SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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

For the quarterly period ended June 30, ~~2018~~2019 or

For the transition period from ______to ______

Commission File Number 001-36283

(Exact Name of Registrant as Specified in Its Charter)

(State or other Jurisdiction of

Incorporation or Organization)

85 Enterprise, Suite 450

Aliso Viejo, California92656

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code ~~(949)~~ (949) 382-7800

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

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 ý No ¨

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

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

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

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

Registrant’s shares of common stock outstanding as of ~~August 1, 2018: 20,855,778~~July 26, 2019: 20,096,969

THE NEW HOME COMPANY INC.

FORM 10-Q

INDEX




		Page Number

PART I Financial Information

Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	4
	Unaudited Condensed Consolidated Statements of Equity for the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3641
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5661
Item 4.	Controls and Procedures	5761

Part II Other Information

Item 1.	Legal Proceedings	5862
Item 1A.	Risk Factors	5862
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5862
Item 3.	Defaults Upon Senior Securities	5963
Item 4.	Mine Safety Disclosures	5963
Item 5.	Other Information	5963
Item 6.	Exhibits	6064

	Signatures	6165

PART I – FINANCIAL INFORMATION



Item 1.	Financial Statements

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value amounts)


	June 30,		December 31,		June 30,		December 31,
	2018		2017		2019		2018
	(Unaudited)				(Unaudited)
Assets
Cash and cash equivalents	$	90,758	$	123,546	$	48,224	$	42,273
Restricted cash	567		424		124		269
Contracts and accounts receivable	20,370		23,224		16,113		18,265
Due from affiliates	212		1,060		218		1,218
Real estate inventories	469,738		416,143		541,954		566,290
Investment in and advances to unconsolidated joint ventures	58,501		55,824		33,637		34,330
Other assets	25,864		24,291		32,987		33,452
Total assets	$	666,010	$	644,512	$	673,257	$	696,097

Liabilities and equity
Accounts payable	$	28,978	$	23,722	$	26,629	$	39,391
Accrued expenses and other liabilities	23,796		38,054		32,375		29,028
Unsecured revolving credit facility	35,000		—		66,000		67,500
Senior notes, net	319,402		318,656		309,060		320,148
Total liabilities	407,176		380,432		434,064		456,067
Commitments and contingencies (Note 11)
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, 20,855,778 and 20,876,837, shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	209		209
Common stock, $0.01 par value, 500,000,000 shares authorized, 20,096,969 and 20,058,904, shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively					201		201
Additional paid-in capital	198,234		199,474		192,691		193,132
Retained earnings	60,312		64,307		46,206		46,621
Total stockholders' equity	258,755		263,990		239,098		239,954
Non-controlling interest in subsidiary	79		90		95		76
Total equity	258,834		264,080		239,193		240,030
Total liabilities and equity	$	666,010	$	644,512	$	673,257	$	696,097

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues:
Home sales	$	117,460		$	96,929		$	196,897		$	166,335		$	140,464		$	117,460		$	239,650		$	196,897
Fee building, including management fees from unconsolidated joint ventures of $672, $1,217, $1,652 and $2,431, respectively	38,095			47,181			81,889			102,798
Fee building, including management fees from unconsolidated joint ventures of $619, $672, $1,162 and $1,652, respectively													22,285			38,095			41,947			81,889
	155,555			144,110			278,786			269,133			162,749			155,555			281,597			278,786
Cost of Sales:
Home sales	102,678			82,488			172,372			142,553			123,525			102,678			210,094			172,372
Home sales impairments	—			1,300			—			1,300
Fee building	37,038			45,899			79,737			99,825			21,770			37,038			41,038			79,737
	139,716			129,687			252,109			243,678
													145,295			139,716			251,132			252,109
Gross Margin:
Home sales	14,782			13,141			24,525			22,482			16,939			14,782			29,556			24,525
Fee building	1,057			1,282			2,152			2,973			515			1,057			909			2,152
	15,839			14,423			26,677			25,455			17,454			15,839			30,465			26,677

Selling and marketing expenses	(9,466		)	(6,376		)	(16,105		)	(11,377		)	(9,683		)	(9,466		)	(18,362		)	(16,105		)
General and administrative expenses	(5,979		)	(5,595		)	(11,998		)	(10,685		)	(5,841		)	(5,979		)	(13,232		)	(11,998		)
Equity in net income (loss) of unconsolidated joint ventures	(120		)	201			215			507			185			(120		)	369			215
Gain on early extinguishment of debt													552			—			969			—
Other income (expense), net	(92		)	(148		)	(118		)	(35		)	(102		)	(92		)	(295		)	(118		)
Pretax income (loss)	182			2,505			(1,329		)	3,865			2,565			182			(86		)	(1,329		)
(Provision) benefit for income taxes	(67		)	(988		)	793			(1,512		)	(974		)	(67		)	(310		)	793
Net income (loss)	115			1,517			(536		)	2,353			1,591			115			(396		)	(536		)
Net loss attributable to non-controlling interest	—			—			11			10
Net (income) loss attributable to non-controlling interest													(19		)	—			(19		)	11
Net income (loss) attributable to The New Home Company Inc.	$	115		$	1,517		$	(525	)	$	2,363		$	1,572		$	115		$	(415	)	$	(525	)

Earnings (loss) per share attributable to The New Home Company Inc.:
Basic	$	0.01		$	0.07		$	(0.03	)	$	0.11		$	0.08		$	0.01		$	(0.02	)	$	(0.03	)
Diluted	$	0.01		$	0.07		$	(0.03	)	$	0.11		$	0.08		$	0.01		$	(0.02	)	$	(0.03	)
Weighted average shares outstanding:
Basic	20,958,991			20,869,429			20,942,601			20,819,288			20,070,914			20,958,991			20,028,600			20,942,601
Diluted	21,024,769			20,956,723			20,942,601			20,921,150			20,095,533			21,024,769			20,028,600			20,942,601

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)


	Stockholders’ Equity														Non-controlling Interest in Subsidiary				Total Equity			Stockholders’ Equity Three Months Ended June 30														Non-controlling Interest in Subsidiary			Total Equity
	Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity						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, 2016	20,712,166		$	207		$	197,161		$	47,155		$	244,523		Non-controlling Interest in Subsidiary	$	101		Total Equity		$	244,624
Net income (loss)	—		—			—			2,363			2,363			(10		)		2,353
Balance at March 31, 2018																						21,007,902		$	210		$	199,361		$	60,302		$	259,873		$	79		$	259,952
Adoption of ASU 2018-07 (see Note 1)																						—		—			(18		)	18			—			—			—
Net income																						—		—			—			115			115			—			115
Stock-based compensation expense	—		—			1,306			—			1,306			—				1,306			—		—			862			—			862			—			862
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans	(55,407	)	—			(584		)	—			(584		)	—				(584		)	(2,366	)	—			(23		)	—			(23		)	—			(23		)
Shares issued through stock plans	218,907		2			100			—			102			—				102			55,482		1			(1		)	—			—			—			—
Balance at June 30, 2017	20,875,666		$	209		$	197,983		$	49,518		$	247,710		$	91			$	247,801
Repurchase of common stock																						(205,240	)	(2		)	(1,947		)	(123		)	(2,072		)	—			(2,072		)
Balance at June 30, 2018																						20,855,778		$	209		$	198,234		$	60,312		$	258,755		$	79		$	258,834

Balance at March 31, 2019																						20,049,113		$	200		$	192,169		$	44,634		$	237,003		$	76		$	237,079
Net income																						—		—			—			1,572			1,572			19			1,591
Stock-based compensation expense																						—		—			523			—			523			—			523
Shares issued through stock plans																						47,856		1			(1		)	—			—			—			—
Balance at June 30, 2019																						20,096,969		$	201		$	192,691		$	46,206		$	239,098		$	95		$	239,193

																						Stockholders’ Equity Six Months Ended June 30														Non-controlling Interest in Subsidiary			Total Equity
																						Number of Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Total Stockholders’ Equity						Total Equity
Balance at December 31, 2017	20,876,837		$	209		$	199,474		$	64,307		$	263,990		$	90			$	264,080		20,876,837		$	209		$	199,474		$	64,307		$	263,990		Non-controlling Interest in Subsidiary	$	90		$	264,080
Adoption of ASC 606 and ASU 2018-07 (see Note 1)	—		—			(18		)	(3,347		)	(3,365		)	—				(3,365		)	—		—			(18		)	(3,347		)	(3,365		)	—			(3,365		)
Net income (loss)	—		—						(525		)	(525		)	(11		)		(536		)
Net loss																						—		—			—			(525		)	(525		)	(11		)	(536		)
Stock-based compensation expense	—		—			1,704			—			1,704			—				1,704			—		—			1,704			—			1,704			—			1,704
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans	(86,182	)	—			(977		)	—			(977		)	—				(977		)	(86,182	)	—			(977		)	—			(977		)	—			(977		)
Repurchase of common stock	(205,240	)	(2		)	(1,947		)	(123		)	(2,072		)	—				(2,072		)	(205,240	)	(2		)	(1,947		)	(123		)	(2,072		)	—			(2,072		)
Shares issued through stock plans	270,363		2			(2		)	-			—			—				—			270,363		2			(2		)	—			—			—			—
Balance at June 30, 2018	20,855,778		$	209		$	198,234		$	60,312		$	258,755		$	79			$	258,834		20,855,778		$	209		$	198,234		$	60,312		$	258,755		$	79		$	258,834

Balance at December 31, 2018																						20,058,904		$	201		$	193,132		$	46,621		$	239,954		$	76		$	240,030
Net income (loss)																						—		—			—			(415		)	(415		)	19			(396		)
Stock-based compensation expense																						—		—			1,089			—			1,089			—			1,089
Shares net settled with the Company to satisfy employee personal income tax liabilities resulting from share based compensation plans																						(85,420	)	—			(488		)	—			(488		)	—			(488		)
Shares issued through stock plans																						277,401		2			(2		)	—			—			—			—
Repurchase of common stock																						(153,916	)	(2		)	(1,040		)	—			(1,042		)	—			(1,042		)
Balance at June 30, 2019																						20,096,969		$	201		$	192,691		$	46,206		$	239,098		$	95		$	239,193

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Six Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2019			2018
Operating activities:
Net income (loss)	$	(536	)	$	2,353
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net loss							$	(396	)	$	(536	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Deferred taxes	(1,481		)	(54		)	—			(1,481		)
Amortization of equity based compensation	1,704			1,306
Amortization of stock-based compensation							1,089			1,704
Distributions of earnings from unconsolidated joint ventures	715			1,588			279			715
Inventory impairments	—			1,300
Abandoned project costs	43			206			19			43
Equity in net income of unconsolidated joint ventures	(215		)	(507		)	(369		)	(215		)
Deferred profit from unconsolidated joint ventures	136			497			—			136
Depreciation and amortization	2,646			236			5,042			2,646
Gain on early extinguishment of debt							(969		)	—
Net changes in operating assets and liabilities:
Contracts and accounts receivable	2,854			9,573			2,152			2,854
Due from affiliates	788			(671		)	975			788
Real estate inventories	(53,108		)	(74,407		)	24,970			(53,108		)
Other assets	(6,095		)	(2,900		)	(2,240		)	(6,095		)
Accounts payable	5,256			1,160			(12,762		)	5,256
Accrued expenses and other liabilities	(14,217		)	(11,588		)	1,102			(14,217		)
Net cash used in operating activities	(61,510		)	(71,908		)
Net cash provided by (used in) operating activities							18,892			(61,510		)
Investing activities:
Purchases of property and equipment	(184		)	(95		)	(8		)	(184		)
Cash assumed from joint venture at consolidation	—			995
Contributions and advances to unconsolidated joint ventures	(8,954		)	(8,517		)	(4,120		)	(8,954		)
Distributions of capital and repayment of advances from unconsolidated joint ventures	5,874			2,948			4,928			5,874
Interest collected on advances to unconsolidated joint ventures	178			—			—			178
Net cash used in investing activities	(3,086		)	(4,669		)
Net cash provided by (used in) investing activities							800			(3,086		)
Financing activities:
Borrowings from credit facility	35,000			72,000			40,000			35,000
Repayments of credit facility	—			(190,000		)	(41,500		)	—
Proceeds from senior notes	—			324,465
Payment of debt issuance costs	—			(6,440		)
Repurchases of senior notes							(10,856		)	—
Repurchases of common stock	(2,072		)	—			(1,042		)	(2,072		)
Tax withholding paid on behalf of employees for stock awards	(977		)	(584		)	(488		)	(977		)
Proceeds from exercise of stock options	—			102
Net cash provided by financing activities	31,951			199,543
Net (decrease) increase in cash, cash equivalents and restricted cash	(32,645		)	122,966
Net cash (used in) provided by financing activities							(13,886		)	31,951
Net increase (decrease) in cash, cash equivalents and restricted cash							5,806			(32,645		)
Cash, cash equivalents and restricted cash – beginning of period	123,970			31,081			42,542			123,970
Cash, cash equivalents and restricted cash – end of period	$	91,325		$	154,047		$	48,348		$	91,325

See accompanying notes to the unaudited condensed consolidated financial statements.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

The New Home Company Inc. (the "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 and Arizona.

Based on our public float at June 29, 2018, we qualify as 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 ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2017.~~2018. 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 ~~period~~periods are not necessarily indicative of the results to be expected for the full year.

Unless the context otherwise requires, the terms "we", "us", "our" and "the Company" refer to the Company and its wholly owned subsidiaries, on a consolidated basis.

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.

Reclassification

~~Certain items in~~The Company updated its reportable segments effective for the ~~prior~~2019 first quarter. Please refer to Note 15 for more information. Prior year ~~unaudited condensed consolidated statements of cash flows have~~comparative data has been reclassified to ~~conform~~align with the composition of the current year ~~presentation. These reclassifications have not changed the results of operations of prior periods. On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ ("ASU 2016-18") under the full retrospective method. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows. For additional detail on restricted cash, please see Note 1 - Restricted Cash.reportable segments.

Segment Reporting

Accounting Standards Codification ("ASC") 280, Segment Reporting ("ASC 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, and fee building. In accordance with ASC 280, ~~we have determined that~~ our California homebuilding ~~division~~reportable segment aggregates the Northern California and ~~our fee building division are our~~Southern California homebuilding operating segments ~~which are also our reportable segments.~~based on the similarities in long-term economic characteristics.

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.

Restricted Cash

Restricted cash of ~~$0.6~~$0.1 million and ~~$0.4~~$0.3 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, is held in accounts for payments of subcontractor costs incurred in connection with various fee building projects.

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.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Six Months Ended June 30,
	2019		2018
	(Dollars in thousands)
Cash and cash equivalents	$	48,224	$	90,758
Restricted cash	124		567
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows	$	48,348	$	91,325

Six Months Ended June 30,
2018 2017
(Dollars in thousands)
Cash and cash equivalents $ 90,758
$ 153,959
Restricted cash 567
88
Total cash, cash equivalents, and restricted cash shown in the statements of cash flows $ 91,325
$ 154,047

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 nonrefundable land deposits, are expensed to other income (expense), net if we determine continuation of the prospective project is not probable.

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 ASC 360, 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 on a ~~periodic~~quarterly 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.

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 future undiscounted ~~future~~ cash flows of the project are more or less than the asset’s carrying value. If the estimated future undiscounted ~~future~~ cash flows exceed the asset’s carrying value, no impairment adjustment is required. However, if the estimated future undiscounted ~~future~~ cash flows are less than the asset’s carrying value then the ~~asset's fair value~~asset is ~~determined and compared to the asset's carrying value.~~impaired. If the ~~asset's carrying value exceeds the asset's fair value, it~~asset is deemed impaired, ~~and~~it is written down to its fair ~~value.~~value in accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820").

