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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________________

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

For the quarterly period ended March 31, 2020
or

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

For the transition period from to
Commission file number: 001-33530

Green Brick Partners, Inc.

(Exact name of registrant as specified in its charter)

Delaware |  |  |  |  | 20-5952523 |
(State or other jurisdiction of incorporation) |  |  |  |  | (IRS Employer Identification Number) |
2805 Dallas Pkwy | , | Ste 400 |  |  |  |
Plano | , | TX | 75093 |  | (469) | 573-6755
(Address of principal executive offices, including Zip Code) |  |  |  |  | (Registrant’s telephone number, including area code) |

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

Title of each class | Trading Symbol(s) | Name of each exchange on which registered
Common Stock, par value $0.01 per share | GRBK | The Nasdaq Stock Market LLC
Preferred Stock Purchase Rights | N/A | N/A

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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The number of shares of the Registrant's common stock outstanding as of May 6, 2020 was 50,616,922.

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PART I |  | FINANCIAL INFORMATION |
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) | 1
|  | Condensed Consolidated Balance Sheets, March 31, 2020 and December 31, 20 19 | 1
|  | Condensed Consolidated Statements of Income for the three months ended March 31, 2020 and 201 9 | 2
|  | Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2 020 and 201 9 | 3
|  | Condensed Consolidated Statements of Cash Flows for the three months ended Mar ch 31, 2020 and 2019 | 4
|  | Notes to Condensed Consolidated Financial Statements | 5
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17
| Item 4. | Controls and Procedures | 24
PART II |  | OTHER INFORMATION |
| Item 1A. | Risk Factors | 25
| Item 5. | Other Information | 26
| Item 6. | Exhibits | 26
|  | Signatures | 27

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GREEN BRICK PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)

| March 31, 2020 |  | December 31, 2019
ASSETS |  |  |
Cash and cash equivalents | $ | 105,860 |  |  | $ | 33,269 |
Restricted cash | 6,771 |  |  | 4,416 |
Receivables | 6,021 |  |  | 4,720 |
Inventory | 770,628 |  |  | 753,567 |
Investments in unconsolidated entities | 31,202 |  |  | 30,294 |
Right-of-use assets - operating leases | 2,887 |  |  | 3,462 |
Property and equipment, net | 4,743 |  |  | 4,309 |
Earnest money deposits | 18,876 |  |  | 14,686 |
Deferred income tax assets, net | 15,262 |  |  | 15,262 |
Intangible assets, net | 686 |  |  | 707 |
Goodwill | 680 |  |  | 680 |
Other assets | 11,564 |  |  | 10,167 |
Total assets | $ | 975,180 |  |  | $ | 875,539 |
LIABILITIES AND EQUITY |  |  |
Liabilities: |  |  |
Accounts payable | $ | 31,332 |  |  | $ | 30,044 |
Accrued expenses | 31,492 |  |  | 24,656 |
Customer and builder deposits | 22,585 |  |  | 23,954 |
Lease liabilities - operating leases | 2,986 |  |  | 3,564 |
Borrowings on lines of credit, net | 242,758 |  |  | 164,642 |
Senior unsecured notes, net | 73,466 |  |  | 73,406 |
Contingent consideration | 5,267 |  |  | 5,267 |
Total liabilities | 409,886 |  |  | 325,533 |
Commitments and contingencies |  |  |
Redeemable noncontrolling interest in equity of consolidated subsidiary | 11,412 |  |  | 13,611 |
Equity: |  |  |
Green Brick Partners, Inc. stockholders’ equity |  |  |
Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued and outstanding | — |  |  | — |
Common stock, $0.01 par value: 100,000,000 shares authorized; 51,008,861 and 50,879,949 issued and 50,616,922 and 50,488,010 outstanding as of March 31, 2020 and December 31, 2019, respectively | 510 |  |  | 509 |
Treasury stock, at cost, 391,939 and 391,939 shares as of March 31, 2020 and December 31, 2019, respectively | (3,167) |  |  | (3,167) |
Additional paid-in capital | 294,695 |  |  | 290,799 |
Retained earnings | 250,944 |  |  | 235,027 |
Total Green Brick Partners, Inc. stockholders’ equity | 542,982 |  |  | 523,168 |
Noncontrolling interests | 10,900 |  |  | 13,227 |
Total equity | 553,882 |  |  | 536,395 |
Total liabilities and equity | $ | 975,180 |  |  | $ | 875,539 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
1

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GREEN BRICK PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

|  | Three Months Ended March 31, |  |
|  | 2020 |  | 2019
Residential units revenue |  | $ | 191,187 |  |  | $ | 161,588 |
Land and lots revenue |  | 22,080 |  |  | 7,040 |
Total revenues |  | 213,267 |  |  | 168,628 |
Cost of residential units |  | 147,187 |  |  | 127,828 |
Cost of land and lots |  | 17,111 |  |  | 5,434 |
Total cost of revenues |  | 164,298 |  |  | 133,262 |
Total gross profit |  | 48,969 |  |  | 35,366 |
Selling, general and administrative expenses |  | (26,869) |  |  | (23,066) |
Change in fair value of contingent consideration |  | — |  |  | (454) |
Equity in income of unconsolidated entities |  | 2,565 |  |  | 1,846 |
Other (loss) income, net |  | (1,909) |  |  | 1,627 |
Income before income taxes |  | 22,756 |  |  | 15,319 |
Income tax expense |  | 6,040 |  |  | 3,828 |
Net income |  | 16,716 |  |  | 11,491 |
Less: Net income (loss) attributable to noncontrolling interests |  | 799 |  |  | (1,114) |
Net income attributable to Green Brick Partners, Inc. |  | $ | 15,917 |  |  | $ | 12,605 |
Net income attributable to Green Brick Partners, Inc. per common share: |  |  |  |
Basic |  | $ | 0.32 |  |  | $ | 0.25 |
Diluted |  | $ | 0.31 |  |  | $ | 0.25 |
Weighted average common shares used in the calculation of net income attributable to Green Brick Partners, Inc. per common share: |  |  |  |
Basic |  | 50,454 |  |  | 50,563 |
Diluted |  | 50,646 |  |  | 50,605 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
2

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GREEN BRICK PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
For the three months ended March 31, 2020 and 2019:

| Common Stock |  |  | Treasury Stock |  |  | Additional Paid-in Capital |  | Retained Earnings |  | Total Green Brick Partners, Inc. Stockholders’ Equity |  | Noncontrolling Interests |  | Total Stockholders’ Equity
| Shares | Amount |  | Shares | Amount |  |  |  |  |  |  |  |  |  |
Balance at December 31, 2019 | 50,879,949 |  | $ | 509 |  |  | (391,939) |  | $ | (3,167) |  |  | $ | 290,799 |  |  | $ | 235,027 |  |  | $ | 523,168 |  |  | $ | 13,227 |  |  | $ | 536,395 |
Issuance of common stock under 2014 Omnibus Equity Incentive Plan | 204,620 |  | 2 |  |  | — |  | — |  |  | 1,598 |  |  | — |  |  | 1,600 |  |  | — |  |  | 1,600 |
Withholdings from vesting of restricted stock awards | (75,708) |  | (1) |  |  | — |  | — |  |  | (591) |  |  | — |  |  | (592) |  |  | — |  |  | (592) |
Amortization of deferred share-based compensation | — |  | — |  |  | — |  | — |  |  | 134 |  |  | — |  |  | 134 |  |  | — |  |  | 134 |
Change in fair value of redeemable noncontrolling interest | — |  | — |  |  | — |  | — |  |  | 2,755 |  |  | — |  |  | 2,755 |  |  | — |  |  | 2,755 |
Contributions | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | — |  |  | 400 |  |  | 400 |
Distributions | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | — |  |  | (2,970) |  |  | (2,970) |
Net income | — |  | — |  |  | — |  | — |  |  | — |  |  | 15,917 |  |  | 15,917 |  |  | 243 |  |  | 16,160 |
Balance at March 31, 2020 | 51,008,861 |  | $ | 510 |  |  | (391,939) |  | $ | (3,167) |  |  | $ | 294,695 |  |  | $ | 250,944 |  |  | $ | 542,982 |  |  | $ | 10,900 |  |  | $ | 553,882 |

| Common Stock |  |  | Treasury Stock |  |  | Additional Paid-in Capital |  | Retained Earnings |  | Total Green Brick Partners, Inc. Stockholders’ Equity |  | Noncontrolling Interests |  | Total Stockholders’ Equity
| Shares | Amount |  | Shares | Amount |  |  |  |  |  |  |  |  |  |
Balance at December 31, 2018 | 50,719,884 |  | $ | 507 |  |  | (136,756) |  | $ | (981) |  |  | $ | 291,299 |  |  | $ | 177,526 |  |  | $ | 468,351 |  |  | $ | 17,281 |  |  | $ | 485,632 |
Share-based compensation | — |  | — |  |  | — |  | — |  |  | 71 |  |  | — |  |  | 71 |  |  | — |  |  | 71 |
Issuance of common stock under 2014 Omnibus Equity Incentive Plan | 159,780 |  | 2 |  |  | — |  | — |  |  | 1,464 |  |  | — |  |  | 1,466 |  |  | — |  |  | 1,466 |
Withholdings from vesting of restricted stock awards | (59,116) |  | (1) |  |  | — |  | — |  |  | (544) |  |  | — |  |  | (545) |  |  | — |  |  | (545) |
Amortization of deferred share-based compensation | — |  | — |  |  | — |  | — |  |  | 101 |  |  | — |  |  | 101 |  |  | — |  |  | 101 |
Stock repurchases | — |  | — |  |  | (7,862) |  | (60) |  |  |  | — |  |  |  | — |  |  | (60) |  |  | — |  |  | (60) |
Accretion of redeemable noncontrolling interest | — |  | — |  |  | — |  | — |  |  | (1,120) |  |  | — |  |  | (1,120) |  |  | — |  |  | (1,120) |
Distributions | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | — |  |  | (10,735) |  |  | (10,735) |
Net income (loss) | — |  | — |  |  | — |  | — |  |  | — |  |  | 12,605 |  |  | 12,605 |  |  | (1,758) |  |  | 10,847 |
Balance at March 31, 2019 | 50,820,548 |  | $ | 508 |  |  | (144,618) |  | $ | (1,041) |  |  | $ | 291,271 |  |  | $ | 190,131 |  |  | $ | 480,869 |  |  | $ | 4,788 |  |  | $ | 485,657 |

