Comstock Holding Companies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Dollar amounts below are in millions unless stated otherwise. The company is transitioning from homebuilding and land development to fee-based asset management and real estate services, primarily in the Washington, D.C. region.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.922 | $3.454 | $9.511 | $6.692 |
| Gross profit | $0.499 | $0.172 | $1.277 | $0.692 |
| Operating income (loss) | $(0.110) | $(0.225) | $0.330 | $(0.089) |
| Continuing-operations income (loss), net | $(0.094) | $0.316 | $0.346 | $0.487 |
| Net loss, including discontinued operations | $(0.253) | $(1.002) | $(0.184) | $(1.725) |
- Revenue increased about 42% year over year in both the quarter and first half. Asset management revenue was $4.024 million in Q2 and $7.885 million for six months; real estate services revenue was $0.898 million and $1.626 million, respectively.
- Gross margin improved to about 10.1% in Q2 from 5.0%, and to 13.4% for six months from 10.3%. The filing attributes revenue growth to reimbursable personnel and other costs under the amended management agreement, property-management growth, and expansion of environmental and consulting services.
- Interest expense rose to $0.132 million in Q2 from $0.024 million and to $0.166 million for six months from $0.048 million. The company recorded no income tax expense for continuing operations in 2019, primarily because of its net operating loss carryforwards.
- At June 30, cash and cash equivalents were $1.603 million; total assets were $27.986 million, total liabilities $20.973 million, and total equity $7.013 million. These balance-sheet totals include assets and liabilities classified as discontinued operations.
- Notes payable were $6.383 million, excluding debt presented within discontinued operations. The affiliate unsecured note accounted for $4.984 million, is due in 2020, and bears 10% interest. The filing reports $7.027 million of secured real-estate debt within discontinued-operation liabilities. No credit facilities or project loans were scheduled to mature in the remainder of 2019; management said obligations with lenders had been extended or repaid through August 14, 2019.
- The cash-flow statement reports $6.376 million of net cash provided by operating activities for the first half, including $7.013 million from discontinued operations; net cash used in investing activities was $0.042 million and net cash used in financing activities was $5.585 million. The reported ending cash, restricted cash and cash equivalents were $1.603 million.
Material changes and business developments
- On April 30, 2019, the company completed its exit from homebuilding and land development and shifted to two platforms: CDS Asset Management and Comstock Real Estate Services. Homebuilding operations were presented as discontinued operations. The discontinued business generated $6.845 million of Q2 revenue and a $0.159 million net loss attributable to Comstock; for six months it generated $13.614 million of revenue and a $0.530 million attributable net loss.
- The April 2019 amended asset management agreement with CDS, an entity wholly owned by CEO Christopher Clemente, covers a portfolio including Reston Station and Loudoun Station. Fees are based on the greater of a market-rate fee structure or reimbursed costs plus a fixed annual $1 million payment, with additional potential incentive and transaction fees. The agreement runs through 2027, subject to its termination provisions.
- In connection with the transfer transactions, the company issued 3.1 million Class A shares and 1.22 million Series C preferred shares to CDS. Class A shares issued increased from 3.704 million at year-end 2018 to 7.815 million at June 30, 2019. Preferred shares outstanding rose to 3.441 million, with a $17.203 million liquidation preference.
- On July 23, 2019, an amendment to the Comstock X operating agreement resulted in the company no longer considering Comstock X a variable interest entity. Its assets and liabilities were to be deconsolidated beginning in Q3 2019.
Outlook, risks, and unusual items
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management describes the strategy as asset-light and expects recurring management fees and real estate services to support growth, but these expectations are forward-looking and subject to execution and market risks.
- The company disclosed a material weakness in internal control over financial reporting related to accounting for complex second-quarter divestiture transactions. Management was implementing enhanced review procedures and use of outside accounting resources. Separately, the CEO and CFO concluded disclosure controls and procedures were effective as of June 30, 2019.
- Related-party concentration is significant: Q2 related-party revenue was $4.167 million of total $4.922 million, and the primary asset management client is controlled by the CEO. The company also leases its headquarters from a CEO affiliate.
- The company reported approximately $147 million of federal and state net operating losses, which begin expiring in 2027 if unused; a change in ownership under Section 382 could limit their use. Other stated risks include debt service, real-estate market conditions, government approvals, capital access, and maintaining Nasdaq listing compliance.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. The filing records no impairment charges in the first half of 2019, compared with $0.774 million in discontinued operations in the first half of 2018.
Investor verification priorities
- Verify the accounting, consideration, and final balance-sheet and cash-flow effects of the related-party divestiture, including the Q3 deconsolidation of Comstock X and remediation of the disclosed material weakness.
- Assess the sustainability and collectability of revenue from CDS and other related parties, and review the amended agreement’s fee calculation, termination rights, and incentive-fee provisions.
- Confirm repayment or extension terms for the $4.984 million affiliate note due in 2020 and the status of debt and obligations transferred with the discontinued homebuilding operations.
- Track cash generation from continuing operations separately from discontinued operations, and evaluate the impact of substantial share issuance and Series C preferred liquidation preferences on common shareholders.