NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Comstock Holding Companies, Inc. and subsidiaries (“Comstock”, “CHCI” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and other applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Such financial statements do not include all of the disclosures required by GAAP for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. The Company has evaluated subsequent events through the date these consolidated financial statements were issued and has included all necessary adjustments and disclosures. For further information and a discussion of our significant accounting policies, other than discussed below, refer to our audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted asset management and services company primarily focused in the Washington, D.C. Metropolitan Statistical Area. In 2018, the Company made a strategic decision to transform its operating platform from being primarily focused on developing on-balance sheet, for-sale, homebuilding projects to being focused on commercial and residential asset management and real estate related services. On April 30, 2019, the Company announced the exit from the homebuilding business. The Company now operates through five subsidiaries – CDS Asset Management, LC (“CAM”), Comstock Residential Management, LC, Comstock Commercial Management, LC, Park X Management, LC and Comstock Environmental Services, LLC (“CES”). The Company’s homebuilding operations are presented in Discontinued Operations (see Note 19 – Discontinued Operations). References in these Consolidated Financial Statements to “Comstock,” “Company”, “we,” “our” and “us” refer to Comstock Holding Companies, Inc. together in each case with our subsidiaries unless the context suggests otherwise.
The Company’s Class A common stock is traded on the NASDAQ Capital Market under the symbol “CHCI”.
Throughout this quarterly report on Form 10-Q, amounts are in thousands, except per share data, number of stock options, number of stock awards, or as otherwise noted.
The Consolidated Balance Sheet as of December 31, 2019 was derived from the audited financial statements contained in the 2019 Form 10-K.
For the three and six months ended June 30, 2020 and 2019, comprehensive income (loss) equaled net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Recent Developments
On July 30, 2020, the Company retired an unsecured seller-financed promissory note with an outstanding balance of $595 thousand. The Company received a $50 thousand discount to retire the note prior to maturity. The gain on extinguishment will be reflected in the Company's third quarter results. See Note 8 - Debt and Note 20 - Subsequent Events for more information.
Use of Estimates
Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts for the reporting periods. We base these estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate these estimates and judgments on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions. Material estimates are utilized in the valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-based compensation, valuation of preferred stock issuances, capitalization of costs, consolidation of variable interest entities and fair value of financial instruments (including the fair value of our equity method investments).
Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which removes, adds and modifies certain disclosure requirements for fair value measurements in Topic 820. ASU 2018-13 removes the following disclosure requirements: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and (ii) the entity’s valuation processes for Level 3 fair value measurements. ASU 2018-13 adds the following disclosure requirements: (i) provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future, (ii) disclose changes in unrealized gains and losses related to Level 3 measurements for the period included in other comprehensive income, and (iii) disclose for Level 3 measurements the range and weighted average of the significant unobservable inputs and the way it is calculated. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company adopted ASU 2018-13 prospectively as of January 1, 2020. The adoption did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments", which modifies how companies recognize expected credit losses on financial instruments and other commitments to extend credit held by an entity at each reporting date. Existing GAAP requires an “incurred loss” methodology whereby companies are prohibited from recording an expected loss until it is probable that the loss has been incurred. ASU 2016-13 requires companies to use a methodology that reflects current expected credit losses (“CECL”) and requires consideration of a broad range of reasonable and supportable information to record and report credit loss estimates, even when the CECL is remote. Companies will be required to record the allowance for credit losses and deduct that amount from the basis of the asset. The guidance is effective for the Company for financial statement periods beginning after December 15, 2022, although early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes", which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those periods. Early adoption is permitted. We do not expect the adoption of this pronouncement to have a material impact on our consolidated financial statements.
We assessed other accounting pronouncements issued or effective during the three and six months ended June 30, 2020 and deemed they were either not applicable to us or are not anticipated to have a material effect on our consolidated financial statements. Other standards previously issued and adopted by the Company have been disclosed in previous filings.
2. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
In connection with the preparation of the Company’s 2019 consolidated financial statements, the Company identified errors in its historical financial statements relating to how the Company accounted for debt discounts and how the Company accounted for reimbursement of salaries and other salary related costs for its property management revenue arrangements. Specifically, the Company incorrectly accounted for debt discount of certain notes payable due to affiliates that should have been fully amortized at the end of the initial three-year term in October 2017. In addition, in the interim periods in 2019, the Company previously reported the reimbursement of salary costs from its property management agreements on a net basis, although the Company was required to account for these payroll related reimbursements on a gross basis. The correction of these non-cash errors had no effect on the previously reported operating income (loss) or total cash flows from operations, investing, or financing of the Company.
The Company evaluated the errors and, based on an analysis of quantitative and qualitative factors, determined that the related impact was not material to the Company’s consolidated financial statements for any prior period.
All financial statements and footnotes presented herein have been adjusted to reflect the revisions below.
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|
|
|
|
|
|
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|
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|
|
For the three months ended June 30, 2019
|
|
|
|
|
|
For the six months ended June 30, 2019
|
|
|
|
|
|
|
As previously
reported
|
|
Adjustment
|
|
As adjusted
|
|
As previously
reported
|
|
Adjustment
|
|
As adjusted
|
|
Revenue—asset management
|
$
|
4,024
|
|
|
$
|
415
|
|
|
$
|
4,439
|
|
|
$
|
7,885
|
|
|
$
|
708
|
|
|
$
|
8,593
|
|
|
Direct costs—asset management
|
3,514
|
|
|
426
|
|
|
3,940
|
|
|
6,831
|
|
|
776
|
|
|
7,607
|
|
|
Interest (expense)
|
(132)
|
|
|
16
|
|
|
(116)
|
|
|
(166)
|
|
|
32
|
|
|
(134)
|
|
|
Other income, net
|
16
|
|
|
11
|
|
|
27
|
|
|
16
|
|
|
68
|
|
|
84
|
|
|
Net income (loss)
|
(253)
|
|
|
16
|
|
|
(237)
|
|
|
(184)
|
|
|
32
|
|
|
(152)
|
|
|
Additional paid-in capital
|
197,333
|
|
|
1,025
|
|
|
198,358
|
|
|
197,333
|
|
|
1,025
|
|
|
198,358
|
|
|
Accumulated deficit
|
(194,503)
|
|
|
(1,740)
|
|
|
(196,243)
|
|
|
(194,503)
|
|
|
(1,740)
|
|
|
(196,243)
|
|
|
Total equity
|
7,013
|
|
|
(715)
|
|
|
6,298
|
|
|
7,013
|
|
|
(715)
|
|
|
6,298
|
|
3. TRADE RECEIVABLES & TRADE RECEIVABLES – RELATED PARTIES
Trade receivables include amounts due from real estate services, asset management and commercial development. The Company records an allowance for doubtful accounts based on historical collection experience and the aging of receivables. As of June 30, 2020, the allowance for doubtful accounts was de minimis based on the Company’s historical collection experience for receivables older than 90 days along with an analysis of collections received after the filing date.