The accompanying notes are an integral part of these condensed consolidated financial statements.
3

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GREEN BRICK PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Cash flows from operating activities: |  |  |
Net income | $ | 16,716 |  |  | $ | 11,491 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |
Depreciation and amortization expense | 627 |  |  | 888 |
Share-based compensation expense | 1,734 |  |  | 1,638 |
Change in fair value of contingent consideration | — |  |  | 454 |
Deferred income taxes, net | — |  |  | (955) |
Equity in income of unconsolidated entities | (2,565) |  |  | (1,846) |
Write-offs of option deposits and pre-acquisition costs | 3,440 |  |  | 466 |
Distributions of income from unconsolidated entities | 1,657 |  |  | 272 |
Changes in operating assets and liabilities: |  |  |
(Increase) decrease in receivables | (1,301) |  |  | 2,069 |
Increase in inventory | (16,884) |  |  | (21,720) |
(Increase) decrease in earnest money deposits | (7,436) |  |  | 3,319 |
Increase in other assets | (1,595) |  |  | (2,068) |
Increase (decrease) in accounts payable | 1,288 |  |  | (4,451) |
Increase in accrued expenses | 6,850 |  |  | 2,855 |
Decrease in customer and builder deposits | (1,369) |  |  | (1,643) |
Net cash provided by (used in) operating activities | 1,162 |  |  | (9,231) |
Cash flows from investing activities: |  |  |
Purchase of property and equipment | (1,054) |  |  | (571) |
Net cash used in investing activities | (1,054) |  |  | (571) |
Cash flows from financing activities: |  |  |
Borrowings from lines of credit | 126,000 |  |  | 37,000 |
Repayments of lines of credit | (48,000) |  |  | (31,000) |
Payments of withholding tax on vesting of restricted stock awards | (592) |  |  | (544) |
Stock repurchases | — |  |  | (60) |
Contributions from noncontrolling interests | 400 |  |  | — |
Distributions to noncontrolling interests | (2,970) |  |  | (10,735) |
Net cash provided by (used in) financing activities | 74,838 |  |  | (5,339) |
Net increase (decrease) in cash and cash equivalents and restricted cash | 74,946 |  |  | (15,141) |
Cash and cash equivalents, beginning of period | 33,269 |  |  | 38,315 |
Restricted cash, beginning of period | 4,416 |  |  | 3,440 |
Cash and cash equivalents and restricted cash, beginning of period | 37,685 |  |  | 41,755 |
Cash and cash equivalents, end of period | 105,860 |  |  | 23,873 |
Restricted cash, end of period | 6,771 |  |  | 2,741 |
Cash and cash equivalents and restricted cash, end of period | $ | 112,631 |  |  | $ | 26,614 |

Supplemental disclosure of cash flow information: |  |  |
Cash paid for interest, net of capitalized interest | $ | — |  |  | $ | — |
Cash paid for income taxes, net of refunds | $ | (137) |  |  | $ | — |

The accompanying notes are an integral part of these condensed consolidated financial statements.
4

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GREEN BRICK PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and applicable regulations of the Securities and Exchange Commission (“SEC”), but do not include all of the information and footnotes required for complete financial statements. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the accompanying unaudited condensed consolidated financial statements for the periods presented reflect all adjustments of a normal, recurring nature necessary to fairly state our financial position, results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020 or subsequent periods due to seasonal variations and other factors, such as the effects of novel coronavirus (“COVID-19”) and its influence on our future results.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Green Brick Partners, Inc., its controlled subsidiaries, and variable interest entities (“VIEs”) in which Green Brick Partners, Inc. or one of its controlled subsidiaries is deemed to be the primary beneficiary (together, the “Company”, “we”, or “Green Brick”).
All intercompany balances and transactions have been eliminated in consolidation.
The Company uses the equity method of accounting for its investments in unconsolidated entities over which it exercises significant influence but does not have a controlling interest. Under the equity method, the Company’s share of the unconsolidated entities’ earnings or losses, if any, is included in the condensed consolidated statements of income.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes, including the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Beginning in the first quarter of 2020, the Company reclassified the write-offs of option deposits and pre-acquisition costs from selling, general and administrative expenses to other (loss) income, net in the consolidated statements of income in order to be more comparable with its peers. There was no impact on net income from the reclassification in any period.
For a complete set of the Company’s significant accounting policies, refer to Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Newly identified significant accounting policies during the three months ended March 31, 2020 are presented below.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
Recent Accounting Pronouncements
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
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certain other instruments from an “incurred loss” approach to an “expected credit loss” methodology. The Company adopted the standard on January 1, 2020 using the full retrospective application. The adoption of ASU 2016-13 had no impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 of the goodwill impairment test. A goodwill impairment will now be determined by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The Company adopted the standard on January 1, 2020. The adoption of ASU 2017-04 had no impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2020, with early adoption permitted. The Company does not expect the adoption of ASU 2019-12 to have a material impact on the Company’s consolidated financial statements.
2. BUSINESS COMBINATION
On April 26, 2018 (the “Acquisition Date”), following a series of transactions, the Company acquired substantially all of the assets and assumed certain liabilities of GHO Homes Corporation and its affiliates (“GHO”) through a newly formed subsidiary, GRBK GHO Homes, LLC (“GRBK GHO”), in which the Company holds an 80% controlling interest.
GRBK GHO operates primarily in the Vero Beach, Florida market and is engaged in land and lot development, as well as all aspects of the homebuilding process. The acquisition allowed the Company to expand its operations into a new geographic market. The Company consolidates the financial statements of GRBK GHO as the Company owns 80% of the outstanding voting shares of the builder.
The noncontrolling interest attributable to the 20% minority interest owned by our Florida-based partner is included as redeemable noncontrolling interest in equity of consolidated subsidiary in the Company’s condensed consolidated financial statements.
In February 2020, the Company and the minority partner of GRBK GHO amended the operating agreement of GRBK GHO to change the initial date upon which the put and purchase options related to the redeemable noncontrolling interest can be exercised from April 2021 to April 2024.
The following table shows the changes in redeemable noncontrolling interest in equity of consolidated subsidiary during the three months ended March 31, 2020 and 2019 (in thousands):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Redeemable noncontrolling interest, beginning of period | $ | 13,611 |  |  |  | $ | 8,531 |
Net income attributable to redeemable noncontrolling interest partner | 556 |  |  |  | 644 |
Change in fair value of redeemable noncontrolling interest | (2,755) |  |  |  | 1,120 |
Redeemable noncontrolling interest, end of period | $ | 11,412 |  |  |  | $ | 10,295 |

Under the terms of the purchase agreement, the Company may be obligated to pay contingent consideration to our partner if certain annual performance targets are met over the three-year period following the Acquisition Date. The performance targets specified in the purchase agreement were met for the period from January 1, 2019 through December 31, 2019, and contingent consideration of $5.3 million was earned by the minority partner in 2019 and paid by the Company in April 2020 in addition to a $1.5 million distribution of income. As of March 31, 2020, the estimate of the undiscounted contingent consideration payouts for the period from January 1, 2020 through April 26, 2021 was $0.
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3. INVENTORY
A summary of inventory is as follows (in thousands):

| March 31, 2020 |  | December 31, 2019
Homes completed or under construction | $ | 344,961 |  |  | $ | 314,966 |
Land and lots - developed and under development | 421,471 |  |  | 437,553 |
Land held for sale | 4,196 |  |  | 1,048 |
Total inventory | $ | 770,628 |  |  |  | $ | 753,567 |

A summary of interest costs incurred, capitalized and expensed is as follows (in thousands):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Interest capitalized at beginning of period | $ | 18,596 |  |  |  | $ | 14,780 |
Interest incurred | 2,959 |  |  |  | 2,886 |
Interest charged to cost of revenues | (2,679) |  |  |  | (1,140) |
Interest capitalized at end of period | $ | 18,876 |  |  |  | $ | 16,526 |

