) (93 )% Total revenue $ 45,889 $ 34,464 $ 11,425 33 % $ 107,680 $ 146,525 $ (38,845 ) (27 )% Net income (loss) $ 426 $ 2,417 $ (1,991 ) (82 )% $ (1,092 ) $ 16,378 $ (17,470 ) (107 )% Selling communities at end of period 8 8 — — % Backlog (dollar value) $ 69,834 $ 85,317 $ (15,483 ) (18 )% Backlog (homes) 83 88 (5 ) (6 )% Average sales price of backlog $ 841 $ 970 $ (129 ) (13 )% Homebuilding lots owned and controlled 398 661 (263 ) (40 )% Land development lots owned and controlled 2,415 2,415 — — % Total lots owned and controlled 2,813 3,076 (263 ) (9 )% Provision for Income TaxesFor the three months ended September 30, 2017 and 2016, the Company recorded a provision for income taxes of $2.7 million and $3.5 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded a provision for income taxes of $4.2 million and $4.7 million, respectively. Included in the nine month period for 2016 is an allocation of income from LR8 of $0.5 million due to a reduction in the warranty reserve and a $1.1 million gain from the closeout of LR8 due to the purchase of our JV partner's interest for less than its carrying value, which resulted in a provision for income taxes of $0.6 million for the nine month period ended September 30, 2016 and did not impact our effective tax rate. TheCompany's effective tax rate for the three and nine months ended September 30, 2017 and 2016March 31, 2021, differs from the 35%federal statutory rate primarily due to the discrete provision related to estimated blended state tax rate updates and stock compensation, as well as state income tax rates and tax credits for energy efficient homes. duewhich are now available to state income taxes partially offset by thebe carried back to tax benefit of production activities.years with a 35% federal statutory rate.ninethree months ended September 30, 2017March 31, 2021 were proceeds from the sale of our senior notes due 2022, cash generated from home sales activities, advancesproceeds from the tack-on offering of our unsecured revolving credit facility,2025 Notes, and distributions from our unconsolidated joint ventures, and management fees from our fee building agreements.ventures. Our principal uses of capital for the ninethree months ended September 30, 2017March 31, 2021 were land purchases, land development, home construction, repayments on our revolving credit facility, contributionsthe acquisition of Epic Homes and advances to our unconsolidated joint ventures,repayment of the acquired company's third-party debt, repurchases of the Company's common stock, and payment of operating expenses, interest and the payment of routine liabilities.outflowoutflows associated with home and land construction waswere previously incurred. From a liquidity standpoint, we are activelygenerally active in acquiring and developing lots to increasemaintain or grow our lot supply and community count. As we continueWe are focused on rebuilding our land pipeline to expand our business, wemeet surging housing demand driven by improved economic conditions. We expect cash outlays for land purchases, land development and home construction at times to exceed our cash generated by operations.thirdfirst quarter of 20172021 with $62.4$114.8 million of cash and cash equivalents, a $31.9$7.5 million increase from December 31, 2016, primarily as2020. Generally, we intend to maintain our debt levels within our target net leverage ranges in the near term, and then to deploy a result of the issuanceportion of our senior notes due 2022. We expect to generate cash from the sale of our inventory, but intend to redeploy the neton hand and cash generated from the sale of inventory to acquire and develop strategic, well-positioned lots that represent opportunities to generate future income and cash flows.Our investments in land and land development in the future will depend significantly on market conditions and available opportunities that meet our investment return standards.September 30, 2017March 31, 2021 and December 31, 2016,2020, we had $10.6$0.8 million and $22.8$2.6 million, respectively, in accounts payable that related to costs incurred under our fee building agreements. Funding to pay these amounts is the obligation of the third-party land owner, which is generally funded on a monthly basis. Similarly, contracts and accounts receivable as of the same dates included $11.7$1.1 million and $24.3$3.1 million, respectively, related to the payment of the above payables.continuing operations, to provide us with the financial flexibility to operate our business. In that regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of our homes. As of September 30, 2017,March 31, 2021, we had outstanding borrowings of $325$285 million in aggregate principal related to our senior notes.2025 Notes and no borrowings outstanding under our $60 million unsecured credit facility. We will consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our assets and the ability of particular assets, and our companyCompany as a whole, to generate cash flow to cover the expected debt service. In addition, our debt contains certain financial covenants, among others, that limitslimit the amount of leverage we can maintain.maintain, and minimum tangible net worth and liquidity requirements. Additionally,have an existing effective shelf registration statementbelieve that allows uswe will be able to issue equity,fund our current and foreseeable liquidity needs with our cash on hand, cash generated from operations, our revolving credit facility or, to the extent available, through accessing debt or hybrid securities up to $349.7 millionequity capital, as of September 30, 2017.Seniorneeded, although no assurances can be provided that such additional debt or equity capital will be available or on acceptable terms. Due 2022March 17, 2017,October 28, 2020, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Unsecured Notes due 20222025 (the "Existing Notes"“Original 2025 Notes”), in a private placement.placement to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and outside the United States in reliance on Regulation S under the Securities Act. The 2025 Notes were issued at an offering price of 98.961%100% of their face amount, which represents a yield to