As of June 30, 2020 and December 31, 2019, the Company had $3.0 million and $3.6 million, respectively, of receivables from related parties, primarily related to the 2019 AMA, as defined in Note 15. The Company does not record an allowance for doubtful accounts related to receivables from related parties. This is due to the related party nature of the receivables along with the collection history.
4. EQUITY METHOD INVESTMENTS IN REAL ESTATE VENTURES AT FAIR VALUE
Based upon elections made at the date of investment, the Company reports the equity method investments in real estate ventures at fair value. For such investments, the Company increases or decreases the investment each reporting period by the change in the fair value and the Company reports the fair value adjustments in the Consolidated Statement of Operations in the ‘loss on equity method investments carried at fair value’ line item. Changes in fair value of the Company's investment in Investors X (defined below) are impacted by distributions as the fair value is based on finite cash flows from the wind-down of that entity.
Fair value of equity method investments are classified as Level 3 of the fair value hierarchy. As of June 30, 2020 and December 31, 2019, the Company had equity method investments in real estate ventures at fair value of $7.6 million and $8.4 million, respectively. The table below shows the change in the Company’s investments in real estate ventures reported at fair value.
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Six Months Ended
June 30, 2020
|
|
Fair value of investments as of December 31, 2019
|
$
|
8,421
|
|
|
Distributions
|
(717)
|
|
|
Change in fair value
|
(88)
|
|
|
Fair value of investments as of June 30, 2020
|
$
|
7,616
|
|
See Note 15 – Related Party Transactions for additional discussion of our investments in real estate ventures at fair value.
Investors X
The Company has elected to account for the equity method investment in Comstock Investors X, L.C. (“Investors X”), a Variable Interest Entity (“VIE”) that owns the Company’s residual homebuilding operations at fair value. Fair value is determined using a discounted cash flow model based on expected future cash flows for income and realization events of the underlying asset. Expected future cash flows includes contractually fixed revenues and expenses as well as estimates for future revenues and expenses where contracts do not currently exist. These estimates are based on prior experience as well as comparable, third party data.
As of June 30, 2020 and December 31, 2019, the fair value of the Company’s investment in Investors X is $6.4 million and $7.2 million, respectively. The Company received distributions of $144 thousand and $514 thousand during the three and six months ended June 30, 2020, respectively, and recognized a loss in fair value of $73 thousand and $42 thousand, respectively.
Summarized Financial Information for Investors X
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|
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|
|
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|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2020
|
|
Statement of Operations:
|
|
|
|
|
Total revenue
|
$
|
3,678
|
|
|
$
|
7,198
|
|
|
Direct costs
|
3,220
|
|
|
6,262
|
|
|
Net income
|
$
|
458
|
|
|
$
|
936
|
|
|
Comstock Holding Companies, Inc. share of net income
|
$
|
458
|
|
|
$
|
936
|
|
The Hartford
On December 30, 2019, the Company made an investment related to the purchase of a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia (the “Hartford”). The Company will retain a 2.5% equity interest in the asset at a cost of approximately $1.2 million. The Company has elected to account for the equity method investment in the Hartford at fair value. Fair value is determined using an income approach and sales comparable approach models. As of June 30, 2020 and December 31, 2019, the fair value of the Company’s investment in the Hartford was $1.2 million. The fair value of the Hartford increased by $27 thousand during the three and six months ended June 30, 2020. The Company received distributions of $59 thousand during the three and six months ended June 30, 2020.
Summarized Financial Information for the Hartford
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2020
|
|
2020
|
|
Statement of Operations:
|
|
|
|
|
Total revenue
|
$
|
2,498
|
|
|
$
|
4,058
|
|
|
Direct costs
|
753
|
|
|
1,152
|
|
|
Other costs
|
2,339
|
|
|
3,891
|
|
|
Net income
|
$
|
(594)
|
|
|
$
|
(985)
|
|
|
Comstock Holding Companies, Inc. share of net income
|
$
|
(15)
|
|
|
$
|
(25)
|
|
5. GOODWILL & INTANGIBLES
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business acquisition. Following an acquisition, we perform an analysis to value the acquired company’s tangible and identifiable intangible assets and liabilities. With respect to identifiable intangible assets, we consider backlog, non-compete agreements, client relationships, trade names, patents and other assets. We amortize our intangible assets based on the period over which the contractual or economic benefits of the intangible assets are expected to be realized. We assess the recoverability of the unamortized balance of our intangible assets when indicators of impairment are present based on expected future profitability and undiscounted expected cash flows and their contribution to our overall operations. Should the review indicate that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of the intangible assets would be recognized as an impairment loss. As of the acquisition date, goodwill consisted primarily of synergies resulting from the combination, expected expanded opportunities for growth and production, and savings in corporate overhead costs.
We perform our annual goodwill impairment review during our fourth quarter as of October 1. In addition, we regularly evaluate whether events and circumstances have occurred that may indicate a potential change in recoverability of goodwill. We perform interim goodwill impairment reviews between our annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, significant or unusual changes in market capitalization, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior
periods. During the three months ended March 31, 2020 we considered the impact of the coronavirus ("COVID-19") pandemic and the resulting economic impact a triggering event and performed a goodwill impairment review. There were no events indicating a potential change in recoverability of goodwill during the three months ended June 30, 2020.
When assessing goodwill for impairment, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than it's carrying amount or elect to bypass such assessment. If it is determined that it is more likely than not that the fair value of a reporting unit is less than it’s carrying value, or the Company elects to bypass such assessment, the Company then determines the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates, including the Company's discount rate, growth rate and future financial performance as well as a market multiple model based upon similar transactions in the market. Assumptions about the discount rate are based on a weighted average cost of capital built up from various interest rate components applicable to the Company. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. Market multiples are derived from recent transactions among businesses of a similar size and industry. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then an impairment loss is recognized for the difference. For the three months ended March 31, 2020 the Company determined that there was no impairment to goodwill. As of June 30, 2020 and December 31, 2019, the balance of goodwill was $1.7 million. This goodwill is reflected within our Real Estate Services segment.