As of March 31, 2020, the Company reviewed the performance and outlook for all of its communities for indicators of potential impairment and performed detailed impairment analysis when necessary. As of March 31, 2020, the Company performed further impairment analysis of the selling communities with indicators of impairment with a combined corresponding carrying value of approximately $11.8 million. For the three months ended March 31, 2020, the Company recorded a de minimis impairment adjustment to reduce the carrying value of impaired communities to fair value.
There were no impairment adjustments related to inventory recorded during the three months ended March 31, 2019.
4. INVESTMENT IN UNCONSOLIDATED ENTITIES
A summary of the unaudited condensed financial information of the unconsolidated entities that are accounted for by the equity method is as follows (in thousands):

| March 31, 2020 |  | December 31, 2019
Assets: |  |  |
Cash | $ | 10,996 |  |  | $ | 11,699 |
Accounts receivable | 1,341 |  |  | 3,252 |
Bonds and notes receivable | 7,342 |  |  | 5,864 |
Loans held for sale, at fair value | 18,580 |  |  | 23,143 |
Inventory | 82,371 |  |  | 73,704 |
Other assets | 5,050 |  |  | 4,012 |
Total assets | $ | 125,680 |  |  | $ | 121,674 |
Liabilities: |  |  |
Accounts payable | $ | 6,368 |  |  | $ | 1,726 |
Accrued expenses and other liabilities | 7,294 |  |  |  | 7,784 |
Notes payable | 57,689 |  |  |  | 58,223 |
Total liabilities | $ | 71,351 |  |  | $ | 67,733 |
Owners’ equity: |  |  |  |  |
Green Brick | $ | 27,020 |  |  | $ | 25,910 |
Others | 27,309 |  |  | 28,031 |
Total owners’ equity | $ | 54,329 |  |  | $ | 53,941 |
Total liabilities and owners’ equity | $ | 125,680 |  |  | $ | 121,674 |

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| Three Months Ended March 31, |  |
| 2020 |  | 2019
Revenues | $ | 35,365 |  |  |  | $ | 31,097 |
Costs and expenses | 29,815 |  |  |  | 27,317 |
Net earnings of unconsolidated entities | $ | 5,550 |  |  |  | $ | 3,780 |
Company’s share in net earnings of unconsolidated entities | $ | 2,565 |  |  |  | $ | 1,846 |

5. EARNEST MONEY DEPOSITS
In the ordinary course of business, we enter into land purchase contracts with third-party developers in order to procure lots for the construction of our homes in the future. We also utilize option contracts with lot sellers as a method of acquiring lots in staged takedowns. Both land purchase and lot option contracts generally require us to pay a non-refundable earnest money deposit.
We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting the earnest money deposit with no further financial responsibility to the land seller. Management determined to abandon certain option contracts due to the impact of the COVID-19 pandemic on the homebuilding industry and projected future demand for homes in certain markets and/or locations. Earnest money deposits and pre-acquisition costs written off related to option contracts abandoned totaled $3.4 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively.
6. DEBT
Lines of Credit
Borrowings on lines of credit outstanding, net of debt issuance costs, as of March 31, 2020 and December 31, 2019 consisted of the following (in thousands):

| March 31, 2020 |  | December 31, 2019
Secured revolving credit facility | $ | 29,000 |  |  | $ | 38,000 |
Unsecured revolving credit facility | 215,000 |  |  | 128,000 |
Debt issuance costs, net of amortization | (1,242) |  |  | (1,358) |
Total borrowings on lines of credit, net | $ | 242,758 |  |  | $ | 164,642 |

Secured Revolving Credit Facility
On July 30, 2015, the Company entered into a revolving credit facility (the “Secured Revolving Credit Facility”) with Inwood National Bank, which initially provided for up to $50.0 million. Amounts outstanding under the Secured Revolving Credit Facility are secured by mortgages on real property and security interests in certain personal property (to the extent that such personal property is connected with the use and enjoyment of the real property) that is owned by certain of the Company’s subsidiaries.
The entire unpaid principal balance and any accrued but unpaid interest is due and payable on the maturity date. Following several amendments, as of March 31, 2020, the aggregate commitment amount was $75.0 million and the maturity date of the Secured Revolving Credit Facility was May 1, 2022.
As of March 31, 2020, letters of credit outstanding totaling $8.9 million reduced the aggregate maximum commitment amount to $66.1 million.
As of March 31, 2020, the interest rate on outstanding borrowings under the Secured Revolving Credit Facility was 4.00% per annum.
Unsecured Revolving Credit Facility
On December 15, 2015, the Company entered into a credit agreement (the “Credit Agreement”), providing for a senior, unsecured revolving credit facility with initial aggregate lending commitments of up to $40.0 million (the “Unsecured Revolving Credit Facility”).
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Following amendments to the Credit Agreement, the aggregate lending commitment available under the Unsecured Revolving Credit Facility as of March 31, 2020 was $215.0 million, the maximum aggregate amount of the Unsecured Revolving Credit Facility was $275.0 million, and the termination date with respect to commitments under the Unsecured Revolving Credit Facility was December 14, 2021 for $30.0 million and December 14, 2022 for $185.0 million out of the aggregate lending commitment of $215.0 million. As of March 31, 2020, the interest rates on outstanding borrowings under the Unsecured Revolving Credit Facility ranged from 3.25% to 3.44% per annum.
Based on the unprecedented disruptions to the credit and economic markets arising from the COVID-19 pandemic, we drew the full amount of our unsecured revolving credit facility during the three months ended March 31, 2020. We used a portion of these borrowings to pay down our secured revolving credit facility and the remainder are held in cash and cash equivalents.
Senior Unsecured Notes
On August 8, 2019, the Company issued $75.0 million aggregate principal amount of senior unsecured notes due on August 8, 2026 at a fixed rate of 4.00% per annum to Prudential Private Capital in a Section 4(a)(2) private placement transaction and received net proceeds of $73.3 million. A brokerage fee of approximately $1.5 million associated with the issuance was paid at closing. The brokerage fee, and other debt issuance costs of approximately $0.2 million, were deferred and reduced the amount of debt on our consolidated balance sheet. The Company used the net proceeds from the issuance of the senior unsecured notes to repay borrowings under the Company’s existing revolving credit facilities.
Principal on the senior unsecured notes is required to be paid in increments of $12.5 million on August 8, 2024 and $12.5 million on August 8, 2025. The final principal payment of $50.0 million is due on August 8, 2026. Optional prepayment is allowed with payment of a “make-whole” penalty which fluctuates depending on market interest rates. Interest is payable quarterly in arrears commencing November 8, 2019.
7. SHARE-BASED COMPENSATION
Share-Based Award Activity
During the three months ended March 31, 2020, the Company granted restricted stock awards (“RSAs”) under its 2014 Omnibus Equity Incentive Plan to executive officers (“EOs”). The RSAs granted to the EOs were 100% vested and non-forfeitable on the grant date. The fair value of the RSAs granted to EOs was recorded as share-based compensation expense on the grant date. The Company withheld 75,708 shares of common stock from EOs, at a total cost of $0.6 million, to satisfy statutory minimum tax requirements upon grant of the RSAs.
A summary of share-based awards activity during the three months ended March 31, 2020 is as follows:

| Number of Shares |  | Weighted Average Grant Date Fair Value per Share
| (in thousands) |  |
Nonvested, December 31, 2019 | 59 |  |  | $ | 9.05 |
Granted | 205 |  |  | $ | 10.59 |
Vested | (205) |  |  | $ | 10.59 |
Forfeited | — |  |  | $ | — |
Nonvested, March 31, 2020 | 59 |  |  | $ | 9.05 |

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Stock Options
A summary of stock options activity during the three months ended March 31, 2020 is as follows:

| Number of Shares |  | Weighted Average Exercise Price per Share |  | Weighted Average Remaining Contractual Term |  | Aggregate Intrinsic Value
| (in thousands) |  |  |  | (in years) |  | (in thousands)
Options outstanding, December 31, 2019 | 500 |  |  | $ | 7.49 |  |  |  |  |
Granted | — |  |  | — |  |  |  |  |
Exercised | — |  |  | — |  |  |  |  |
Forfeited | — |  |  | — |  |  |  |  |
Options outstanding, March 31, 2020 | 500 |  |  | $ | 7.49 |  |  | 4.57 |  | $ | 280 |
Options exercisable, March 31, 2020 | 500 |  |  | $ | 7.49 |  |  | 4.57 |  | $ | 280 |

Share-Based Compensation Expense
Share-based compensation expense was $1.7 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively. Recognized tax benefit related to share-based compensation expense was $0.4 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, the estimated total remaining unamortized share-based compensation expense related to unvested RSAs, net of forfeitures, was $0.1 million which is expected to be recognized over a weighted-average period of 0.1 years.
8. REVENUE RECOGNITION
Disaggregation of Revenue
The following reflects the disaggregation of revenue by primary geographic market, type of customer, product type, and timing of revenue recognition for the three months ended March 31, 2020 and 2019 (in thousands):

| Three Months Ended March 31, 2020 |  |  |  | Three Months Ended March 31, 2019 |  |
| Residential units revenue |  | Land and lots revenue |  | Residential units revenue |  | Land and lots revenue
Primary Geographical Market |  |  |  |  |  |  |
Central | $ | 123,425 |  |  | $ | 22,080 |  |  | $ | 84,425 |  |  | $ | 7,030 |
Southeast | 67,762 |  |  | — |  |  | 77,163 |  |  | 10 |
Total revenues | $ | 191,187 |  |  | $ | 22,080 |  |  | $ | 161,588 |  |  | $ | 7,040 |
Type of Customer |  |  |  |  |  |  |
Homebuyers | $ | 191,187 |  |  | $ | — |  |  | $ | 161,588 |  |  | $ | — |
Homebuilders | — |  |  | 22,080 |  |  | — |  |  | 7,040 |
Total revenues | $ | 191,187 |  |  | $ | 22,080 |  |  | $ | 161,588 |  |  | $ | 7,040 |
Product Type |  |  |  |  |  |  |
Residential units | $ | 191,187 |  |  | $ | — |  |  | $ | 161,588 |  |  | $ | — |
Land and lots | — |  |  | 22,080 |  |  | — |  |  | 7,040 |
Total revenues | $ | 191,187 |  |  | $ | 22,080 |  |  | $ | 161,588 |  |  | $ | 7,040 |
Timing of Revenue Recognition |  |  |  |  |  |  |
Transferred at a point in time | $ | 189,248 |  |  | $ | 22,080 |  |  | $ | 159,233 |  |  | $ | 7,040 |
Transferred over time | 1,939 |  |  | — |  |  | 2,355 |  |  | — |
Total revenues | $ | 191,187 |  |  | $ | 22,080 |  |  | $ | 161,588 |  |  | $ | 7,040 |

