Comstock Holding Companies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Dollar amounts below are in millions unless otherwise indicated.
Business context
Comstock operates primarily in the Washington, D.C. region, providing real estate asset-management and related services. After exiting homebuilding in 2019, it reports Asset Management and Real Estate Services as continuing segments. Its long-term Anchor Portfolio agreement is with an entity affiliated with CEO Christopher Clemente.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $6.966 | $4.882 |
| Gross profit | $0.953 | $0.721 |
| Operating income | $0.191 | $0.417 |
| Net income (loss) | $(0.012) | $0.085 |
| Cash from (used in) operations | $(1.908) | $3.393 |
- Revenue grew 42.8% year over year: Asset Management revenue increased to $5.435 million from $4.154 million; Real Estate Services revenue rose to $1.531 million from $0.728 million. Management attributed growth to reimbursable costs and property-management activity, and expansion in environmental consulting.
- Gross margin was approximately 13.7%, versus 14.8%; operating margin was approximately 2.7%, versus 8.5%. Higher direct costs, general and administrative expense, selling and marketing, and interest expense weighed on results.
- Continuing operations recorded a $0.012 million net loss, compared with $0.456 million income in Q1 2019. Q1 2019 total net income of $0.085 million also included a $0.371 million discontinued-operations loss.
- Cash and cash equivalents were $7.180 million at quarter-end, up from $3.511 million at year-end. Current assets were $12.434 million and current liabilities $7.535 million, for working capital of $4.899 million.
- Total notes payable were $12.492 million, compared with $6.995 million at December 31, 2019. This included $5.5 million borrowed under a new affiliate revolving line. The filing lists $5.782 million of 2020 maturities; the company said those obligations were paid on April 10, 2020.
- Equity-method real estate investments carried at fair value were $8.230 million, down from $8.421 million. Stockholders’ equity was $8.547 million; Series C preferred stock had a $17.203 million liquidation preference.
Material changes and unusual items
- Related parties generated $5.484 million, or about 79% of Q1 revenue. The filing identifies a substantial reliance on affiliate relationships, including the Anchor Portfolio arrangement.
- On March 19, 2020, the company secured a $10 million revolving line from CDS, an entity wholly owned by its CEO, at an initial rate of WSJ Prime plus 1%. It drew $5.5 million on March 27; the agreed maturity for that draw is April 30, 2023. On April 10, proceeds were used to retire the 10% Comstock Growth Fund debt.
- On April 20, after quarter-end, the company received approximately $1.95 million under the Paycheck Protection Program. The loan bears 1% interest, has a two-year term if not forgiven, and forgiveness depends on meeting program requirements.
- The company revised its Q1 2019 comparative figures for debt-discount accounting and gross presentation of certain payroll reimbursements. It said the errors were not material to prior periods and did not affect previously reported operating income or total cash flows.
Outlook, risks and controls
The company gave no specific financial guidance. It said COVID-19 had not significantly affected results to date, but warned that the pandemic could adversely affect markets, client financial condition, revenue, receivables, goodwill, investment values, liquidity and operating results; the duration and severity were uncertain. It reported no material legal proceedings and no off-balance-sheet arrangements.
Management concluded that disclosure controls and procedures were not effective at March 31, 2020, due to a material weakness involving review and reconciliation of debt balances and related discount amortization. Remediation efforts include adding technical accounting resources and more detailed debt reviews. The company also reported approximately $145 million of federal and state net operating loss carryforwards, potentially subject to limitation under ownership-change rules.
Investor verification priorities
- Verify the April 10 repayment of the Comstock Growth Fund debt and the terms, outstanding balance and related-party governance of the CEO-affiliated revolver.
- Track PPP loan forgiveness eligibility, use of proceeds and any repayment obligation.
- Assess the sustainability of revenue given that about 79% came from related parties, and review the termination and fee provisions of the Anchor Portfolio agreement.
- Monitor COVID-19 effects on client collections, property activity and fair-value estimates, including the Level 3 real estate investments.
- Follow remediation of the material weakness and confirm that debt accounting and reporting controls become effective.