Intangible assets include customer relationships which have an amortization period of four years. During the three and six months ended June 30, 2020, $17 thousand and $33 thousand of intangible asset amortization was recorded in ‘General and administrative’ expense on the Consolidated Statements of Operations, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Intangibles
|
$
|
268
|
|
|
$
|
268
|
|
|
Less: accumulated amortization
|
(198)
|
|
|
(165)
|
|
|
|
$
|
70
|
|
|
$
|
103
|
|
As of June 30, 2020, the future estimated amortization expense related to these intangible assets was:
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|
|
|
|
|
|
|
|
Amortization
Expense
|
|
2020 (6 months ended December 31, 2020)
|
$
|
34
|
|
|
2021
|
36
|
|
|
Total
|
$
|
70
|
|
6. LEASES
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-2, Leases, later codified as Accounting Standards Codification ("ASC") 842 ("ASC 842"), using the modified retrospective method.
The determination of whether an arrangement contains a lease and the classification of a lease, if applicable, is made at lease commencement, at which time the Company also measures and recognizes an ROU asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. For the purposes of recognizing ROU assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient to not recognize a ROU asset or lease liability for short-term leases, which are leases with a term of twelve months or less. The lease term is defined as the non-cancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised.
ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The rates implicit within the Company's leases are generally not determinable; therefore, the Company's incremental borrowing rate of 6.5%, at the time of adoption, was used to determine the present value of lease payments. The determination of the Company’s incremental borrowing rate requires judgment. The incremental borrowing rate is determined at lease commencement, or as of January 1, 2019 for operating leases in existence upon adoption of ASC 842.
The Company has operating leases for its office facilities as well as for office equipment. The Company's leases have remaining terms of less than one year to 3 years. The leases can contain various renewal and termination options. The period
which is subject to an option to extend the lease is included in the lease term if it is reasonably certain that the option will be exercised. The period which is subject to an option to terminate the lease is included if it is reasonably certain that the option will not be exercised. Lease costs related to the Company's operating leases are generally recognized as a single ratable lease cost over the lease term.
Maturities of lease liabilities as of June 30, 2020 are as follows:
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|
|
|
|
|
|
|
|
Operating
Leases
|
|
2020 (6 months ended December 31)
|
$
|
27
|
|
|
2021
|
54
|
|
|
2022
|
9
|
|
|
Total lease payments
|
90
|
|
|
Less: imputed interest
|
5
|
|
|
Present value of lease liabilities
|
$
|
85
|
|
As of June 30, 2020, operating lease payments include $54 thousand related to options to extend lease terms that are reasonably certain of being exercised. The Company does not have any lease liabilities which have not yet commenced as of June 30, 2020.
7. REVENUE
The Company’s revenues consist primarily of
•Asset Management;
•Property Management;
•Capital Markets;
•Leasing;
•Project & Development Services; and
•Environmental Consulting and Engineering Services.
Asset Management
Asset Management primarily provides comprehensive real estate asset management services to the CDS Portfolio (defined below), representing a series of daily performance obligations delivered over time. Pricing includes a cost-plus management fee or a market-rate fee form of variable consideration. The Company earns whichever is higher. See Note 15 – Related Party Transactions.
The amount of revenue recognized is presented on a gross basis for any services provided by our employees, as we control the services provided by the employees. This is evidenced by our obligation for their performance and our ability to direct and redirect their work and negotiate the value of such services. In the instances where we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed.
Property Management
We provide on-site day-to-day management services for owners of office, industrial, retail, multifamily residential and various other types of properties, representing a series of daily performance obligations delivered over time. Pricing is generally in the form of a monthly management fee based upon property-level cash receipts, square footage under management or some other variable metric. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. Project management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed. The amount of revenue recognized is presented on a gross basis for any services provided by our employees, as we control the services provided by the employees. This is evidenced by our obligation for their performance and our ability to direct and redirect their work and negotiate the value of
such services. In the instances where we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements.
Capital Markets
We offer clients commercial mortgage and structured financing services. We are compensated for our services via a fee paid upon successful commercial financing from third party lenders. The fee earned is contingent upon the funding of the loan, which represents the transfer of control for services to the customer. Therefore, we typically satisfy our performance obligation at the point in time of the funding of the loan, when there is a present right to payment.
Leasing
We provide strategic advice and execution services for owners, investors, and occupiers of real estate in connection with the leasing of office, industrial and retail space. We are compensated for our services in the form of a commission. Our commission is paid upon signing of the lease by the tenant. We satisfy our performance obligation at a point in time; generally, at the time of the contractual event where there is a present right to payment.
Project and Construction Management
We provide project and construction management services for owners and occupiers of real estate in connection with the management and leasing of office, industrial and retail space. The fees that we earn are typically variable based upon a percentage of project cost. We are compensated for our services in the form of management fees. Project and construction management services represent a series of performance obligations delivered over time and revenue is recognized over time.
Environmental Consulting and Engineering
We provide environmental consulting and engineering services for owners of real estate. Remediation services are generally contracted and performed by Comstock Environmental. We are compensated for our services as well as for the services of subcontractors used to perform remediation services. Fees earned are generally based upon employee time spent as well as a cost-plus arrangement for subcontractors used. Generally, environmental consulting and engineering services represent a series of performance obligations delivered over time and revenue is recognized over time.
Contract Costs
Expenses, primarily employee commissions, incurred on leasing and capital markets transactions represent substantially all of our incremental costs to obtain revenue contracts. We apply the applicable practical expedient offered by ASC Topic 606 "Revenue", when the amortization period is one year or less and, therefore, recognize these costs as an operating expense as they are incurred.