Revenue recognized over time represents revenue from mechanic’s lien contracts.
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Contract Balances
Opening and closing contract balances included in customer and builder deposits on the condensed consolidated balance sheets are as follows (in thousands):

| March 31, 2020 |  | December 31, 2019 |  |  |  |
Customer and builder deposits | $ | 22,585 |  |  | $ | 23,954 |  |  |  |  |

The difference between the opening and closing balances of customer and builder deposits results from the timing difference between the customers’ payments of deposits and the Company’s performance, impacted slightly by terminations of contracts.
The amount of deposits on residential units and land and lots held as of the beginning of the period and recognized as revenue during the three months ended March 31, 2020 and 2019 are as follows (in thousands):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Type of Customer |  |  |
Homebuyers | $ | 5,835 |  |  |  | $ | 6,604 |
Homebuilders | 3,641 |  |  |  | 825 |
Total deposits recognized as revenue | $ | 9,476 |  |  |  | $ | 7,429 |

Performance Obligations
There was no revenue recognized during the three months ended March 31, 2020 and 2019 from performance obligations satisfied in prior periods.
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of transaction price allocated to the remaining performance obligations on our land sale and lot option contracts is $35.6 million. The Company will recognize the remaining revenue when the lots are taken down, or upon closing for the sale of a land parcel, which is expected to occur as follows (in thousands):

| Total
Remainder of 2020 | $ | 19,217 |
2021 | 15,865 |
2022 | 560 |
Total | $ | 35,642 |

The timing of lot takedowns is contingent upon a number of factors, including customer needs, the number of lots being purchased, receipt of acceptance of the plat by the municipality, weather-related delays, and agreed-upon lot takedown schedules.
Our contracts with homebuyers have a duration of less than one year. As such, the Company uses the practical expedient as allowed under ASC 606, Revenue from Contracts with Customers, and therefore has not disclosed the transaction price allocated to remaining performance obligations as of the end of the reporting period.
9. SEGMENT INFORMATION
Financial information relating to the Company’s reportable segments is as follows. 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.

| Three Months Ended March 31, |  |
(in thousands) | 2020 |  | 2019
Revenues: |  |  |
Builder operations |  |  |
Central | $ | 123,425 |  |  |  | $ | 84,425 |

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| Three Months Ended March 31, |  |
(in thousands) | 2020 |  | 2019
Southeast | 67,762 |  |  |  | 77,173 |
Total builder operations | 191,187 |  |  |  | 161,598 |
Land development | 22,080 |  |  |  | 7,030 |
Total revenues | $ | 213,267 |  |  |  | $ | 168,628 |
Gross profit: |  |  |
Builder operations |  |  |
Central | $ | 30,716 |  |  |  | $ | 18,117 |
Southeast | 18,154 |  |  |  | 19,287 |
Total builder operations | 48,870 |  |  |  | 37,404 |
Land development | 6,182 |  |  |  | 1,783 |
Corporate, other and unallocated (1) | (6,083) |  |  |  | (3,821) |
Total gross profit | $ | 48,969 |  |  |  | $ | 35,366 |
Income before income taxes: |  |  |
Builder operations |  |  |
Central | $ | 11,868 |  |  | $ | 6,938 |
Southeast | 8,804 |  |  | 9,152 |
Total builder operations | 20,672 |  |  | 16,090 |
Land development | 5,577 |  |  | 2,677 |
Corporate, other and unallocated (2) | (3,493) |  |  | (3,448) |
Income before income taxes | $ | 22,756 |  |  | $ | 15,319 |

| March 31, 2020 |  | December 31, 2019
Inventory: |  |  |
Builder operations |  |  |
Central | $ | 279,771 |  |  | $ | 251,677 |
Southeast | 184,990 |  |  | 168,140 |
Total builder operations | 464,761 |  |  | 419,817 |
Land development | 279,206 |  |  | 308,071 |
Corporate, other and unallocated (3) | 26,661 |  |  | 25,679 |
Total inventory | $ | 770,628 |  |  | $ | 753,567 |
Goodwill: (4) |  |  |
Builder operations - Southeast | $ | 680 |  |  | $ | 680 |

(1)Corporate, other and unallocated gross loss is comprised of capitalized overhead and capitalized interest adjustments that are not allocated to builder operations and land development segments.
(2)Corporate, other and unallocated loss before income taxes includes results from Green Brick Title, LLC and investments in unconsolidated subsidiaries.
(3)Corporate, other and unallocated inventory consists of capitalized overhead and interest related to work in process and land under development.
(4)In connection with the GRBK GHO business combination, the Company recorded goodwill of $0.7 million.
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10. EARNINGS PER SHARE
The Company’s RSAs have the right to receive forfeitable dividends on an equal basis with common stock and therefore are not considered participating securities that must be included in the calculation of net income per share using the two-class method.
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each period, adjusted for nonvested shares of RSAs during each period. Diluted earnings per share is calculated using the treasury stock method and includes the effect of all dilutive securities, including stock options and RSAs.
The computation of basic and diluted net income attributable to Green Brick Partners, Inc. per share is as follows (in thousands, except per share amounts):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Net income attributable to Green Brick Partners, Inc. | $ | 15,917 |  |  | $ | 12,605 |
Weighted-average number of shares outstanding - basic | 50,454 |  |  | 50,563 |
Basic net income attributable to Green Brick Partners, Inc. per share | $ | 0.32 |  |  | $ | 0.25 |
Weighted-average number of shares outstanding - basic | 50,454 |  |  | 50,563 |
Dilutive effect of stock options and restricted stock awards | 192 |  |  | 42 |
Weighted-average number of shares outstanding - diluted | 50,646 |  |  | 50,605 |
Diluted net income attributable to Green Brick Partners, Inc. per share | $ | 0.31 |  |  | $ | 0.25 |

The following shares which could potentially dilute earnings per share in the future are not included in the determination of diluted net income attributable to Green Brick Partners, Inc. per common share (in thousands):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Antidilutive options to purchase common stock and restricted stock awards | — |  |  |  | 21 |

11. FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Company’s financial instruments, none of which are held for trading purposes, include cash and cash equivalents, restricted cash, receivables, earnest money deposits, other assets, accounts payable, accrued expenses, customer and builder deposits, borrowings on lines of credit, senior unsecured notes, and contingent consideration liability.
Per the fair value hierarchy, level 1 financial instruments include: cash and cash equivalents, restricted cash, receivables, earnest money deposits, other assets, accounts payable, accrued expenses, and customer and builder deposits due to their short-term nature. The Company estimates that, due to the short-term nature of the underlying financial instruments or the proximity of the underlying transaction to the applicable reporting date, the fair value of level 1 financial instruments does not differ materially from the aggregate carrying values recorded in the condensed consolidated financial statements as of March 31, 2020 and December 31, 2019.
Level 2 financial instruments include borrowings on lines of credit and senior unsecured notes. Due to the short-term nature and floating interest rate terms, the carrying amounts of borrowings on lines of credit are deemed to approximate fair value. The estimated fair value of the senior unsecured notes as of March 31, 2020 was $70.4 million.
The fair value of the contingent consideration liability related to the GRBK GHO business combination was estimated using the internally developed discounted cash flow analysis. As the measurement of the contingent consideration is based primarily on significant inputs not observable in the market, it represents a level 3 measurement.
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Key inputs in measuring the fair value of the contingent consideration liability are management’s projections of GRBK GHO’s net income and debt, and the annual discount rate of 16.5% that reflects the risk associated with achieving the milestones of the contingent consideration payments.
As there was no change in balance for level 3 measurements which was represented by the contingent consideration liability of $5.3 million, the reconciliation of the beginning and ending balances for level 3 measurements is not required.
There were no transfers between the levels of the fair value hierarchy for any of our financial instruments during the three months ended March 31, 2020.
Fair Value of Nonfinancial Instruments
Nonfinancial assets and liabilities include inventory which is measured at cost unless the carrying value is determined to be not recoverable in which case the affected instrument is written down to fair value. Per the fair value hierarchy, these items are level 3 nonfinancial instruments. For additional information on the Company’s inventory, refer to Note 3.
12. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2020 and 2019, the Company had the following related party transactions through the normal course of business.
Corporate Officers
Trevor Brickman, the son of Green Brick’s Chief Executive Officer, is the President of CLH20, LLC (“Centre Living”). Green Brick’s ownership interest in Centre Living is 90% and Trevor Brickman’s ownership interest is 10%. Green Brick has 90% voting control over the operations of Centre Living. As such, 100% of Centre Living’s operations are included within our condensed consolidated financial statements. During the three months ended March 31, 2020, Trevor Brickman made a $0.4 million cash contribution to Centre Living.
GRBK GHO
GRBK GHO leases office space from entities affiliated with the president of GRBK GHO. During the three months ended March 31, 2020, GRBK GHO incurred de minimis rent expense under such lease agreements. As of March 31, 2020, there were no amounts due to the affiliated entities related to such lease agreements.
GRBK GHO receives title closing services on the purchase of land and third-party lots from an entity affiliated with the president of GRBK GHO. During the three months ended March 31, 2020, GRBK GHO incurred de minimis fees related to such title closing services. As of March 31, 2020, no amounts were due to the title company affiliate.
13. COMMITMENTS AND CONTINGENCIES
Letters of Credit and Performance Bonds
During the ordinary course of business, certain regulatory agencies and municipalities require the Company to post letters of credit or performance bonds related to development projects. As of March 31, 2020 and December 31, 2019, letters of credit outstanding were $9.0 million and $9.0 million, respectively, and performance bonds outstanding totaled $6.2 million and $5.4 million, respectively. The Company does not believe that it is likely that any material claims will be made under a letter of credit or performance bond in the foreseeable future.
Warranties
Warranty accruals are included within accrued expenses on the condensed consolidated balance sheets. Warranty activity during the three months ended March 31, 2020 and 2019 consisted of the following (in thousands):

