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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32375
Comstock Holding Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
20-1164345
(I.R.S. Employer
Identification No.)
1886 Metro Center Drive, 4th Floor, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
(703) 230-1985
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, par value $0.01 per share
Preferred Stock Purchase Rights
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files). ☒
Yes ☐
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant based on the last reported sale price of the registrant’s common equity on the Nasdaq Capital Market (“NASDAQ”) on
June 30, 2018, which was the last business day of the registrant’s most recently completed second fiscal quarter, was $4,405,580. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are
deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.
As of March 20, 2019, there were 3,663,843 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share, and 220,250 shares of the registrant’s Class B common stock, par value $0.01 per share.
Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders or Annual Report on Form 10-K, to be filed within 120 days after the registrant’s fiscal year ended December 31, 2018, are
incorporated by reference into Part III of this Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
SIGNATURES
COMSTOCK HOLDING COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2018
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1
1
11
26
26
26
27
28
28
28
29
37
37
37
37
38
39
39
39
39
39
39
40
40
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CAUTIONARY NOTES REGARDING FORWARD-LOOKING STATEMENTS
PAR T I
Some of the statements contained in this Annual Report on Form 10-K include forward-looking statements. These forward-looking statements can be
identified by the use of words such as “anticipate,” “believe,” “estimate,” “may,” “likely,” “intend,” “expect,” “will,” “should,” “seeks” or other similar
expressions. Forward-looking statements are based largely on our expectations and involve inherent risks and uncertainties including certain risks described in this
Annual Report on Form 10-K. When considering those forward-looking statements, you should keep in mind the risks, uncertainties and other cautionary
statements made in this Annual Report on Form 10-K. You should not place undue reliance on any forward-looking statement, which speaks only as of the date
made. Some factors which may affect the accuracy of the forward-looking statements apply generally to the real estate industry, while other factors apply directly
to us. Any number of important factors which could cause actual results to differ materially from those in the forward-looking statements include: our ability to
transition our business strategy and operating platform and secure any necessary funding for such transition and future growth; general economic and market
conditions, including interest rate levels; changes in the commercial real estate market; our ability to service our debt; inherent risks in investment in real estate; our
ability to attract and retain clients; our ability to compete in the markets in which we operate; regulatory actions; fluctuations in operating results; our anticipated
growth strategies; shortages and increased costs of labor or building materials; the availability and cost of land in desirable areas; adverse weather conditions and
natural disasters; our ability to raise debt and equity capital and grow our operations on a profitable basis and our continuing relationships with affiliates.
Our actual results could differ materially from these projected or suggested by the forward-looking statements. The Company undertakes no obligation to
update publicly or revise any forward-looking statements in light of new information or future events, except as required by law. For a discussion of factors that
could cause actual results to differ, please see the discussion in this Annual Report on Form 10-K under the heading “Risk Factors” in Item 1A.
Item 1. Business
The following business description should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K.
Financial information for each of our reportable segments is included in Note 2 to our consolidated financial statements.
Throughout this annual report on Form 10-K, amounts in thousands, except per share data, number of units, or as otherwise noted.
Overview
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted real estate asset management, development and
services company primarily focused in the Washington, D.C. Metropolitan Statistical Area (“MSA”) of the United States. In 2018, the Company began to transform
its operational platform from for sale production homebuilding to asset management, commercial development and complementary real estate related services. As
part of the transformation, the Company now operates through two primary real estate focused platforms – CDS Asset Management, LC (“CAM”) and Comstock
Real Estate Services, LC (“CRES”) and is in the process of winding down its on-balance sheet production homebuilding business. References in this Annual Report
on Form 10-K to “Comstock,” “Company”, “CAM”, “CRES”, “we,” “our” and “us” refer to Comstock Holding Companies, Inc. together in each case with our
subsidiaries and any predecessor entities unless the context suggests otherwise.
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Available Information
We make available, as soon as reasonably practicable, on our website, www.comstockcompanies.com
, all of our reports required to be filed with the
Securities and Exchange Commission (SEC). The SEC maintains an internet site that contains these reports, proxy statements and other information at
www.sec.gov
. In addition, these reports are available free of charge on the “Investor Relations” page of our website under “SEC Filings” and include our annual
and quarterly reports on Form 10-K and Form 10-Q (including related filings in XBRL format), current reports on Form 8-K, proxy statements and amendments to
such reports. In addition to our SEC filings, our corporate governance documents, including our Code of Ethics for the Chief Executive Officer and senior financial
officers and Code of Conduct applicable to all employees and directors are available on the “Investor Relations” page of our website under “Corporate
Governance.”
Our principal executive offices are located at 1886 Metro Center Drive, 4th Floor, Reston, Virginia 20190 and our telephone number is (703) 230-1985.
Information on or linked to our website is not incorporated by reference into this Annual Report on Form 10-K unless expressly noted.
Our Business Strategy
In 2018, we began winding down our on-balance-sheet, for-sale homebuilding operation and refocusing our operations on commercial real estate
development, asset management and real estate related fee-based services. As a result, the Company began operating through two real estate focused platforms,
CDS Asset Management ("CAM") and Comstock Real Estate Services ("CRES"). CAM provides real estate development, asset management, and property
management services, while CRES provides development supply chain services, including capital markets, real estate brokerage, environmental consulting and
design services in the Washington, DC metropolitan area and in New Jersey and Pennsylvania.
We believe that Comstock's substantial experience in entitling, designing, developing, and managing a diverse range of properties including apartments,
single-family homes, townhomes, mid-rise condominiums, high-rise condominiums and mixed-use (residential and commercial) properties, as well as large scale
commercial parking garages and transit related projects, positions the CAM subsidiary to capitalize on commercial development and asset management
opportunities in the Washington, DC region. Our CRES subsidiary is well positioned to capitalize on market opportunities related to providing development supply
chain services, including capital markets, brokerage, environmental consulting and other real estate related services in the Washington, DC metropolitan area and in
other parts of the Washington, D.C. MSA.
In connection with our new strategy, and anchoring the transition of our operations, the Company entered into a Master Asset Management Agreement
(“AMA”), effective as of January 2, 2018, through its CAM subsidiary with Comstock Development Services, LC (“CDS”), an entity wholly owned by the Chief
Executive Officer of the Company. The AMA covers two large-scale, transit-oriented, mixed-use developments in the Washington, DC area; Reston Station, a
multi-million square foot development located in Reston, VA, and Loudoun Station, a multi-million square foot development in Ashburn, VA, as well as a mixed-
use development asset located in Herndon, VA. Separately, the Company also entered fee-based management agreements with unrelated third parties concerning a
mixed-use property in Tysons Corner, VA, and an affordable housing multi-family development in Rockville, MD.
