INVESTMENT IN UNCONSOLIDATED ENTITY

On August 15, 2017, the Company, JBGL Ownership LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“JBGL”), and GB Challenger, LLC, a newly formed Texas limited liability company (the “Challenger Subsidiary”) entered into a Membership Interest Purchase and Contribution Agreement (the “Challenger Agreement”) with The Challenger Group, Inc., a Wyoming corporation (“TCGI”), TCG Holdings, LLC, a Wyoming limited liability company (“TCG”), GTG Holdings, LLC, a Wyoming limited liability company (“GTG” and together with TCGI and TCG, the “Challenger Entities”) and Brian R. Bahr (“Bahr”), resulting in the Company, through its interest in JBGL, and the Challenger Entities owning a 49.9% and 50.1% ownership interest, respectively, in the Challenger Subsidiary, and the Challenger Subsidiary owning all of the membership and ownership interests in the subsidiaries of the Challenger Entities named in the Challenger Agreement (“Challenger Homebuilder Subsidiaries”). As consideration for such interests, the Company agreed to issue to the Challenger Entities, or their designees, 1,497,000 shares of its common stock, par value $0.01 per share, in a private placement, with 20,000 shares of its common stock held back pending satisfactory resolution of indemnification claims (“Holdback Shares”). The Company expects to issue the Holdback Shares during the second quarter of 2018; therefore, $0.2 million has been recorded in additional paid-in capital on the consolidated balance sheet as of December 31, 2017. The Challenger Entities, at their discretion, may offer to sell and transfer an additional 20.1% or, in certain circumstances, all of the Challenger Entities’ interest in the Challenger Subsidiary (“Additional Membership Interests”) to the Company on or after the third anniversary of the Challenger Agreement. The Company is not required to purchase the Additional Membership Interests. The Company incurred approximately $0.3 million in related acquisition costs which are included in the cost basis of investment in unconsolidated entity.

The Challenger Entities operate homebuilding operations under the name Challenger Homes. Challenger Homes constructs townhouses, single family homes and luxury patio homes, and is headquartered in Colorado Springs, Colorado. The Company partnered with Challenger Homes in order to expand its business with partners who are complementary to its current builder partner group and to gain a presence in the Colorado Springs market.

As a result of the investment in the Challenger Subsidiary on August 15, 2017, the Company issued 1,477,000 unregistered shares of its common stock, par value $0.01 per share (excluding 20,000 Holdback Shares). The issuance of the common stock by the Company was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and the safe harbor provided by Rule 506 promulgated thereunder. The Company relied, in part, upon representations from each of the individuals that they are “accredited investors” as such term is defined in Rule 501 of Regulation D.

The Company’s investment in the Challenger Subsidiary at August 15, 2017 of $15.1 million was more than its share of the estimated underlying net assets of the Challenger Subsidiary, resulting in a preliminary difference in basis of approximately $5.1 million, which was attributed to goodwill. The goodwill is reviewed for impairment as part of the investment in unconsolidated entity. The Company’s investment in the Challenger Subsidiary on August 15, 2017 was determined as follows (in thousands, except per share data):



Consideration transferred at closing
Green Brick common stock issued	1,477
Price per share of Green Brick common stock⁽¹⁾	$	9.90
Fair value of common stock consideration	$	14,622

Acquisition related costs	$	241
Total fair value of consideration transferred at closing	$	14,863

Potential future consideration
Holdback Shares	20
Price per share of Green Brick common stock⁽¹⁾	$	9.90
Total fair value of potential future consideration	$	198

Total fair value of consideration	$	15,061


(1)	Based upon closing price of the Company’s common stock upon the parties’ execution of the Challenger Agreement.

The Challenger Entities and the Company will direct the operations of the Challenger Homebuilder Subsidiaries through the Challenger Subsidiary, with the Company as the minority stakeholder. The Company holds two of the five board of managers (the “Managers”) seats of the Challenger Subsidiary. The Challenger Subsidiary’s six officers, employees of the Challenger Entities, were designated by the Managers for the purpose of managing the day to day operations. The Company does not have a controlling financial interest in the Challenger Subsidiary as the Company has less than 50% of the voting interests in the Challenger Subsidiary. The Company’s investment in the Challenger Subsidiary is treated as an unconsolidated investment under the equity method of accounting, carried at cost, as adjusted for the Company’s share of income or losses and reduced for distributions received, and included in investment in unconsolidated entity in the Company’s consolidated balance sheets. The net carrying value of the Company’s investment in the Challenger Subsidiary was $16.9 million as of 2017. For the year ended December 31, 2017, there were no impairments related to our investment in this unconsolidated entity. The Company recognized $2.7 million in equity in income of unconsolidated entity from the date of the acquisition through December 31, 2017.

A summary of the condensed financial information of the unconsolidated entity that is accounted for under the equity method is as follows (in thousands):



	December 31, 2017
Cash	$	3,981
Accounts receivable	1,494
Inventory	57,841
Goodwill	4,615
Noncompete intangible asset	202
Other assets	5,098
Total assets	$	73,231

Accounts payable	$	5,060
Accrued expenses and other liabilities	2,857
Notes payable	36,923
Equity	28,391
Total liabilities and equity	$	73,231

	For the Five Months Ended December 31, 2017
Revenues	$	58,958
Gross profit	$	13,989
Income before taxes	$	5,502