| Three Months Ended March 31, |  |
| 2020 |  | 2019
Warranty accrual, beginning of period | $ | 3,840 |  |  |  | $ | 2,980 |
Warranties issued | 840 |  |  |  | 653 |
Changes in liability for existing warranties | (87) |  |  |  | (144) |
Settlements | (420) |  |  |  | (862) |
Warranty accrual, end of period | $ | 4,173 |  |  |  | $ | 2,627 |

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Operating Leases
The Company has leases associated with office and design center space in Georgia, Texas, and Florida that, at the commencement date, have a lease term of more than 12 months and are classified as operating leases. The exercise of any extension options available in such operating lease contracts is not reasonably certain.
Operating lease cost of $0.3 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively, is included in selling, general and administrative expenses in the condensed consolidated statements of income. For the three months ended March 31, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities was $0.3 million and $0.3 million, respectively.
As of March 31, 2020, the weighted-average remaining lease term and the weighted-average discount rate used in calculating our lease liabilities were 3.0 years and 5.25%, respectively.
The future annual undiscounted cash flows in relation to the operating leases and a reconciliation of such undiscounted cash flows to the operating lease liabilities recognized in the condensed consolidated balance sheet as of March 31, 2020 are presented below (in thousands):

Remainder of 2020 | $ | 934 |
2021 | 1,011 |
2022 | 734 |
2023 | 1,055 |
Total future lease payments | $ | 3,734 |
Less: Interest | 748 |
Present value of lease liabilities | $ | 2,986 |

The Company elected the short-term lease recognition exemption for all leases that, at the commencement date, have a lease term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. For such leases, the Company does not recognize ROU assets or lease liabilities and instead recognizes lease payments in the condensed consolidated income statements on a straight-line basis. Short-term lease cost of $0.1 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively, related to such lease contracts is included in selling, general and administrative expenses in the condensed consolidated statements of income.
Legal Matters
Lawsuits, claims and proceedings may be instituted or asserted against us in the normal course of business. The Company is also subject to local, state and federal laws and regulations related to land development activities, house construction standards, sales practices, title company regulations, employment practices and environmental protection. As a result, the Company may be subject to periodic examinations or inquiry by agencies administering these laws and regulations.
The Company records an accrual for legal claims and regulatory matters when they are probable of occurring and a potential loss is reasonably estimable. The Company accrues for these matters based on facts and circumstances specific to each matter and revises these estimates when necessary.
In view of the inherent difficulty of predicting outcomes of legal claims and related contingencies, the Company generally cannot predict their ultimate resolution, related timing or eventual loss. If evaluations indicate loss contingencies that could be material are not probable, but are reasonably possible, the Company will disclose their nature with an estimate of the possible range of losses or a statement that such loss is not reasonably estimable. We believe that the disposition of legal claims and related contingencies will not have a material adverse effect on our results of operations and liquidity or on our financial condition.
14. SUBSEQUENT EVENT
On April 29, 2020, through a series of transactions, the Company obtained 100% control of one of its controlled builders by acquiring the remaining 50% equity interest. The Company is currently evaluating the accounting for this acquisition.
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These forward-looking statements typically include the words “anticipate,” “believe,” “consider,” “estimate,” “expect,” “forecast,” “intend,” “objective,” “plan,” “predict,” “projection,” “seek,” “strategy,” “target,” “will” or other words of similar meaning. Some of them are opinions formed based upon general observations, anecdotal evidence and industry experience, but that are not supported by specific investigation or analysis. Forward-looking statements in this Quarterly Report include statements concerning our belief that we have ample liquidity; our goals and strategies and their anticipated benefits; the effects of COVID-19 pandemic on our results of operations, business and liquidity, including the impact on demand for new home sales, closings and cancellations; our intentions and the expected benefits and advantages of our product and land positioning strategies; our exposure to supplier concentration risk; our delivery of substantially all of our backlog existing as of quarter end; our positions and our expected outcome relating to litigation in general; our intentions to not pay dividends; expectations regarding our industry and our business into 2020 and beyond, the demand for and the pricing of our homes; our land and lot acquisition strategy and potential expansion into new markets; the availability of labor and materials for our operations; the sufficiency of our insurance coverage and warranty accruals; the sufficiency of our capital resources to support our business strategy; the sufficiency of our land pipeline; the impact of new accounting standards and changes in accounting estimates; trends and expectations regarding sales prices, sales orders, cancellations, construction costs, gross margins, land costs and profitability and future home inventories; our future cash needs; the impact of seasonality; and our future compliance with debt covenants.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business. In addition, even if results are consistent with the forward-looking statements contained in this Quarterly Report on Form 10-Q, those results may not be indicative of results or developments in subsequent periods. Furthermore, industry forecasts are likely to be inaccurate, especially over long periods of time and in industries particularly sensitive to market conditions such as land development, homebuilding and builder financing.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from what is anticipated by our forward-looking statements. The most important factors that could cause actual results to differ materially from those anticipated by our forward-looking statements include, but are not limited to: slowdowns in the real estate markets across the nation, including a slowdown in real estate markets in regions where we have significant homebuilding or multifamily development activities and as a result of the effects of the COVID-19 pandemic; increases in operating costs, including costs related to labor, construction materials, real estate taxes and insurance, which exceed our ability to increase prices; our inability to successfully execute our strategies; changes in general economic and financial conditions, including as a result of the COVID-19 pandemic, that reduce demand for our homes and finished lots, lower our profit margins or reduce our access to credit; our inability to acquire land at anticipated prices; the possibility that we will incur nonrecurring costs that affect earnings in one or more reporting periods; increases in cancellations, including as a result of the COVID-19 pandemic; decreased demand for our homes and finished lots, including as a result of the COVID-19 pandemic; increased competition for home sales from other sellers of new and resale homes; increases in mortgage interest rates or tightening of mortgage lending practices; a decline in the value of our inventories and resulting write-downs of the carrying value of our real estate assets; the failure of the controlled builders or third parties with whom we enter into joint ventures, partnerships or other strategic investments; participants in various joint ventures to honor their commitments; difficulty obtaining land-use entitlements or construction financing; natural disasters and other unforeseen events for which our insurance does not provide adequate coverage; new laws or regulatory changes that adversely affect the profitability of our businesses; our inability to refinance our debt as it matures on terms that are acceptable to us; and changes in accounting standards that adversely affect our reported earnings or financial condition.
Please see “Risk Factors” located in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q for a further discussion of these and other risks and uncertainties which could affect our future results. We undertake no obligation to revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events, except to the extent we are legally required to disclose certain matters in SEC filings or otherwise.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”) on March 6, 2020. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
In the following discussion and analysis, we utilize a financial measure, net debt to total capitalization ratio, that is a non-GAAP financial measure as defined by the Securities and Exchange Commission. We present this measure because we believe it is useful to management and investors in evaluating the Company’s financing structure. We also believe this measure facilitates the comparison of our financing structure with other companies in our industry. Because this measure is not calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
Overview and Outlook
Our key financial and operating metrics are home deliveries, home closings revenue, average sales price of homes delivered, and net new home orders, which refers to sales contracts executed reduced by the number of sales contracts canceled during the relevant period.
During the three months ended March 31, 2020 as compared to the three months ended March 31, 2019:
•Home deliveries increased by 21.7%
•Home closings revenue increased by 18.8%
•Average sales price of homes delivered decreased by 2.4%
•Net new home orders increased by 42.3%.
The United States has been severely impacted by a coronavirus (“COVID-19”) pandemic. While response to the COVID-19 outbreak continues to rapidly evolve, it has led to stay-at-home orders and social distancing guidelines that have seriously disrupted activities in large segments of the economy. Although we continue to build, close and sell homes in our markets, traffic in our sales offices and sales have slowed significantly. For example, during the final two weeks of March and through the end of April, the impact of shelter-in-place/stay-at-home restrictions has reduced our net new home sales and our home sales per community as compared to the same period in the prior year and materially increased cancellations. We expect that an adverse impact on net new sales will continue in the second quarter and beyond and, consequently, our closings, and therefore our results of operations, for the balance of 2020 will be more impacted than the first quarter. The Company’s management continues to evaluate the impact of the COVID-19 pandemic on the homebuilding industry, future demand for homes, availability of human resources, and liquidity, among other factors.
Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 2019
Residential Units Revenue and New Homes Delivered
The table below represents residential units revenue and new homes delivered for the three months ended March 31, 2020 and 2019 (dollars in thousands):