When estimating undiscounted 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.

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 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.

If a real estate asset is deemed impaired, the impairment is 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 ~~using~~inventories 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. Some of the critical assumptions involved with measuring the asset's fair value include estimating future revenues, sales absorption rates,

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~~revenues, sales absorption rates,~~ development and construction costs, and other 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 three and six months ended June 30, ~~2017, we recorded an impairment charge of $1.3 million relating to one community in Southern California. For additional detail regarding the impairment charge, please see Note 4.~~2019 and 2018, no real estate impairments were recorded.

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, Interest ("ASC 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 income from 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.

Revenue Recognition

~~Effective January 1, 2018, we adopted the requirements of ASU 2014-09,~~ The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ~~(Topic 606)~~ ("ASC 606") under the modified retrospective method. For additional detail on the new standard and the impact to our condensed consolidated financial statements, refer to "Recently Issued Accounting Standards" below.. 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 606, home sales revenue is recognized when our performance obligations within the underlying sales contracts are fulfilled. We consider our obligations fulfilled when closing conditions are complete, title has transferred to the homebuyer, and collection of 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 Estate Inventories and Cost of Sales." When it is determined that the earnings process is not complete, the related revenue and profit are deferred for recognition in future periods.

For periods prior to January 1, 2018, the company recognized home sales and other real estate sales revenue in accordance with ASC 360. Under ASC 360, revenue from home sales and other real estate sales was recorded and a profit was recognized when the sales process was complete under the full accrual method. The sales process was considered complete for home sales and other real estate sales when all conditions of escrow were met, including delivery of the home or other real estate asset, title passes, appropriate consideration is received and collection of associated receivables, if any, is reasonably assured.

Fee Building

The Company enters into fee building agreements to provide services whereby it builds homes on behalf of third-party property owners. The third-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-party property owners for all direct and indirect costs plus a fee. The 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-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 606,

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~~for periods after January 1, 2018 and ASC 605,~~ ~~Revenue Recognition~~ ~~("ASC 605") for prior periods,~~ 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 agreements. Under this approach, revenue is earned in proportion to total costs incurred divided by total costs expected to be incurred. In the course of providing fee 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 ~~revenue~~revenues and cost of sales.

The Company also provides construction management and coordination services and sales and marketing services as part of agreements with third parties and its unconsolidated joint ventures. ~~Within these agreements, the Company does not bear any financial risks.~~ In certain contracts, the Company also provides project

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management and administrative services. For most services provided, the Company fulfills its related obligations as time-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 as part of providing sales and marketing services. This obligation 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 these services are recognized as incurred. Prior to the adoption of ASC 606, the Company recognized revenues from these services in accordance with ASC 605 under a proportional performance method or completed performance method. Under ASC 605, revenue was earned as services were provided in proportion to total services expected to be provided to the customer or on a straight line basis if the pattern of performance could not be determined.

The Company’s fee building revenues have historically been concentrated with a small number of customers. For the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, one customer comprised 95%, ~~96%~~93%, ~~97%,~~95% and ~~98%~~96%, respectively, of fee building revenue. The balance of the fee building revenues primarily represented management fees earned from unconsolidated joint ventures and third-party customers. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, one customer comprised ~~61%~~39% and ~~49%~~48% of contracts and accounts receivable, respectively, with the balance of contracts and accounts receivable primarily representing escrow receivables from home sales.

Variable Interest Entities

The Company accounts for variable interest entities in accordance with ASC 810, Consolidation ("ASC 810"). Under ASC 810, a variable interest entity ("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.

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 non-controlling equity holders) lack both substantive participating rights and substantive kick-out rights, defined as follows:

•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.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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 nonrefundable 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 nonrefundable deposit, a VIE may have been created. At June 30, 2019, the Company had outstanding nonrefundable cash deposits of $15.3 million pertaining to land option contracts and purchase contracts.

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As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company was not required to consolidate any VIEs. In accordance with ASC 810, we ~~reassess on an~~perform ongoing ~~basis~~reassessments of whether we are the primary beneficiary of a VIE.

Non-controlling Interest

During 2013, the Company entered into a joint venture agreement with a third-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. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the third-party investor had an equity balance of $0.1 million and $0.1 million, respectively.

Investments in and Advances to Unconsolidated Joint Ventures

We use the equity method to account for investments in homebuilding and land development joint ventures when any of the following situations exist: 1) the joint venture qualifies as a VIE and we are not the primary beneficiary, 2) we do not control the joint venture but have the ability to exercise significant influence over its operating and financial policies, or 3) we function as the managing member or general partner of the joint venture and our joint venture partner has substantive participating rights or can replace us as managing member or general partner without cause.

As of June 30, ~~2018,~~2019, the Company concluded that none of its joint ventures were VIEs and accounted for these entities under the equity method of accounting.

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 ~~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 be~~is classified as cash inflows from operating activities unless the cumulative distributions received 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~~is 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 generally consistent with those of the ~~Company with an exception for the requirements of ASC 606 which our joint ventures had not adopted at June 30, 2018.~~Company.

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 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 six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, no impairments related to investment in and advances to unconsolidated joint ventures were recorded.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Selling and Marketing Expense

~~Effective January 1, 2018, costs~~Costs incurred for tangible assets directly used in the sales process such as our sales offices, design studios and model landscaping and furnishings are capitalized to other assets in the accompanying condensed consolidated balance sheets under ASC 340, Other Assets and Deferred Costs ("ASC 340"). These costs are depreciated to selling and marketing expenses generally over the shorter of 2430 months or the actual estimated life of the selling community. All other selling and marketing costs, such as commissions and advertising, are expensed as incurred. ~~Prior to January 1, 2018, the Company followed the guidance under ASC 970-340,~~ ~~Real Estate - Other Assets and Deferred Costs~~ ~~("ASC 970")~~, and capitalized certain selling and marketing costs to other assets in the consolidated balance sheet if the costs were reasonably expected to be recovered from the sale of the project or from incidental operations, and were incurred for tangible assets that were used directly through the selling period to aid in the sale of the project or services that had been performed to obtain regulatory approval of sales. These capitalizable selling and marketing costs included, but were not limited to, model home design, model home decor and landscaping, and sales office/design studio setup. These costs were amortized to selling and marketing expense as the underlying homes were delivered.

Warranty Accrual

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 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 rates. In addition, the Company has received warranty payments from third-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.

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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 June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, no allowance was recorded related to contracts and accounts receivable.

Property, Equipment and Capitalized Selling and Marketing Costs

Property, equipment and capitalized selling and marketing costs are recorded at cost and included in other assets in the accompanying condensed consolidated balance sheets. 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. Capitalized selling and marketing costs are depreciated using the straight-line method to selling and marketing expenses over the shorter of either 2430 months or the actual estimated life of the selling community.

Income Taxes

Income taxes are accounted for in accordance with ASC 740, Income Taxes ("ASC 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.

~~Deferred~~Each quarter we assess our deferred tax ~~assets are evaluated on a quarterly basis~~asset to determine ~~if adjustments~~whether 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 ~~the valuation allowance are required. In accordance with ASC 740, we assess whether~~establish a valuation allowance ~~should be established based on~~for any portion of the ~~consideration of all~~

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~available evidence using a "more~~tax asset we conclude is more likely than ~~not" standard~~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 ~~respect~~net operating losses and tax credit carryforwards and available tax planning alternatives, to ~~whether deferred tax assets will be realized.~~the extent these items are applicable. 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. 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 June 30, 2019 and December 31, 2018, no valuation allowance was recorded.

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, ~~(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-not recognition threshold requires a substantial degree of judgment by management based on the individual facts and circumstances. At June 30, 2019, the Company has concluded that there were no significant uncertain tax positions requiring recognition in its financial statements.

The Company classifies any interest and penalties related to income taxes assessed as part of income tax expense. As of June 30, 2019, the Company has not been assessed interest or penalties by any major tax jurisdictions related to any open tax periods.

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Stock-Based Compensation

We account for share-based awards in accordance with ASC 718, Compensation – Stock Compensation ("ASC 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.

On ~~June 26, 2015, the Company entered into an agreement that transitioned Joseph Davis' role within the Company from Chief Investment Officer to a non-employee consultant to the Company. On~~ February 16, 2017, the Company entered into an agreement that transitioned Wayne Stelmar's role within the Company from Chief Investment Officer to a non-employee consultant and non-employee director. Per the ~~agreements, Mr. Davis' and~~agreement, Mr. Stelmar's outstanding equity awards ~~will continue~~continued 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 award pursuant to the award's original terms, that award will be treated as an award to a non-employee prospectively, provided the individual is required 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~~agreement noted above, we accounted for ~~their~~his share-based awards in accordance with ASC 505-50 through March 31, 2018. ASC 505-50 required that these awards be accounted for prospectively, such that the fair value of the awards ~~will be~~was 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 required that compensation cost ultimately recognized in the Company's financial statements be the sum of (a) the compensation cost recognized during the period of time the individual was an employee (based on the grant-date fair value) plus (b) the fair value of the award determined on the measurement date determined in accordance with ASC 505-50 for the pro-rata portion of the vesting period in which the individual was a non-employee. ~~Mr. Davis' outstanding awards fully vested during January 2017 and were fully expensed.~~

In June of 2018, the Financial Accounting Standards Board ("FASB") issued ~~ASU~~Accounting Standards Update ("ASU") No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") which expanded the scope of ASC 718 to include share-based payments for acquiring goods and services from nonemployees, with certain exceptions. Under ASC 718, the measurement date for equity-classified, share-based awards is generally the grant date of the award. The Company early adopted ASU 2018-07 on April 1, 2018, at which time Mr. Stelmar's award was the only nonemployee award outstanding. In accordance with the transition guidance, the Company assessed Mr. Stelmar's award for which a measurement date had not been established. The outstanding award was re-measured to fair value as of the April 1, 2018 adoption date. The adoption of ASU 2018-07 ~~provides~~provided administrative relief by fixing the remaining unamortized expense of the award and eliminating the requirement to quarterly re-measure the Company's one remaining nonemployee award. The Company adopted this standard on a modified retrospective basis booking a cumulative-effect adjustment of an $18,000 increase to retained earnings and equal decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. ~~The remaining unamortized expense for~~ Mr. Stelmar's award was fully expensed as of ~~June 30, 2018 was $0.1 million.~~March 31, 2019.

~~Stock~~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

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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 and~~ six months ended June 30, 2019 and 2018, the Company repurchased and retired 153,916 and 205,240 shares of its common stock at an aggregate purchase price of $1.0 million and $2.1 ~~million.~~million, respectively. The shares were returned to the status of authorized but unissued.

Dividends

No dividends were paid on our common stock during the three and six months ended June 30, 2019 and 2018. 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 at 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.

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Recently Issued Accounting Standards

The Company currently 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 (the "Securities Act"), 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.

In ~~May 2014,~~February 2016, the FASB issued ASU No. ~~2014-09,~~ ~~Revenue from Contracts with Customers~~2016-02, Leases (Topic ~~606)~~842) ("ASC ~~606"~~842")~~, which supersedes existing accounting literature relating~~. ASC 842 requires organizations that lease assets (referred to ~~how~~as "lessees") to present lease assets and ~~when a company recognizes revenue.~~lease liabilities on the balance sheet at their gross value based on the rights and obligations created by those leases. Under ASC ~~606,~~842, a ~~company will~~lessee is required to recognize ~~revenue when it transfers promised goods~~assets and liabilities for leases with greater than 12 month terms. Lessor accounting remains substantially similar to prior GAAP. The Company's lease agreements impacted by ASC 842 primarily relate to our corporate headquarters, other office locations and office or ~~services to customers in an amount that reflects~~construction equipment where we are the ~~consideration to which the company expects to be entitled in exchange for those goods~~lessee and ~~services. Additionally,~~are all classified as operating leases.

The Company adopted ASC ~~606 supersedes existing industry-specific accounting literature relating to how a company expenses certain selling and marketing costs. Effective~~842 on January 1, ~~2018, the Company adopted the requirements of ASC 606 using~~2019 under the modified retrospective approach.

Under the modified retrospective approach, the Company ~~recognized~~applied the ~~cumulative effect~~requirements of ~~initially applying the new standard as a $3.4 million, tax-effected decrease~~ASC 842 to ~~the opening balance of retained earnings~~its leases as of ~~January 1, 2018.~~the adoption date and recognized a $3.1 million right-of-use asset and a related $3.5 million liability. The comparative information has not been restated and continues to be reported as it was previously, under the appropriate accounting standards in effect for those periods. ~~The adjustment to retained earnings related~~For additional information on our operating leases, please see Note 11.

For leases that commenced before the January 1, 2019 adoption date, the Company has elected the practical expedient package outlined in ASC 842-10-65-1(f) which prescribes the following:

1.An entity need not reassess whether any expired or existing contracts contain leases.


2.	An entity need not reassess the lease classification for any expired or existing leases (for example, all existing leases that were classified as operating leases in accordance with ASC 840, Leases, will be classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 will be classified as finance leases).

3.An entity need not reassess initial direct costs for any existing lease.

In June 2016, the FASB issued 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 "incurred loss" approach to a ~~$4.7 million write-down~~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 and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), in May 2019 to provide further clarification on this topic. The standard is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application upon adoption. The Company is currently evaluating the impact of ~~certain recoverable selling~~ASU 2016-13 and marketing costs included in other assets that were formerly capitalized under ASC 970, but that no longer qualify for capitalization under the Company's accounting policy reflecting the changes upon the adoption of ASC 606. Asdoes not anticipate a material impact to its consolidated financial statements as a result of this write-down, the Company's deferred tax asset increased by $1.3 million. For the three and six months ended June 30, 2018, the Company expensed $0.9 million and $1.3 million, respectively, in selling and marketing costs that would have been capitalized and expensed over the underlying home closings under ASC 970. For the three and six months ended June 30, 2018, the Company depreciated $0.5 million and $0.8 million, respectively, less in selling and marketing expenses for its capitalized selling and marketing assets than it would have if these expenses were recognized as required by ASC 970. adoption.

In addition, the accounting policy change resulted in the depreciation expense for capitalized selling and marketing assets to be included in the line item "depreciation and amortization" in the condensed consolidated statement of cash flows for the six months ended June 30, 2018, compared to netting the amortization expense in the net change to other assets line item. The adoption of ASC 606 did not have a material impact on other areas of the Company's condensed consolidated balance sheet and statement of cash flows for the six months ended June 30, 2018 or the condensed consolidated statements of operations for the three and six months ended June 30, 2018.

~~In June~~August 2018, the FASB issued ASU ~~2018-07, which was adopted by~~2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the ~~Company on April 1, 2018 using the modified retrospective basis~~Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). The amendments in ASU 2018-13 modify certain disclosure requirements of fair value measurements and resulted in a cumulative-effect adjustment of an $18,000 increase to retained earnings and an equal decrease to additional paid-in capital as of the beginning of the 2018 fiscal year. For further discussion of our adoption of this ASU, see “Stock-Based Compensation.”