maturity of 7.50%7.25%. Net proceeds from the offering of the Original 2025 Notes, together with cash on hand, were used to redeem all of the outstanding 2022 Notes at a redemption price of 101.813% of the principal amount thereof, plus accrued and unpaid interest to the redemption date. On May 4, 2017,February 24, 2021, the Company completed a tack-on private placement offering through the sale of an additional $75$35.0 million in aggregate principal amount of Additional 2025 Notes (together, with the 7.25% SeniorOriginal 2025 Notes, due 2022 ("Additionalthe "2025 Notes"). The Additional 2025 Notes were issued at an offering price of 102.75%103.25% of their face amount, plus accrued interest since March 17, 2017, which representedrepresents a yield to maturity of 6.438%6.427%. Net proceeds fromUnamortized premium and debt issuance costs are amortized and capitalized to interest costs using the Existingeffective interest method. The 2025 Notes were usedare general senior unsecured obligations that rank equally in right of payment to repay all existing and future senior indebtedness, including borrowings outstanding under the Company’sCompany's senior unsecured revolving credit facility withfacility. The 2025 Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the remainderCompany's 100% owned subsidiaries. Pursuant to be used for general corporate purposes. Net proceeds from the Additionalindenture governing our 2025 Notes will be used for working capital, land acquisition and general corporate purposes. Interest(the "Indenture"), interest on the Existing2025 Notes and the Additional Notes (the “Original Notes”) will be paid semiannually in arrears on April 115 and October 1, which commenced15 of each year, commencing on October 1, 2017.April 15, 2021. The 2025 Notes will mature on April 1, 2022. In accordance with its obligations under two registration rights agreements executed in connection withOctober 15, 2025.private placementsCompany may redeem all or a portion of the Original2025 Notes on September 8, 2017,upon not less than 15 nor more than 60 days’ notice, at the Company completed an exchange offerredemption prices (expressed as percentages of the Original Notes for an equal principal amount of 7.25% Senior Notes due 2022 (the "Notes") which terms are identical in all material respectson the redemption date) set forth below plus accrued and unpaid interest, if any, to the Original Notes except thatapplicable redemption date, if redeemed during the Notes are registered under12-month period, as applicable, commencing on October 15 of the Securities Actyears as set forth below: 49The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the indenture for the Notes. Exceptions to the additional indebtedness limitation include, among other things, (1) borrowings of up to $260 million under existing orof future bank credit facilities of up to the greater of (i) $100 million and (ii) 20% of our consolidated tangible assets, (2) non-recourse indebtedness, and (3) indebtedness incurred for the purpose of refinancing or repaying certain existing indebtedness. Under the limitation on restricted payments, we are also prohibited from making restricted payments, aside from certain exceptions, if we do not satisfy either the leverage condition or interest coverage condition. In addition, the amount of restricted payments that we can make is subject to an overall basket limitation, which builds based on, among other things, 50% of consolidated net income from January 1, 20172021 forward and 100% of the net cash proceeds from qualified equity offerings. Exceptions to the foregoing limitations on our ability to make restricted payments include, among other things, investments in joint ventures and other investments up to 15% of our consolidated tangible net assets and a general basket of up to the greater of $15 million.million and 3% of our consolidated tangible assets. The Notes are guaranteed byIndenture contains certain other covenants, among other things, the ability of the Company and its restricted subsidiaries to issue certain equity interests, make payments in respect of subordinated indebtedness, make certain investments, sell assets, incur liens, create certain restrictions on the ability of restricted subsidiaries to pay dividends or to transfer assets, enter into transactions with affiliates, create unrestricted subsidiaries, and consolidate, merge or sell all or substantially all of its assets. These covenants are subject to a number of exceptions and qualifications as set forth in the Company's 100% owned subsidiaries, for more information about these guarantees, please see Note 16.Indenture. The leverage and interest coverage conditions are summarized in the table below, as described and defined further in the Indenture. September 30, 2017Financial ConditionsActual Requirement Fixed Charge Coverage Ratio: EBITDA to Consolidated Interest IncurredIncurred; or2.8
1.4 > 2.0 : 1.0 Leverage Ratio: Indebtedness to Tangible Net Worth 1.26
1.43 < 2.25 : 1.0 September 30, 2017,March 31, 2021, we were able to satisfy both the leverage condition and the interest coverageratio condition. The foregoing conditions are further defined and described in the indenture for the Notes.Senior Unsecured Revolving The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group. September 27, 2017,October 30, 2020, the Company entered into a ModificationCredit Agreement (the “Modification”“Credit Agreement” or “Credit Facility”) to itswith JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto. The Credit Facility. The Modification, among other things, (i) extends the maturity date of theAgreement provides for a $60 million unsecured revolving credit facility, to September 1, 2020, (ii) decreases (A) the total commitmentsmaturing April 30, 2023. The Credit Agreement also provides that, under the facility to $200 million from $260 million and (B) the accordion feature to $300 million from $350 million, (iii) revises certain financial covenants, including the tangible net worth, minimum liquidity, and interest coverage tests, in addition to providing relief on compliance with the interest coverage test so long ascircumstances, the Company maintains cash equalmay increase