The following table presents the Company’s sales from contracts with customers disaggregated by categories which best represents how the nature, amount and timing and uncertainty of sales are affected by economic factors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenue by customer
|
|
|
|
|
|
|
|
|
Related party
|
$
|
4,589
|
|
|
$
|
4,699
|
|
|
$
|
10,073
|
|
|
$
|
8,796
|
|
|
Commercial
|
1,875
|
|
|
638
|
|
|
3,357
|
|
|
1,423
|
|
|
Total Revenue by customer
|
$
|
6,464
|
|
|
$
|
5,337
|
|
|
$
|
13,430
|
|
|
$
|
10,219
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by contract type
|
|
|
|
|
|
|
|
|
Fixed-price
|
$
|
1,066
|
|
|
$
|
493
|
|
|
$
|
2,026
|
|
|
$
|
926
|
|
|
Cost-plus
|
3,654
|
|
|
3,332
|
|
|
7,088
|
|
|
7,110
|
|
|
Time and Material
|
1,744
|
|
|
1,512
|
|
|
4,316
|
|
|
2,183
|
|
|
Total Revenue by contract type
|
$
|
6,464
|
|
|
$
|
5,337
|
|
|
$
|
13,430
|
|
|
$
|
10,219
|
|
For the three and six months ended June 30, 2020, $6.1 million and $12.9 million, respectively, of our revenues were earned for contracts where revenue is recognized over time. For the three and six months ended June 30, 2019, $5.1 million and $10.0 million, respectively, of our revenues were earned for contracts where revenue is recognized over time.
For the three and six months ended June 30, 2020, $0.4 million and $0.6 million, respectively, of our revenues were earned for contracts where revenue is recognized at a point in time. For the three and six months ended June 30, 2019, $0.2 million in revenues were earned for contracts where revenue is recognized at a point in time.
8. DEBT
As of June 30, 2020, notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Secured financing
|
$
|
—
|
|
|
$
|
694
|
|
|
Notes payable- due to affiliates, unsecured, net of $27 thousand discount and unamortized deferred financing charges as of December 31, 2019
|
5,519
|
|
|
5,706
|
|
|
Unsecured financing
|
632
|
|
|
595
|
|
|
Total notes payable
|
$
|
6,151
|
|
|
$
|
6,995
|
|
As of June 30, 2020, net maturities and/or curtailment obligations of all borrowings are as follows:
|
|
|
|
|
|
|
|
2020
|
$
|
82
|
|
|
2021
|
55
|
|
|
2022
|
495
|
|
|
2023
|
5,519
|
|
|
Total
|
$
|
6,151
|
|
Secured financing
As of December 31, 2019, the Company had two secured loans related to Comstock Environmental. The first loan was used to finance the acquisition of Comstock Environmental and carried a fixed interest rate of 6.5% with a maturity date of October 17, 2022. At December 31, 2019, this financing had an outstanding balance of $667 thousand. This loan was retired during the three months ended June 30, 2020. Comstock Environmental had an additional secured loan with an outstanding balance of $27 thousand as of December 31, 2019 that was used to fund the purchase of an asset used in the business. This loan was retired during the six months ended June 30, 2020. These financings were secured by the assets of Comstock Environmental and guaranteed by our Chief Executive Officer.
Unsecured financing
As of June 30, 2020 and December 31, 2019, the Company had one unsecured seller-financed promissory note with an outstanding balance of $595 thousand. This financing carries an annual interest rate of LIBOR plus 3% and has a maturity date of July 17, 2022. This loan has $50 thousand due on the third and fourth loan anniversary dates with the remainder due at maturity. At June 30, 2020 and December 31, 2019, the interest rate was 3.6% and 5.0%, respectively. On July 30, 2020 the Company retired this promissory note. See Note 20 - Subsequent Events for more details. In addition, during the six months ended June 30, 2020, the Company financed the Director’s and Officer’s insurance policy with a one year term loan. As of June 30, 2020, the balance on this loan was $37 thousand.
Notes payable, due to affiliates – unsecured
Comstock Growth Fund
On October 17, 2014, the Company entered into an unsecured promissory note with Comstock Growth Fund ("CGF") whereby CGF made a loan to the Company in the initial principal amount of $10.0 million and a maximum amount available for borrowing of up to $20.0 million with a three-year term. On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of $25 million. On May 23, 2018, the Company entered into a Membership Interest Exchange and Subscription Agreement (the “Membership Exchange Agreement”), together with a revised promissory note agreement, in which a note (“CGF Note”) with an outstanding principal and accrued interest balance of $7.7 million was exchanged for
1,482,300 shares of the Company’s Series C Non-Convertible Preferred Stock, par value $0.01 per share and a stated liquidation value of $5.00 per share (the “Series C Preferred Stock”), issued by the Company to Comstock Development Services, LC ("CDS"). The Company exchanged the preferred equity for 91.5% of CDS membership interest in the CGF promissory note. Concurrently, the face amount of the CGF promissory note was reduced to $5.7 million as of the Effective Date. The CGF Note bore interest at a fixed rate of 10% per annum. Interest payments are made monthly in arrears. The Company is the administrative manager of CGF but does not own any membership interests. The Company had approximately $5.7 million of outstanding borrowings and accrued interest under the CGF Note, net of discounts, as of December 31, 2019. The maturity date for the CGF Note was April 16, 2020. The CGF Note was repaid prior to maturity during the six months ended June 30, 2020.
Revolving Capital Line of Credit
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”). Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the Wall Street Journal Prime Rate plus 1.00% per annum on advances made under the Revolver, payable monthly in arrears. The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS. On March 27, 2020, the Company borrowed $5.5 million under the Revolver. The $5.5 million borrowed has a maturity date of April 30, 2023.
For the three and six months ended June 30, 2020, the Company made interest payments for all debt facilities of $0.1 million and $0.3 million, respectively. For the three and six months ended June 30, 2019, the Company made interest payments for all debt facilities of $0.1 million and $0.2 million, respectively.
During the three months ended June 30, 2020, the Company retired the $5.7 million of outstanding borrowings for the CGF Note and did not make principal payments for the Revolver. During the three and six months ended June 30, 2019, the Company did not make principal payments for the CGF Note.
9. PAYCHECK PROTECTION PLAN LOAN
In response to the COVID-19 pandemic, the Paycheck Protection Program (the “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). Companies who met the eligibility requirements set forth by the PPP could qualify for PPP loans provided by local lenders, which supports payroll, rent and utility expenses (“qualified expenses”). If the loan proceeds are fully utilized to pay qualified expenses over the covered period, as further defined by the PPP, the full principal amount of the PPP loan may qualify for loan forgiveness, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period.
In April 2020, the Company received proceeds of $1.95 million under the PPP (the "PPP Loan") provided by Mainstreet Bank (the “Lender”). Based on the term and conditions of the loan agreement, the term of the PPP loan is two years with an annual interest rate of 1% and principal and interest payments will be deferred for the first six-months of the loan term, which has been updated according to the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”).