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~ ("ASC 842"). ASC 842 will require organizations that lease assets (referred to as "lessees") to present lease assets and lease liabilities on the balance sheet at their gross value based on the the rights and obligations created by those leases. Under ASC 842, a lessee will be required to recognize assets and liabilities for leases with greater than 12 month terms. Lessor accounting remains substantially similar to current GAAP. Additional disclosures including qualitative and quantitative information regarding leasing activities are ~~also required. ASC 842 is~~ effective for all entities for fiscal years, and interim ~~and annual reporting~~ periods within those fiscal years, beginning after December 15, ~~2018~~2019. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-13 and ~~mandates~~does not anticipate a ~~modified retrospective transition method. In July 2018, the FASB issued ASU No. 2018-11,~~ ~~Leases (Topic 842), Targeted Improvements~~ ~~("ASU 2018-11") which provides for an additional transition method that allows companies to apply the new lease standard at the adoption date, eliminating the requirement to apply the standard~~material impact to the ~~earliest period presented in the~~consolidated financial statements. The Company's lease agreements that will be impacted by ASC 842 primarily relate to our corporate headquarters, several other office locations and office or construction equipment where we are the lessee. We believe all applicable agreements would be considered operating leases. Upon adoptionstatements as a result of ~~ASC 842, we expect to add a right-of-use asset and a related lease liability to our consolidated balance sheets. We expect to recognize lease expense on a straight-line basis.~~adoption.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In August 2016, the FASB issued ASU 2016-15. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Our adoption of ASU 2016-15 on January 1, 2018, did not have an impact on our condensed consolidated financial statements and disclosures as the Company had previously classified cash distributions received from equity method investees using the cumulative earnings approach.

~~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. We adopted ASU 2017-05 on January 1, 2018 under the modified retrospective approach. There was no effect of initially applying the new standard and there was no impact to our condensed consolidated financial statements.

~~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. We adopted ASU 2017-09 on January 1, 2018 and its adoption did not have an impact on our condensed consolidated financial statements.

~~In March 2018, the FASB issued ASU 2018-05,~~ ~~Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118~~ ("ASU 2018-05"), which amends Income Taxes (Topic 740) by incorporating the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin 118 (“SAB 118”) issued on December 22, 2017. SAB 118 provides guidance on accounting for the effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with SAB 118. Please see Note 14 to our condensed consolidated financial statements for additional information.

2. Computation of ~~Earnings~~Income (Loss) Per Share

The following table sets forth the components used in the computation of basic and diluted earnings per share for the three and six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019			2018
	(Dollars in thousands, except per share amounts)
Numerator:
Net income (loss) attributable to The New Home Company Inc.	$	1,572	$	115	$	(415	)	$	(525	)

Denominator:
Basic weighted-average shares outstanding	20,070,914		20,958,991		20,028,600			20,942,601
Effect of dilutive shares:
Stock options and unvested restricted stock units	24,619		65,778		—			—
Diluted weighted-average shares outstanding	20,095,533		21,024,769		20,028,600			20,942,601

Basic income (loss) per share attributable to The New Home Company Inc.	$	0.08	$	0.01	$	(0.02	)	$	(0.03	)
Diluted income (loss) per share attributable to The New Home Company Inc.	$	0.08	$	0.01	$	(0.02	)	$	(0.03	)

Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share	1,349,106		952,882		1,292,726			1,333,106

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(Dollars in thousands, except per share amounts)
Numerator:
Net income (loss) attributable to The New Home Company Inc. $ 115
$ 1,517
$ (525 ) $ 2,363

Denominator:
Basic weighted-average shares outstanding 20,958,991
20,869,429
20,942,601
20,819,288
Effect of dilutive shares:
Stock options and unvested restricted stock units 65,778
87,294
—
101,862
Diluted weighted-average shares outstanding 21,024,769
20,956,723
20,942,601
20,921,150

Basic earnings (loss) per share attributable to The New Home Company Inc. $ 0.01
$ 0.07
$ (0.03 ) $ 0.11
Diluted earnings (loss) per share attributable to The New Home Company Inc. $ 0.01
$ 0.07
$ (0.03 ) $ 0.11

Antidilutive stock options and unvested restricted stock units not included in diluted earnings per share 952,882
22,077
1,333,106
846,725

~~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:



	June 30,			December 31,
	2019			2018
	(Dollars in thousands)
Contracts receivable:
Costs incurred on fee building projects	$	41,038		$	159,136
Estimated earnings	909			4,401
	41,947			163,537
Less: amounts collected during the period	(35,642		)	(154,743		)
Contracts receivable	$	6,305		$	8,794

Contracts receivable:
Billed	$	—		$	—
Unbilled	6,305			8,794
	6,305			8,794
Accounts receivable:
Escrow receivables	9,530			8,787
Other receivables	278			684
Contracts and accounts receivable	$	16,113		$	18,265

June 30, December 31,
2018 2017
(Dollars in thousands)
Contracts receivable:
Costs incurred on fee building projects $ 79,737
$ 184,827
Estimated earnings 2,152
5,497
81,889
190,324
Less: amounts collected during the period (69,557 ) (178,704 )
Contracts receivable $ 12,332
$ 11,620

Contracts receivable:
Billed $ —
$ —
Unbilled 12,332
11,620
12,332
11,620
Accounts receivable:
Escrow receivables 7,157
11,554
Other receivables 881
50
Contracts and accounts receivable $ 20,370
$ 23,224

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 invoiced. All unbilled receivables as of June 30, ~~2018~~2019 and

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, ~~2017~~2018 are expected to be billed and collected within 30 days. Accounts payable at June 30, ~~2018~~2019 and December 31, ~~2017~~2018 includes ~~$10.8~~$5.6 million and ~~$11.3~~$8.5 million, respectively, related to costs incurred under the Company’s fee building contracts.

4. Real Estate Inventories

Real estate inventories are summarized as follows:



	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Deposits and pre-acquisition costs	$	17,485	$	20,726
Land held and land under development	122,392		115,987
Homes completed or under construction	352,535		380,956
Model homes	49,542		48,621
	$	541,954	$	566,290

June 30, December 31,
2018 2017
(Dollars in thousands)
Deposits and pre-acquisition costs $ 40,001
$ 35,846
Land held and land under development 43,368
47,757
Homes completed or under construction 329,278
302,884
Model homes 57,091
29,656
$ 469,738
$ 416,143

All of our deposits and pre-acquisition costs are nonrefundable, except for refundable deposits of ~~$1.0~~$0.7 million and ~~$0.8~~$0.9 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

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 land, development, indirects, permits, materials and labor (except for capitalized selling and marketing costs, which are classified in other assets).

In accordance with 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 on a quarterly basis or whenever indicators of impairment exist. ~~For the three and six months ended June 30, 2017, the Company recognized~~

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

real estate-related impairments of $1.3 million in cost of sales resulting in a decrease of the same amount to pretax income (loss) for our homebuilding segment. Fair value for the homebuilding project impaired during 2017 second quarter was calculated under a discounted cash flow model with project cash flows discounted at an 8% rate. The following table summarizes inventory impairments recorded during the three and six months ended June 30, 2018 and 2017:

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(Dollars in Thousands)
Inventory impairments:
Home sales $ —
$ 1,300
$ —
$ 1,300
Total inventory impairments $ —
$ 1,300
$ —
$ 1,300

Remaining carrying value of inventory impaired at period end $ —
$ 12,550
$ —
$ 12,550
Number of projects impaired during the period —
1
—
1
Total number of projects subject to periodic impairment review during the period ⁽¹⁾
26
25
26
26

⁽¹⁾ ~~Represents the peak number of real estate projects that we had during each respective period. The number of projects outstanding at the end of each period~~

~~may be less than the number of projects listed herein.~~

The home sales impairments of $1.3 million related to homes completed or under construction for one active homebuilding community located in Southern California. This community was experiencing a slow monthly sales absorption rate, and the Company determined that additional incentives were required to sell the remaining homes at estimated aggregate sales prices that would be lower than its previous carrying value.

~~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 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 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. For the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 interest incurred, capitalized and expensed was as follows:



	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Interest incurred	$	7,606		$	6,612		$	15,367		$	13,328
Interest capitalized to inventory	(7,606		)	(6,149		)	(15,367		)	(12,344		)
Interest capitalized to investment in unconsolidated joint ventures	—			(463		)	—			(984		)
Interest expensed	$	—		$	—		$	—		$	—

Capitalized interest in beginning inventory	$	28,600		$	19,884		$	25,681		$	16,453
Interest capitalized as a cost of inventory	7,606			6,149			15,367			12,344
Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition	3			5			13			5
Previously capitalized interest included in cost of home sales	(6,301		)	(3,750		)	(11,153		)	(6,514		)
Capitalized interest in ending inventory	$	29,908		$	22,288		29,908			22,288

Capitalized interest in beginning investment in unconsolidated joint ventures	$	672		$	1,962		$	713		$	1,472
Interest capitalized to investment in unconsolidated joint ventures	—			463			—			984
Capitalized interest transferred from investment in unconsolidated joint ventures to inventory upon lot acquisition	(3		)	(5		)	(13		)	(5		)
Previously capitalized interest included in equity in net income (loss) of unconsolidated joint ventures	(48		)	(18		)	(79		)	(49		)
Capitalized interest in ending investment in unconsolidated joint ventures	621			2,402			621			2,402
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures	$	30,529		$	24,690		$	30,529		$	24,690

Capitalized interest as a percentage of inventory	5.5		%	4.7		%	5.5		%	4.7		%
Interest included in cost of home sales as a percentage of home sales revenue	4.4		%	3.2		%	4.7		%	3.3		%

Capitalized interest as a percentage of investment in and advances to unconsolidated joint ventures	1.8		%	4.1		%	1.8		%	4.1		%

Three months ended June 30, Six months ended June 30,
2018 2017 2018 2017
(Dollars in thousands)
Interest incurred $ 6,612
$ 6,401
$ 13,328
$ 8,437
Interest capitalized to inventory (6,149 ) (5,878 ) (12,344 ) (7,750 )
Interest capitalized to investment in unconsolidated joint ventures (463 ) (523 ) (984 ) (687 )
Interest expensed $ —
$ —
$ —
$ —

Capitalized interest in beginning inventory $ 19,884
$ 6,663
$ 16,453
$ 6,342
Interest capitalized as a cost of inventory 6,149
5,878
12,344
7,750
Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon lot acquisition 5
—
5
—
Previously capitalized interest included in cost of sales (3,750 ) (1,720 ) (6,514 ) (3,271 )
Capitalized interest in ending inventory $ 22,288
$ 10,821
22,288
10,821

Capitalized interest in beginning investment in unconsolidated joint ventures $ 1,962
$ 164
$ 1,472
$ —
Interest capitalized to investment in unconsolidated joint ventures 463
523
984
687
Capitalized interest transferred from investment in unconsolidated joint venture to inventory upon lot acquisition (5 ) —
(5 ) —
Previously capitalized interest included in equity in net income (loss) of unconsolidated joint ventures (18 ) —
(49 ) —
Capitalized interest in ending investment in unconsolidated joint ventures 2,402
687
2,402
687
Total capitalized interest in ending inventory and investments in unconsolidated joint ventures $ 24,690
$ 11,508
$ 24,690
$ 11,508

Capitalized interest as a percentage of inventory 4.7 % 3.0 % 4.7 % 3.0 %
Interest included in cost of sales as a percentage of home sales revenue 3.2 % 1.8 % 3.3 % 2.0 %

Capitalized interest as a percentage of investment in and advances to unconsolidated joint ventures 4.1 % 1.2 % 4.1 % 1.2 %

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Investments in and Advances to Unconsolidated Joint Ventures

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had ownership interests in 10 unconsolidated joint ventures with ownership percentages that generally ranged from 5% to 35%. The condensed combined balance sheets for our unconsolidated joint ventures accounted for under the equity method were as follows:

As of June 30, 2018 and December 31, 2017, the Company had advances outstanding of approximately $0 and $3.8 million, respectively, to one of its unconsolidated joint ventures, which were included in the notes payable balances of the unconsolidated joint ventures in the table above. The advances related 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 bore interest at 10% per annum and was fully repaid during the 2018 second quarter.

The condensed combined statements of operations for our unconsolidated joint ventures accounted for under the equity method were as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2019		2018			2019		2018
	(Dollars in thousands)
Revenues	$	59,078	$	33,879		$	101,365	$	65,892
Cost of sales and expenses	57,288		34,165			99,062		65,374
Net income (loss) of unconsolidated joint ventures	$	1,790	$	(286	)	$	2,303	$	518
Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations	$	185	$	(120	)	$	369	$	215

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% of more of the Company's consolidated net income (loss). For the six months ended June 30, 2019, income allocations from two of the Company's unconsolidated joint ventures accounted for under the equity method each exceeded 20% of the Company's consolidated net income (loss). The table below presents select combined financial information for these joint ventures:

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(Dollars in thousands)
Revenues $ 33,879
$ 35,171
$ 65,892
$ 61,791
Cost of sales and expenses 34,165
35,825
65,374
63,309
Net income (loss) of unconsolidated joint ventures $ (286 ) $ (654 ) $ 518
$ (1,518 )
Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying condensed consolidated statements of operations $ (120 ) $ 201
$ 215
$ 507



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Revenues	$	44,358	$	23,798	$	76,395	$	53,439
Cost of home sales	40,548		21,910		69,624		47,544
Gross margin	$	3,810	$	1,888	$	6,771	$	5,895
Expenses	1,983		1,779		3,840		4,193
Net income	$	1,827	$	109	$	2,931	$	1,702
Equity in net income (loss) of unconsolidated joint ventures reflected in the accompanying consolidated statements of operations	$	261	$	11	$	488	$	452

For the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company earned ~~$0.7 million, $1.7~~$0.6 million, $1.2 million, $0.7 million and ~~$2.4~~$1.7 million respectively, in management fees from its unconsolidated joint ventures. For additional detail regarding management fees, please see Note ~~12 - "Related Party Transactions."~~

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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, the Company also recognized a gain of $0.3 million, which was included in equity in net income (loss) 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.12.

Other assets consist of the following:



	June 30,		December 31,
	2019		2018
	(Dollars in thousands)

Property, equipment and capitalized selling and marketing costs, net ⁽¹⁾	$	9,094	$	11,738
Deferred tax asset, net	13,937		13,937
Prepaid income taxes	443		514
Prepaid expenses	5,715		6,348
Warranty insurance receivable ⁽²⁾	1,257		915
Right-of-use lease asset ⁽³⁾	2,541		—
	$	32,987	$	33,452

June 30, December 31,
2018 2017
(Dollars in thousands)

Property, equipment and capitalized selling and marketing costs, net⁽¹⁾⁽²⁾
$ 10,059
$ 603
Deferred tax asset, net 7,798
6,317
Prepaid income taxes 1,251
—
Prepaid expenses 5,554
4,937
Warranty insurance receivable⁽³⁾
1,202
1,202
Capitalized selling and marketing costs⁽¹⁾⁽⁴⁾
—
11,232
$ 25,864
$ 24,291

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:



	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Warranty accrual⁽¹⁾	$	7,049	$	6,898
Accrued compensation and benefits	3,157		5,749
Accrued interest	6,236		6,497
Completion reserve	3,351		4,192
Lease liability⁽²⁾	2,902		—
Customer deposits	7,188		2,192
Other accrued expenses	2,492		3,500
	$	32,375	$	29,028

June 30, December 31,
2018 2017
(Dollars in thousands)
Warranty accrual⁽¹⁾
$ 6,998
$ 6,859
Accrued compensation and benefits 2,545
9,164
Accrued interest 6,176
6,217
Completion reserve 2,379
5,792
Income taxes payable —
6,368
Deferred profit from unconsolidated joint ventures —
136
Other accrued expenses 5,698
3,518
$ 23,796
$ 38,054

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Changes in our warranty accrual are detailed in the table set forth below:



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Beginning warranty accrual for homebuilding projects	$	6,767		$	6,775		$	6,681		$	6,634
Warranty provision for homebuilding projects	627			470			1,054			986
Warranty payments for homebuilding projects	(581		)	(469		)	(922		)	(844		)
Adjustment to warranty accrual⁽¹⁾	94			—			94			—
Ending warranty accrual for homebuilding projects	6,907			6,776			6,907			6,776

Beginning warranty accrual for fee building projects	178			223			217			225
Warranty provision for fee building projects	—			—			9			—
Warranty efforts for fee building projects	(18		)	(1		)	(66		)	(3		)
Adjustment to warranty accrual for fee building projects⁽¹⁾	(18		)	—			(18		)	—
Ending warranty accrual for fee building projects	142			222			142			222
Total ending warranty accrual	$	7,049		$	6,998		$	7,049		$	6,998

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 warranty accrual and related estimated insurance recoveries are 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 warranty 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 insurance recoveries could differ significantly from amounts currently estimated.