Pursuant to the AMA, CDS has engaged CAM to manage and administer the CDS commercial real estate portfolio (“CRE Portfolio”) and the day to-day
operations of CDS and each property-owning subsidiary of CDS. Pursuant to the terms of the AMA, CAM provides investment advisory, development and asset
management services related to the build out, lease-up and stabilization, and management of the CRE Portfolio. CDS pays the Company fees for the services
provided by the Company in connection with the CDS portfolio of assets under management (“AUM”) calculated on a cost-plus basis, thereby protecting the
Company from incurring operating costs related to asset management services being provided to CDS in excess of fees collected during the transition, while also
enabling the Company to expand its operating capabilities through the addition of qualified managers with experience in growing AUM.
In addition to the asset management services provided by CAM to CDS, the Company’s CRES subsidiary is focused on generating growth organically and
through potential acquisitions of operating businesses that would provide complementary development and supply chain services to assets under management
pursuant to the AMA as
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well as to unrelated third parties in the areas of environmental consulting, mortgage brokerage, and capital market and financial consulting services.
We believe that we have several strengths that distinguish our new business focus and strategy:
•
•
•
•
•
•
•
•
Revenue
Base.
Our revenues are primarily generated from recurring fees earned under the AMA and operations of our CRES subsidiary. The AMA
provides a reliable cost-plus source of revenue and cashflow to cover the Company’s operating expenses related to the services being provided to
CDS pursuant to the AMA, positioning the Company to enhance bottom line results and pursue additional revenue growth .
Management
Services
. Our experienced asset management professionals provide management services to a wide range of real estate assets and
businesses that include a variety of commercial real estate uses, including apartments, office buildings, hotels, commercial garages, leased lands,
retail stores, mixed-use developments, and transit-oriented developments. Our management team has significant capabilities generated through
decades of experience managing large-scale projects and portfolios of commercial real estate development, construction, and property and asset
management services. The properties and businesses we currently manage are located primarily along the Dulles Corridor section of the
Washington DC Metro Silver Line in Fairfax and Loudoun Counties.
Real
Estate
Services
. Our experienced real estate services-based management team provides a wide range of real estate services in the areas of
strategic corporate planning, capital markets and financial consulting services, commercial mortgage brokerage services, and environmental and
design-based services. Our environmental services group provides consulting, environmental studies, remediation services and site-specific
solutions for properties that may benefit from environmental due diligence, site-specific assessments, and environmental remediation. The real
estate services business platform allows us to generate positive fee income from our highly qualified personnel and serves as a potential catalyst for
joint venture and acquisition opportunities.
Homebuilding
. We will continue to wind-down our for-sale homebuilding operation and with the intention of completing the wind-down as
quickly and efficiently as possible. In connection with the winding-down of our for-sale homebuilding operations, we may continue to develop,
construct, and market individual homes and building lots for sale until we have depleted our inventory of such products or identified a means of
completing the wind-down in an expediated manner. We will substantially complete our production homebuilding operations by the second quarter
of 2019 but anticipate residual land development activities and finished lot sales to third party homebuilders to continue beyond
2019. Additionally, the Company may engage in homebuilding activities from time to time if self-performance of our residual lot inventory
pipeline is deemed the best financial alternative. Any future homebuilding activities are expected to be provided off balance sheet on an asset
management basis.
Quality
and
Depth
of
Management
. We have a highly qualified and experienced management team providing a broad base of deep expertise and a
proven track record to our clients. The combination of the new platforms leverages the diverse capabilities and relationships of the management
teams of the Comstock organization developed over more than thirty years.
Alignment
of
Interests
. We believe our new business strategy fosters a strong economic alignment of interests with our shareholders due to our
Chief Executive Officer’s large economic interest in the Company and in the portfolio being managed by the Company pursuant to the AMA.
Operating
Efficiencies.
As previously reported, the transition of our business focus and new strategy required the combination of the operating
platform of the Company and the operating platform of the privately held commercial development company controlled by the Company’s Chief
Executive Officer. The integration of the two operating platforms has significantly enhanced the operating capabilities of the Company while
providing opportunities for additional operational efficiencies and management alignment.
Fee-Based
Service
Platform
. Our asset-light business strategy, adopted in 2018, has contributed to our ability to materially reduce our liabilities
during 2018 and we believe will contribute to our ability to produce positive results in future periods.
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The Company’s various bus iness units work in concert to leverage the collective skill sets of our organization. The talent and experience of our personnel
allows workflow flexibility and a multitasking approach to managing various projects. We believe that our business network in the Washington, D.C. MSA
provides us with a competitive advantage in sourcing and executing on investment opportunities.
While Comstock has developed numerous properties in multiple key markets throughout the southeastern United States, and our management team has experience
managing large regional portfolios, we believe the Washington, DC MSA provides continued growth opportunity in the near-term for several reasons, including the
following:
•
•
•
•
•
•
•
Long
Track
Record
. Comstock has been active in the Washington, DC MSA since 1985 and has developed, acquired, and managed thousands of
residential units and millions of square feet of mixed-use properties, throughout the region.
Multiple
Public-Private
Partnerships
. Comstock has been selected by multiple local governments (Fairfax County, Loudoun County, and Town of
Herndon) to develop and manage large-scale mixed-use, and transit facility developments through public-private partnerships at a time when local
jurisdictions are focused on public-private partnerships as a means of leveraging private sector capabilities to meet public infrastructure development
needs.
Economic
Drivers
. Significant growth trends in demand for cyber security and other technology services in the government sector, as well as in the
private sector, has generated growth opportunities for tech companies, generating numerous start-ups, and is attracting big tech to the region. Further,
Northern Virginia’s data center market, primarily the Dulles Corridor, has seen record growth and has become the global leader in data center space
while accounting for more than 40% of national data center space absorption in recent years.
Diverse
Employment
Base
. The diverse and well-educated employment base in the Washington, DC MSA, coupled with proximity to the federal
government and the presence of well-established government contractors is contributing to the attractiveness of the region to tech companies.
Metro’s
Silver
Line.
Phase I of Metro’s Silver Line opened in 2014, connecting Tysons Corner and Reston to Arlington and downtown Washington,
DC. Phase II is scheduled to open in early 2020 and will extend service from the terminus of Phase I located in the center of Comstock’s Reston Station
development to Herndon, Dulles International Airport, and Loudoun County, terminating at Comstock’s Loudoun Station development.
Regional
Land
Use
Plans.
Recent changes to Comprehensive Land Use Plans of Fairfax County and Loudoun County encourage high density and
mixed-use development proximate to the new Silver Line Metro Stations.
Increased
Demand
for
Transit-Oriented
and
Mixed-Use
Developments
. Recent trends indicate commercial tenants are increasingly seeking to locate
(or relocate) office to Metro Accessible sites and have demonstrated a willingness to pay premium rents for commercial space because proximity to
Metro in urban, mixed-use developments has become a key recruiting tool. Additionally, demand for housing in transit-oriented, mixed-use
neighborhoods has increased steadily over the past decade while home ownership rates have decreased and demand for high quality rental housing has
increased.