the aggregate principal amount of revolving commitments up to not less than the trailing twelve month consolidated interest incurred, and (iv) adds certain wholly owned subsidiaries as guarantors.A portionan aggregate of the net proceeds from the sale$100 million. our senior notes due 2022 was used to repay theMarch 31, 2021, we had no outstanding balance ofborrowings under the Credit Facility. As of September 30, 2017, there was noAmounts outstanding balance onunder the Credit Facility. Interest is payable monthly and is chargedAgreement accrue interest at a rate of 1-monthequal to either, at the Company’s election, LIBOR plus a margin ranging from 2.25%of 3.50% to 3.00%4.50% per annum, or base rate plus a margin of 2.50% to 3.50%, in each case depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter.ratio. As of September 30, 2017,March 31, 2021, the interest rate under the Credit Facility was 3.98%. Pursuant to5.00% The covenants of the Credit Facility,Agreement include customary negative covenants that, among other things, restrict the Company is requiredCompany’s ability to maintainincur secured indebtedness, grant liens, repurchase or retire its senior unsecured notes, and make certain acquisitions, investments, asset dispositions and restricted payments, including stock repurchases. In addition, the Credit Agreement contains certain financial covenants, as defined in the Credit Facility, including, but not limited to, those listed in the following table. The table below reflects any updates to covenant requirements that resulted from the modification agreement.50 September 30, 2017 Financial Covenants Actual CovenantRequirement (Dollars in thousands) Unencumbered Liquid Assets (Minimum Liquidity Covenant) $ 62,443 $ 10,000 (1) EBITDA to Interest Incurred(2)2.8 > 1.75 : 1.0 Tangible Net Worth $ 252,802 $ 182,159 Leverage Ratio 51.3 % < 65% Adjusted Leverage Ratio (3)NA < 50% Unencumbered Liquid Assets (Minimum Liquidity Covenant) (1) $114,815 $10,000 (1) EBITDA to Interest Incurred(2) 1.43 > 1.75 : 1.0 Tangible Net Worth $195,567 $150,594 Net Leverage Ratio 47.3% < 60% (1)CompanyEBITDA to Interest Incurred test is not in compliance withmet, it will not be considered an event of default so long as the interest coverage test, the minimum liquidity requirement as of each quarter end measurement date isCompany maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred.(2)incurred (as defined in the existing credit facility agreement) which was $22.9 million as of March 31, 2021. The modification of the Credit Facility executed September 27, 2017, provides relief onCompany was in compliance with the interest coverage test. If the test is notthis requirement with an unrestricted cash balance of $114.8 million at March 31, 2021.met, it will not be considered an eventso long assubject to cure periods in certain circumstances, that would result in the Company maintainstermination of the commitments and permit the Lenders to accelerate payment on outstanding borrowings and require cash equalcollateralization of letters of credit. These events of default include nonpayment of principal, interest and fees or other amounts; violation of covenants; inaccuracy of representations and warranties; cross default to not less than the trailing 12 month consolidated interest incurred.(3)Adjusted Leverage Ratio is computed as total joint venture debt divided by total joint venture equity. The Adjusted Leverage Ratio requirement ceases to apply as of and after the fiscal quarter in which consolidated tangible net worth is at least $250 million. During any period when the Adjusted Leverage Ratio ceases to apply, consolidated tangible net worth shall be reduced by an adjustment equal to the aggregate amount of investments in and advance to unconsolidated joint ventures that exceed 35% of consolidated tangible net worth as calculated without giving effect to this adjustment (the "Adjustment Amount"). At September 30, 2017, the Company's consolidated tangible net worth exceeded $250 million and the Adjusted Leverage Ratio ceased to apply. In addition, the Adjustment Amount was considered in the calculation of consolidated tangible net worth.certain other indebtedness; unpaid judgments; change in control; and certain bankruptcy and other insolvency events. As of September 30, 2017,March 31, 2021 we were in compliance with all financial covenants under our Credit Facility. $ — $ — 43,914 44,045 $ 43,914 $ 44,045 (2) The estimated remaining costs to complete as of March 31, 2021 and December 31, 2020 were $18.2 million and $16.3 million, respectively. September 30, December 31, 2017 2016 (Dollars in thousands) Total debt, net $ 318,452 $ 118,000 Equity, exclusive of noncontrolling interest 252,802 244,523 Total capital $ 571,254 $ 362,523 Ratio of debt-to-capital (1)55.7 % 32.5 % Total debt, net $ 318,452 $ 118,000 Less: cash, cash equivalents and restricted cash 62,656 31,081 Net debt 255,796 86,919 Equity, exclusive of noncontrolling interest 252,802 244,523 Total capital $ 508,598 $ 331,442 Ratio of net debt-to-capital (2)50.3 % 26.2 % $ 280,291 $ 244,865 197,567 197,442 $ 477,858 $ 442,307 Ratio of debt-to-capital(1) 58.7 % 55.4 % $ 280,291 $ 244,865 115,045 107,459 Net debt 165,246 137,406 197,567 197,442 Total capital $ 362,813 $ 334,848 Ratio of net debt-to-capital(2) 45.5 % 41.0 % (1)thetotal capital (the sum of total debt, net of unamortized premium and debt issuance costs plus equity, exclusive of noncontrolling interest.