9. Senior Notes and Unsecured Revolving Credit Facility

~~Notes payable~~Indebtedness consisted of the following:



	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
7.25% Senior Notes due 2022, net	$	309,060	$	320,148
Unsecured revolving credit facility	66,000		67,500
Total Indebtedness	$	375,060	$	387,648

June 30, December 31,
2018 2017
(Dollars in thousands)
7.25% Senior Notes due 2022, net $ 319,402
$ 318,656
Unsecured revolving credit facility 35,000
—
Total Notes Payable $ 354,402
$ 318,656

The carrying amount of our senior notes listed above at June 30, 2018 is net of the unamortized discount of $1.9 million, unamortized premium of $1.5 million, and $5.2 million of unamortized debt issuance costs that are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. Debt issuance costs for the unsecured revolving credit facility are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.

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"), in a private placement. The Existing 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 offering through the sale of an additional $75 million in aggregate principal amount of the 7.25% Senior Notes due 2022 ("Additional 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%. Net proceeds from the Existing Notes were used to repay all borrowings outstanding under the Company’s senior unsecured revolving credit facility with the remainder used for general corporate purposes. Net proceeds from the Additional Notes were used for working capital, land

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

acquisition and general corporate purposes. Interest on the Existing Notes and the Additional Notes (together, the "Notes") is paid semiannually in arrears on April 1 and October 1. The Notes were exchanged in an exchange offer for Notes that are identical to the original Notes, except that they are registered under the Securities Act, ~~of 1933, as amended~~ and are freely tradeable in accordance with applicable law.

The carrying amount of our Senior Notes listed above at June 30, 2019 is net of the unamortized discount of $1.4 million, unamortized premium of $1.1 million, and unamortized debt issuance costs of $3.7 million, each of which are amortized and capitalized to interest costs on a straight-line basis over the respective terms of the notes which approximates the effective interest method. The carrying amount for the Senior Notes listed above at December 31, 2018, is net of the unamortized discount of $1.7 million, unamortized premium of $1.3 million, and unamortized debt issuance costs of $4.5 million. Debt issuance costs for the unsecured revolving credit facility are included in other assets and amortized and capitalized to interest costs on a straight-line basis over the term of the agreement.

The 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 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 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, borrowings of up to $260 million under existing or future bank credit facilities, non-recourse indebtedness, and 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 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, 2017 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 $15 million. The Notes are guaranteed, on an unsecured basis, jointly and severally, by all of the Company's 100% owned subsidiaries. See Note

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

17 for information about the guarantees and supplemental financial statement information about our guarantor subsidiaries group and non-guarantor subsidiaries group.

During the 2019 second quarter, the Company repurchased and retired approximately $7.0 million in face value of the Notes. The Notes were purchased at 90.82% of face value, for a cash payment of $6.3 million. The Company recognized a $0.6 million gain on the early extinguishment of debt, and the unamortized discount, premium and debt issuance costs associated with the retired notes totaling approximately $90,000 were written off. Total repurchases of the Notes for the six months ended June 30, 2019 equaled $12.0 million in face value at 90.58% of the face value, for a cash payment of $10.9 million. The Company recognized a total gain on early extinguishment of debt of $1.0 million and wrote off approximately $160,000 of unamortized discount, premium and debt issuance costs associated with the Notes retired during the six months ended June 30, 2019.

The Company's unsecured revolving credit facility ("Credit Facility") is with a bank group and matures on September 1, 2020. Total commitments under the Credit Facility are $200 million with an accordion feature that allows the facility size thereunder to be increased up to an aggregate of $300 million, subject to certain financial conditions, including the availability of bank commitments. As of June 30, ~~2018,~~2019, we had ~~$35~~$66.0 million of outstanding borrowings under the credit facility. Interest is payable monthly and is charged at a rate of 1-month LIBOR plus a margin ranging from 2.25% to 3.00% depending on the Company’s leverage ratio as calculated at the end of each fiscal quarter. As of June 30, ~~2018,~~2019, the interest rate under the Credit Facility was ~~4.84%~~5.40%. Pursuant to the Credit Facility, the Company is required to maintain certain financial covenants as defined in the Credit Facility, including (i) a minimum tangible net worth; (ii) maximum leverage ratios; (iii) a minimum liquidity covenant; and (iv) a minimum fixed charge coverage ratio based on EBITDA (as detailed in the Credit Facility) to interest incurred or if this test is not met, the Company maintains unrestricted cash equal to not less than the trailing 12 month consolidated interest incurred. As of June 30, ~~2018,~~2019, the Company was in compliance with all financial covenants.

The Credit Facility also provides a $25 million sublimit for letters of credit, subject to conditions set forth in the agreement. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had ~~$3.4~~$2.3 million in outstanding letters of credit issued under the Credit Facility.

10. Fair Value Disclosures

ASC 820, 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 measurement date and requires assets and liabilities carried at fair value to be classified and disclosed in the following three categories:

Fair Value of Financial Instruments

The following table presents an estimated fair value of the Company's Notes and Credit Facility. The Notes are classified as Level 2 and primarily reflect estimated prices obtained from outside pricing sources. The Company's Credit Facility is classified as Level 3 within the fair value hierarchy. The Company had an outstanding balance of ~~$35.0~~$66.0 million under its Credit Facility at June 30, ~~2018,~~2019, and the estimated fair value of the outstanding balance approximated the carrying value due to the short-term nature of LIBOR contracts.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018 December 31, 2017
Carrying Amount Fair Value Carrying Amount Fair Value
(Dollars in thousands)
7.25% Senior Notes due 2022, net ⁽¹⁾
$ 319,402
$ 332,313
$ 318,656
$ 336,375
Unsecured revolving credit facility $ 35,000
$ 35,000
$ —
$ —



	June 30, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
7.25% Senior Notes due 2022, net ⁽¹⁾	$	309,060	$	294,234	$	320,148	$	292,500
Unsecured revolving credit facility	$	66,000	$	66,000	$	67,500	$	67,500

(1) The carrying value for the Senior Notes, as presented at June 30, ~~2018,~~2019, is net of the unamortized discount of ~~$1.9~~$1.4 million, unamortized premium of ~~$1.5~~$1.1 million, and ~~$5.2 million of~~ unamortized debt issuance ~~costs.~~costs of $3.7 million. The carrying value for the Senior Notes, as presented at December 31, ~~2017,~~2018, is net of the unamortized discount of ~~$2.2~~$1.7 million, unamortized premium of ~~$1.8~~$1.3 million, and ~~$5.9 million of~~ unamortized debt issuance ~~costs.~~costs of $4.5 million. The unamortized discount, 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 inventory and long-lived assets that are measured at cost when acquired and adjusted for impairment to fair value, if deemed necessary. For the three and six months ended June 30, 2017, the Company recognized real estate-related impairment adjustments of $1.3 million related to one homebuilding community. The impairment adjustment was made using Level 3 inputs and assumptions, and the carrying value of the real estate inventories subject to the 2017 impairment adjustment was $12.6 million at June 30, 2017.

11. Commitments and Contingencies

From time-to-time, the Company is involved in various legal matters arising in the ordinary course of business. 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. 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.

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 conditions 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 Company's liability under such LTV maintenance agreements. 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 June 30, ~~2018~~2019 and December 31, ~~2017, $31.3~~2018, $24.4 million and ~~$38.6~~$41.3 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 ~~$5.0~~$4.9 million and ~~$6.7~~$7.3 million, respectively, as of June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. 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

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the unconsolidated entity such as fraud, misrepresentation, misapplication or non-payment of rents, profits, insurance, and condemnation proceeds, waste and mechanic liens, and bankruptcy.

We obtain surety bonds in the normal course of business to ensure completion of certain infrastructure improvements of our projects. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had outstanding surety bonds totaling ~~$50.8~~$52.8 million and ~~$52.1~~$50.5 million, respectively. The estimated remaining costs to complete of such improvements as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~$19.4~~$25.1 million and ~~$24.4~~$20.3 million, respectively. The beneficiaries of the bonds are various municipalities 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.

~~During~~The Company accounts for contracts deemed to contain a lease under ASC 842. At the ~~2017 third quarter,~~inception of a lease, or if a lease is subsequently modified, we determine whether the ~~Company amended a joint venture agreement pursuant~~lease is an operating or financing lease. Our lease population is fully comprised of operating leases and includes leases for certain office space and equipment for use in our operations. For all leases with an expected term that exceeds one year, right-of-use assets and lease liabilities are recorded on the condensed consolidated balance sheets. The depreciable lives of right-of-use assets are limited to the expected term which ~~it, among~~would include any renewal options we expect to exercise. The exercise of lease renewal options is generally at our discretion and we expect that in the normal course of business, leases that expire will be renewed or replaced by other ~~things, agreed to acquire~~leases. Our lease payments do not contain variable payments, any residual value guarantees, or material restrictive covenants. Right-of-use lease assets are included in other assets and lease liabilities are recorded in accrued expenses and other liabilities within our condensed consolidated balance sheets and total $2.5 million and $2.9 million, respectively, at June 30, 2019.

For the three and six months ended June 30, 2019, lease costs and cash flow information for leases with terms in excess of one year was as follows:

Net lease cost ⁽¹⁾

Lease cash flows (included in operating cash flows)⁽¹⁾

(1) Does not include the cost of short-term leases with terms of less than one year which totaled approximately ~~400 lots in Phase 1 of the joint venture project~~$0.2 million and ~~posted a $5.1~~$0.5 million ~~nonrefundable deposit~~ for the ~~acquisition~~three and six months ended June 30, 2019, respectively, or the benefit from a sublease agreement of ~~such lots. The agreement allows~~one of our office spaces which totaled approximately $49,000 and $98,000 for the ~~Company~~three and six months ended June 30, 2019, respectively.

Future minimum lease payments under our operating leases are as follows (dollars in thousands):

Total lease payments⁽¹⁾

Less: Interest⁽²⁾

Present value of lease liabilities⁽³⁾

(1)Lease payments include options to ~~enter the property~~extend lease terms that are reasonably certain of being exercised.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(3) The weighted average remaining lease term and weighted average incremental borrowing rate used in ~~advance of the closing date to perform certain improvements, which it began in the 2018 second quarter~~calculating our lease liabilities were 1.9 years and totaled $4.1 million. The agreement required the Company to reimburse the joint venture for the costs of these improvement which were estimated to be $17.0 million should the Company not acquire the lots. In July of 2018, the Company acquired these lots eliminating the potential reimbursement contingency.5.2%, respectively at June 30, 2019.

12. Related Party Transactions

During the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company incurred construction-related costs on behalf of its unconsolidated joint ventures totaling $1.5 million, ~~$3.6~~$3.2 million, ~~$1.7~~$1.5 million and ~~$4.0~~$3.6 million, respectively. As of June 30, ~~2018~~2019 and December 31, ~~2017, $0.1~~2018, $0.2 million and ~~$0.1~~$0.4 million, respectively, are included in due from affiliates in the accompanying condensed consolidated balance sheets related to such costs.

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 "Management Agreements"). Pursuant to the Management Agreements, the Company receives a management fee based on each project’s revenues. During the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company earned ~~$0.7 million, $1.7~~$0.6 million, $1.2 million, $0.7 million and ~~$2.4~~$1.7 million, respectively, in management fees, which have been recorded as fee building revenues in the accompanying condensed consolidated statements of operations. As of June 30, ~~2018~~2019 and December 31, ~~2017, $24,000~~2018, $0 and ~~$0.3~~$0.2 million, respectively, of management fees are included in due from affiliates in the accompanying condensed consolidated balance sheets.

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 entities that have investments in two of the Company's unconsolidated joint ventures, TNHC Meridian Investors LLC (which is an owner of another entity, TNHC Newport LLC, which entity owned our "Meridian" project) and TNHC Russell Ranch LLC ("Russell Ranch"). The Company's investment in these two joint ventures was $9.8 million at June 30, 2019 and $6.5 million at December 31, 2018. A former member of the Company's board of directors who served during 2018 is affiliated with entities that have investments in three of the Company's unconsolidated joint ventures, Arantine Hills Holdings LP ("Bedford"), Calabasas Village LP, and TNHC-TCN Santa Clarita, LP. As of June 30, 2019 and December 31, 2018, the Company's investment in these ~~five~~three unconsolidated joint ventures totaled ~~$41.2 million.~~ $10.9 million and $12.0 million, respectively.

During the ~~2017~~2019 second quarter, the ~~Bedford~~Company entered into a second amendment to the limited liability company agreement of Russell Ranch between the Company and IHP. Prior to the execution of the second amendment, each of IHP and the Company had contributed its maximum capital commitments pursuant to the joint venture agreement. Pursuant to the second amendment, the parties agreed to fund additional required capital in the aggregate amount of approximately $26 million for certain remaining backbone improvements for the Project (the “Phase 1 Backbone Improvements”) as follows: 50% by IHP and 50% by the Company (“Amendment Additional Capital”). The Amendment Additional Capital will be returned to IHP and the Company ahead of any other contributed capital; provided that none of the Amendment Additional Capital accrues a preferred return that base capital contributions are generally afforded under the joint venture agreement. To the extent of overruns on the Phase 1 Backbone Improvements, the Company is required to fund such overrun capital (“TNHC Overrun Capital”); provided that such contributions shall receive capital account credit. Pursuant to the second amendment, the distribution of cash flow under the agreement was amended to ~~increase~~provide that Amendment Additional Capital would be returned prior to TNHC Overrun Capital, which would, in turn, be returned ahead of the ~~Company's funding obligation by $4.0 million over the existing contribution cap. During the 2017 third quarter, the~~base capital preferred return and base capital.

The Company ~~amended~~previously purchased lots from the Russell Ranch joint venture ~~agreement pursuant to which it, among other things, agreed to acquire approximately 400 lots in~~as described below (the "Phase 1 Purchase"). The parties also amended the purchase and sale contract for the Phase 1 Purchase to provide relief from the profit participation provisions of ~~the project. At June 30, 2018, the Company had a $5.1 million nonrefundable deposit outstanding related to~~ this ~~purchase, which was subsequently applied to the purchase price of the land when it was fully taken down in July of 2018.~~transaction under certain circumstances.