Comstock has been focused on these emerging trends for more than a decade and the Company, through the AMA, controls the development and asset management
of a significant portfolio at the forefront of the urban transformation taking place in the Dulles Corridor. With a stabilized portfolio and development pipeline that
includes millions of square feet of mixed-use and transit-oriented properties located at key Metro stations in the Dulles Corridor, Comstock is well positioned to
capitalize on trends that we believe will shape the future commercial real estate landscape.
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Our Operations
We believe that we are properly staffed for current market conditions and have the ability to manage growth as market conditions warrant. Our operations
are focused mainly in the Washington, D.C. MSA, where we believe our over 30 years of experience provides us the best opportunity to enhance stockholder value.
Our Managed Communities
Reston Station . Reston Station is among the largest mixed-use, transit-oriented developments in the Washington D.C. MSA. Located at the terminus of
phase I of Metro’s Silver Line, the Reston Station neighborhood will contain approximately 4.5 million square feet of mixed-use development covering almost 40
acres spanning the highly-trafficked Dulles Toll Road and surrounding Metro’s Wiehle Reston-East Metro Station, the terminus station on Phase I of the Silver
Line and the only Metro rail station currently in Reston, VA. The Company is providing a wide variety of its real estate and asset management services to the
project pursuant to the AMA, including development and construction management services, leasing management services, property management services, and
capital markets services. The Reston Station neighborhood is being developed in four distinct districts as follows:
• Metro Plaza District . The Metro Plaza District has entitlements in place that allow for up to 1.7 million square feet of mixed-use
development in five buildings on approximately 7 acres leased pursuant to a long term ground lease with Fairfax County situated directly above the Reston Station
Transit Facility, a 1.8 million square foot underground transit facility that includes approximately 2,300 parking spaces operated by Fairfax County as a Metro
commuter parking facility, and approximately 1,200 parking spaces operated by the Company as a parking facility for retail and office users, as well as Metro
commuters. As of December 31, 2018, construction has been completed on three of the five buildings located above the Reston Station Transit Facility including a
370,000 square foot Trophy-Class office tower, a portion of which has been leased to Google and other corporate users, and the two remaining buildings containing
additional Class A office space and ground floor retail are in various stages of development, construction, and leasing. The Metro Plaza District portion of the
Reston Station development, including the transit facility and parking garage, is the subject of a Public-Private Partnership agreement between the Board of
Supervisors of Fairfax County, Virginia and Comstock Reston Station Holdings, LC, an entity affiliated with CDS.
• Promenade District . The Promenade District has entitlements in place that allow for approximately 1.4 million square feet of mixed-use
development on approximately 8 acres situated adjacent to Reston Station’s Metro Plaza District and the Reston Station Transit Facility. As of December 31, 2018,
the Company is providing asset management services for the existing buildings consisting of approximately 70,000 square feet of office space constructed prior to
1995, while designing new buildings that will be constructed on the site including office, retail, residential and hotel uses. Marriott International has entered into a
franchise agreement with an affiliate of CDS concerning the development and operation of a Marriott Renaissance Hotel and residential tower that is planned to be
developed as the first phase of the Promenade District, including approximately 240 hotel rooms, approximately 80 residential units and retail, entertainment and
conference spaces.
• Commerce District . The Commerce District has entitlements in place that allow for approximately 1.5 million square feet of mixed-use
development, including three existing Class-A office buildings that include a total of approximately 400,000 square feet. The Commerce District property is
situated on approximately 12 acres located adjacent to the south entrance to the Wiehle Reston-East Metro Station and lies directly across the Dulles Toll Road
from the Metro Plaza District of Reston Station and the Reston Station Transit Facility. Currently, Comstock is leasing and managing the three existing office
buildings while it is also developing designs for new buildings that will include up to 1.1 million square feet of office, retail, hotel and residential uses. The
Commerce District property was acquired by a subsidiary of CDS in 2019. The Company is providing a variety of asset management and development services
related to the Commerce District property, which was acquired by an affiliate of CDS in 2019.
• Comstock District . The Comstock District at Reston Station consists of 8.5 acres of land located adjacent to the Promenade District, and
currently is the home to Comstock’s corporate headquarters. The Comstock
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District has entitlements in place to allow for approximately 770,000 square feet of mixed-use development, including an existing 90,000 square foot Class A offi
ce building with Comstock’s corporate headquarters, an existing 418-unit residential apartment building owned by an entity not affiliated with Comstock, and
entitlements for additional residential buildings and office/retail uses. The Company is providing a variety of asset management and development services related
to the portion of the Comstock District property, which is owned by an affiliate of CDS.
Loudoun Station . Loudoun Station, located at the terminus of Phase II of Metro’s Silver Line is Loudoun County’s first Metro connected development and
represents Loudoun County’s beginning transformation into a transit connected community with direct metro rail connectivity to Dulles International Airport,
Reston, Tysons Corner, and downtown Washington, D.C. Currently, Loudoun Station has approximately 700,000 square feet of mixed-use development completed,
including approximately 357 residential units, 50,000 square feet of Class-A office space, 118,000 square feet of ground floor retail spaces, and a 1,500-space
commuter parking garage. Phase II of Metro’s Silver Line is under construction and expected to commence passenger service in early to mid-2020. Construction
of the next phase of residential, retail and commercial space commenced in 2018 and is expected to be completed in early-2020. The Company is providing a
variety of its real estate and asset management services related to the existing buildings and future development pursuant to the AMA, including development and
construction management services, leasing management services, property management services, and capital markets services.
Herndon Station . On November 1, 2017, an affiliate of CDS entered into a public-private partnership with the Town of Herndon, Virginia to acquire,
develop, and construct a mixed-use project in the historic downtown area of the Town of Herndon. The development will include up to approximately 500,000
square feet of residential, retail and entertainment spaces, including a performing arts center. The project will also include a large parking garage for public and
private use and also anticipates improvements to existing connections to the adjacent WO&D trail. The Company is providing a variety of asset management and
development services related to the Herndon Station development pursuant to the AMA.
Shady Grove Metro . In the 2nd quarter of 2018, we conveyed the building pad site for 110 multifamily dwelling units in Rockville, Maryland adjacent to
the Shady Grove Metro Station to a joint venture between a subsidiary of the Company and Stratford Capital, LLC (the “JV”). The JV commenced construction of
the project in late-2018 and is expected to be completed in 2019. The project is being developed as a low-income housing tax credit (LIHTC) project. The
Company is providing a variety of asset management and real estate development management services to the project through its completion pursuant to an asset
management agreement with the JV.
International Gateway . In 2018, CAM entered into an asset management agreement with an unaffiliated property owner to provide asset management,
property management and consulting services for a portfolio of two mixed-use retail/office buildings in Tysons Corner, Virginia, known as International Gateway.