(2)capital, exclusive of noncontrolling interest.capital. The most directly comparable 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 believe that by deducting our cash from our debt, we provide a measure of our indebtedness that takes into account our cash liquidity. We believe this provides useful information as the ratio of debt-to-capital does not take into account our liquidity and we believe that the ratio net of cash provides supplemental information by which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage to the leverage of our competitors that present similar information.account our liquidity and we believe that the ratio net of cash provides supplemental information by which our financial position may be considered. Investors may also find this to be helpful when comparing our leverage to the leverage of our competitors that present similar information. See the table above reconciling this non-GAAP financial measure to the ratio of debt-to-capital.NineThree Months Ended September 30, 2017March 31, 2021 Compared to NineThree Months Ended September 30, 2016March 31, 2020ninethree months ended September 30, 2017March 31, 2021 as compared to the ninethree months ended September 30, 2016March 31, 2020, the comparison of cash flows is as follows:Net cash provided by operating activities was $2.5 million for the three months ended March 31, 2021 compared to $17.3 million for the three months ended March 31, 2020. The year-over-year change was primarily due to an increase in land acquisition and development spend for the 2021 period. Net cash used in investing activities was $5.1 million for the three months ended March 31, 2021 compared to $1.1 million for the three months ended March 31, 2020. The increase in cash used was primarily related to the $6.5 million net cash payment the Company made in the 2021 first quarter to complete the Epic Homes acquisition. This outflow was partially offset by the $2.1 million year-over-year decrease in contributions to unconsolidated joint ventures. • Net cash provided by financing activities was $10.2 million for the three months ended March 31, 2021 and represented $36.1 million in proceeds from the Company's tack-on offering of its 2025 Notes partially offset by a $23.8 million repayment of debt the Company assumed as part of the Epic Homes acquisition. For the three months ended March 31, 2020, net cash used in financing activities was $7.4 million and primarily consisted of $4.8 million in repurchases of the Company's 2022 Notes and $2.2 million in stock repurchases. 52Net cash used in operating activities was $160.3 million for the nine months ended September 30, 2017 versus $146.7 million for the nine months ended September 30, 2016. The year-over-year change was primarily a resultNet cash used in investing activities was $6.3 million for the nine months ended September 30, 2017 compared to $7.9 million provided by investing activities for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, our net contributions and advances to unconsolidated joint ventures were $7.6 million compared to a net distribution from unconsolidated joint ventures of $6.3 million during the nine months ended September 30, 2016 and was the primary reason net cash used in investing activities increased. The reduction in distributions from unconsolidated joint ventures primarily related to the reduction in revenues and profits, and the completion of certain joint venture communities.Net cash provided by financing activities was $198.6 million for the nine months ended September 30, 2017 versus $137.2 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in net borrowings, in particular the issuance of our Senior Notes due 2022.non-refundablenonrefundable deposit for the right to acquire lots over a specified period of time at pre-determined prices. We generally have the right at our discretion to terminate our obligations under both purchase contracts and option contracts by forfeiting our cash deposit with no further financial responsibility to the land seller.seller or financial intermediary. In some instances, we may also expend funds for due diligence and development activities with respect to our option contracts prior to purchase which we would have to write off should we not purchase the land. As of September 30, 2017,March 31, 2021, we had $38.1$10.1 million of non-refundablenonrefundable and $0.1 million of refundable cash deposits pertaining to land option contracts and purchase contracts with an estimated aggregate remaining purchase price of $329.4$89.8 million, (netnet of deposits).deposits. These cash deposits are included as a component of our real estate inventories in ourthe accompanying condensed consolidated balance sheets.leveraging our capital baseaccessing larger or desirable lot positionsexpanding our market opportunitiesmanaging financial and market risk associated with land holdingsestablishing strategic alliancesThe Company has provided credit enhancementsconnection with joint venture borrowings in the form of loan-to-value (“LTV”) maintenance agreements in order to secure the joint venture's performance under the loans and maintenance of certain LTV ratios. The Company has also entered into agreements with its partners in each of thenine unconsolidated joint ventures, whereby the Company and its partners are apportioned liability under the LTV maintenance agreements according to their respective capital interest. In addition, the agreements provide the Company, to the extent its partner has an unpaid liability under such credit enhancements, the right to receive distributions from the unconsolidated joint venture that would otherwise be made to the partner. However, there is no guarantee that such distributions will be made or will be sufficient to cover the share of the liability apportioned to us. The loans underlying the LTV maintenance agreements comprise acquisition and development loans, construction revolvers and model home loans, and the agreements remain in force until the loans are satisfied. Due to the nature of the loans, the outstanding balance at any given time is subject to a number of factors including the status of site improvements, the mix of horizontal and vertical development underway, the timing of phase build outs, and the period necessary to complete the escrow process for homebuyers. As of September 30, 2017 and December 31, 2016, $46.4 million and $56.0 million, respectively, was outstanding under loans that are credit enhanced by the Company through LTV maintenance agreements. Under the terms of the joint venture agreements, the Company's proportionate share of LTV maintenance agreement liabilities was $8.0 million and $8.6 million, respectively, as of September 30, 2017 and December 31, 2016. In addition, the Company has provided completion agreements regarding specific performance for certain projects whereby the Company is required to complete the given project with funds provided by the