In June 2020, the Flexibility Act was signed into law, which amended the CARES Act. The Flexibility Act changed key provisions of the PPP, including, but not limited to, (i) provisions relating to the maturity of PPP loans, (ii) the deferral period covering of PPP loan payments and (iii) the process for measurement of loan forgiveness. More specifically, the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of the enactment of the Flexibility Act (“June 5, 2020”) and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. As of the date of this filing, the Company has not approached the Lender to request an extension of the current maturity date from two years to five years. The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period (“covered period”), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. Therefore, the Company’s deferral period for principal and interest payments was updated from six-months according to the terms and conditions of the loan agreement to ten months. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans before June 5, 2020 to determine, at their sole discretion, a covered period of either eight weeks or 24-weeks.
After reviewing the applicable terms and conditions of the Flexibility Act, the Company has elected to extend the length of the covered period from the lesser of (i) period whereby qualified expenses equal loan proceeds or (ii) 24 weeks. The Company has performed initial calculations for the PPP loan forgiveness according to the terms and conditions of the SBA’s Loan Forgiveness Application (Revised June 16, 2020) and, based on such calculations, expects that the PPP loan will be forgiven in full over a period less than 24 weeks. In addition, the Company has determined that it is probable the Company will meet all the
conditions of the PPP loan forgiveness. As such, the Company has determined that the PPP loan should be accounted for as a government grant which analogizes with International Accounting Standards (“IAS”) 20, Accounting for Government Grants and Disclosure of Government Assistance. Under the provisions of IAS 20, “a forgivable loan from government is treated as a government grant when there is reasonable assurance that the entity will meet the terms for forgiveness of the loan.” IAS 20 does not define “reasonable assurance”, however, based on certain interpretations, it is analogous to “probable” under GAAP under FASB ASC 450-20-20, which is the definition the Company has applied to its expectations of the PPP loan forgiveness. In addition, in accordance with the provisions of IAS 20, government grants shall be recognized in profit or loss on a systematic basis over the periods in which the Company recognizes costs for which the grant is intended to compensate (i.e. qualified expenses). Therefore, the Company recognized PPP funding as a contra-expense during the periods when qualified expenses were incurred. The balance and activity related to the PPP loan is as follows as of June 30, 2020.
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
PPP loan proceeds
|
$
|
1,954
|
|
|
Qualified expenses eligible for forgiveness
|
(1,954)
|
|
|
PPP loan balance
|
$
|
—
|
|
The Company plans to submit the PPP loan forgiveness application in the near term. In accordance with the terms and conditions under the Flexibility Act, the lender has 60 days from receipt of the completed application to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statue and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA. Although the Company believes it is probable that the PPP loan will be forgiven, the Company cannot currently provide any objective assurance that it will obtain forgiveness in whole or in part. The amount the Company borrowed is within the "safe-harbor" limitations of the SBA. The SBA has published Frequently Asked Question 46 stating that if the principal amount of the loan is less than $2 million, the borrower "will be deemed to have made the required certification concerning the necessity of the loan request in good faith".
Pursuant to the Flexibility Act, the Company’s PPP loan agreement will be amended in the event that no amount or less than all of the PPP loan is forgiven. In addition, starting in August 2021, the Company will be required to make principal and interest payments totaling $82,671 per month or an adjustment amount based on the loan amendment over the remaining term of the PPP loan until such time the loan is fully settled. The Company may prepay the PPP loan at any time without penalty and the loan agreement evidencing the PPP Loan contains customary events of default relating to, among other things, payment defaults, or breaches of representations and warranties, or other provisions of the loan agreement. The occurrence of an event of default may trigger the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or the Lender filing suit and obtaining a judgment against the Company.
10. COMMITMENTS AND CONTINGENCIES
Litigation
Currently, we are not subject to any material legal proceedings. From time to time, we are named as a defendant in legal actions arising from our normal business activities. Although we cannot accurately predict the amount of our liability, if any, that could arise with respect to legal actions pending against us, we do not believe it is reasonably possible that such liability will have a material adverse effect on our financial position, operating results and cash flows. We believe that we have obtained adequate insurance coverage, rights to indemnification, or where appropriate, have established appropriate reserves in connection with any such legal proceedings.
11. FAIR VALUE DISCLOSURES
The carrying amounts reported in the consolidated balance sheets for cash equivalents, accounts receivable, and accounts payable are reasonable estimates of their fair values based on their short maturities. The fair value of fixed and floating rate debt is based on unobservable market rates (Level 3 inputs). The fair value of the fixed and floating rate debt was estimated using a discounted cash flow analysis on the blended borrower rates currently available to the Company for loans with similar terms. The following table summarizes the carrying amount and the corresponding fair value of fixed and floating rate debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31,
2019
|
|
Carrying amount
|
$
|
6,151
|
|
|
$
|
6,995
|
|
|
Fair value
|
$
|
5,717
|
|
|
$
|
6,820
|
|
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Investments in Real Estate Ventures at Fair Value
We report our two investments in real estate ventures at fair value. For such investments, we increase or decrease our investment each reporting period by the change in the fair value and we report these fair value adjustments in the Consolidated Statements of Operations.
For our investments in real estate ventures at fair value, we estimate the fair value using the level 3 Income Approach or a sales comparable approach to determine a fair value. Critical inputs to fair value estimates include various level 3 inputs such as valuations of the underlying real estate assets and borrowings, which incorporate investment-specific assumptions such as discount rates, capitalization rates, rental and expense growth rates, and asset-specific market borrowing rates. As of June 30, 2020 and December 31, 2019, investments in the real estate ventures at fair value were approximately $7.6 million and $8.4 million, respectively.
Non-Recurring Fair Value Measurements
The Company may also value its non-financial assets and liabilities, including items such as long-lived assets, at fair value on a non-recurring basis if it is determined that impairment has occurred. Such fair value measurements use significant unobservable inputs and are classified as Level 3.
12. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
During the three and six months ended June 30, 2020, the Company issued no stock options. During the six months ended June 30, 2020, the Company issued 630,352 restricted stock awards to employees. During the three and six months ended June 30, 2019, the Company issued 20,000 and 114,431 stock options and 184,463 and 242,251 restricted stock awards to employees, respectively.
Stock-based compensation expense associated with restricted stock and stock options is recognized based on the grant date fair value of the award over its vesting period. The following table reflects the statements of operations line items for stock-based compensation for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Cost of sales - Real Estate Services
|
$
|
—
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
Expense - General and administrative
|
204
|
|
|
95
|
|
|
417
|
|
|
168
|
|
|
|
$
|
204
|
|
|
$
|
122
|
|
|
$
|
417
|
|
|
$
|
206
|
|
Under net settlement procedures currently applicable to our outstanding restricted stock awards for employees, upon each settlement date and election by the employees, restricted stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the settlement date as determined by the closing price of our Class A common stock on the trading day immediately preceding the applicable settlement date. The remaining amounts are delivered to the recipient as shares of our Class A common stock.