Our Recent Acquisitions to Perform Services
On July 17, 2017, JK Environmental Services, LLC (“JK”), an entity wholly owned by CDS Capital Management, L.C., a subsidiary of the Company,
purchased all of the business assets of Monridge Environmental, LLC pursuant to an Asset Purchase Agreement dated July 14, 2017 for a purchase price of Two
Million Forty Thousand Dollars ($2,040,000). JK has its principal office located in Conshohocken, Pennsylvania, and operates in Maryland, Pennsylvania, New
Jersey, and Delaware. In August 2018, JK changed its name to Comstock Environmental Services, LC (“Comstock Environmental”) which will continue to operate
as an environmental services company, providing consulting, remediation, and other environmental services to its clients.
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Our Developed Homebuilding Communities
We are currently winding down the on balance sheet homebuilding projects in the Washington, D.C. MSA. The following communities remained active in
the year ended December 31, 2018:
The Estates
at
Leeland
is a community located in Fredericksburg, Virginia. The property is being developed as 24 single-family units. As of December 31,
2018, we have 1 building lot remaining in inventory, which is under contract to be sold to a third-party homebuilder pursuant to a land purchase agreement.
Marrwood
East
is a residential project in Loudoun County, Virginia. The property was developed as 35 single-family units. All 35 single-family units were
constructed and delivered to third-party purchasers as of December 2018.
The
Towns
at
1333
is a townhome community located in Alexandria, Virginia. The property was developed as 18 condominium townhome units. All 18
units were constructed and delivered to third-party purchasers as of December 2018.
Richmond
Station
is a development located in Prince William County, Virginia. We are currently developing the land into building lots for 104 townhomes
and 54 multi-family units, all of which are under contract to be sold to two separate third-party homebuilders pursuant to land purchase agreements. Land
development commenced in 2018.
The
Townes
at
Shady
Grove
Metro
is a residential community in Rockville, Maryland, adjacent to the Shady Grove Metro rail station consisting of 36
townhomes, and 3 single-family units. As of December 31, 2018, we have constructed and delivered 30 units, including the 3 single-family units. The remaining 9
townhome lots are under contract to be sold to a third-party homebuilder pursuant to a land purchase agreement.
Momentum
at
Shady
Grove
Metro
is an affordable housing residential development in Rockville, Maryland, adjacent to the Shady Grove Metro rail station
consisting of 110 multi-family units. During 2018, we sold this land to a joint-venture between the Company and a third-party developer of affordable housing
communities. Construction commenced in 2018 and is expected to be complete in 2019.
The
Woods
at
Spring
Ridge
is a residential project in Frederick, Maryland. The property is being developed as 21 single-family units. A majority of the
units were sold during 2018. As of December 31, 2018, we have closed on 9 units and we have 4 units in backlog.
Solomons
Choice
is a residential project located in Anne Arundel County, Maryland. The property was being developed as 56 single-family units. In the
third quarter of 2018, consistent with our strategy to wind-down our for-sale homebuilding operation, we exited this project after selling 1 unit.
The
Townes
at
Totten
Mews
are located in the Northeast quadrant of Washington, D.C. This property is being developed as 40 townhome units. A majority
of the units were sold during 2018. As of December 31, 2018, we have closed on 24 units and there were 12 units in backlog.
Backlog
As of December 31, 2018, we had 16 units in backlog representing revenue of approximately $10.4 million, compared to 20 units in backlog representing
revenue of approximately $13.9 million as of December 31, 2017.
Land/Lot Acquisition and Inventory Management
While the Company is transitioning away from homebuilding as a primary revenue source, the Company and its subsidiaries continue to have ongoing
homebuilding operations. We attempt to mitigate our exposure to real estate inventory risks by utilizing land/lot option contracts, where possible, generally
commencing construction of custom features or optional upgrades on homes under contract only after the buyer’s receipt of mortgage approval and receipt of
satisfactory deposits from the buyer and monitoring and managing the number of speculative units
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built in each community . We are currently a party to se veral joint ventures, all of which are consolidated in our financial statements.
Going forward, with the change in strategy in 2018, the Company does not intend to acquire new homebuilding projects on balance sheet and will limit its
role to providing a variety of asset management services to homebuilding projects owned by third parties and we do not anticipate such future projects to be
consolidated on our financial statements.
Land Development and Home Construction
Substantially all of our land development and home construction work is performed by subcontractors. Subcontractors typically are selected after a
competitive bidding process and retained for a specific community pursuant to a contract that obligates the subcontractor to complete the scope of work at an
agreed-upon price. Agreements with the subcontractors and suppliers generally are negotiated for each community. We compete with other homebuilders for
qualified subcontractors, raw materials and lots in the markets where we operate. We employ land development supervisors and construction superintendents to
monitor land development and home construction activities, participate in major design and building decisions, coordinate the activities of subcontractors and
suppliers, review the work of subcontractors for quality and cost control and monitor compliance with zoning and building codes. In addition, our construction
superintendents play a significant role in working with our homebuyers by assisting with option selection and home modification decisions, educating buyers on the
construction process and instructing buyers on post-closing home maintenance.
Our home designs are selected or prepared in each of our communities to appeal to the tastes and preferences of local homebuyers. We also offer optional
interior and exterior features to allow homebuyers the opportunity to enhance the basic home design and to allow us to generate additional revenue from each home
sold. Construction time for our homes depends on the weather, availability of labor, materials and supplies, size of the home, and other factors. We typically
complete construction of a home within three to six months.
We typically do not maintain significant inventories of land development or home construction materials, except for work in progress materials for homes
under construction. Generally, the construction materials used in our operations are readily available from numerous sources.
Marketing and Sales
We market and sell our homes primarily through commissioned employees. A significant number of our home closings also involve an independent real
estate broker representing the buyer. We typically conduct home sales from sales offices and/or furnished model homes in each community. Our sales personnel
assist prospective homebuyers by providing floor plans and price information, demonstrating the features and layouts of model homes and assisting with the
selection of options and other custom features. We train and inform our sales personnel on the availability of financing, construction schedules, and marketing and
advertising plans. As market conditions warrant, to be competitive, we may provide potential homebuyers with one or more of a variety of incentives, including
closing cost assistance, discounts and free upgrades.
We market our homes and communities to prospective homebuyers and real estate brokers through electronic media, including email, social networking
sites and our company website, as well as brochures, flyers, newsletters and promotional events. We attempt to position our communities in locations that are
desirable to potential homebuyers and convenient to or visible from local traffic patterns, which helps to reduce advertising costs. Model homes play a substantial
role in our marketing efforts, and we expend significant effort and resources to create an attractive atmosphere in our model homes.
We manage inventory to build a limited number of speculative homes in our communities. Speculative homes enhance our marketing and sales efforts to
prospective homebuyers who are relocating to these markets, as well as to independent brokers, who often represent homebuyers requiring a home within a short
time frame. We determine our speculative homes strategy based on local market factors, such as new job growth, the number of job relocations, housing demand
and supply (including new homes), seasonality, current sales contract cancellation trends and our
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past experience in the local markets. We maintain a low level of speculative home inventory in each community based on our current and planned sales pace, and
we monitor and adjust speculative home inventory on an ongoing basis as conditions warrant. Speculative homes help to provide us with opportunities to compete
effectively with existing homes available in the market and i mprove our profits and returns on our inventory of owned lots.