beneficiary of the agreement. If there are not adequate funds available under the specific project loans, the Company would then be subject to financial liability under such completion guaranties. Typically, under such terms of the joint venture agreements, the Company has the right to apportion the respective share of any costs funded under such completion guaranties to its partners. However, there is no guarantee that we will be able to recover against our partners for such amounts owed to us under the terms of such joint venture agreements. In connection with joint venture borrowings, the Company also selectively provides (a) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (b) indemnification of the lender from “bad boy acts” of the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.During October 2017, the Company acquired the remaining outside equity interest of our TNHC Tidelands LLC unconsolidated joint venture. The Company paid $13.6 million to our joint venture partner for its interest and paid off the $4.1 million remaining balance on the joint venture's construction loan.As of September 30, 2017, we held ownership interests in 11 unconsolidated joint ventures, sevensix of which related to homebuilding activities and fourthree related to land development as noted below. We were a party to four loan-to-value maintenance agreements related to unconsolidateddevelopment. Of the nine joint ventures, as of September 30, 2017.none have active homebuilding or land development activities ongoing and are effectively inactive with only warranty activities or limited close-out management and development obligations ongoing. We consider a joint venture to be "active" if homebuilding or land development activities are ongoing and the entity continues to own homebuilding lots or homes remaining to be delivered. The following table reflects certain financial and other information related to our unconsolidated joint ventures as of September 30, 2017: September 30, 2017 YearFormedLocation Total Joint Venture NWHM Equity (2)Debt-to-TotalCapitalizationLoan-to-ValueMaintenanceAgreementFutureCapitalCommitment(3)Lots Owned and Controlled Joint Venture (Project Name) Ownership % Assets Debt(1)Equity (Dollars in 000's) TNHC-HW San Jose LLC (Orchard Park) 2012 San Jose, CA 15% 3,827 — 1,643 493 — % N/A — — TNHC-TCN Santa Clarita LP (Villa Metro)(4)2012 SantaClarita, CA10% 1,441 — 816 204 — % N/A — — TNHC Newport LLC (Meridian)(4)2013 NewportBeach, CA12% 3,426 — 1,500 264 — % N/A — — Encore McKinley Village LLC (McKinley Village) 2013 Sacramento, CA 10% 83,324 21,917 56,585 5,664 28 % Yes — 274 TNHC Russell Ranch LLC (Russell Ranch)(4)(5)2013 Folsom, CA 35% 73,116 20,153 40,204 15,856 33 % No 23,929 870 TNHC-HW Foster City LLC (Foster Square)(5)2013 Foster City, CA 35% 2,871 — 1,543 717 — % N/A — — Calabasas Village LP (Avanti)(4)2013 Calabasas,CA10% 50,424 8,009 39,812 5,041 17 % Yes — 35 TNHC-HW Cannery LLC (Cannery Park)(5)2013 Davis, CA 35% 12,403 — 8,385 2,934 — % N/A — 110 Arantine Hills Holdings LP (Bedford Ranch)(4)(5)2014 Corona, CA 5% 134,990 — 134,409 6,719 — % N/A 2,370 1,435 TNHC Tidelands LLC (Tidelands) 2015 San Mateo, CA 20% 21,967 5,001 16,377 4,750 23 % Yes — 24 TNHC Mountain Shadows LLC (Mountain Shadows) 2015 Paradise Valley, AZ 25% 67,510 34,584 29,909 7,951 54 % Yes — 65 Total Unconsolidated Joint Ventures $ 455,299 $ 89,664 $ 331,183 $ 50,593 21 % $ 26,299 2,813 (1)The carrying value of the debt is presented net of $0.6 million in unamortized debt issuance costs. Scheduled maturities of the unconsolidated joint venture debt as of September 30, 2017 are as follows: $12.7 million matures in 2017, $44.2 matures in 2018 and $33.4 million matures in 2019. Projects at McKinley Village and Mountain Shadows have multiple debt instruments, some of which do not have LTV maintenance agreements.(2)Represents the Company's equity in unconsolidated joint ventures. EquityCompany does not include $5.1 million in advances to unconsolidated joint ventures and $1.1 million of interest capitalized to certain investments in unconsolidated joint ventures which along with equity, are included in investments in and advances to unconsolidated joint ventures in the accompanying condensed consolidated balance sheets.(3)Estimated future capital commitment represents our proportionate share of estimated future contributions to the respective unconsolidated joint ventures as of September 30, 2017. Actual contributions may differ materially.(4)Certain members of the Company's board of directors are affiliated with entities that have an investment in these joint ventures.(5)Land development joint venture.As of September 30, 2017, the unconsolidated joint ventures were in compliance with their respective loan covenants, where applicable, and we were not requiredexpect to make any loan-to-value maintenance related payments duringfuture contributions to any of its unconsolidated joint ventures. three and nine months ended September 30, 2017.affordability of mortgage financing to homebuyers. While we attempt to pass on cost increases to customers through increased prices, when weak housing market conditions exist, we may be unable to offset cost increases with higher selling prices.springlate winter and summer,spring, although this activity is also highly dependentdepends on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes five to nineten months to construct a new home, depending on the nature of the product and whether it is single-family home,detached or multi-family attached, we typically deliver more homes in the second half of the year as springlate winter and summerspring 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 a higher levelthe majority of cash receipts from home deliveries occursoccur during the second half of the year.year, particularly in the fourth quarter. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility inthe evolution of COVID-19 and its impact on the homebuilding industry and the timingopening and closeout of community openingscommunities. For example, we experienced high demand during the fourth quarter of 2020, which we attribute to market factors including low interest rates, a continued undersupply of homes, and cycle times basedconsumers’ increased focus on product type.the importance of home amid the COVID-19 pandemic. Accordingly, as a result of the ongoing uncertainties and evolution of COVID-19, our traditional seasonal pattern was significantly impacted during 2020. and Estimatesestimatespolicies and policiesestimates have not changed from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.54JOBS ActWe qualify as an "emerging growth company" pursuant to the provisionsTable of the JOBS Act. For as long as we are an "emerging growth company," we may elect certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies," including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our annual reports and proxy statements, and exemptions from the requirements of holding shareholder advisory "say-on-pay" votes on executive compensation.ContentsIn addition, Section 107 of the JOBS Act also provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An "emerging growth company" can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to "opt out" of such extended transition period and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.Item 3. Information about our market risk is disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and is incorporated hereinreference.In addition, on March 17, 2017, the Company completed the sale of $250 million in aggregate principal amount of 7.25% Senior Notes due 2022 in a private placement. The notes were issued at an offering price of 98.961% of their face amount, which represents a yield to maturity of 7.50%. On May 4, 2017, the Company completed a tack-on private placement through the sale of an additional $75 million in aggregate principal amountRule 12b-2 of the 7.25% Senior Notes due 2022. The additional notes were issued at an offering price of 102.75% of their face amount plus accrued interest since March 17, 2017, which represents a yield to maturity of 6.438%. During the 2017 third quarter, pursuant to its obligations under two registration rights agreements with the initial purchasers, the Company exchanged its 7.25% Senior Notes due 2022 for exchange notes registered under the Securities Act (the "Notes"). The Notes represent fixed-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. For a discussion regarding the fair value of the Notes, see Note 9, “Fair Value Disclosures” to our consolidated financial statements included elsewhere in this report, which is incorporated herein by reference. Exchange Act.Item 4. and evaluating controls and procedures specified in the SEC's rules and forms, and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily iswas required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.September 30, 2017.ChangeMarch 31, 2021.55business.business, including, without limitation warranty claims and litigation and arbitration proceedings alleging construction defects. We do not believe that any such claims and litigation will materially affect our results of operations or financial position. For more information regarding how we account fora discussion of our legal proceedings,matters and associated reserves, please see Note 10, “Commitments11, Commitments and Contingencies” to the accompanying notes to our Condensed Consolidated Financial Statementscondensed unaudited consolidated financial statements included elsewhere in this report, which is incorporated herein by reference.The following Risk Factors underheading “Risks Relateddate of this report, there have been no material changes to Our Indebtedness” below amend and restate the Risk Factorsrisk factors set forth in Part I, Item 1A of the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016 under the headings “Our level of indebtedness may adversely affect our financial position and prevent us from fulfilling our debt obligations; “Our current financing arrangements contain, and our future financing arrangements will likely contain, restrictive covenants relating to our operations”; and “Interest expense on debt we incur may limit our cash available to fund our growth strategies.”Risks Related to Our IndebtednessOur level of indebtedness may adversely affect our financial condition and prevent us from fulfilling our debt obligations, and we may incur additional debt in the future.The homebuilding industry is capital intensive and requires significant up-front expenditures to secure land and pursue development and construction on such land. Accordingly, we incur substantial indebtedness to finance our homebuilding activities. As discussed elsewhere in this filing, including the Management's Discussion and Analysis of Financial Condition and Result of Operations - Liquidity and Capital Resources, the Company has issued $325 million in aggregate principal amount of 7.25% Senior Notes due 2022 which are registered under the Securities Act (the "Notes"). As of September 30, 2017, we had approximately $318.5 million in aggregate principal amount of debt outstanding, net of the unamortized discount of $2.3 million, unamortized premium of $1.9 million, and $6.1 million of debt issuance costs. In addition, we have $200 million in debt commitments under our revolving credit facility, of which no indebtedness is outstanding or utilized to provide letters of credit and $200.0 million is available for borrowing, subject to satisfaction of the financial covenants and borrowing base requirements in our revolving credit facility. Moreover, the terms of the indenture governing the Notes and our revolving credit facility permit us to incur additional debt, in each case, subject to certain restrictions. Incurring substantial debt subjects us to many risks that, if realized, would adversely affect us, including the risk that:our ability to obtain additional financing as needed for working capital, land acquisition costs, building costs, other capital expenditures, or general corporate purposes, or to refinance existing indebtedness before its scheduled maturity, may be limited;our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase with higher financing costs;we may be required to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing funds available for other purposes such as land and lot acquisition, development and construction activities;our cash flow from operations may be insufficient to make required payments of principal of and interest on the debt, which would likely result in acceleration of the maturity of such debt;we may be put at a competitive disadvantage and reduce our flexibility in planning for, or responding to, changing conditions in our industry, including increased competition; andthe terms of any refinancing may not be as favorable as the terms of the debt being refinanced.Our ability to meet our expenses depends, to a large extent, on our future performance, which will be affected by financial, business, economic and other factors. We will not be able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. If we do not have sufficient funds, we may be required to refinance all or part of our existing debt, sell assets or borrow additional funds. We cannot guarantee that we will be able to do so on terms acceptable to us, if at all. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of our assets on disadvantageous terms, potentially resulting in losses. To the extent we cannot meet any future debt service obligations, we may lose some or all of our assets that may be pledged to secure our obligations to foreclosure. Also, debt agreements may contain specific cross-default provisions with respect to specified other indebtedness, giving the lenders the right to declare a default if we are in default under other loans in some circumstances. Defaults under our debt agreements could have a material adverse effect on our business, prospects, liquidity, financial condition and results of operations.Our current financing arrangements contain, and our future financing arrangements likely will contain, restrictive covenants relating to our operations.Our current financing arrangements, including the Indenture governing the Notes, contain covenants (financial and otherwise) affecting our ability to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. These restrictions limit our ability to, among other things:incur or guarantee additional indebtedness or issue certain equity interests;pay dividends or distributions, repurchase equity or prepay subordinated debt;make certain investments;sell assets;incur liens;create certain restrictions on the ability of restricted subsidiaries to transfer assets;enter into transactions with affiliates;create unrestricted subsidiaries; andconsolidate, merge or sell all or substantially all of our assets.In addition, our revolving credit facility contains a maximum leverage ratio of less than 65%, which, as defined in our credit agreement, is calculated on a net debt basis after a minimum liquidity threshold. Our leverage ratio as of September 30, 2017, as calculated under our revolving credit facility, was approximately 51%. Failure to have sufficient borrowing base availability in the future or to be in compliance with our maximum leverage ratio under our revolving credit facility could have a material adverse effect on our operations and financial condition.A breach of the covenants under the Indenture or any of the other agreements governing our indebtedness could result in an event of default under the Indenture or other such agreements.A default under the Indenture governing the Notes or our revolving credit facility or other agreements governing our indebtedness may allow our creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under our revolving credit facility. Furthermore, if we were unable to repay the amounts due and payable under any future secured credit facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or the holders of our notes accelerate the repayment of our borrowings, we cannot assure you that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:limited in how we conduct our business;unable to raise additional debt or equity financing to operate during general economic or business downturns; orunable to compete effectively or to take advantage of new business opportunities. These restrictions may affect our ability to grow in accordance with our plans.Potential future downgrades of our credit ratings could adversely affect our access to capital and could otherwise have a material adverse effect on us.Rating agencies may elect in the future to downgrade our corporate credit rating or any rating of the notes due to deterioration in our homebuilding operations, credit metrics or other earnings-based metrics, as well as our leverage or a significant decrease in our tangible net worth. These ratings and our current credit condition affect, among other things, our ability to access new capital, especially debt, and negative changes in these ratings may result in more stringent covenants and higher interest rates under the terms of any new debt. Our credit ratings could be downgraded or rating agencies could issue adverse commentaries in the future, which could have a material adverse effect on our business, results of operations, financial condition and liquidity. In particular, a weakening of our financial condition, including a significant increase in our leverage or decrease in our profitability or cash flows, could adversely affect our ability to obtain necessary funds, result in a credit rating downgrade or change in outlook, or otherwise increase our cost of borrowing.Interest expense on debt we incur may limit our cash available to fund our growth strategies.As of September 30, 2017, we had approximately $318.5 million in aggregate principal amount of debt outstanding, net of the unamortized discount of $2.3 million, unamortized premium of $1.9 million, and $6.1 million of debt issuance costs. In addition, we have $200.0 million in debt commitments under our revolving credit facility, of which no indebtedness is outstanding or utilized to provide letters of credit and $200.0 million is available for borrowing, subject to satisfaction of the financial covenants and borrowing base requirements in our senior unsecured revolving credit facility. As part of ourfinancing strategy, in addition to our sale of the Notes, we may incur a significant amount of additional debt. Our revolving credit facility has, and any additional debt we subsequently incur may have, a floating rate of interest. Our Notes have a fixed rate