|  | Three Months Ended March 31, |  |  |  |  |  |
|  | 2020 |  | 2019 |  | Change |  | %
Home closings revenue |  | $ | 189,248 |  |  | $ | 159,233 |  |  | $ | 30,015 |  |  | 18.8%
Mechanic’s lien contracts revenue |  | 1,939 |  |  | 2,355 |  |  | (416) |  |  | (17.7)%
Residential units revenue |  | $ | 191,187 |  |  | $ | 161,588 |  |  | $ | 29,599 |  |  | 18.3%
New homes delivered |  | 448 |  |  | 368 |  |  | 80 |  |  | 21.7%
Average sales price of homes delivered |  | $ | 422.4 |  |  | $ | 432.7 |  |  | $ | (10.3) |  |  | (2.4)%

The $29.6 million increase in residential units revenue was driven by the 21.7% increase in new homes delivered, which was due to a 17.5% increase in our absorption rate for net new home orders per average active selling community, as well as an organic increase in the number of active selling communities. The 2.4% decrease in the average sales price of homes delivered for the three months ended March 31, 2020 was attributable to product mix.
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New Home Orders and Backlog
The table below represents new home orders and backlog related to our builder operations segments, excluding mechanic’s lien contracts (dollars in thousands):

|  | Three Months Ended March 31, |  |  |  |  |  |
|  | 2020 |  | 2019 |  | Change |  | %
Net new home orders |  | 632 |  |  | 444 |  |  | 188 |  |  | 42.3 | %
Cancellation rate |  | 16.5 | % |  | 15.4 | % |  | 1.1 | % |  | 7.1 | %
Absorption rate per average active selling community per quarter |  | 6.7 |  |  | 5.7 |  |  | 1.0 |  |  | 17.5 | %
Average active selling communities |  | 94 |  |  | 78 |  |  | 16 |  |  | 20.5 | %
Active selling communities at end of period |  | 93 |  |  | 79 |  |  | 14 |  |  | 17.7 | %
Backlog |  | $ | 427,322 |  |  | $ | 307,548 |  |  | $ | 119,774 |  |  | 38.9 | %
Backlog (units) |  | 970 |  |  | 658 |  |  | 312 |  |  | 47.4 | %
Average sales price of backlog |  | $ | 440.5 |  |  | $ | 467.4 |  |  | $ | (26.9) |  |  | (5.8) | %

Net new home orders increased 42.3% over the prior year period. The increase is a result of increased demand in response to lower interest rates and a 20.5% increase in average selling communities. Our absorption rate per average active selling community increased 17.5% year over year. Net new order volume slowed dramatically in March 2020, down 5.9% versus March 2019 as a result of the COVID-19 pandemic. The slowdown was a function of a cancellation rate of 28.4% in March versus 10.7% in January and 11.1% in February, as well as a marked decline in gross new orders. This slowdown has continued into April. As a result, our results for the three months ended March 31, 2020 are not indicative of trends that we expect to persist as uncertainty caused by COVID-19 has impacted and will continue to impact our business and operations.
Backlog refers to homes under sales contracts that have not yet closed at the end of the relevant period, and absorption rate refers to the rate at which net new home orders are contracted per average active selling community during the relevant period. Upon a cancellation, the escrow deposit may be returned to the prospective purchaser. Accordingly, backlog may not be indicative of our future revenue.
Our cancellation rate, which refers to sales contracts canceled divided by sales contracts executed during the relevant period, was 16.5% for the three months ended March 31, 2020, compared to 15.4% for the three months ended March 31, 2019. Sales contracts relating to homes in backlog may be canceled by the prospective purchaser for a number of reasons, such as the prospective purchaser’s inability to obtain suitable mortgage financing. Upon a cancellation, the escrow deposit may be returned to the prospective purchaser. Management believes a cancellation rate in the range of 15% to 20% is representative of an industry average cancellation rate. Our cancellation rate is on the low end of the industry average, which we believe is due to our target buyer demographics which generally includes a lower percentage of the first time homebuyers than the industry average. As previously stated, in March 2020, the level of cancellations was adversely impacted by the economic impacts of the COVID-19 pandemic.
The $119.8 million increase in value of backlog was due to the 47.4% increase in the number of homes in backlog, partially offset by the 5.8% decrease in the average sales price of backlog. The 47.4% increase in the number of homes in backlog was due to a 17.5% increase in the absorption rate per average active selling community and a 20.5% increase in the number of average active selling communities. The decrease of the average sales price of homes in backlog was the result of change in product mix.
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Residential Units Gross Margin
The table below represents the components of residential units gross margin (dollars in thousands):

|  | Three Months Ended March 31, |  |  |  |  |  |
|  | 2020 |  |  |  | 2019 |  |
Home closings revenue |  | $ | 189,248 |  |  | 100.0 | % |  | $ | 159,233 |  |  | 100.0 | %
Cost of homebuilding units |  | 145,591 |  |  | 76.9 | % |  | 126,083 |  |  | 79.2 | %
Homebuilding gross margin |  | $ | 43,657 |  |  | 23.1 | % |  | $ | 33,150 |  |  | 20.8 | %
Mechanic’s lien contracts revenue |  | $ | 1,939 |  |  | 100.0 |  |  | $ | 2,355 |  |  | 100.0 | %
Cost of mechanic’s lien contracts |  | 1,596 |  |  | 82.3 |  |  | 1,745 |  |  | 74.1 | %
Mechanic’s lien contracts gross margin |  | $ | 343 |  |  | 17.7 |  |  | $ | 610 |  |  | 25.9 | %
Residential units revenue |  | $ | 191,187 |  |  | 100.0 | % |  | $ | 161,588 |  |  | 100.0 | %
Cost of residential units |  | 147,187 |  |  | 77.0 | % |  | 127,828 |  |  | 79.1 | %
Residential units gross margin |  | $ | 44,000 |  |  | 23.0 | % |  | $ | 33,760 |  |  | 20.9 | %

Cost of residential units for the three months ended March 31, 2020 increased by $19.4 million, or 15.1%, compared to the three months ended March 31, 2019, primarily due to the 21.7% increase in the number of new homes delivered.
Residential units gross margin for the three months ended March 31, 2020 increased to 23.0%, compared to 20.9% for the three months ended March 31, 2019, primarily because of a decrease in sales incentives offered to customers, price increases to homes sold in certain communities, and building homes on lots developed by the Company where our lower land cost increases our profitability.
Land and Lots Revenue
The table below represents lots closed and land and lots revenue (dollars in thousands):

|  | Three Months Ended March 31, |  |  |  |  |  |
|  | 2020 |  | 2019 |  | Change |  | %
Lots revenue |  |  | $ | 22,080 |  |  | $ | 7,030 |  |  | $ | 15,050 |  |  | 214.1 | %
Land revenue |  |  | — |  |  | 10 |  |  | (10) |  |  | (100.0) | %
Land and lots revenue |  |  | $ | 22,080 |  |  | $ | 7,040 |  |  | $ | 15,040 |  |  | 213.6 | %
Lots closed |  |  | 138 |  |  | 47 |  |  | 91 |  |  | 193.6 | %
Average sales price of lots closed |  |  | $ | 160.0 |  |  | $ | 149.6 |  |  | $ | 10.4 |  |  | 7.0 | %

Lots revenue increased by 214.1%, driven by a 193.6% increase in the number of lots closed and an average lot price increase of 7.0%.
Selling, General and Administrative Expenses
The table below represents the components of selling, general and administrative expenses (dollars in thousands):

|  | Three Months Ended March 31, |  |  |  | As Percentage of Segment Revenue |  |
|  | 2020 |  | 2019 |  | 2020 |  | 2019
Builder operations |  | $ | 25,460 |  |  | $ | 20,819 |  |  | 13.3 | % |  | 12.9 | %
Land development |  | 327 |  |  | 409 |  |  | 1.5 | % |  | 5.8 | %
Corporate, other and unallocated |  | 1,082 |  |  | 1,838 |  |  | — |  |  | — |
Total selling, general and administrative expenses |  | $ | 26,869 |  |  | $ | 23,066 |  |  | 12.6 | % |  | 13.7 | %