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 six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, the Company incurred ~~$0.1 million, $0.2 million,~~$22,000, $55,000, $0.1 million and ~~$0.3~~$0.2 million, respectively, for these services. For the same periods, the Company's unconsolidated joint ventures incurred $0, ~~$0.4 million, $0.3 million~~$0, $0 and ~~$0.6~~$0.4 million, respectively, for these services. Of these costs, $0$22,000 and ~~$10,700~~$7,000 was due to TL Fab LP from the Company at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and $0 and $8,000 was due to TL Fab LP from the Company's unconsolidated joint ventures at ~~both~~ June 30, ~~2018~~2019 and December 31, ~~2017.~~2018, respectively.

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 360-20, Property, Plant and Equipment - Real

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Estate Sales ("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 with the Company having 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-party home buyers at the time of the home closing. At June 30, ~~2018~~2019 and December 31, ~~2017, $0~~2018, $0.2 million and ~~$0.1~~

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

$0.2 million, respectively, of deferred gain from lot sale transactions is included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets as deferred profit from unconsolidated joint ventures for lot transactions between the Company and its TNHC-HW Cannery LLC ("Cannery") unconsolidated joint venture. In addition, at June 30, 2018, $0.5 million of deferred gain from lot transactions with the TNHC-HW Cannery LLC ("Cannery"), Bedford and ~~Bedford~~Russell Ranch unconsolidated joint ventures remained unrecognized and included as a reduction to land basis in the accompanying condensed consolidated balance sheets. At December 31, 2017, $0.5 million, of deferred gain from the Cannery lot transactions remained unrecognized and was included as a reduction to land basis in the accompanying condensed consolidated balance sheets.

The Company’s land purchase agreement with the Cannery ~~requires profit participation payments due upon the closing~~provides for reimbursement 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. During the six months ended June 30, 2017, the Company was refunded $0.2 million from the Cannery for profit participation overpayments from prior periods due to a modification of the underlying calculation related to profit participation. As of June 30, 2018 and December 31, 2017, no profit participation was due to the Cannery. Also per the purchase agreement, thecertain fee credits. The Company was reimbursed $0.1 million in fee credits from the Cannery during the six months ended June 30, 2018. As of June 30, ~~2018~~2019 and December 31, ~~2017, $0~~2018, $66,000 and ~~$0.1 million,~~$37,000, respectively, in fee credits was due to the Company from the Cannery, which is included in due from affiliates in the accompanying condensed consolidated balance sheets.

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 ("Transition Date"). As of the Transition Date, Mr. Davis ceased being an employee of the Company and became an independent contractor performing consulting services. For his services, ~~he is~~Mr. Davis was compensated $5,000 per ~~month. His current agreement terminates on~~month through June 26, 2019 ~~with the option~~when his contract was amended to extend ~~the agreement~~its term for one year ~~if mutually consented~~and reduce his scope of services and compensation to ~~by the parties. Either party may terminate the agreement at any time for any or no reason.~~$1,000 per month. At June 30, ~~2018,~~2019, 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 a fee building contract pursuant to which the Company acts 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. During the three and six months ended June 30, 2019 and 2018, the Company billed the Davis Family Trust $10,000, $0.5 million, $0.6 million and $0.7 million, respectively, including reimbursable construction costs and the Company's contractor's fees which are included in fee building revenues in the accompanying condensed consolidated statements of operations. Contractor's fees comprised $0, $15,000, $17,000 and $17,100 of the total billings for the three and six months ended June 30, 2019 and 2018, respectively. The Company recorded $13,000, $0.5 million, $0.6 million and $0.6 million for the three and six months ended June 30, 2019 and 2018, respectively, for the ~~cost~~costs of this fee building revenue which are included in fee building cost of sales in the accompanying condensed consolidated statements of operations. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company was due ~~$48,000~~$0 and ~~$0.5~~$0.6 million, respectively, from the Davis Family Trust for construction draws, which are included in due from affiliates in the accompanying condensed consolidated balance sheets.

On February 17, 2017, the Company entered into a consulting agreement that transitioned Mr. Stelmar'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 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. For his consulting services, Mr. Stelmar is compensated $6,000 per month. The current term is through August 17, 2019 and may be extended upon mutual consent of the parties. Additionally, Mr. Stelmar's outstanding restricted stock unit equity award granted in 2016 ~~will continue~~continued to vest in accordance with its original terms based on his continued provision of consulting services rather than continued ~~employment.~~employment and fully vested during the 2019 first quarter. At June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, no fees were due to Mr. Stelmar for his consulting services.

On ~~June 29, 2015,~~February 14, 2019, the Company ~~formed~~entered into a ~~new unconsolidated joint venture, TNHC Tidelands LLC ("Tidelands"), and received capital credit in excess~~consulting agreement that transitioned Thomas Redwitz's role from that of ~~our contributed land basis. As~~Chief Investment Officer to a ~~result,~~non-employee consultant to the Company ~~recognized $1.6 million in equity in net income (loss)~~effective March 1, 2019. For his consulting services, Mr. Redwitz is compensated $10,000 per month. The agreement terminates March 1, 2020 and may be extended upon mutual consent of ~~unconsolidated joint ventures and deferred $0.4 million in profit from unconsolidated joint ventures related to~~

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~this transaction for~~ the ~~year ended December 31, 2015. During the three and six months ended~~parties. At June 30, ~~2017, $34,000 and $0.1 million, respectively, of the previously deferred revenue was recognized as equity in net income (loss) of unconsolidated joint ventures.~~ 2019, no fees were due to Mr. Redwitz for his consulting services.

During the third quarter of 2017, the Company acquired the remaining outside equity interest of the Tidelands joint venture. As part of this transaction, the remaining deferred profit was written off, and at December 31, 2017, no deferred profit remained unrecognized or was included in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

~~As of June 30,~~ 2018, ~~and December 31, 2017,~~ the Company had advances outstanding ~~of approximately $0 and $3.8 million, respectively,~~ to an unconsolidated joint venture, Encore ~~McKinley.~~McKinley Village LLC. The note bore interest at 10% per annum and was fully repaid during the 2018 second quarter. For the three and six months ended June 30, 2018, ~~and 2017,~~ the Company earned $49,000 ~~$0.1 million, $0.1 million~~ and ~~$0.3~~$0.1 million, respectively, in interest income on the unsecured promissory note which is included in equity in net income (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations. As of June 30, 2018 and December 31, 2017, $0 and $34,000, respectively, of interest income was due to the Company and included in due from affiliates in the accompanying condensed consolidated balance sheets.

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 (loss) of unconsolidated joint ventures in the accompanying condensed consolidated statements of operations, and our 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 the Company also recognized a gain of $0.3 million, which was included in equity in net income (loss) 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 2017, the~~The Company entered into two transactions in each of 2018 and 2017 to purchase land from affiliates of IHP, ~~Capital Partners VI, LLC,~~ which owns more than 10% of the Company's outstanding common stock and is affiliated with one member of the Company's board of directors.

The first 2017 agreement allows the Company the option to purchase lots in Northern California in a phased takedown for a gross purchase price of $16.1 million with profit participation and master marketing fees due to the seller as outlined in the contract. As of June 30, ~~2018,~~2019, the Company has taken down approximately ~~one-third~~two-thirds of the lots, paid $0.4 million in master marketing fees, and has a ~~$0.6~~$0.3 million nonrefundable deposit outstanding on the remaining lots. The second 2017 transaction ~~allows~~

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

allowed the Company to purchase finished lots in Northern California which includes customary profit participation and iswas structured as ~~a rolling option~~an optioned takedown. The total purchase price, including the cost for the finished lot development and the ~~rolling~~ option, iswas expected to be approximately ~~$56.2~~$56.7 million, ~~and depends~~dependent on the timing of takedowns, as well as our obligation to pay certain fees and costs during the option maintenance period. During the 2019 second quarter, an unrelated third party entered into agreements to purchase from the IHP affiliate some of the lots under the Company's option. The Company has in turn entered into an arrangement pursuant to which it shall purchase such lots on a rolling take down basis from such unrelated third party. The unrelated third party has agreed to purchase 67% of the lots originally under contract with the IHP affiliate and has already closed on 55% of the lots originally under contract with the IHP affiliate. Following the purchase of the lots by the unrelated third party, the purchase price of remaining lots from the IHP affiliate is expected to be approximately $8.4 million. As of June 30, ~~2018,~~2019, the Company ~~has made~~(i) had a ~~$0.3~~$2.3 million ~~refundable~~nonrefundable deposit ~~reimbursed~~up with the ~~owner~~IHP affiliate, (ii) paid $0.1 million for fees and costs, (iii) paid ~~$1.5~~$3.0 million in option payments, and (iv) paid $9.2 million for the purchase of lots directly from the IHP affiliate.

The first 2018 agreement allows the Company to purchase finished lots in Northern California for a gross purchase price of $8.0 million with additional profit participation, marketing fees and certain reimbursements due to the seller as outlined in the agreement. As of June 30, 2019, the Company has taken down all of the lots, paid $0.3 million in master marketing fees and reimbursed the seller $0.2 million in costs related to this contract. The second 2018 agreement allows the Company to purchase land in a master-plan community in Arizona for an estimated purchase price of $3.8 million plus profit participation and marketing fees pursuant to contract terms. The Company has an outstanding, nonrefundable deposit of $0.3 million related to this contract and had not taken down any ~~lots.~~lots as of June 30, 2019.

In the first quarter 2018, the Company entered into an agreement with its Bedford joint venture that is affiliated with one former member of the Company's board of directors for the option to purchase lots in phased takedowns. As of June 30, ~~2018,~~2019, the Company has made a $1.5 million nonrefundable deposit as consideration for this option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price of the land is $10.0 million with profit participation due to seller as outlined in the contract. Subsequent to June 30, 2019, the Company entered into an amendment to this agreement to reduce the gross purchase price of the land to $9.3 million. The Company has taken down approximately ~~one-fourth~~two-thirds of the contracted lots and ~~$1.1~~$0.7 million of the nonrefundable deposit remains outstanding. During the fourth quarter 2018, the Company entered into a second option agreement with the Bedford joint venture to purchase lots in phased takedowns. The Company made a $1.4 million nonrefundable deposit as consideration for the option, and a portion of the deposit will be applied to the purchase price across the phases. The gross purchase price of the land is $10.5 million with profit participation due to the seller pursuant to the agreement. At June 30, 2019, the Company had taken down approximately 42% of the optioned lots and $0.8 million of the deposit remained outstanding.

FMR LLC beneficially ~~owns~~owned over 10% of the Company's common stock during 2018, and an affiliate of FMR LLC ("Fidelity") provides investment management and record keeping services to the Company’s 401(k) Plan. For the three and six months ended June 30, 2018, ~~and 2017,~~ the Company paid Fidelity approximately $5,000 ~~$9,000, $4,000~~ and ~~$7,000,~~$9,000, respectively, for 401(k) Plan record keeping and investment management services. The participants in the Company's 401(k) Plan paid Fidelity approximately $2,000 ~~$4,000, $1,000~~ and ~~$2,000~~$4,000 for the three and six months ended June 30, 2018, ~~and 2017,~~ respectively, for record keeping and investment management services. As of June 30, 2019, FMR LLC owns less than 10% of the Company's common stock.

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. 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. For more information regarding these agreements please refer to Note 11.

13. Stock-Based Compensation

The Company's 2014 Long-Term Incentive Plan (the "2014 Incentive 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.

The number of shares of our common stock 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

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

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.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At our 2016 Annual Meeting of Shareholders on May 24, 2016, our shareholders approved the Company's 2016 Incentive Award Plan (the "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. On May 22, 2018, our shareholders approved the amended and restated 2016 Incentive Plan which increased the number of shares authorized for issuance under the plan from 800,000 to 2,100,000 shares. The amended and restated 2016 Incentive Plan will expire on April 4, 2028.

The Company has issued stock option and restricted stock unit awards under the 2014 Incentive Plan and stock option, restricted stock unit, ~~awards~~ and performance share unit awards under the 2016 Incentive Plan. As of June 30, ~~2018, 51,433~~2019, 61,443 shares remain available for grant under the 2014 Incentive Plan and ~~1,465,834~~1,053,811 shares remain available for grant under the 2016 Incentive Plan. The exercise price of stock-based 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 option, restricted stock unit awards, and performance 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.

A summary of the Company’s common stock option activity as of and for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented below:



	Six Months Ended June 30,
	2019				2018
	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	821,470		$	11.00	826,498		$	11.00
Granted	249,283		$	5.76	—		$	—
Exercised	—		$	—	—		$	—
Forfeited	(2,736	)	$	11.00	(5,028	)	$	11.00
Outstanding, end of period	1,068,017		$	9.78	821,470		$	11.00
Exercisable, end of period	818,734		$	11.00	821,470		$	11.00

Six Months Ended June 30,
2018 2017
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 826,498
$ 11.00
835,786
$ 11.00
Granted —
$ —
—
$ —
Exercised —
$ —
(9,288 ) $ 11.00
Forfeited (5,028 ) $ 11.00
—
$ —
Outstanding, end of period 821,470
$ 11.00
826,498
$ 11.00
Exercisable, end of period 821,470
$ 11.00
826,498
$ 11.00

A summary of the Company’s restricted stock unit activity as of and for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is presented below:



	Six Months Ended June 30,
	2019				2018
	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	469,227		$	10.75	562,082		$	10.72
Granted	230,774		$	5.28	179,268		$	11.24
Vested	(277,401	)	$	10.50	(270,363	)	$	11.02
Forfeited	(48,178	)	$	10.91	—		$	—
Outstanding, end of period	374,422		$	7.54	470,987		$	10.74

Six Months Ended June 30,
2018 2017
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 562,082
$ 10.72
474,989
$ 10.66
Granted 179,268
$ 11.24
343,933
$ 10.84
Vested (270,363 ) $ 11.02
(209,619 ) $ 10.76
Forfeited —
$ —
(26,194 ) $ 10.82
Outstanding, end of period 470,987
$ 10.74
583,109
$ 10.72

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A summary of the Company’s performance share unit activity as of and for the six months ended June 30, 2019 and 2018 is presented below:



	Six Months Ended June 30,
	2019				2018
	Number of Shares		Weighted-Average Grant-Date Fair Value per Share		Number of Shares	Weighted-Average Grant-Date Fair Value per Share
Performance Share Unit Activity
Outstanding, beginning of period	125,422		$	11.68	—	$	—
Granted (at target)	—		$	—	125,422	$	11.68
Vested	—		$	—	—	$	—
Forfeited	(26,882	)	$	11.68	—	$	—
Outstanding, end of period (at target)	98,540		$	11.68	125,422	$	11.68

Six Months Ended June 30,
2018
Number of Shares Weighted-Average Grant-Date Fair Value per Share
Performance Share Unit Activity —
$ —
Outstanding, beginning of period —
$ —
Granted (at target) 125,422
$ 11.68
Vested —
$ —
Forfeited —
$ —
Outstanding, end of period (at target) 125,422
$ 11.68

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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(Dollars in thousands)
Expense related to:
Stock options	$	50	$	—	$	72	$	—
Restricted stock units and performance share units	473		862		1,017		1,704
	$	523	$	862	$	1,089	$	1,704

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(Dollars in thousands)
Expense related to:
Stock options $ —
$ —
$ —
$ 11
Restricted stock units 798
695
1,562
1,295
Performance share units 64
—
142
—
$ 862
$ 695
$ 1,704
$ 1,306

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:



	Six Months Ended June 30,
	2019	2018
Expected term (in years)	6.0	0
Expected volatility	39.9%	—
Risk-free interest rate	2.5%	—
Expected dividends	—	—
Weighted-average grant date fair value	$2.43	$0

We used the "simplified method" to establish the expected term of the common stock options granted by the Company. Our restricted stock unit awards and performance share unit awards are valued based on the closing price of our common stock on the date of grant. The number of performance share units that will vest ranges from 50%-150% of the target amount awarded based on actual cumulative earnings per share and return on equity growth from 2018-2019, subject to initial achievement of minimum thresholds. We evaluate the probability of achieving the performance targets established under each of the outstanding performance share unit awards quarterly and estimate the number of underlying units that are probable of being issued. Compensation expense for ~~these~~restricted stock unit and performance share unit awards is being recognized using the straight-line method over the requisite service period, subject to cumulative catch-up adjustments required as a result of changes in the number shares probable of being ~~issued.~~issued for performance share unit awards. At June 30, 2019, the probability of achieving the performance targets associated with the outstanding performance share unit awards was estimated to be 0%. Forfeitures are recognized in compensation cost during the period that the award forfeiture occurs.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At June 30, ~~2018,~~2019, the amount of unearned stock-based compensation currently estimated to be expensed through ~~2021~~2022 is ~~$4.9~~$2.8 million. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is 1.8 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.