Quality Control
We provide our single-family and townhouse home buyers with a one-year limited warranty covering workmanship and materials. The limited warranty is
transferable to subsequent buyers not under direct contract with us and requires that all home buyers agree to the definitions and procedures set forth in the
warranty. Typically, we provide our condominium home buyers with a two-year limited warranty, or as required by statute. In addition, we periodically provide
structural warranty of longer durations pursuant to applicable statutory requirements. From time to time, we assess the appropriateness of our warranty reserves and
adjust accruals as necessary. Based on historical experience and when deemed appropriate by us, we may accrue additional warranty reserves. We require our
general contractors and sub-contractors to warrant the work they perform and they are contractually obligated to correct defects in their work that arise during the
applicable warranty period. We seek to minimize our risk associated with warranty repairs through our quality assurance program and by selecting contractors with
good reputations, sufficient resources and adequate insurance. It is typical that there is a gap in the warranty coverage provided by contractors and by home
builders, which we have self-insured in the past. It is our experience that the warranty claims which we have self-insured have not been significant in nature, but we
periodically obtain additional insurance to protect against this unquantifiable risk.
Competition
The real estate asset management and services industry is highly competitive. Our growth will depend upon our ability to professionally manage the assets
subject to the AMA and to expand our services to new clients in the markets in which we operate on a cost-efficient basis. We compete with other businesses in the
real estate management and asset management businesses on the basis of price, location, experience, service and reputation. Many of these competitors are larger
than us and operate on a national or global scale and they and their clients may have greater technical, marketing and financial resources than we currently provide
to our clients. Such competitors may also enjoy competitive advantages that result from, among other things, lower costs of capital, greater business scale and
enhanced operating efficiencies. Their larger scale and broad national or global presence may allow them to offset downturns in certain localized markets or
seasonality related to certain services with increased or steady operations in other markets. We also face competitors on a local and regional basis. Certain
competitors may also be subject to different regulatory requirements or rules that may allow them more flexibility or better access to pursue potential investments
and raise capital for themselves or their managed companies. In addition, certain competitors may have higher risk tolerance, different risk assessments or lower
return thresholds, which could allow them to consider a broader range of investments and to bid more aggressively for investment opportunities than us. Our ability
to continue to compete effectively will depend in large part upon the ability to attract, retain and motivate employees, and we must compete with other companies
to attract and retain employees.
For our homebuilding operations, we compete primarily on the basis of price, location, design, quality, service and reputation. We compete with small
private builders and large regional or national builders. In addition to competing for home buyers and renters, builders compete for construction financing, raw
materials and skilled labor. Additionally, under normal market conditions, competition exists within the industry for prime development sites, especially those
where developed building lots are available under option lot contracts. We compete with other local, regional and national builders in all of these areas. Many of
our competitors have significantly greater financial, sales and marketing and other resources than we have. Some of the national builders that we compete against
include Pulte Homes, Beazer Homes, M/I Homes, DR Horton, Toll Brothers, CalAtlantic Homes, NVR, K. Hovnanian and Lennar.
Competition among home builders and multi-family developers is often specific to product types being offered in a particular area. We do not often
compete with the large national developers in the urban communities where we develop high-rise and mixed use products. This is primarily because most national
builders tend to focus on a narrower range of products than what we offer. We believe this provides us with a distinct advantage in terms of attracting potential
home buyers and renters in certain areas. We believe the factors that home buyers consider in
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deciding whether to purchase or rent from us include the product type, location, value quality, and reputation of the developer. We believe that our projects and
product offerings compare favorably on these factors, and we continually strive to maintain our reputation of building quality products.
Governmental Regulation and Environmental Matters
We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning finance, banking, investments, zoning, building
design, construction, density requirements and similar matters. We may also be subject to periodic delays or may be precluded entirely from developing in certain
communities due to building moratoriums or “slow-growth” or “no-growth” initiatives that could be implemented in the future in the states where we operate.
Local and state governments also have broad discretion regarding the imposition of development fees for projects in their jurisdiction.
We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning protection of the environment, primarily
with respect to our homebuilding business. Some of the laws to which we and our properties are subject to may impose requirements concerning development in
waters of the United States, including wetlands, the closure of water supply wells, management of asbestos-containing materials, exposure to radon and similar
issues. The particular environmental laws that apply to any given community vary based on several factors, including the environmental conditions related to a
particular property and the present and former uses of the property. These environmental laws may result in delays, may cause us to incur substantial compliance
related costs, and may prohibit or severely restrict development in certain environmentally sensitive areas. To date, environmental laws have not had a material
adverse impact on our operations.
Technology and Intellectual Property
We utilize our technology infrastructure to facilitate the management of our client’s projects and the marketing of our projects. We use media and internet
based marketing platforms, primarily in lieu of print advertisements. We believe that the home buying population will continue to increase its reliance on
information available on the internet to help guide its rental and home buying decision. Accordingly, through our marketing efforts, we will continue to seek to
leverage this trend to lower per sale marketing costs while maximizing potential sales.
Our Chief Executive Officer and Chairman of the Board, Christopher Clemente, has licensed his ownership interest in the “Comstock” brand and trademark
to us in perpetuity and free of charge. We routinely take steps, and occasionally take legal action, to protect it against infringement from third parties. Mr. Clemente
has retained the right to continue to use the “Comstock” brand and trademark including for real estate development projects in our current or future markets that are
unrelated to the Company but excluding products developed as for sale homes.
Seasonality
We experience seasonality across our business segments. With respect to our Asset Management segment, we do not expect seasonality to materially
impact our operations. With respect to our Real Estate Services segment and Homebuilding segment, we do anticipate being impacted by adverse weather
conditions. The markets in which we operate are four-season markets that experience significant periods of rain and snow. Construction and remediation cycles and
efforts are often adversely affected by severe weather. With respect to our Homebuilding segment, the primary selling season is from January through May as well
as September and October. Orders in other months typically are lower. Historically, seasonal activity has increased our working capital requirements for our
homebuilding operations during the third and fourth quarters of our fiscal year. As a result of seasonal activity across our business segments, our quarterly results of
operations and financial position at the end of a particular fiscal quarter are not necessarily representative of the balance of our fiscal year.
