Comstock Holding Companies, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated financial statements; amounts below are in millions except per-share data. Comstock operates asset management and real estate services businesses, primarily in the Washington, D.C. region, after exiting homebuilding in 2019.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $7.33 | $5.68 | $20.76 | $15.90 |
| Operating income | $0.48 | $0.17 | $1.97 | $0.60 |
| Net income (loss) | $0.42 | $(0.63) | $1.59 | $(0.78) |
| Diluted earnings (loss) per share | $0.05 | $(0.07) | $0.19 | $(0.13) |
- Q3 asset management revenue grew 24.5% to $5.89 million; real estate services revenue grew 52% to $1.44 million. For the nine months, the respective increases were 16.1% and 106%.
- Gross profit was $1.63 million in Q3 and $4.74 million for the nine months, compared with $0.62 million and $1.83 million in the prior-year periods. Gross margins were approximately 22% and 23%, respectively, versus approximately 11% and 12%.
- General and administrative expense increased to $1.03 million in Q3 and $2.26 million year to date, primarily from higher personnel and equity compensation costs. Nine-month selling and marketing expense was $0.51 million, compared with none in 2019.
- Cash and cash equivalents were $4.49 million at September 30, versus $3.51 million at year-end 2019. Current assets were $9.38 million and current liabilities $2.34 million.
- Nine-month operating cash flow was $2.66 million, versus $6.91 million in 2019; the prior-year figure included $7.43 million from discontinued operations. Investing cash use was $0.11 million and financing cash use was $1.57 million. Ending cash increased by $0.98 million.
- Total notes payable were $5.52 million, including $5.50 million owed to an affiliate and due in 2023. The company had repaid its prior $5.7 million affiliate note. A $10 million affiliate revolver was established, with $5.5 million drawn; its stated rate is WSJ Prime plus 1%.
Changes, outlook and significant items
- Performance improved against the prior-year periods, with higher revenue and a return to net income. Management attributed growth to reimbursable costs and expansion under its asset management arrangements, as well as organic growth in real estate services.
- The 2019 Asset Management Agreement (AMA) with an entity controlled by the CEO is a major revenue foundation. It covers the Anchor Portfolio, runs through December 31, 2027, and provides fees based on the greater of specified market-rate fees or cost-plus charges. Additional incentive and transaction-related fees may apply.
- Related parties accounted for $5.96 million, or about 81%, of Q3 revenue and $16.03 million, or about 77%, of nine-month revenue. Related-party receivables were $3.02 million at quarter-end; no allowance is recorded for them.
- The company received a $1.95 million Paycheck Protection Program loan and recognized the proceeds as a reduction of eligible expenses, treating the loan as a government grant because management considered forgiveness probable. The loan balance was reported as zero at September 30, but forgiveness had not been confirmed; the company said it planned to submit an application.
- Management reported no significant COVID-19 impact to results to date, but said continued disruption could adversely affect customers, revenue, receivables, goodwill, the Investors X investment, results and liquidity. No specific financial guidance was provided.
- A $66,000 payroll-tax deferral was included in accrued personnel costs; half is due December 31, 2021 and half December 31, 2022. A new ten-year headquarters lease with an affiliate commenced November 1, 2020.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It disclosed that 2019 comparative figures were revised for identified accounting errors; management said the errors were not material to prior periods and did not affect previously reported operating income or total cash flows.
- For the nine months, the statement of operations reports 2019 interest expense of $0.30 million; the MD&A text gives a different comparative figure. The filing text does not provide a clear reconciliation.
Important facts for investors to verify
- Progress and outcome of the PPP loan forgiveness application, including any repayment obligation if forgiveness is denied or reduced.
- Continuing reliance on CEO-affiliated entities for revenue, receivables, the affiliate revolver, and the headquarters lease; review the terms and governance protections for these arrangements.
- Liquidity and debt-service capacity, including the affiliate revolver’s interest terms and the $5.5 million maturity in 2023.
- The economic implications of Series C preferred stock, which has a stated liquidation preference of $17.2 million, compared with reported total stockholders’ equity of $10.5 million.
- COVID-19 exposure and the valuation assumptions for the Level 3 real estate investments, particularly Investors X.
- The differing 2019 interest-expense comparative figures in the financial statements and MD&A, and the effects of the prior-period revisions.