For the three and six months ended June 30, ~~2018,~~2019, the Company recorded ~~a $0.1~~an income tax provision of $1.0 million ~~provision~~ and ~~an $0.8~~$0.3 million, ~~benefit for income taxes,~~ respectively. Comparatively, the Company recorded ~~respective~~an income tax ~~provisions~~provision of ~~$1.0~~$0.1 million and ~~$1.5~~an income tax benefit of $0.8 million for the three and six months ended June 30, ~~2017.~~2018, respectively. The Company's effective tax rate for the three and six months ended June 30, 2018, was 36.8% and 59.7%, respectively, and 24.7% and 30.0% before discrete items. For the three and six months ended June 30, 2017, the Company's effective tax rates were 39.4% and 39.1%, respectively, and 38.0% and 38.1% before discrete items. Effective tax rate before discrete items is a non-GAAP measure, please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Provision (Benefit) for Income Taxes" for a reconciliation to effective tax rate, the nearest GAAP equivalent.

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~The effective tax rates for the three and six months ended June 30, 2018 differ~~all periods differs from the federal statutory tax rates due to state income taxes, estimated deduction limitations for executive compensation and discrete items. ~~Discrete items comprised~~The Company recorded a $0.3 million discrete provision in the first six months of 2019 related to stock compensation and state tax rate changes while a $0.4 million ofdiscrete benefit was taken in the ~~tax benefit for the first half of~~comparable 2018 ~~and were~~period primarily related to ~~benefits from~~ energy tax credits that were extended in February 2018 for 2017 closings and, to a lesser extent, an adjustment to the Company's deferred tax asset revaluation required as a result of the federal tax rate cut. The effective tax rates for the three and six months June 30, 2017 differ from the federal statutory tax rates due primarily to state income taxes, offset partially by the benefit from 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.

With the enactment of the Tax Cuts and Jobs Act (the "Tax Act"), the corporate federal income tax rate dropped from a maximum of 35% to a flat 21% rate effective January 1, 2018. The SEC staff issued Staff Accounting Bulletin 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act and provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Act. As a result of the rate change, the Company was required to revalue its net deferred tax asset at December 31, 2017 and recorded a provisional adjustment to reduce its value by $3.2 million. The provisional amount recorded at December 31, 2017, is subject to revisions as we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service, FASB, and other standard-setting and regulatory bodies. During the 2018 first quarter the Company recorded an immaterial adjustment to the provisional amount, and our accounting for the tax effects of the Tax Act will be completed during the one-year measurement period.

15. Segment Information

The Company’s operations are organized into ~~two~~three reportable segments: two homebuilding segments (Arizona and California) 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 Northern California and Southern California homebuilding operating segments.

Our homebuilding operations acquire and develop land and construct and sell single-family attached and detached

homes. Our fee building operations build homes and manage construction related activities on behalf of third-party property owners and our joint ventures. In addition, our ~~Corporate~~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 ~~Corporate~~corporate are allocated to the fee building segment primarily based on its respective percentage of ~~revenues.~~revenues and to each homebuilding segment based on its respective investment in and advances to unconsolidated joint ventures and real estate inventories balances. The assets of our fee building segment primarily consist of cash, restricted cash and accounts receivable. The majority of our ~~Corporate~~corporate personnel and resources are primarily dedicated to activities relating to our homebuilding segment, and, therefore, the balance of any unallocated ~~Corporate~~corporate expenses ~~and assets~~ are ~~included in~~allocated within our homebuilding ~~segment.~~reportable segments.

~~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.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Financial information relating to reportable segments was as follows:



	June 30,		December 31,
	2019		2018
	(Dollars in thousands)
Homebuilding assets:
California	$	548,223	$	551,807
Arizona	95,370		86,205
Total homebuilding assets	643,593		638,012
Fee building assets	7,064		10,879
Corporate unallocated assets	22,600		47,206
Total assets	$	673,257	$	696,097

June 30, December 31,
2018 2017
(Dollars in thousands)
Assets:
Homebuilding $ 652,444
$ 631,087
Fee building 13,566
13,425
Total $ 666,010
$ 644,512

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

16. Supplemental Disclosure of Cash Flow Information

The following table presents certain supplemental cash flow information:



	Six Months Ended June 30,
	2019		2018
	(Dollars in thousands)
Supplemental disclosures of cash flow information
Interest paid, net of amounts capitalized	$	—	$	—
Income taxes paid	$	240	$	7,000

Six Months Ended June 30,
2018 2017
(Dollars in thousands)
Supplemental disclosures of cash flow information
Interest paid, net of amounts capitalized $ —
$ —
Income taxes paid $ 7,000
$ 8,750
Supplemental disclosures of non-cash transactions
Assets assumed from unconsolidated joint ventures $ —
$ 100
Liabilities and equity assumed from unconsolidated joint ventures $ —
$ 1,095
Contribution of real estate to unconsolidated joint ventures $ —
$ 1,013

~~THE NEW HOME COMPANY INC.~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

17. Supplemental Guarantor Information

The 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.

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETS



	June 30, 2019
	NWHM		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	4,005	$	44,040	$	179	$	—		$	48,224
Restricted cash	—		124		—		—			124
Contracts and accounts receivable	8		16,518		—		(413		)	16,113
Intercompany receivables	228,506		—		—		(228,506		)	—
Due from affiliates	—		218		—		—			218
Real estate inventories	—		541,954		—		—			541,954
Investment in and advances to unconsolidated joint ventures	—		33,637		—		—			33,637
Investment in subsidiaries	370,716		—		—		(370,716		)	—
Other assets	18,975		14,003		12		(3		)	32,987
Total assets	$	622,210	$	650,494	$	191	$	(599,638	)	$	673,257

Liabilities and equity
Accounts payable	$	329	$	26,300	$	—	$	—		$	26,629
Accrued expenses and other liabilities	7,723		25,001		59		(408		)	32,375
Intercompany payables	—		228,506		—		(228,506		)	—
Due to affiliates	—		8		—		(8		)	—
Unsecured revolving credit facility	66,000		—		—		—			66,000
Senior notes, net	309,060		—		—		—			309,060
Total liabilities	383,112		279,815		59		(228,922		)	434,064
Stockholders' equity	239,098		370,679		37		(370,716		)	239,098
Non-controlling interest in subsidiary	—		—		95		—			95
Total equity	239,098		370,679		132		(370,716		)	239,193
Total liabilities and equity	$	622,210	$	650,494	$	191	$	(599,638	)	$	673,257

June 30, 2018
NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM
(Dollars in thousands)
Assets
Cash and cash equivalents $ 38,449
$ 52,126
$ 183
$ —
$ 90,758
Restricted cash —
567
—
—
567
Contracts and accounts receivable 12
21,670
—
(1,312 ) 20,370
Intercompany receivables 158,687
—
—
(158,687 ) —
Due from affiliates —
212
—
—
212
Real estate inventories —
469,738
—
—
469,738
Investment in and advances to unconsolidated joint ventures —
58,501
—
—
58,501
Investment in subsidiaries 406,812
—
—
(406,812 ) —
Other assets 17,030
8,849
—
(15 ) 25,864
Total assets $ 620,990
$ 611,663
$ 183
$ (566,826 ) $ 666,010

Liabilities and equity
Accounts payable $ 68
$ 28,897
$ 13
$ —
$ 28,978
Accrued expenses and other liabilities 7,765
17,255
91
(1,315 ) 23,796
Intercompany payables —
158,687
—
(158,687 ) —
Due to affiliates —
12
—
(12 ) —
Unsecured revolving credit facility 35,000
—
—
—
35,000
Senior notes, net 319,402
—
—
—
319,402
Total liabilities 362,235
204,851
104
(160,014 ) 407,176
Stockholders' equity 258,755
406,812
—
(406,812 ) 258,755
Non-controlling interest in subsidiary —
—
79
—
79
Total equity 258,755
406,812
79
(406,812 ) 258,834
Total liabilities and equity $ 620,990
$ 611,663
$ 183
$ (566,826 ) $ 666,010

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2018
	NWHM		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	28,877	$	13,249	$	147	$	—		$	42,273
Restricted cash	—		269		—		—			269
Contracts and accounts receivable	7		18,926		—		(668		)	18,265
Intercompany receivables	192,341		—		—		(192,341		)	—
Due from affiliates	—		1,218		—		—			1,218
Real estate inventories	—		566,290		—		—			566,290
Investment in and advances to unconsolidated joint ventures	—		34,330		—		—			34,330
Investment in subsidiaries	396,466		—		—		(396,466		)	—
Other assets	18,643		14,812		—		(3		)	33,452
Total assets	$	636,334	$	649,094	$	147	$	(589,478	)	$	696,097

Liabilities and equity
Accounts payable	$	240	$	39,151	$	—	$	—		$	39,391
Accrued expenses and other liabilities	8,492		21,129		71		(664		)	29,028
Intercompany payables	—		192,341		—		(192,341		)	—
Due to affiliates	—		7		—		(7		)	—
Unsecured revolving credit facility	67,500		—		—		—			67,500
Senior notes, net	320,148		—		—		—			320,148
Total liabilities	396,380		252,628		71		(193,012		)	456,067
Stockholders' equity	239,954		396,466		—		(396,466		)	239,954
Non-controlling interest in subsidiary	—		—		76		—			76
Total equity	239,954		396,466		$	76	(396,466		)	240,030
Total liabilities and equity	$	636,334	$	649,094	$	147	$	(589,478	)	$	696,097

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017
NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM
(Dollars in thousands)
Assets
Cash and cash equivalents $ 99,586
$ 23,772
$ 188
$ —
$ 123,546
Restricted cash —
424
—
—
424
Contracts and accounts receivable 10
24,238
—
(1,024 ) 23,224
Intercompany receivables 129,414
—
—
(129,414 ) —
Due from affiliates —
1,060
—
—
1,060
Real estate inventories —
416,143
—
—
416,143
Investment in and advances to unconsolidated joint ventures —
55,824
—
—
55,824
Investment in subsidiaries 356,443
—
—
(356,443 ) —
Other assets 8,464
15,827
—
—
24,291
Total assets $ 593,917
$ 537,288
$ 188
$ (486,881 ) $ 644,512

Liabilities and equity
Accounts payable $ 237
$ 23,479
$ 6
$ —
$ 23,722
Accrued expenses and other liabilities 11,034
27,954
80
(1,014 ) 38,054
Intercompany payables —
129,414
—
(129,414 ) —
Due to affiliates —
10
—
(10 ) —
Senior notes, net 318,656
—
—
—
318,656
Total liabilities 329,927
180,857
86
(130,438 ) 380,432
Stockholders' equity 263,990
356,431
12
(356,443 ) 263,990
Non-controlling interest in subsidiary —
—
90
—
90
Total equity 263,990
356,431
$ 102
(356,443 ) 264,080
Total liabilities and equity $ 593,917
$ 537,288
$ 188
$ (486,881 ) $ 644,512

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018
NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM
(Dollars in thousands)
Revenues:
Home sales $ —
$ 196,897
$ —
$ —
$ 196,897
Fee building —
81,889
—
—
81,889
—
278,786
—
—
278,786
Cost of Sales:
Home sales —
172,350
22
—
172,372
Fee building —
79,737
—
—
79,737
—
252,087
22
—
252,109

Gross Margin:
Home sales —
24,547
(22 ) —
24,525
Fee building —
2,152
—
—
2,152
—
26,699
(22 ) —
26,677
Selling and marketing expenses —
(16,105 ) —
—
(16,105 )
General and administrative expenses (801 ) (11,194 ) (3 ) —
(11,998 )
Equity in net income of unconsolidated joint ventures —
215
—
—
215
Equity in net loss of subsidiaries (176 ) —
—
176
—
Other income (expense), net 76
(194 ) —
—
(118 )
Pretax income (loss) (901 ) (579 ) (25 ) 176
(1,329 )
Benefit for income taxes 376
417
—
—
793
Net income (loss) (525 ) (162 ) (25 ) 176
(536 )
Net loss attributable to non-controlling interest in subsidiary —
—
11
—
11
Net income (loss) attributable to The New Home Company Inc. $ (525 ) $ (162 ) $ (14 ) $ 176
$ (525 )

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THE NEW HOME COMPANY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



	Six Months Ended June 30, 2018
	NWHM			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Net cash used in operating activities	$	(39,156	)	$	(22,349	)	$	(5	)	$	—		$	(61,510	)
Investing activities:
Purchases of property and equipment	(22		)	(162		)	—			—			(184		)
Contributions and advances to unconsolidated joint ventures	—			(8,954		)	—			—			(8,954		)
Contributions to subsidiaries from corporate	(103,885		)	—			—			103,885			—
Distributions of capital from subsidiaries	49,975			—			—			(49,975		)	—
Distributions of capital and repayment of advances from unconsolidated joint ventures	—			5,874			—			—			5,874
Interest collected on advances to unconsolidated joint ventures	—			178			—			—			178
Net cash used in investing activities	$	(53,932	)	$	(3,064	)	$	—		$	53,910		$	(3,086	)
Financing activities:
Borrowings from credit facility	35,000			—			—			—			35,000
Contributions to subsidiaries from corporate	—			103,885			—			(103,885		)	—
Distributions to corporate from subsidiaries	—			(49,975		)	—			49,975			—
Repurchases of common stock	(2,072		)	—			—			—			(2,072		)
Tax withholding paid on behalf of employees for stock awards	(977		)	—			—			—			(977		)
Net cash provided by financing activities	$	31,951		$	53,910		$	—		$	(53,910	)	$	31,951
Net (decrease) increase in cash, cash equivalents and restricted cash	(61,137		)	28,497			(5		)	—			(32,645		)
Cash, cash equivalents and restricted cash – beginning of period	99,586			24,196			188			—			123,970
Cash, cash equivalents and restricted cash – end of period	$	38,449		$	52,693		$	183		$	—		$	91,325