As of June 30, 2020, the weighted-average remaining contractual term of unexercised stock options was 7 years. As of June 30, 2020 and December 31, 2019, there was $1.6 million and $0.6 million, respectively, of unrecognized compensation cost related to stock options and restricted stock awards.
The Company intends to issue new shares of its Class A common stock upon vesting of restricted stock grants or the exercise of stock options.
13. INCOME (LOSS) PER SHARE
The weighted average shares and share equivalents used to calculate basic and diluted (loss) income from continuing operations for the three and six months ended June 30, 2020 and 2019, and discontinued operations per share for the three and six months ended June 30, 2019, are presented in the accompanying consolidated statements of operations. Restricted stock awards, stock options and warrants for the three and six months ended June 30, 2020 and 2019 are included in the diluted income (loss) per share calculation using the treasury stock method and average market prices during the periods, unless their inclusion would be anti-dilutive.
The following share equivalents have been excluded from the continuing operations dilutive share computation for the three and six months ended June 30, 2020 and 2019 as their inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Restricted stock awards
|
2
|
|
|
135
|
|
|
3
|
|
|
—
|
|
|
Stock options
|
193
|
|
|
280
|
|
|
209
|
|
|
232
|
|
|
Warrants
|
657
|
|
|
620
|
|
|
688
|
|
|
558
|
|
|
|
852
|
|
|
1,035
|
|
|
900
|
|
|
790
|
|
The following share equivalents have been excluded from the discontinued operations dilutive share computation for the three and six months ended June 30, 2019 as their inclusion would be anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Restricted stock awards
|
—
|
|
|
135
|
|
|
—
|
|
|
153
|
|
|
Stock options
|
—
|
|
|
297
|
|
|
—
|
|
|
258
|
|
|
Warrants
|
—
|
|
|
620
|
|
|
—
|
|
|
558
|
|
|
|
—
|
|
|
1,052
|
|
|
—
|
|
|
969
|
|
14. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Consolidated loss in statement of operations
Included within the Company’s net loss from discontinued operations, net of tax for the three and six months ended June 30, 2019 are the activities of real estate entities that were determined to be VIEs. These entities have been established to own and operate real estate property and were deemed VIEs primarily based on the fact that the equity investment at risk is not sufficient to permit the entities to finance their activities without additional financial support. The Company determined that it was the primary beneficiary of these VIEs as a result of the Company’s majority voting rights and complete operational control of these entities.
Prior to April 30, 2019, the Company evaluated Investors X and determined that the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support and the Company was the primary beneficiary of the VIE as a result of its complete operational control of the activities that most significantly impact the economic performance and its obligation to absorb losses or receive benefits. As a result of the April 30, 2019 Master Transfer Agreement (“MTA”) entered into between the Company and CDS, the Company determined that Investors X was considered held for sale effective April 30, 2019 and Investors X activities were reclassified to discontinued operations in the accompanying Consolidated Financial Statements. See Note 15 - Related Party Transactions for more information.
15. RELATED PARTY TRANSACTIONS
Lease for Corporate Headquarters
The Company leases its corporate headquarters from an affiliate wholly-owned by our CEO. Future minimum lease payments under this lease, which expires on September 30, 2020, are $149 thousand.
For the three and six months ended June 30, 2020, total rental payments made were $156 thousand and $298 thousand, respectively. For the three and six months ended June 30, 2019, total rental payments made were $153 thousand and $299 thousand, respectively.
Asset Management Agreement
On March 30, 2018, CAM, an entity wholly owned by the Company, entered into that AMA with CDS. The effective date of the AMA is January 2, 2018. Pursuant to the AMA, CDS has engaged CAM to manage and administer the CDS’ commercial real estate portfolio and the day to-day operations of CDS and each property-owning subsidiary of CDS (the "CDS Portfolio"). Pursuant to the terms of the AMA, CAM will provide investment advisory, development and asset management services necessary to build out, stabilize and manage certain assets.
Pursuant to the AMA, CDS will pay CAM an annual cost-plus fee (the “Annual Fee”) in an aggregate amount equal to the sum of (i) the employment expenses of personnel dedicated to providing services to the CDS Portfolio pursuant to the AMA, (ii) the costs and expenses of the Company related to maintaining the listing of its shares on a securities exchange and complying with regulatory and reporting obligations as a public company, and (iii) a fixed annual payment of $1,000,000.
2019 Amended Asset Management Agreement
On April 30, 2019, CAM entered into the 2019 AMA with CDS, which amends and restates in its entirety the AMA. Pursuant to the 2019 AMA, CDS will engage CAM to manage and administer the Anchor Portfolio and the day to-day operations of CDS and each property-owning subsidiary of CDS (collectively, the “CDS Entities”). The “Anchor Portfolio” consists of a majority of the properties we currently manage.
Pursuant to the 2019 AMA, the Company provides asset management services related to the build out, lease-up and stabilization, and management of the Anchor Portfolio. CDS pays the Company and its subsidiaries annual fees equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5% of revenues generated by properties included in the Anchor Portfolio; (b) a construction management fee equal to 4% of all costs associated with Anchor Portfolio projects in development; (c) a property management fee equal to 1% of the Anchor Portfolio revenues, (d) an acquisition fee equal to up to 0.5% of the purchase price of acquired assets; and (f) a disposition fee equal to 0.5% of the sales price of an asset on disposition; or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of the Company related to maintaining the public listing of its shares and complying with related regulatory and reporting obligations, and (z) a fixed annual payment of $1,000,000.
In addition to the annual payment of the greater of either the Market Rate Fee or the Cost Plus Fee (as defined in the 2019 AMA), the Company also is entitled on an annual basis to the following additional fees: (i) an incentive fee equal to 10% of the free cash flow of each of the real estate assets comprising the Anchor Portfolio after calculating a compounding preferred return of 8% on CDS invested capital; (ii) an investment origination fee equal to 1% of raised capital, (iii) a leasing fee equal to $1.00/sf for new leases and $0.50/sf for renewals; and (iv) mutually agreeable loan origination fees related to the Anchor Portfolio.