Asset Management Agreement
Our commercial development, asset management and real estate services business operates pursuant to the AMA between CAM and CDS that was entered
into on March 30, 2018 with an effective date of January 2, 2018. Pursuant to the Agreement, CDS will pay CAM an annual cost-plus fee (the “Annual Fee”) in an
aggregate amount
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equal to the sum of (i) the employment expenses of personnel dedicated to providing services to the CRE Portfolio pursuant to the Agreement, (ii) th e 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. In connection with th e execution of the AMA , CDS paid CAM a deposit in the aggregate amount
of $2,500,000 pursuant to the AMA that will be credited against the Annual Fee to be paid to CAM in accordance with the AMA . The initial term of the AMA will
terminate on December 31, 2 022 (“Initial Term”). The AMA will automatically renew for successive additional one-year terms (each an “Extension Term”) unless
CDS delivers written notice of non-renewal of the AMA at least 180 days prior to the termination date of the Initial Term or any Extension Term. CDS may
terminate the AMA without cause upon 180 days advance written notice to CAM. In the event of such a termination, CDS will pay CAM any accrued Annual Fees
du e and payable as of the termination date. If a termination by CDS without cause is effective prior to January 1, 2020, CDS will pay CAM an additional
termination fee equal to $500,000. CAM may terminate the AMA without cause upon 180 days advance written n otice to CDS, in which event CDS will pay CAM
any accrued Annual Fees due and payable as of the termination date. CDS and CAM will indemnify each other and their affiliates and their respective directors,
officers, employees, partners, members, stockholder s, other equity holders agents and representatives from and against all expenses, losses, damages, liabilities and
other claims incurred by any Indemnified Party related to the AMA , except for those arising from actions constituting bad faith, willful misc onduct or gross
negligence by an i ndemnified p arty.
Employees
At December 31, 2018, we had 82 full-time and 3 part-time employees. Our employees are not represented by any collective bargaining agreements and we
have never experienced a work stoppage. We believe we have good relations with our employees. With the integration of the new business segments, we expect the
number of our employees will increase in 2019.
Executive Officers of the Registrant
Our executive officers and other management employees and their respective ages and positions as of December 31, 2018 are as follows:
Name
Christopher Clemente
Christopher Guthrie
Jubal R. Thompson
Age
58
40
49
Current Position
Chairman and Chief Executive Officer
Chief Financial Officer
General Counsel and Secretary
Christopher
Clemente
founded Comstock in 1985 and has been a director since May 2004. Since 1992, Mr. Clemente has served as our Chairman and Chief
Executive Officer. Mr. Clemente has over 30 years of experience in all aspects of real estate development and homebuilding, and more than 30 years of experience
as an entrepreneur.
Christopher
Guthrie
was named our Chief Financial Officer effective June 12, 2018. Prior to that, Mr. Guthrie served as Chief Financial Officer of
Comstock Partners, the private company owned by Christopher Clemente, the Chief Executive Officer of the Company. Mr. Guthrie joined the Company in 2014
and prior to joining the Company, served as Principal at Red Zone Capital where his responsibilities included management of the accounting and finance functions.
Jubal
R.
Thompson
has served as our General Counsel since October 1998 and our Secretary since December 2004. Mr. Thompson has significant
experience in the areas of real estate acquisitions and dispositions, real estate and corporate finance, corporate governance, mergers and acquisition and risk
management.
Item 1A. Risk Factors
Our business is subject to a number of risks and uncertainties. Prospective investors should carefully consider the risks described below, together with all of
the other information in this Annual Report on Form 10-K. The risks
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described below may not be the only risks we face but are risks we believe may be material at this time. Additional risks that we do not yet know of, or that we
currently think are immate rial, may also impair our business operations or financial results. If any of the events or circumstances described below occurs, our
business, financial condition or results of operations and the trading price of our securities could decline. Investors an d prospective investors should consider the
following risks, the information contained under the heading “Warning Concerning Forward Looking Statements” and the risks described elsewhere in this Annual
Report before deciding whether to invest in our securi ties.
Risks Relating to Our Management Fee For Services Business
Substantially all of our revenues are derived from our provision of management services to CDS, an entity that is wholly owned by our CEO. The loss or
failure, or decline in business or assets, of any of the CDS assets could substantially reduce our revenues.
The fees we earn from providing management services to CDS, an entity wholly owned by our Chief Executive Officer, comprise substantially all our
Asset Management revenues. Our Asset Management revenues depend in large part on the ability of CDS to raise capital to invest in real estate assets and on the
positive performance of CDS investments and investor returns. The AMA with CDS is subject to a number of risks and uncertainties. Therefore, our operating
results and our ability to maintain and grow our revenues currently depends upon the ability of CDS to maintain and grow its businesses. The inability of CDS to
raise capital to invest in its real estate assets, reduced business activities, sales of assets, the failure of any of the CDS assets, or the termination of their
management agreements with us would materially and substantially reduce our revenues and our profitability.
We expect that substantially all of our revenues will be derived from our provision of management services to a limited number of companies. The loss or
failure, or decline in business or assets could substantially reduce our revenues.
We anticipate that the fees we earn from providing asset management services to our client under the AMA will comprise substantially all our revenue in
the near term. Therefore, our revenues depend in large part on the ability of our largest clients to invest in real estate assets or their other respective businesses and
on the positive performance of the investments or businesses of our largest clients. Our clients’ investments and businesses are subject to a number of risks and
uncertainties. Therefore, our operating results and our ability to maintain and grow our revenues depends upon the ability of our clients to maintain and grow their
respective businesses. Reduced business activities by, or failure of, any of the clients or certain of the projects or the termination of their management agreements,
particularly with respect to the AMA, would materially reduce our revenues and our profitability.
The AMA and other agreements with clients are subject to termination, and any such termination could have a material adverse effect on our business, results
of operations and financial condition.
The AMA and our other management services or consulting agreements with our clients may be terminated by a client or by us in certain circumstances.
Depending upon the circumstances of a termination, we may or may not be entitled to receive a termination fee. If any of our management or consulting
agreements with a client is terminated, we may be unable to replace the lost revenue. Even if we receive a termination fee upon the termination of a management
agreement with a client, we would likely be unable to invest the proceeds of the termination fee we receive to replace the lost revenues. The termination of our
management agreement or consulting agreement with any of our largest clients could have a material adverse impact on our business, results of operations and
financial condition.
The commercial real estate industry has been and may continue to be adversely affected by economic conditions in the United States generally.
Our business and operations are significantly dependent on conditions in the commercial real estate industry, which in turn is impacted by general
economic conditions in the United States. Commercial real estate markets in the United States were significantly negatively impacted during the recent recession.
Although commercial real estate markets have improved, with valuations approaching, and in some cases exceeding, 2007 levels, new
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challenges have arisen, including uncertain U.S. Federal Reserve policy regarding the timing and amount of future increases in interest rates and increasing real
estate development activities. Adverse conditions in the commercial rea l estate industry and declining real estate values could harm our business and financial
condition by limiting our and our c lient s’ access to debt and equity capital and our and their ability to grow our and their businesses. Adverse conditions may also
gi ve rise to an increase in defaults of the Company’s loans and other investments. An economic slowdown or recession or declining real estate values could
materially and adversely affect us and our clients.
The asset management business is highly competitive.