Six Months Ended June 30, 2017
NWHM Inc. Guarantor Subsidiaries Non-Guarantor Subsidiaries Consolidating Adjustments Consolidated NWHM
(Dollars in thousands)
Net cash used in operating activities $ (21,176 ) $ (49,799 ) $ (47 ) $ (886 ) $ (71,908 )
Investing activities:
Purchases of property and equipment (40 ) (55 ) —
—
(95 )
Cash assumed from joint venture at consolidation —
995
—
—
995
Contributions and advances to unconsolidated joint ventures —
(8,517 ) —
—
(8,517 )
Contributions to subsidiaries from corporate (94,035 ) —
—
94,035
—
Distributions of capital from subsidiaries 19,880
—
—
(19,880 ) —
Distributions of capital and repayment of advances from unconsolidated joint ventures —
2,948
—
—
2,948
Net cash (used in) provided by investing activities $ (74,195 ) $ (4,629 ) $ —
$ 74,155
$ (4,669 )
Financing activities:
Borrowings from credit facility 72,000
—
—
—
72,000
Repayments of credit facility (190,000 ) —
—
—
(190,000 )
Proceeds from senior notes 324,465
—
—
—
324,465
Payment of debt issuance costs (6,440 ) —
—
—
(6,440 )
Contributions to subsidiaries from corporate —
94,035
—
(94,035 ) —
Distributions to corporate from subsidiaries —
(20,766 ) —
20,766
—
Tax withholding paid on behalf of employees for stock awards (584 ) —
—
—
(584 )
Proceeds from exercise of stock options $ 102
$ —
$ —
$ —
102
Net cash provided by financing activities $ 199,543
$ 73,269
$ —
$ (73,269 ) $ 199,543
Net increase (decrease) in cash, cash equivalents and restricted cash 104,172
18,841
(47 ) —
122,966
Cash, cash equivalents and restricted cash – beginning of period 16,385
14,427
269
—
31,081
Cash, cash equivalents and restricted cash – end of period $ 120,557
$ 33,268
$ 222
$ —
$ 154,047

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 ~~of 1933, as amended (the "Securities Act")~~ 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, 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," "could," "can," "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, and financial needs.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in Part I, Item 1A, "Risk Factors" and Part II, Item 7, "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, ~~2017~~2018 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:

This quarterly report on Form 10-Q includes certain non-GAAP measures, including ~~homebuilding gross margin before impairments (or home sales gross margin before impairments), homebuilding gross margin percentage before impairments,~~ Adjusted EBITDA, Adjusted EBITDA margin percentage, ~~the~~ ratio of Adjusted EBITDA to total interest incurred, net debt, ~~the~~ ratio of net debt-to-capital, general and administrative costs excluding severance charges, general and administrative costs excluding severance charges as a percentage of home sales revenue, selling, marketing and general and administrative costs excluding severance charges, selling, marketing and general and administrative costs excluding severance charges as a percentage of home sales revenue, adjusted homebuilding gross margin (or homebuilding gross margin before ~~impairments and~~ interest

in cost of home sales), and adjusted homebuilding gross margin ~~percentage and effective tax rate before discrete items.~~percentage. For a reconciliation of ~~homebuilding gross margin before impairments (or home sales gross margin before impairments), homebuilding gross margin percentage before impairments,~~ Adjusted EBITDA, Adjusted EBITDA margin percentage, and the ratio of Adjusted EBITDA to total interest incurred 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 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 severance charges, general and administrative expenses excluding severance charges as a percentage of homes sales revenue, selling, marketing and general and administrative expenses excluding severance charges and selling, marketing and general and administrative expenses excluding severance charges as a percentage of home sales revenue, please see "-- Results of Operations - Selling, General and Administrative Expenses." For a reconciliation of adjusted homebuilding gross margin (or homebuilding gross margin ~~excluding impairments and~~before interest in cost of home sales) and adjusted homebuilding gross margin percentage to the comparable GAAP measures 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 the effective tax rate before discrete items to the comparable GAAP measure please see Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Provision (Benefit) for Income Taxes."

Selected Financial Information

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
(Dollars in thousands)
Revenues:
Home sales $ 117,460
$ 96,929
$ 196,897
$ 166,335
Fee building, including management fees from unconsolidated joint ventures of $672, $1,217, $1,652 and $2,431, respectively 38,095
47,181
81,889
102,798
155,555
144,110
278,786
269,133
Cost of Sales:
Home sales 102,678
82,488
172,372
142,553
Home sales impairments —
1,300
—
1,300
Fee building 37,038
45,899
79,737
99,825
139,716
129,687
252,109
243,678
Gross Margin:
Home sales 14,782
13,141
24,525
22,482
Fee building 1,057
1,282
2,152
2,973
15,839
14,423
26,677
25,455

Home sales gross margin 12.6 % 13.6 % 12.5 % 13.5 %
Home sales gross margin before impairments⁽¹⁾
12.6 % 14.9 % 12.5 % 14.3 %
Fee building gross margin 2.8 % 2.7 % 2.6 % 2.9 %

Selling and marketing expenses (9,466 ) (6,376 ) (16,105 ) (11,377 )
General and administrative expenses (5,979 ) (5,595 ) (11,998 ) (10,685 )
Equity in net income (loss) of unconsolidated joint ventures (120 ) 201
215
507
Other income (expense), net (92 ) (148 ) (118 ) (35 )
Pretax income (loss) 182
2,505
(1,329 ) 3,865
(Provision) benefit for income taxes (67 ) (988 ) 793
(1,512 )
Net income (loss) 115
1,517
(536 ) 2,353
Net loss attributable to non-controlling interest —
—
11
10
Net income (loss) attributable to The New Home Company Inc. $ 115
$ 1,517
$ (525 ) $ 2,363

Interest incurred $ 6,612
$ 6,401
$ 13,328
$ 8,437
Adjusted EBITDA⁽²⁾
$ 6,564
$ 6,304
$ 10,127
$ 11,265
Adjusted EBITDA margin percentage⁽²⁾
4.2 % 4.4 % 3.6 % 4.2 %

LTM⁽³⁾ Ended June 30,
2018 2017
Interest incurred $ 26,869
$ 12,951
Adjusted EBITDA⁽²⁾
$ 49,007
$ 50,393
Adjusted EBITDA margin percentage⁽²⁾
6.4 % 6.5 %
Ratio of Adjusted EBITDA to total interest incurred ⁽²⁾
1.8x
3.9x



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands)
Revenues:
Home sales	$	140,464		$	117,460		$	239,650		$	196,897
Fee building, including management fees from unconsolidated joint ventures of $619, $672, $1,162 and $1,652, respectively	22,285			38,095			41,947			81,889
	162,749			155,555			281,597			278,786
Cost of Sales:
Home sales	123,525			102,678			210,094			172,372
Fee building	21,770			37,038			41,038			79,737
	145,295			139,716			251,132			252,109
Gross Margin:
Home sales	16,939			14,782			29,556			24,525
Fee building	515			1,057			909			2,152
	17,454			15,839			30,465			26,677

Home sales gross margin	12.1		%	12.6		%	12.3		%	12.5		%
Fee building gross margin	2.3		%	2.8		%	2.2		%	2.6		%

Selling and marketing expenses	(9,683		)	(9,466		)	(18,362		)	(16,105		)
General and administrative expenses	(5,841		)	(5,979		)	(13,232		)	(11,998		)
Equity in net income (loss) of unconsolidated joint ventures	185			(120		)	369			215
Gain on early extinguishment of debt	552			—			969			—
Other income (expense), net	(102		)	(92		)	(295		)	(118		)
Pretax income (loss)	2,565			182			(86		)	(1,329		)
(Provision) benefit for income taxes	(974		)	(67		)	(310		)	793
Net income (loss)	1,591			115			(396		)	(536		)
Net (income) loss attributable to non-controlling interest	(19		)	—			(19		)	11
Net income (loss) attributable to The New Home Company Inc.	$	1,572		$	115		$	(415	)	$	(525	)

Interest incurred	$	7,606		$	6,612		$	15,367		$	13,328
Adjusted EBITDA⁽¹⁾	$	11,119		$	6,564		$	18,025		$	10,127
Adjusted EBITDA margin percentage⁽¹⁾	6.8		%	4.2		%	6.4		%	3.6		%

							LTM⁽²⁾ Ended June 30,
							2019			2018
Interest incurred							$	30,416		$	26,869
Adjusted EBITDA⁽¹⁾							$	47,796		$	49,007
Adjusted EBITDA margin percentage⁽¹⁾							7.1		%	6.4		%
Ratio of Adjusted EBITDA to total interest incurred ⁽¹⁾							1.6x			1.8x


(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 June 30, Six Months Ended June 30,
2018 % 2017 % 2018 % 2017 %
(Dollars in thousands)
Home sales revenue $ 117,460
100.0 % $ 96,929
100.0 % $ 196,897
100.0 % $ 166,335
100.0 %
Cost of home sales 102,678
87.4 % 83,788
86.4 % 172,372
87.5 % 143,853
86.5 %
Homebuilding gross margin 14,782
12.6 % 13,141
13.6 % 24,525
12.5 % 22,482
13.5 %
Add: Home sales impairments —
— % 1,300
1.3 % —
— % 1,300
0.8 %
Homebuilding gross margin before impairments $ 14,782
12.6 % $ 14,441
14.9 % $ 24,525
12.5 % $ 23,782
14.3 %

~~(2)~~

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, 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.


	Three Months Ended June 30,						Six Months Ended June 30,						LTM⁽²⁾ Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,						LTM⁽²⁾ Ended June 30,
	2018			2017			2018			2017			2018			2017			2019			2018			2019			2018			2019			2018
	(Dollars in thousands)																		(Dollars in thousands)
Net income (loss)	$	115		$	1,517		$	(536	)	$	2,353		$	14,252		$	21,704		$	1,591		$	115		$	(396	)	$	(536	)	$	(14,090	)	$	14,252
Add:
Interest amortized to cost of sales and equity in net income (loss) of unconsolidated joint ventures	3,768			1,720			6,563			3,271			14,349			6,891			6,349			3,768			11,232			6,563			24,577			14,349
Provision (benefit) for income taxes	67			988			(793		)	1,512			13,085			13,283			974			67			310			(793		)	(4,972		)	13,085
Depreciation and amortization	1,624			113			2,646			236			2,859			496			2,386			1,624			5,042			2,646			9,027			2,859
Amortization of equity-based compensation	862			695			1,704			1,306			3,201			3,035
Amortization of stock-based compensation																			523			862			1,089			1,704			2,475			3,201
Cash distributions of income from unconsolidated joint ventures	—			—			715			1,588			715			4,235			19			—			279			715			279			715
Noncash impairments and abandonments	8			1,472			43			1,506			1,120			5,257
Severance charges																			—			—			1,788			—			1,788			—
Noncash inventory impairments and abandonments																			14			8			19			43			10,182			1,120
Less:
Gain from notes payable principal reduction	—			—			—			—			—			(250		)
Equity in net income (loss) of unconsolidated joint ventures	120			(201		)	(215		)	(507		)	(574		)	(4,258		)
Gain on early extinguishment of debt																			(552		)	—			(969		)	—			(969		)	—
Equity in net (income) loss of unconsolidated joint ventures																			(185		)	120			(369		)	(215		)	19,499			(574		)
Adjusted EBITDA	$	6,564		$	6,304		$	10,127		$	11,265		$	49,007		$	50,393		$	11,119		$	6,564		$	18,025		$	10,127		$	47,796		$	49,007
Total Revenue	$	155,555		$	144,110		$	278,786		$	269,133		$	760,819		$	769,485		$	162,749		$	155,555		$	281,597		$	278,786		$	670,377		$	760,819
Adjusted EBITDA margin percentage	4.2		%	4.4		%	3.6		%	4.2		%	6.4		%	6.5		%	6.8		%	4.2		%	6.4		%	3.6		%	7.1		%	6.4		%
Interest incurred	$	6,612		$	6,401		$	13,328		$	8,437		$	26,869		$	12,951		$	7,606		$	6,612		$	15,367		$	13,328		$	30,416		$	26,869
Ratio of Adjusted LTM⁽³⁾ EBITDA to total interest incurred													1.8x			3.9x
Ratio of Adjusted LTM⁽²⁾ EBITDA to total interest incurred																															1.6		x	1.8		x

~~The Company continued to make progress with its growth strategy to expand its offerings to include more affordably priced product and grow its community count. Net new home orders were up 98% during~~During the ~~2018~~2019 second quarter, the Company enjoyed both top and bottom-line growth and made significant progress towards reducing our leverage and strengthening our balance sheet. Home sales revenue increased 20% year-over-year from 56% more home deliveries, and our pretax income was up meaningfully over the prior year ~~period as a result~~at $2.6 million versus $0.2 million. In addition, we repurchased $7.0 million of ~~a 100% increase in average active selling communities. Also, contributing to the order growth were three new communities that opened~~senior notes during the quarter, ~~including our first community located in the Inland Empire in Southern California,~~which when combined with a ~~market we expect to grow into a meaningful part~~net $18.0 million pay down of our ~~business, and~~revolving credit facility, contributed to a 240 basis point sequential decrease in our ~~second wholly owned Arizona community located~~net debt-to-capital ratio to 57.7%*.

During the 2018 second quarter, the Company continued to see the impact of the product mix shift resulting from the Company's strategic broadening of its portfolio to include more affordably-priced product. As anticipated with this change, the average selling price of homes delivered and of homes in backlog for the 2018 second quarter declined 20% and 48%, respectively, from the prior year period. The reduction in the average selling price of homes delivered was more than offset by a 52% increase in homes delivered,2.4 sales per community, resulting in a ~~21%~~38% sequential increase in ~~home~~net new orders. We also continued to recognize benefits from our strategic repositioning to more affordable product as sales ~~revenues during~~from these communities represented a higher proportion of our 2019 second quarter net new orders and an absorption pace higher than the ~~2018 second quarter. The decline in average selling price of homes in backlog at June 30, 2018 from the product mix shift drove a 14% decrease in backlog dollar value.~~companywide average.

~~Continued investment in California and Arizona, where housing fundamentals were solid, drove wholly owned lot count up 77% year-over-year at June 30, 2018.~~thoughtfully allocate resources to best position the Company for long-term success. The Company ended the quarter with ~~$91~~$48.2 million in cash and cash equivalents ~~$354.4~~and $375.1 million in debt, of which ~~$35.0~~$66.0 million was outstanding under its ~~$200 million~~ revolving credit ~~facility, a~~facility. As of June 30, 2019 the Company's debt-to-capital ratio ~~of 57.8%,~~was 61.1% and aits net debt-to-capital ratio ~~of 50.4%~~was 57.7%*~~. The 2018 second quarter also marked~~, a 240 basis point sequential improvement from the Company's initial repurchases of common stock under its previously announced stock repurchase plan. The Company repurchased 205,240 shares of common stock for approximately $2.1 million, or an average price of $10.08 per share.2019 first quarter.

*Net debt-to-capital ratio is a non-GAAP measure. For a reconciliation of net debt-to-capital to the appropriate GAAP measure, please see ~~Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations -~~"-- Liquidity and Capital Resources - Debt-to-Capital Ratios."

Results of Operations

Demand for the 2019 second quarter was strongest in ~~Northern~~Southern California with a monthly absorption rate of 2.5 driven by stronger order activity at more affordably priced communities, including a high number of initial sales at a new community of attached court homes located within the Inland Empire. Overall, the Southern California market has experienced a slowdown compared to the prior year due to a run up in home prices and a decrease in demand from foreign national buyers, which contributed to our 19% year-over-year decrease in monthly sales ~~of 3.7 per community for~~pace in this market. Additionally, the Company's Southern California monthly absorption rate benefited during the 2018 second quarter ~~largely attributable to strong~~from two newly-opened communities that experienced solid initial order ~~activity in two Bay Area communities. Southern~~activity. Northern California ~~saw an increase~~experienced a 38% decline in its monthly sales absorption rate ~~to 3.1 sales per community in~~for the ~~2018~~2019 second quarter ~~compared~~primarily related to ~~2.8~~slower demand at our Bay Area communities due to buyer affordability constraints and because sale pace was strongest in the 2017 period. The improvement was primarily attributable to an increase in more affordable product that generally sells at a faster pace than higher-priced product. Arizona contributed 2.2 sales per monththis region in the 2018 second quarter.