The 2019 AMA will terminate on December 31, 2027 (“Initial Term”), an extension from the original termination date of December 31, 2022, and will automatically renew for successive additional one year terms (each an “Extension Term”) unless CDS delivers written notice of non-renewal of the 2019 AMA at least 180 days prior to the termination date of the Initial Term or any Extension Term. Twenty-four months after the effective date of the 2019 AMA, CDS is entitled to terminate the 2019 AMA without cause upon 180 days advance written notice to CAM. In the event of such a termination and in addition to the payment of any accrued annual fees due and payable as of the termination date under the 2019 AMA, CDS is required to pay a termination fee equal to (i) the Market Rate Fee or the Cost Plus Fee paid to CAM for the calendar year immediately preceding the termination , and (ii) a one-time payment of the Incentive Fee (as defined in the 2019 AMA) as if the CDS Portfolio were liquidated for fair market value as of the termination date; or the continued payment of the Incentive Fee as if a termination had not occurred.
Residential, Commercial and Parking Property Management Agreements
The Company entered into separate residential property management agreements with properties owned by CDS Entities under which the Company receives fees to manage and operate the properties, including tenant communications, leasing of apartment units, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
The Company entered into separate commercial property and parking management agreements with properties owned by CDS Entities under which the Company receives fees to manage and operate the office and retail portions of the properties, including tenant communications, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
These property management agreements are each for one year initial terms with successive, automatic one year renewal terms, unless sooner terminated. The Company generally receives base management fees under these agreements based upon a percentage of gross rental revenues for the portions of the buildings being managed in addition to reimbursement of specified expenses, including employment expenses of personnel employed by the Company in the management and operation of each property.
Construction Management Agreements
The Company has construction management agreements with properties owned by CDS Entities under which the Company receives fees to provide certain construction management and supervision services, including construction supervision and management of the buildout of certain tenant premises. The Company receives a flat construction management fee for each engagement under a work authorization based upon the construction management or supervision fee set forth in the applicable tenant’s lease, which fee is generally 1% to 4% of the total costs (or total hard costs) of construction of the tenant’s improvements in its premises, or as otherwise agreed to by the parties.
Business Management Agreements
On April 30, 2019, CAM entered into a Business Management Agreement (the “BMA”) with Investors X, whereby CAM will provide Investors X with asset and professional services related to the wind down of the Company’s divested homebuilding operations and the continuation of services related to the Company’s divested land development activities. The aggregate fee payable to CAM from Investors X under the Management Agreement is $937,500, payable in fifteen quarterly installments of $62,500 each.
The Hartford Investment
On December 30, 2019, the Company made an investment related to the purchase of the Hartford, a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia. The Company’s initial investment related to the purchase of the Hartford is $1.2 million.
In conjunction with the investment, the Company entered into an operating agreement (“Original Operating Agreement”) with Comstock Partners, LC ("Partners") to form Comstock 3101 Wilson, LC (the “Hartford Owner”), to purchase the Hartford. Pursuant to the Original Operating Agreement, the Company holds a minority membership interest in the Hartford Owner and the remaining membership interests of the Hartford Owner is held by Partners, who is further the Manager of the Hartford Owner. At the closing of the acquisition of the Hartford, the Company received an acquisition fee of $500 thousand and is entitled to asset management, property management, construction management and leasing fees for its management of the Property pursuant to separate agreements between the Hartford Owner, or its affiliates, and the Company, or its affiliates. The Company is also entitled to an incentive fee related to the performance of the investment.
On February 7, 2020, the Company, Partners and DWF VI 3101 Wilson Member, LLC (“DWF”), an unaffiliated, third party, equity investor in the Hartford, entered into a limited liability company agreement (the “DWC Operating Agreement”) to form DWC 3101 Wilson Venture, LLC (“DWC”) to, among other things, acquire, own and hold all interests in the Hartford Owner. In furtherance thereof, on February 7, 2020, the Original Operating Agreement for the Hartford Owner was amended and restated (the “A&R Operating Agreement”) to memorialize the Company’s and Partners’ assignment of 100% of its membership interests in the Hartford Owner to DWC. As a result thereof, DWC is the sole member of the Hartford Owner. The Company and Partners, respectively, hold minority membership interests in, and DWF holds the majority membership interest in, DWC. The Company’s ownership interest in the Hartford remains at 2.5%.
Private Placements and Promissory Notes
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”). Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the WSJ Prime Rate plus 1.00% per annum on advances made under the Revolver, payable monthly in arrears. The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS. On March 27, 2020 the Company borrowed $5.5 million under the Revolver. On April 10, 2020, the capital provided to the Company by the Revolver was utilized to retire all of the Company’s 10% corporate indebtedness maturing in 2020 owed to CGF.
See Note 8 - Debt for further description of the CGF Private Placement and the Revolver.
Revenues from Related Parties
The following table details the revenue earned from related parties.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Revenue by customer
|
|
|
|
|
|
|
|
|
Related party
|
$
|
4,589
|
|
|
$
|
4,699
|
|
|
$
|
10,073
|
|
|
$
|
8,796
|
|
|
Commercial
|
1,875
|
|
|
638
|
|
|
3,357
|
|
|
1,423
|
|
|
Total revenue
|
$
|
6,464
|
|
|
$
|
5,337
|
|
|
$
|
13,430
|
|
|
$
|
10,219
|
|
16. UNCONSOLIDATED JOINT VENTURE
The Company accounts for its interest in its title insurance joint venture using the equity method of accounting and adjusts the carrying value for its proportionate share of earnings, losses and distributions. The investment in the unconsolidated joint venture was $32 thousand and $125 thousand as of June 30, 2020 and December 31, 2019, respectively, and is included within ‘Prepaid and other assets, net’ in the accompanying Consolidated Balance Sheets.
The Company’s share of earnings for the three and six months ended June 30, 2020 from this unconsolidated joint venture of $18 thousand and $15 thousand, respectively, is included in ‘Other income, net’ in the accompanying Consolidated Statement of Operations. During the six months ended June 30, 2020, the Company collected and recorded distributions of $108 thousand from this joint venture as a return on investment. There were no distributions recorded during the three months ended June 30, 2020.
The Company’s share of earnings for the three and six months ended June 30, 2019 from this unconsolidated joint venture of $10 thousand and $68 thousand, respectively, is included in ‘Other income, net’ in the accompanying Consolidated Statement of Operations. During the three and six months ended June 30, 2019, the Company collected and recorded distributions of 56 thousand and 114 thousand, respectively, from this joint venture as a return on investment.