The 1.1% decrease of total selling, general and administrative expenses as a percentage of revenue was driven by an increase in revenues and in capitalized overhead adjustments.
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Builder Operations
The 0.4% increase in selling, general and administrative expenses as a percentage of revenue for builder operations was primarily attributable to increases in expenditures to support the growth in homes sales. Builder operations expenditures include salary expenses, sales commissions, and community costs such as advertising and marketing expenses, rent, professional fees, and non-capitalized property taxes.
Land Development
The 4.3% decrease in selling, general and administrative expenses as a percentage of revenue for land development was primarily attributable to internal cost efficiencies, as some of our selling, general and administrative expenses did not increase with the increase of land development segment revenues.
Corporate, Other and Unallocated
Selling, general and administrative expenses for the corporate, other and unallocated non-operating segment for the three months ended March 31, 2020 was $1.1 million, compared to $1.8 million for the three months ended March 31, 2019, the decrease driven primarily by an increase in capitalized overhead adjustments that are not allocated to builder operations and land development segments.
Equity in Income of Unconsolidated Entities
Equity in income of unconsolidated entities increased to $2.6 million, or 38.9%, for the three months ended March 31, 2020, compared to $1.8 million for the three months ended March 31, 2019, primarily due to an increase in earnings from GB Challenger, LLC and the formation of Green Brick Mortgage, LLC.
Other (Loss) Income, Net
Other (loss) income, net, decreased to a loss of $1.9 million for the three months ended March 31, 2020, compared to income of $1.6 million for the three months ended March 31, 2019, the decrease primarily attributable to a $3.0 million increase in write-offs of option deposits and pre-acquisition costs caused by COVID-19 pandemic considerations and customer earnest money deposit of $1.3 million on the sale of finished lots forfeited during the three months ended March 31, 2019, partially offset by an increase in title closing and settlement services.
Income Tax Expense
Income tax expense increased to $6.0 million for the three months ended March 31, 2020 from $3.8 million for the three months ended March 31, 2019, the increase driven primarily by the increase in taxable income.
Lots Owned and Controlled
The following table presents the lots we owned or controlled, including lot option contracts, as of March 31, 2020 and December 31, 2019. Owned lots are those for which we hold title, while controlled lots are those for which we have the contractual right to acquire title but we do not currently own.

| March 31, 2020 |  | December 31, 2019
Lots owned |  |  |
Central | 3,803 |  |  | 4,223 |
Southeast | 2,306 |  |  | 2,196 |
Total lots owned | 6,109 |  |  | 6,419 |
Lots controlled |  |  |
Central | 2,123 |  |  | 1,410 |
Southeast | 452 |  |  | 1,147 |
Total lots controlled | 2,575 |  |  | 2,557 |
Total lots owned and controlled (1) | 8,684 |  |  | 8,976 |
Percentage of lots owned | 70.3 | % |  | 71.5 | %

(1)Total lots excludes lots with homes under construction.
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The decrease in the number of lots is related primarily to the Company’s decision to abandon certain option contracts due to the impact of the COVID-19 pandemic on the homebuilding industry and projected future demand for homes in certain markets and/or locations.
Liquidity and Capital Resources Overview
As of March 31, 2020 and December 31, 2019, we had $105.9 million and $33.3 million of unrestricted cash and cash equivalents, respectively. In response to the extraordinary circumstances created by the economic impacts of the COVID-19 pandemic, management took measures to significantly curtail further land and lot acquisitions and accumulate liquidity by drawing up our senior unsecured revolving credit facility to the extent of our commitments thereunder. Our historical cash management strategy includes redeploying net cash from the sale of home inventory to acquire and develop land and lots that represent opportunities to generate desired margins and using cash to make additional investments in business acquisitions, joint ventures, or other strategic activities. However, based on our current expectations regarding the potential impact of the COVID-19 pandemic on our future results of operations, we are seeking to control our discretionary capital investments and have temporarily limited the construction of unsold, speculative units, purchases of lots and investment in raw land and associated costs of land development to reflect the lower levels of home sales orders that are anticipated for 2020, and have limited the number of new communities in which we had planned to open in 2020 based on an evaluation of competition and supply.
Our principal uses of capital for the three months ended March 31, 2020 were home construction, land purchases, land development, operating expenses, and payment of routine liabilities. We used funds generated by operations and available borrowings to meet our short-term working capital requirements. We remain focused on generating positive margins in our builder operations segments and acquiring desirable land positions in order to maintain a strong balance sheet and remain poised for continued growth.
Cash flows for each of our communities depend on the community’s stage in the development cycle and can differ substantially from reported earnings. Early stages of development or expansion require significant cash outlays for land acquisitions, entitlements and other approvals, roads, utilities, general landscaping and other amenities. These costs are a component of our inventory and are not recognized in our statement of income until a home closes. In the later stages of community development, cash inflows may significantly exceed earnings reported for financial statement purposes, as the cash outflows associated with home construction and land development previously occurred.
Our debt to total capitalization ratio, which is calculated as the sum of borrowings on lines of credit and the senior unsecured notes, net of debt issuance costs (“total debt”), divided by the total capitalization, which equals the sum of Green Brick Partners, Inc. stockholders’ equity and total debt, was approximately 36.8% as of March 31, 2020. Apart from the unusual circumstances created by the economic impacts of the COVID-19 pandemic, it is our intent to prudently employ leverage to continue to invest in our land acquisition, development and homebuilding businesses. We target a debt to total capitalization ratio of approximately 30% to 35%, which we expect will provide us with significant additional growth capital.
Reconciliation of a Non-GAAP Financial Measure
In this Quarterly Report on Form 10-Q, we utilize a financial measure of net debt to total capitalization ratio that is a non-GAAP financial measure as defined by the Securities and Exchange Commission. We present this measure because we believe it is useful to management and investors in evaluating the Company’s financing structure. We also believe this measure facilitates the comparison of our financing structure with other companies in our industry. Because this measure is not calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as a substitute for, or superior to, financial measures prepared in accordance with GAAP.
Given our large accumulation of cash and cash equivalents as of March 31, 2020, our net debt to total capitalization ratio, which is a non-GAAP financial measure calculated as the total debt less cash and cash equivalents, divided by the sum of total Green Brick Partners, Inc. stockholders’ equity and total debt less cash and cash equivalents, remained low at 27.9%.
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The closest GAAP financial measure to the net debt to total capitalization ratio is the debt to total capitalization ratio. The following table represents a reconciliation of the net debt to total capitalization ratio to the closest GAAP financial measure as of March 31, 2020:

| Gross |  | Cash and cash equivalents |  | Net
Total debt, net of debt issuance costs | $ | 316,224 |  |  | $ | (105,860) |  |  |  | $ | 210,364 |
Total Green Brick Partners, Inc. stockholders’ equity | 542,982 |  |  | — |  |  |  | 542,982 |
Total capitalization | $ | 859,206 |  |  | $ | (105,860) |  |  |  | $ | 753,346 |
Debt to total capitalization ratio | 36.8 | % |  |  |  |  |  |  |
Net debt to total capitalization ratio |  |  |  |  |  |  |  | 27.9 | %