of interest. We may incur fixed rate debt in the future that may be at a higher interest rate than our floating rate debt. Higher interest rates could increase debt service requirements on our current floating rate debt and on any floating or fixed rate debt we subsequently incur, and could reduce funds available for operations, future business opportunities or other purposes. If we need to repay existing debt during periods of rising interest rates, we could be required to refinance our then-existing debt on unfavorable terms or liquidate one or more of our assets to repay such debt at times that may not permit realization of a favorable return on such assets and could result in a loss. The occurrence of either such event or both could materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.We may be unable to repurchase the Notes upon a change of control as required by the Indenture.Upon the occurrence of certain specific kinds of change of control events, we must offer to repurchase the notes at 101% of their principal amount, plus accrued and unpaid interest thereon. In such circumstances, we cannot assure you that we would have sufficient funds available to repay all of our indebtedness that would become payable upon a change of control and to repurchase all of the notes. Our failure to purchase the notes would be a default under the Indenture.The following risk factor is added to the Risk Factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Risks Related to Laws and Regulations”We may be unable to find and retain suitable contractors and subcontractors at reasonable rates.The enactment of federal, state or local statutes, ordinances, rules or regulations requiring the payment of prevailing wages on private residential developments would materially increase our costs of development and construction. In January 2017, a bill was introduced in the California State Assembly that may require developers and homebuilders of private residential projects to comply with the requirements for “public works” projects in the state, including the payment of prevailing wages. Most of our business is conducted in California, and it is possible that depending upon how such bill is interpreted that the passage of this bill would materially increase our costs of development and construction, which could materially and adversely affect our financial condition and results of operations. Access to qualified labor at reasonable rates may also be affected by other circumstances beyond our control, including: (i) shortages of qualified tradespeople, such as carpenters, roofers, electricians and plumbers; (ii) high inflation; (iii) changes in laws relating to employment and union organizing activity; (iv) changes in trends in labor force migration; and (v) increases in contractor, subcontractor and professional services costs. The inability to contract with skilled contractors and subcontractors at reasonable rates on a timely basis could materially and adversely affect our financial condition and results of operations.We could be responsible for employment-related liabilities with respect to our contractors’ employees.Although contractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the homebuilding industry, on October 14, 2017, California’s governor signed into law Assembly Bill 1701, which would require general contractors to assume and be liable for unpaid wage, fringe or other benefit payments or contributions that subcontractors owe their employees. Assembly Bill 1701 imposes such liability under California Labor Code Section 218.7 for private works contracts entered on or after January 1, 2018. We are, and may become in the future, subject to similar measures and legislation, such as California Labor Code Section 2810.3, that requires us to share liability with our contractors for the payment of wages and the failure to secure valid workers’ compensation insurance coverage. While the Company ordinarily negotiates with its subcontractors to obtain broad indemnification rights, there is no guarantee that it will be able to recover from its subcontractors for actions brought against the Company by its subcontractors’ employees or unions representing such employees and such liability could have a material and adverse effect on our financial performance. Even if we are successful in obtaining indemnification from our subcontractors, we may sustain additional administrative costs as a result of such legislation which could materially and adversely affect our financial performance. In addition, despite the fact that our subcontractors are independent from us, if regulatory agencies reclassify the employees of contractors as employees of homebuilders, homebuilders using contractors could be responsible for wage and hour labor laws, workers’ compensation and other employment-related liabilities of their contractors. Governmental rulings that make us responsible for labor practices by our subcontractors could create substantial exposures for us in situations that are not within our control.Other than the items set forth above, there have been no material changes to the risk factors disclosed under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. by the IssuerThe Company did not make any purchases of its common stock during the three months ended September 30, 2017. 42,366 $ 5.16 42,366 $ 9,223 17,363 $ 5.38 17,363 $ 9,130 82,094 $ 5.40 82,094 $ 8,687 141,823 $ 5.32 141,823 $ 8,687
Defaults Upon Senior SecuritiesOther Information56None.Item 6.Exhibits101*AnnualQuarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2021, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated StatementStatements of Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.*Filed herewith104* Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. of 1933, as amended, or the Exchange Act (including this Report), unless the Registrant specifically incorporates the foregoing information into those documents by reference.+Certain confidential information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to a Confidential Treatment Request under Rule 24b-2 of the Exchange Act.58SIGNATURES By:H. Lawrence WebbLeonard S. MillerH. Lawrence WebbBy:October 27, 2017April 30, 20215859