Net new home orders for the six months ended June 30, ~~2018 were up 50%~~2019 decreased 21% as compared to the ~~2017~~same period ~~resulting largely from~~in 2018 primarily as a ~~46%~~result of a 33% decline in the monthly sales absorption rate due to weaker buyer demand. A 16% increase in average selling communities ~~from 13 to 19. Buyer demand~~partially offset the slower sales pace for the ~~first half of 2018 was solid with a year-to-date monthly absorption rate of 3.0, consistent with the prior period. Monthly sales per community~~ for the six months ended June 30, 2018 were up slightly in both Northern and Southern California due to strong Bay Area activity and product price diversification, respectively, offset by lower sales absorption in Arizona as communities ramp up starting operations.2019.

~~The Company continued to experience modest cancellation activity with a cancellation rate of 6% for~~During the ~~three~~six months ended June 30, ~~2018 as compared to 10%~~2019, monthly sales absorption was strongest in Northern California at 2.2 monthly sales per community, driven by strong order activity at three affordably-priced communities located within masterplan developments. However, the ~~prior year period, and a cancellation~~39% decrease in Northern California's monthly absorption rate ~~of 6%~~ for the six months ended June 30, ~~2018 as compared to 8% for~~2019 from the same period in ~~2017. We believe our~~2018 was the largest of the divisions due to lack of affordability and strong sales experienced in the first half of 2018 from two Bay Area townhome communities, one of which sold out during the prior year period. The decrease in Southern California year-to-date absorption rates during the first half of 2019 compared to 2018 was attributable to the overall run up in home prices and a slowdown in demand from foreign national buyers in the market, and the high initial orders in the prior year from two communities that opened during the first half of 2018, as noted above.



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



Large accelerated filer	¨	Accelerated filer	☒	Non-accelerated filer	¨	~~Accelerated filer~~	ý	Smaller reporting company	¨ ☒	Emerging growth company	ý☒


	June 30,			December 31,			June 30,			December 31,
	2018			2017			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Cash and cash equivalents	$	26,231		$	30,017		$	35,145		$	45,945
Restricted cash	15,048			15,041			14,740			19,205
Real estate inventories	439,013			396,850			338,176			374,607
Other assets	1,422			3,942			5,950			4,231
Total assets	$	481,714		$	445,850		$	394,011		$	443,988

Accounts payable and accrued liabilities	$	33,844		$	34,959		$	36,191		$	43,158
Notes payable	75,616			78,341			40,564			71,299
Total liabilities	109,460			113,300			76,755			114,457
The New Home Company's equity	56,099			50,523			33,016			33,617
Other partners' equity	316,155			282,027			284,240			295,914
Total equity	372,254			332,550			317,256			329,531
Total liabilities and equity	$	481,714		$	445,850		$	394,011		$	443,988
Debt-to-capitalization ratio	16.9		%	19.1		%	11.3		%	17.8		%
Debt-to-equity ratio	20.3		%	23.6		%	12.8		%	21.6		%



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



Delaware		27-0560089
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



	Not Applicable
(Former name, former address and former fiscal year, if changed since last report)


~~(2)~~	The Company depreciated $2.3 million, $4.9 million, $1.5 million and $2.4 million of capitalized selling and marketing costs to selling and marketing expenses during the three and six months ended June 30, ~~2018.~~


~~(3)~~	~~Of the $1.2 million amount for December 2017, approximately $0.6 million related to 2016 estimated warranty insurance recoveries. For further discussion, please see Note 8.~~


~~(4)~~	2019 and 2018, respectively. The Company ~~amortized $2.1~~depreciated $0.1 million, $0.2 million, $0.1 million and ~~$3.2~~$0.2 million of ~~capitalized selling~~property and ~~marketing costs~~equipment to ~~selling~~general and ~~marketing~~administrative expenses during the three and six months ended June 30, ~~2017.~~2019 and 2018, respectively.


(2)	The Company adjusted its warranty insurance receivable by $0.6 million during the 2019 second quarter to true-up the receivable to align with actual reimbursement experience rates which resulted in pretax income of the same amount. The impact to net income was $0.4 million or $0.02 per diluted share.


(3)	In conjunction with the adoption of ASC 842, the Company established a right-of-use asset of $3.1 million on January 1, 2019. For more information, please refer to Note 1 and Note 11.


(1)	Included in the amount at June 30, 2019 and December 31, ~~2017~~2018 is approximately ~~$1.2~~$1.3 million and $0.9 million, respectively, of ~~additional~~ warranty liabilities estimated to be ~~covered~~recovered by our insurance ~~policies that were adjusted~~policies.



•	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



	~~FORM 10-Q~~



	~~Commission File Number 001-36283~~



	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
7.25% Senior Notes due 2022, net ⁽¹⁾	$	319,402	$	332,313	$	318,656	$	336,375
Unsecured revolving credit facility	$	35,000	$	35,000	$	—	$	—



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(Dollars in thousands)
Lease cost:
Lease costs included in general and administrative expenses	$	265	$	620
Lease costs included in real estate inventories	207		369
Lease costs included in selling and marketing expenses	17		34
Net lease cost ⁽¹⁾	$	489	$	1,023

Other Information:
Lease cash flows (included in operating cash flows)⁽¹⁾	$	563	$	1,053



Remaining for 2019	$	971
2020	1,615
2021	444
2022	10
2023	2
Thereafter	—
Total lease payments⁽¹⁾	$	3,042
Less: Interest⁽²⁾	140
Present value of lease liabilities⁽³⁾	$	2,902


(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 June 30, 2019.



	June 30, 2018
	NWHM Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)
Assets
Cash and cash equivalents	$	38,449	$	52,126	$	183	$	—		$	90,758
Restricted cash	—		567		—		—			567
Contracts and accounts receivable	12		21,670		—		(1,312		)	20,370
Intercompany receivables	158,687		—		—		(158,687		)	—
Due from affiliates	—		212		—		—			212
Real estate inventories	—		469,738		—		—			469,738
Investment in and advances to unconsolidated joint ventures	—		58,501		—		—			58,501
Investment in subsidiaries	406,812		—		—		(406,812		)	—
Other assets	17,030		8,849		—		(15		)	25,864
Total assets	$	620,990	$	611,663	$	183	$	(566,826	)	$	666,010

Liabilities and equity
Accounts payable	$	68	$	28,897	$	13	$	—		$	28,978
Accrued expenses and other liabilities	7,765		17,255		91		(1,315		)	23,796
Intercompany payables	—		158,687		—		(158,687		)	—
Due to affiliates	—		12		—		(12		)	—
Unsecured revolving credit facility	35,000		—		—		—			35,000
Senior notes, net	319,402		—		—		—			319,402
Total liabilities	362,235		204,851		104		(160,014		)	407,176
Stockholders' equity	258,755		406,812		—		(406,812		)	258,755
Non-controlling interest in subsidiary	—		—		79		—			79
Total equity	258,755		406,812		79		(406,812		)	258,834
Total liabilities and equity	$	620,990	$	611,663	$	183	$	(566,826	)	$	666,010


	Three Months Ended June 30, 2018														Three Months Ended June 30, 2019
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated NWHM			NWHM			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM
	(Dollars in thousands)														(Dollars in thousands)
Revenues:
Home sales	$	—		$	117,460		$	—		$	—	$	117,460		$	—		$	140,464		$	—		$	—		$	140,464
Fee building	—			38,095			—			—		38,095			—			22,285			—			—			22,285
	—			155,555			—			—		155,555			—			162,749			—			—			162,749
Cost of Sales:
Home sales	—			102,680			(2		)	—		102,678			—			123,582			(57		)	—			123,525
Fee building	—			37,038			—			—		37,038			—			21,770			—			—			21,770
	—			139,718			(2		)	—		139,716			—			145,352			(57		)	—			145,295

Gross Margin:
Home sales	—			14,780			2			—		14,782			—			16,882			57			—			16,939
Fee building	—			1,057			—			—		1,057			—			515			—			—			515
	—			15,837			2			—		15,839			—			17,397			57			—			17,454
Selling and marketing expenses	—			(9,466		)	—			—		(9,466		)	—			(9,683		)	—			—			(9,683		)
General and administrative expenses	305			(6,281		)	(3		)	—		(5,979		)	617			(6,458		)	—			—			(5,841		)
Equity in net loss of unconsolidated joint ventures	—			(120		)	—			—		(120		)
Equity in net loss of subsidiaries	(58		)	—			—			58		—
Equity in net income of unconsolidated joint ventures															—			185			—			—			185
Equity in net income of subsidiaries															1,087			—			—			(1,087		)	—
Gain on early extinguishment of debt															552			—			—			—			552
Other income (expense), net	(35		)	(57		)	—			—		(92		)	(106		)	4			—			—			(102		)
Pretax income (loss)	212			(87		)	(1		)	58		182
(Provision) benefit for income taxes	(97		)	30			—			—		(67		)
Net income (loss)	115			(57		)	(1		)	58		115
Net loss attributable to non-controlling interest in subsidiary	—			—			—			—		—
Net income (loss) attributable to The New Home Company Inc.	$	115		$	(57	)	$	(1	)	$	58	$	115
Pretax income															2,150			1,445			57			(1,087		)	2,565
Provision for income taxes															(578		)	(396		)	—			—			(974		)
Net income															1,572			1,049			57			(1,087		)	1,591
Net income attributable to non-controlling interest in subsidiary															—			—			(19		)	—			(19		)
Net income attributable to The New Home Company Inc.															$	1,572		$	1,049		$	38		$	(1,087	)	$	1,572


	Three Months Ended June 30, 2017														Three Months Ended June 30, 2018
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated NWHM			NWHM			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated NWHM
	(Dollars in thousands)														(Dollars in thousands)
Revenues:
Home sales	$	—		$	96,929		$	—	$	—		$	96,929		$	—		$	117,460		$	—		$	—	$	117,460
Fee building	—			47,181			—		—			47,181			—			38,095			—			—		38,095
	—			144,110			—		—			144,110			—			155,555			—			—		155,555
Cost of Sales:
Home sales	—			82,488			—		—			82,488			—			102,680			(2		)	—		102,678
Home sales impairments	—			1,300			—		—			1,300
Fee building	595			45,304			—		—			45,899			—			37,038			—			—		37,038
	595			129,092			—		—			129,687			—			139,718			(2		)	—		139,716

Gross Margin:
Home sales	—			13,141			—		—			13,141			—			14,780			2			—		14,782
Fee building	(595		)	1,877			—		—			1,282			—			1,057			—			—		1,057
	(595		)	15,018			—		—			14,423			—			15,837			2			—		15,839
Selling and marketing expenses	—			(6,376		)	—		—			(6,376		)	—			(9,466		)	—			—		(9,466		)
General and administrative expenses	(375		)	(5,220		)	—		—			(5,595		)	305			(6,281		)	(3		)	—		(5,979		)
Equity in net income of unconsolidated joint ventures	—			201			—		—			201
Equity in net income of subsidiaries	2,022			—			—		(2,022		)	—
Equity in net loss of unconsolidated joint ventures															—			(120		)	—			—		(120		)
Equity in net loss of subsidiaries															(58		)	—			—			58		—
Other income (expense), net	26			(174		)	—		—			(148		)	(35		)	(57		)	—			—		(92		)
Pretax income (loss)	1,078			3,449			—		(2,022		)	2,505			212			(87		)	(1		)	58		182
Benefit (provision) for income taxes	439			(1,427		)	—		—			(988		)
Net income	1,517			2,022			—		(2,022		)	1,517
(Provision) benefit for income taxes															(97		)	30			—			—		(67		)
Net income (loss)															115			(57		)	(1		)	58		115
Net loss attributable to non-controlling interest in subsidiary	—			—			—		—			—			—			—			—			—		—
Net income attributable to The New Home Company Inc.	$	1,517		$	2,022		$	—	$	(2,022	)	$	1,517
Net income (loss) attributable to The New Home Company Inc.															$	115		$	(57	)	$	(1	)	$	58	$	115


	Six Months Ended June 30, 2017															Six Months Ended June 30, 2019
	NWHM Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated NWHM			NWHM			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments		Consolidated NWHM
	(Dollars in thousands)															(Dollars in thousands)
Revenues:
Home sales	$	—		$	166,335		$	—		$	—		$	166,335		$	—		$	239,650		$	—		$	—	$	239,650
Fee building	—			102,798			—			—			102,798			—			41,947			—			—		41,947
	—			269,133			—			—			269,133			—			281,597			—			—		281,597
Cost of Sales:
Home sales	—			142,522			31			—			142,553			—			210,151			(57		)	—		210,094
Home sales impairments	—			1,300			—			—			1,300
Fee building	1,085			98,740			—			—			99,825			—			41,038			—			—		41,038
	1,085			242,562			31			—			243,678			—			251,189			(57		)	—		251,132

Gross Margin:
Home sales	—			22,513			(31		)	—			22,482			—			29,499			57			—		29,556
Fee building	(1,085		)	4,058			—			—			2,973			—			909			—			—		909
	(1,085		)	26,571			(31		)	—			25,455			—			30,408			57			—		30,465
Selling and marketing expenses	—			(11,377		)	—			—			(11,377		)	—			(18,362		)	—			—		(18,362		)
General and administrative expenses	(1,154		)	(9,531		)	—			—			(10,685		)	51			(13,283		)	—			—		(13,232		)
Equity in net income of unconsolidated joint ventures	—			507			—			—			507			—			369			—			—		369
Equity in net income of subsidiaries	3,694			—			—			(3,694		)	—
Equity in net loss of subsidiaries																(625		)	—			—			625		—
Gain on early extinguishment of debt																969			—			—			—		969
Other income (expense), net	44			(79		)	—			—			(35		)	(168		)	(127		)	—			—		(295		)
Pretax income (loss)	1,499			6,091			(31		)	(3,694		)	3,865			227			(995		)	57			625		(86		)
Benefit (provision) for income taxes	864			(2,376		)	—			—			(1,512		)
(Provision) benefit for income taxes																(642		)	332			—			—		(310		)
Net income (loss)	2,363			3,715			(31		)	(3,694		)	2,353			(415		)	(663		)	57			625		(396		)
Net loss attributable to non-controlling interest in subsidiary	—			—			10			—			10
Net income attributable to non-controlling interest in subsidiary																—			—			(19		)	—		(19		)
Net income (loss) attributable to The New Home Company Inc.	$	2,363		$	3,715		$	(21	)	$	(3,694	)	$	2,363		$	(415	)	$	(663	)	$	38		$	625	$	(415	)


◦	the cyclical nature of the homebuilding industry which is affected by general economic real estate and other business conditions;


◦	availability of land to acquire and our ability to acquire such land on favorable terms or at all;


◦	shortages of or increased prices for labor, land or raw materials used in housing construction;


◦	availability and skill of subcontractors at reasonable rates;


◦	employment-related liabilities with respect to our contractors' employees;


◦	a large proportion of our fee building revenue being dependent upon one customer;


◦	construction defect product liability, warranty, and ~~warranty~~personal injury claims, including the cost and availability of insurance;


◦	increased costs, delays in land development or home construction and reduced consumer demand resulting from adverse weather conditions or other events outside our control;


◦	increased cost and reduced consumer demand resulting from power, water and other natural resource shortages or price increases;


◦	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;