Key Sources of Liquidity
The Company’s key sources of liquidity were funds generated by operations and borrowings during the three months ended March 31, 2020.
As of March 31, 2020, we had $29.0 million outstanding under our secured revolving credit facility, down from $38.0 million as of December 31, 2019. Borrowings on the secured revolving credit facility have a maturity date of May 1, 2022 and bear interest at a floating rate per annum equal to the rate announced by Bank of America, N.A. as its “Prime Rate” less 0.25%. Notwithstanding the foregoing, the interest may not, at any time, be less than 4% per annum or more than the lesser amount of 18% and the highest maximum rate allowed by applicable law. As of March 31, 2020, the interest rate on outstanding borrowings under the secured revolving credit facility was 4.00% per annum.
As of March 31, 2020, we had $215.0 million outstanding under our unsecured revolving credit facility, up from $128.0 million as of December 31, 2019. Based on the unprecedented disruptions to the credit and economic markets arising from the COVID-19 pandemic, we drew the full amount of our unsecured revolving credit facility during the three months ended March 31, 2020. We used a portion of these borrowings to pay down our secured revolving credit facility and the remainder are held in cash and cash equivalents. Borrowings on the unsecured revolving credit facility have a maturity date of December 14, 2021 for $30.0 million and December 14, 2022 for $185.0 million, respectively, and bear interest at a floating rate equal to either (a) for base rate advances, the highest of (1) the lender’s base rate, (2) the federal funds rate plus 0.5% and (3) the one-month LIBOR plus 1.0%, in each case plus 1.5%; or (b) in the case of Eurodollar rate advances, the reserve adjusted LIBOR plus 2.5%. As of March 31, 2020, the interest rates on outstanding borrowings under the unsecured revolving credit facility ranged from 3.25% to 3.44% per annum.
In addition, we had an aggregate of $75.0 million in senior unsecured notes as of March 31, 2020 and December 31, 2019. Principal on the senior unsecured notes is required to be paid in increments of $12.5 million on August 8, 2024 and $12.5 million on August 8, 2025. The final principal payment of $50.0 million is due on August 8, 2026. Optional prepayment is allowed with payment of a “make-whole” premium which fluctuates depending on market interest rates. Interest, which accrues at a fixed rate of 4.00% per annum, is payable quarterly in arrears commencing November 8, 2019.
Our debt instruments require us to maintain specific financial covenants, each of which we were in compliance with as of March 31, 2020. Specifically, under the most restrictive covenants, we are required to maintain (1) a minimum interest coverage (consolidated EBITDA to interest incurred) of no less than 2.0 to 1.0 and, as of March 31, 2020, our interest coverage on a last 12 months’ basis was 7.93 to 1.0, (2) a Consolidated Tangible Net Worth of no less than approximately $364.0 million and, as of March 31, 2020, we had $541.6 million and (3) maximum debt to total capitalization rolling average ratio of no more than 40.0% and, as of March 31, 2020, we had a rolling average ratio of 34.7%.
For additional information on the Company’s lines of credit and senior unsecured notes, refer to Note 6 to the condensed consolidated financial statements located in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Cash Flows
The following summarizes our primary sources and uses of cash for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019:
•Operating activities. Net cash provided by operating activities for the three months ended March 31, 2020 was $1.2 million, compared to $9.2 million used in operating activities during the three months ended March 31, 2019. The net
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cash inflows for the three months ended March 31, 2020 were primarily driven by $21.6 million of cash generated from business operations and a $6.9 million increase in accrued expenses, partially offset by an increase in inventory of $16.9 million, an increase in earnest money deposits of $7.4 million, a decrease in customer and builder deposits of $1.4 million, and an increase in other assets of $1.6 million.
•Investing activities. Net cash used in investing activities for the three months ended March 31, 2020 increased to $1.1 million, compared to $0.6 million for the three months ended March 31, 2019.
•Financing activities. Net cash provided by financing activities for the three months ended March 31, 2020 was $74.8 million, compared to $5.3 million used in financing activities during the three months ended March 31, 2019. The cash inflows for the three months ended March 31, 2020 were primarily due to borrowings on lines of credit of $126.0 million, partially offset by $48.0 million of repayments of lines of credit and $3.0 million of distributions to noncontrolling interests partners.
Off-Balance Sheet Arrangements and Contractual Obligations
Land and Lot Option Contracts
In the ordinary course of business, we enter into land purchase contracts with third-party developers in order to procure lots for the construction of our homes in the future. We are subject to customary obligations associated with such contracts. These purchase contracts typically require an earnest money deposit, and the purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements, including obtaining applicable property and development entitlements.
We also utilize option contracts with lot sellers as a method of acquiring lots in staged takedowns, which are the schedules that dictate when lots must be purchased to help manage the financial and market risk associated with land holdings, and to reduce the use of funds from our corporate financing sources. Lot option contracts generally require us to pay a non-refundable deposit for the right to acquire lots over a specified period of time at pre-determined prices which typically include escalations in lot prices over time.
Our utilization of lot option contracts is dependent on, among other things, the availability of land sellers willing to enter into these arrangements, the availability of capital to finance the development of optioned lots, general housing market conditions and local market dynamics. Options may be more difficult to procure from land sellers in strong housing markets and are more prevalent in certain geographic regions.
We generally have the right, at our discretion, to terminate our obligations under both purchase contracts and option contracts by forfeiting the earnest money deposit with no further financial responsibility to the land seller. As of March 31, 2020, the Company had earnest money deposits of $22.5 million at risk associated with contracts to purchase 2,575 lots past feasibility studies with an aggregate purchase price of approximately $199.0 million.
Deposits and pre-acquisition costs written off related to option contracts abandoned totaled $3.4 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively. Management determined to abandon certain option contracts due to the impact of the COVID-19 pandemic on the homebuilding industry and projected future demand for homes in certain markets and/or locations.
Letters of Credit and Performance Bonds
Refer to Note 13 in the accompanying Notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for details of letters of credit and performance bonds outstanding.
Guarantee
Refer to Note 3 in the Notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for details of our guarantee in relation to EJB River Holdings, LLC joint venture.
Seasonality
The homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is highly dependent on the number of active selling communities, timing of new community openings and other market factors. Since it typically takes five to nine months to construct a new home, we normally deliver more homes in the second half of the year as spring and
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summer home orders are delivered. Because of this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long-term, although it may be affected by volatility in the homebuilding industry.
Critical Accounting Policies
Our critical accounting policies are described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for recent accounting pronouncements.
Related Party Transactions
See Note 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of our transactions with related parties.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer ( “CEO”) and principal financial officer (“CFO”), we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2020 in providing reasonable assurance that information required to be disclosed in the reports we file, furnish, submit or otherwise provide to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, in such a manner as to allow timely decisions regarding the required disclosures.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2020, there were no changes in our internal controls that have materially affected or are reasonably likely to have a material effect on our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Item 1A. “Risk Factors” of our Form 10-K for the year ended December 31, 2019 includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K. In addition to those risks set forth below, many of the risk factors contained in our Form 10-K are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.
The recent COVID-19 pandemic and resulting worldwide economic conditions are adversely affecting, and will continue to adversely affect, our business operations, financial condition, results of operations, and cash flows.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to spread globally and in March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. In addition, there have been extraordinary and wide-ranging actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, and “shelter-in-place” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. The COVID-19 pandemic and these governmental actions began to have a material adverse impact on our results of operations in the second half of March 2020 and we expect it to continue to adversely affect our business and results of operations.
Our first focus in addressing the impact of the COVID-19 pandemic was implementing steps to minimize the risk to our employees, trade partners and customers. While residential homebuilding is considered an essential service in each of the markets in which we operate, we are still taking steps to increase the safety of our employees, trade partners and customers. For example, we (1) closed our sales centers, model homes, and design centers to the general public and shifted to appointment-only interactions with our customers, following recommended distancing and other health and safety protocols when meeting in person with a customer, (2) modified our construction operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening, (3) modified our corporate and division office functions in order to allow all of our employees to work remotely except for essential minimum basic operations which could only be done in an office setting and (4) eliminated non-emergency interior warranty work in our customers’ homes.
From a business standpoint, we are also taking steps to address the current and anticipated economic impact of the COVID-19 pandemic on our operations and the homebuilding industry as a whole. While the first two months of the year reflected strong new home sales and closings, in the final two weeks of March and through the end of April, the impact of shelter-in-place/stay-at-home restrictions has reduced our net new home sales and our home sales per community as compared to the same period in the prior year and has resulted in materially increased cancellations. This had an adverse effect on our first quarter results of operations. Once the economy has been effectively reopened to active commerce, it is anticipated to have a greater impact on our results for the balance of 2020 as the number of closings will be negatively impacted by reduced net new home sales during this period but we are unable to anticipate the extent of the reduction. Furthermore, based on recent unemployment rates and economic slowdown, which have typically led to reduced consumer confidence, reduced discretionary income and tighter credit requirements for mortgages, we expect that this slowdown in net new home sales will continue in the upcoming quarters and there may be an increase in cancellations. Consequently, we have taken the following steps as we seek to align our cost structure and our capital requirements with our current anticipated level of sales, builds and closings:
•focused on completing and closing the record amount of sold homes in backlog that are under construction;
•temporarily limited the construction of unsold, speculative units to the next completion stage of construction;
•temporarily limited our purchases of lots and land and development of land to reflect the lower levels of home sales orders that are anticipated for 2020, as compared to expectations prior to the pandemic and limited the number of new communities in which we had planned to open in 2020 based on an evaluation of competition and supply;
•decided to not open Trophy Signature Homes in Houston; and
•taken steps to reduce our overall headcount and our selling, general and administrative expenses to align with anticipated activity in the upcoming quarters.
The length and extent of the impact of the COVID-19 pandemic on the economy and the homebuilding industry at this point is difficult to estimate as is the potential mitigating effects of economic relief efforts on the U.S. economy, unemployment, consumer confidence, demand for our homes and the mortgage market, including lending standards and secondary mortgage markets. However, if there is a prolonged economic downturn and/or an extended rise in unemployment or tempering of wage growth, we would expect to experience, among other things, increases in the cancellation rates for homes in our backlog, and decreases in our net new sales orders, homes delivered, revenues, and profitability. We could also be forced to
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reduce our average selling prices in order to generate consumer demand or in reaction to competitive pressures. Any of these actions could have a material adverse effect on our business, results of operations and financial condition.
ITEM 5. OTHER INFORMATION
Item 7.01
In an effort to address the impact of the COVID-19 pandemic on the Company’s financial results, the Company has taken steps to reduce overall headcount and selling, general and administrative expenses to align with anticipated activity in the upcoming quarters. Specifically, the Company has implemented (i) an approximately 18% reduction in its number of employees, and (ii) a base salary reduction through the remainder of 2020 ranging from 5% to 30%. In addition, effective as of April 1, 2020 the Company’s Chief Executive Officer voluntarily agreed to a 32% reduction in his base salary over the remainder of the year and each of the Company’s directors voluntarily agreed to reduce their cash retainers by 30% over the remainder of the year.
ITEM 6. EXHIBITS

Number |  | Description
31.1* |  | Certification of the Company’s Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
31.2* |  | Certification of the Company’s Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
32.1* |  | Certification of the Company’s Chief Executive Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2* |  | Certification of the Company’s Chief Financial Officer Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
101.INS** |  | XBRL Instance Document. The Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH** |  | XBRL Taxonomy Extension Schema Document.
101.CAL** |  | XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF** |  | XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB** |  | XBRL Taxonomy Extension Label Linkbase Document.
101.PRE** |  | XBRL Taxonomy Extension Presentation Linkbase Document.
104** |  | Cover Page Interactive Data File (embedded within the Inline XBRL document contained in Exhibit 101).

* Filed with this Form 10-Q.
** Submitted electronically herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GREEN BRICK PARTNERS, INC. |
/s/ James R. Brickman |
By: James R. Brickman |
Its: Chief Executive Officer |
/s/ Richard A. Costello |
By: Richard A. Costello |
Its: Chief Financial Officer |

Date: May 11, 2020
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