Comstock Holding Companies, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unless indicated otherwise, amounts are in millions of dollars. The company has shifted from homebuilding to asset management and real estate services, primarily in the Washington, D.C. region; homebuilding is reported as discontinued operations.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $6.464 | $5.337 | $13.430 | $10.219 |
| Operating income | $1.299 | $0.011 | $1.490 | $0.428 |
| Net income (loss) | $1.180 | $(0.237) | $1.168 | $(0.152) |
| Diluted continuing-operations EPS | $0.14 | $(0.01) | $0.14 | $0.07 |
| Operating cash flow | Not presented quarterly | $0.656 provided, per cash flow statement | $0.964 provided |
- Quarterly revenue grew 21.1%; six-month revenue grew 31.4%. Real estate services revenue rose 159% in Q2 and 137% year to date, while Q2 asset management revenue fell 6.7% and six-month asset management revenue increased 11.4%.
- Q2 operating margin was approximately 20.1% (2019: 0.2%); six-month operating margin was approximately 11.1% (2019: 4.2%). These are calculated from reported revenue and operating income.
- At June 30, cash was $3.143, current assets $8.413, and current liabilities $2.125 (current ratio approximately 4.0). Total assets were $18.145 versus $19.933 at year-end 2019.
- Total notes payable were $6.151, down from $6.995 at year-end. This included $5.519 owed to an affiliate and $0.632 of other notes. The company had drawn $5.5 of a $10.0 million affiliate revolving line.
- Equity-method investments at fair value were $7.616, down from $8.421. Series C preferred stock had a reported liquidation preference of $17.203; total company equity was $9.921.
Material changes and unusual items
- The company received $1.954 under the Paycheck Protection Program and recorded the full amount as a government grant reducing expenses, leaving no PPP loan balance on the June 30 balance sheet. Management said it expected full forgiveness and planned to apply, but acknowledged forgiveness was not objectively assured. The PPP grant also reduced billable payroll revenue.
- The affiliate revolver funded repayment of approximately $5.7 million of Comstock Growth Fund debt. On July 30, 2020, the company separately retired a $0.595 million seller-financed note at a $0.050 million discount; the gain was to be recorded in Q3.
- Six-month operating cash flow is inconsistent within the filing: the cash flow statement reports $0.656 million provided, while MD&A describes $0.656 million used. The cash flow statement reports $0.073 million used in investing activities; MD&A wording on investing cash flow is also inconsistent. Investors should consult the filed statements and any subsequent clarification.
- The company revised 2019 comparative figures for debt-discount amortization and gross presentation of reimbursed salary costs. It said the errors were not material to prior periods and did not affect operating income or total cash flows.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said it had not seen a significant COVID-19 impact on results to date, but warned that prolonged disruption could affect customers, property-management revenue, receivables, investment valuations, goodwill, results and liquidity.
- Revenue concentration is significant: related parties accounted for $4.589 million of Q2 revenue and $10.073 million for the first six months. The principal asset-management agreement is with an entity affiliated with the CEO; related-party arrangements and receivables warrant scrutiny.
- The company reported approximately $143 million of federal and state net operating losses, which could be limited or impaired by an ownership change. It recorded no material legal proceedings and reported no off-balance-sheet arrangements.
- A material weakness in controls over debt-balance review and debt-discount amortization had been identified in late 2019 and Q1 2020. Management described remediation steps and concluded disclosure controls were effective as of June 30, 2020.
Important facts for investors to verify
- Reconcile the conflicting MD&A and cash flow statement descriptions of operating and investing cash flows.
- Track PPP forgiveness status, including any repayment obligation if forgiveness is denied or reduced.
- Assess dependence on CEO-affiliated customers and lenders, the terms of those arrangements, and collection of related-party receivables.
- Review debt maturities, availability and terms of the affiliate revolver, and the subsequent seller-note retirement.
- Evaluate the potential dilution from equity awards and warrants, and the preferred stock’s liquidation preference relative to common equity.