Our business is highly competitive and our success will be determined by a variety of factors, including, without limitation, the following:
•
•
•
•
•
•
•
•
•
other asset managers may have greater financial, technical, marketing and other resources and more personnel than our clients and we do;
our clients may not perform as well as other companies, including companies managed by other asset managers;
other asset managers and the companies that compete with our clients may have access to more capital or access to capital at lower costs than our
clients and we do;
other asset managers and the companies that compete with our clients may have higher risk tolerance, different risk assessment or a lower return
threshold, which could allow them to acquire a wider variety of assets and a broader range of investments than our clients and as a result we and
our clients may grow our business less and more slowly than those competitors;
there are few barriers to entry into the asset management business, and new entrants will result in increased competition;
other asset managers may be willing or able to engage in aggressive pricing, marketing, or hiring practices;
other asset managers may have more scalable platforms and may operate more efficiently than we do;
other asset managers may have better brand recognition than we have; and
our competitors may from time to time recruit our employees away from us.
If we fail to compete effectively, our business, results of operations and financial condition may be materially adversely impacted.
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R isks Relating to Our Homebuilding Business
Our operations historically required significant capital and our continuing operations during the transition to commercial real estate depends on the
continuing availability of acquisition, construction, and development loans which may not to be available at the time it is needed or at favorable terms.
The real estate development industry is capital intensive and requires significant expenditures for operations, land purchases, land development and
construction as well as potential acquisitions of other homebuilders or developers. In order to maintain our operations, we will need to obtain additional financing.
These funds can be generated through public or private debt or equity financings, operating cash flow, additional bank borrowings or from strategic alliances or
joint ventures. We may not be successful in obtaining additional funds in a timely manner, on favorable terms or at all. We have historically utilized construction,
acquisition and development loans to finance our projects. These credit facilities tend to be project-oriented and generally have variable rates and require significant
management time to administer. Further, these types of financings are typically characterized by short-term loans, which are subject to call. The availability of
borrowed funds, especially for land acquisition and construction financing, has been greatly reduced, and lenders may require us to invest increased amounts of
equity in a project in connection with both new loans and the extension of existing loans. In addition, we may need to further refinance all or a portion of our debt
on or before maturity, which we may not be able to do on favorable terms or at all. Furthermore, if financial institutions discontinue providing these facilities to us,
we would lose our primary source of financing for our operations or the cost of retaining or replacing these credit facilities could increase dramatically. If we do not
have access to additional capital or funds to continue to transition our operations, we may be required to delay, scale back or abandon some or all of our operating
strategies for an orderly transition of our homebuilding operations and rely more heavily on a liquidation strategy for our lot inventory that would likely cause us to
experience a material adverse effect on our business, results of operations and financial condition.
Home prices and sales activities in the Washington, D.C. market have a large impact on our results of operations because we primarily conduct our business in
this market.
We currently develop and sell homes primarily in the Washington, D.C. market; consequently, home prices and sales activities in the Washington, D.C.
geographic market have a large impact on our results of operations. Although demand in this area historically has been strong, the historical slowdowns in
residential real estate demand and continued constraints on obtaining consumer mortgage financing continue to reduce the likelihood of consumers seeking to
purchase new homes. As a result of the specific market and general economic conditions, potential customers may be less willing or able to buy our homes, or we
may take longer or incur more costs to build them. We may not be able to recapture increased costs by raising prices in many cases because of market conditions or
because we fix our prices in advance of delivery by signing home sales contracts. We may be unable to change the mix of our homes or our offerings or the
affordability of our homes to maintain our margins or satisfactorily address changing market conditions in other ways. Our limited geographic diversity means that
adverse general economic, weather or other conditions in this geographic market could adversely affect our results of operations and cash flows or our ability to
grow our business.
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Fluctuations in market conditions and our transition out of homebuilding may affect our ability to sell our land and home inventories at expected prices, or at
all, which could adversely affect our revenues, earnings and cash flows.
We could be subject to significant fluctuations in the market value of our land and home inventories. The risk of owning undeveloped land, developed land
and homes can be substantial. The market value of undeveloped land, buildable lots and housing inventories can fluctuate significantly as a result of changing
economic and market conditions. Inventory carrying costs can be significant and can result in losses in a poorly performing development or market. Material write-
downs of the estimated value of our land and home inventories could occur if market conditions deteriorate or if we purchased land or build home inventories at
higher prices during stronger economic periods and the value of those land or home inventories subsequently declines during weaker economic periods. We could
also be forced to sell homes, land or lots for prices that generate lower profit than we anticipated, or at a loss, and may not be able to dispose of an investment in a
timely manner when we find dispositions advantageous or necessary. Furthermore, a continued decline in the market value of our land or home inventories or our
transition out of homebuilding may give rise to additional impairments of our inventory and write-offs of contract deposits and feasibility cost, which may result in
a breach of financial covenants contained in one or more of our credit facilities, and possibly cause a default under those credit facilities. Defaults in these credit
facilities are often times the responsibility of Comstock, as Comstock is the guarantor of most of its subsidiaries debts.
During 2018 and 2017, we evaluated all of our projects, to the extent of the existence of any impairment indicators requiring evaluation to determine if
carrying amounts were recoverable by evaluating discount rates, sales prices, absorption and our analysis of the best approach to marketing our projects for sale.
During 2018 and 2017, as a result of our impairment analysis, the Company wrote off $2.2 million and $0.5 million, respectively, in feasibility, site
securing, predevelopment, design, carry costs and related costs for certain of our communities in the Washington, D.C. metropolitan area due to unsuccessful
negotiations and changes in market conditions.
Our business is subject to governmental regulations that may delay, increase the cost of, prohibit or severely restrict our development and homebuilding
projects and reduce our revenues and cash flows.
We are subject to extensive and complex laws and regulations that affect the land development and homebuilding processes, including laws and regulations
related to zoning, permitted land uses, levels of density (number of dwelling units per acre), building design, access to water and other utilities, water and waste
disposal and use of open spaces. In addition, we and our subcontractors are subject to laws and regulations relating to worker health and safety. We are also subject
to a variety of local, state and federal laws and regulations concerning the protection of health and the environment. In some of our markets, we are required to pay
environmental impact fees, use energy saving construction materials and give commitments to provide certain infrastructure such as roads and sewage systems. We
are also subject to real estate taxes and other local government fees on real estate purchases. We must also obtain permits and approvals from local authorities to
complete residential development or home construction. The laws and regulations under which we and our subcontractors operate, and our and their obligations to
comply with them, may result in delays in construction and development, cause us to incur substantial compliance and other increased costs, and prohibit or
severely restrict development and homebuilding activity in certain areas in which we operate. If we are unable to continue to develop communities and build and
deliver homes as a result of these restrictions or if our compliance costs increase substantially, our revenues, earnings and cash flows may be reduced.
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Cities and counties in which we operate have adopted, or may adopt, slow or no-growth initiatives that would reduce our ability to build and sell homes in these
areas and could adversely affect our revenues, earnings and cash flows.