Summarized financial information for the unconsolidated joint venture is as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Statement of Operations:
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|
|
|
|
|
|
Total net revenue
|
$
|
64
|
|
|
$
|
48
|
|
|
$
|
95
|
|
|
$
|
196
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|
|
Total expenses
|
29
|
|
|
28
|
|
|
66
|
|
|
61
|
|
|
Net income
|
$
|
35
|
|
|
$
|
20
|
|
|
$
|
29
|
|
|
$
|
135
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|
|
Comstock Holding Companies, Inc. share of net income
|
$
|
18
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|
|
$
|
10
|
|
|
$
|
15
|
|
|
$
|
68
|
|
17. INCOME TAXES
For the three and six months ended June 30, 2020, the Company recognized deferred income tax expense of $1 thousand and $13 thousand, respectively. For the three and six months ended June 30, 2019, the Company recognized no deferred income tax expense from continuing operations due to the valuation allowance and recognized a deferred income tax expense of $7 thousand and $10 thousand from discontinued operations. The effective tax rate for the six months ended June 30, 2020 and 2019 is (0.85)% and (22.41)%, respectively.
The Company currently has approximately $143 million in federal and state NOLs. If unused, these NOLs will begin expiring in 2027. Under Internal Revenue Code Section 382 (“Section 382”), if a change in ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired.
The Company assesses uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainties in Income Taxes. The Company has not recorded any accruals related to uncertain tax positions as of June 30, 2020 and 2019. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2016 through 2019 tax years remain subject to examination by federal and most state tax authorities.
18. SEGMENT DISCLOSURES
Subsequent to July 23, 2019, we operate our business through two segments: Asset Management, and Real Estate Services.
In our Asset Management segment, we focus on providing management services to a wide range of real estate owners and businesses that include a variety of commercial real estate uses, including apartments, hotels, office buildings, commercial garages, leased lands, retail stores, mixed-use developments, and urban transit-oriented developments. The properties and businesses we currently manage are located primarily along the Washington, D.C. Metro Silver Line in Fairfax and Loudoun Counties, but we also manage projects in other jurisdictions including Maryland and Virginia.
In our Real Estate Services segment, our experienced management team provides a wide range of real estate services in the areas of strategic corporate planning, capital markets, brokerage services, and environmental and design-based services. Our environmental services group provides consulting and engineering services, environmental studies, remediation services and provide site specific solutions for any project that may have an environmental impact, from environmental due diligence to site-specific assessments and remediation. The Real Estate Services segment operates in the Mid-Atlantic Region.
The following table includes the Company’s two reportable segments of Asset Management and Real Estate Services, excluding discontinued operations, for the three and six months ended June 30, 2020 and 2019.
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Asset
Management
|
|
Real Estate
Services
|
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Total
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
Gross revenue
|
$
|
4,140
|
|
|
$
|
2,324
|
|
|
$
|
6,464
|
|
|
Gross profit
|
923
|
|
|
1,226
|
|
|
2,149
|
|
|
Net income
|
417
|
|
|
763
|
|
|
1,180
|
|
|
Total assets
|
13,627
|
|
|
4,518
|
|
|
18,145
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
Gross revenue
|
$
|
4,439
|
|
|
$
|
898
|
|
|
$
|
5,337
|
|
|
Gross profit (loss)
|
499
|
|
|
(11)
|
|
|
488
|
|
|
Net income (loss)
|
275
|
|
|
(353)
|
|
|
(78)
|
|
|
Total assets
|
3,923
|
|
|
3,396
|
|
|
7,319
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
Gross revenue
|
$
|
9,575
|
|
|
$
|
3,855
|
|
|
$
|
13,430
|
|
|
Gross profit
|
1,725
|
|
|
1,377
|
|
|
3,102
|
|
|
Net income
|
700
|
|
|
468
|
|
|
1,168
|
|
|
Total assets
|
13,627
|
|
|
4,518
|
|
|
18,145
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
Gross revenue
|
$
|
8,593
|
|
|
$
|
1,626
|
|
|
$
|
10,219
|
|
|
Gross profit
|
986
|
|
|
223
|
|
|
1,209
|
|
|
Net income (loss)
|
717
|
|
|
(339)
|
|
|
378
|
|
|
Total assets
|
3,923
|
|
|
3,396
|
|
|
7,319
|
|
19. DISCONTINUED OPERATIONS
On April 30, 2019, the Company entered into a the MTA with CDS, an entity wholly owned by Christopher Clemente, the Chief Executive Officer of the Company, and FR54, LC (“FR54”), an entity also controlled by Mr. Clemente, that sets forth certain transactions to complete the Company’s previously announced exit from the homebuilding and land development business in favor of a migration to an asset management model. Refer to Note 14 – Consolidation of Variable Interest Entities for further discussion regarding the accounting related to discontinued operations.
The Company did not carry any assets or liabilities from discontinued operations on the consolidated balance sheet as of June 30, 2020 and December 31, 2019.
The operating results of the discontinued operations that are reflected on the consolidated statement of operations within the net income (loss) from discontinued operations are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
Revenues
|
|
|
|
|
Revenue—homebuilding
|
$
|
6,845
|
|
|
$
|
13,614
|
|
|
Total revenue
|
6,845
|
|
|
13,614
|
|
|
Expenses
|
|
|
|
|
Cost of sales—homebuilding
|
6,898
|
|
|
13,620
|
|
|
Sales and marketing
|
67
|
|
|
181
|
|
|
General and administrative
|
19
|
|
|
20
|
|
|
Operating (loss)
|
(139)
|
|
|
(207)
|
|
|
Income tax expense
|
7
|
|
|
10
|
|
|
Net (loss) from discontinued operations
|
(146)
|
|
|
(217)
|
|
|
Net income attributable to non-controlling interests
|
13
|
|
|
313
|
|
|
Net (loss) attributable to Comstock Holding Companies, Inc.
|
$
|
(159)
|
|
|
$
|
(530)
|
|
20. SUBSEQUENT EVENTS
On July 30, 2020, the Company retired the unsecured seller-financed promissory note with an outstanding balance of $595 thousand. This financing carried an annual interest rate of LIBOR plus 3% and had a maturity date of July 17, 2022. In exchange for early retirement of the seller-financed promissory note, the Company received a discount on debt extinguishment of $50 thousand.
COMSTOCK HOLDING COMPANIES, INC.