From time to time, certain cities and counties in which we operate have approved, and others in which we operate may approve, various “slow-growth” or
“no-growth” initiatives and other similar ballot measures. Such initiatives restrict development within localities by, for example, limiting the number of building
permits available in a given year. Approval of slow- or no-growth measures could reduce our ability to obtain building permits and build and sell homes in the
affected markets and could create additional costs and administration requirements, which in turn could have an adverse effect on our revenues, earnings and cash
flows. Increased regulation in the housing industry increases the time required to obtain the necessary approvals to begin construction and has prolonged the time
between the initial acquisition of land or land options and the commencement and completion of construction. These delays increase our costs, decrease our
profitability and increase the risks associated with the land inventories we maintain.
Municipalities may restrict or place moratoriums on the availability of utilities, such as water and sewer taps. If municipalities in which we operate take
actions like these, it could have an adverse effect on our business by causing delays, increasing our costs or limiting our ability to build in those municipalities.
This, in turn, could reduce the number of homes we sell and decrease our revenues, earnings and cash flows.
Our ability to sell homes and, accordingly, our results of operations, will be affected by the availability of mortgage financing to potential home buyers.
Most home buyers finance their purchase of new homes through third-party mortgage financing. As a result, residential real estate demand is adversely
affected by increases in interest rates and decreases in the availability of consumer mortgage financing. Increased monthly mortgage costs and the continued
constraints on obtaining financing for potential home buyers have depressed the market for new homes. For instance, regulations which tighten underwriting
standards have made mortgage financing more difficult to obtain for some of our entry-level home buyers, which has led to decreased demand from these buyers.
Even if potential home buyers do not experience difficulty securing mortgage financing for their purchases of new homes, increases in interest rates and decreased
mortgage availability or significant alterations to mortgage product types could make it harder for them to sell their existing homes. This could continue to
adversely affect our operating results and financial condition.
Limitations on, or reduction or elimination of, tax benefits associated with owning a home could have an adverse effect on the demand for our home products.
Existing tax laws generally permit significant expenses associated with owning a home, to be deducted for the purpose of calculating an individual’s
federal, and in many cases, state, taxable income, primarily including mortgage interest expenses and real estate taxes. New tax laws and regulations have recently
been enacted that limit mortgage interest deductions. These regulations may increase the after-tax cost of owning a home, increasing the costs for many of our
potential customers and may have an adverse effect on the homebuilding industry in general, as the loss or reduction of homeowner tax deductions could decrease
the demand for new homes.
The competitive conditions in the homebuilding industry could increase our costs, reduce our revenues and earnings and otherwise adversely affect our results
of operations and cash flows.
The homebuilding industry is highly competitive and fragmented. We compete with a number of national, regional and local builders for customers, raw
materials and labor. For example, in the Washington, D.C. market, we compete against multiple publicly-traded national home builders, and many privately-owned
regional and local home builders. We do not compete against all of the builders in all of our product types or submarkets, as some builders focus on particular types
of projects within those markets, such as large estate homes, that are not in competition with our projects.
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We compete primarily on the basis of price, location, design, quality, service and reputation. Some of our competitors have greater financial resource s,
more established market positions and better opportunities for land and home site acquisitions, greater amounts of unrestricted cash resources on hand, and lower
costs of capital, labor and material than us. The competitive conditions in the homebuildin g industry and our announcement to transition out of homebuilding
could, among other things:
•
•
•
•
require us to increase selling commissions and other incentives, which could reduce our profit margins;
result in delays in construction if we experience delays in procuring materials or hiring trades people or laborers;
result in lower sales volume, sales pricing and revenues; and
increase our costs and reduce our earnings.
Our homes also compete with sales of existing homes and condominiums, foreclosure sales of existing homes and condominiums and available rental
housing. A continued oversupply of competitively priced resale, foreclosure or rental homes in our markets could adversely affect our ability to sell homes
profitably.
Increases in our cancellation rate could have a negative impact on our home sales revenue and homebuilding margins.
The cancellation rate of buyers who contracted to buy a home from us but did not close escrow (as a percentage of overall orders) was approximately 7%
and 16% during the years ended December 31, 2018 and 2017, respectively. Home order cancellations negatively impact the number of closed homes, net new
home orders, home sales revenue and results of operations, as well as the number of homes in backlog. Home order cancellations can result from a number of
factors, including declines or slow appreciation in the market value of homes, increases in the supply of homes available to be purchased, increased competition,
higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient
down payments, and adverse changes in economic conditions including unemployment. Upon a home order cancellation, the homebuyer’s escrow deposit is
returned to the homebuyer (other than certain miscellaneous deposits, which we retain). An increase in the level of our home order cancellations could have a
negative impact on our business, prospects, liquidity, financial condition and results of operations.
If we are not able to develop our communities successfully, our results of operations, cash flows, and financial condition could be adversely impacted.
Before a community generates any revenues, material expenditures are required to acquire land, to obtain development approvals and to construct
significant portions of project infrastructure, amenities, model homes and sales facilities. It can take a year or more for a community development to achieve
cumulative positive cash flow. Our inability to develop and market our communities successfully and to generate positive cash flows from these operations in a
timely manner could have a material adverse effect on our ability to service our debt and to meet our working capital requirements.
If we experience shortages of labor or supplies or other circumstances beyond our control, there could be delays or increased costs associated with developing
our projects, which would adversely affect our operating results and cash flows.
We, from time to time, may be affected by circumstances beyond our control, including:
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work stoppages, labor disputes and shortages of qualified trades people, such as carpenters, roofers, electricians and plumbers;
lack of availability of adequate utility infrastructure and services;
increases in transportation costs for delivery of materials;
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•
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our need to rely on local subcontractors who may not be adequately capitalized or insured; and
shortages or fluctuations in prices of building materials.
These difficulties have caused and likely will cause unexpected construction delays and short-term increases in construction costs. In an attempt to protect
the margins on our projects, we often purchase certain building materials with commitments that lock in the prices of these materials for 90 to 120 days or more.
However, once the supply of building materials subject to these commitments is exhausted, we are again subject to market fluctuations and shortages. We may not
be able to recover unexpected increases in construction or materials costs by raising our home prices because, typically, the price of each home is established at the
time a customer executes a home sale contract. Furthermore, sustained increases in construction and material costs may, over time, erode our profit margins and
may adversely affect our results of operations and cash flows.
We continue to depend on the availability and skill of subcontractors and their willingness to work with us as we transition out of our homebuilding operations.
Substantially all of our land development and construction work is done by subcontractors with us acting as the general contractor or by subcontractors
working for a general contractor we select for a particular project. Accordingly, the timing and quality of our land development and construction depends on the
availability, skill, and willingness of those subcontractors to work with us as we transition out of our homebuilding business. We do not have long-term contractual
commitments with subcontractors or suppliers. Although we believe that our relationships with our suppliers and subcontractors are good, we cannot assure that
skilled subcontractors will continue to be available at reasonable rates and in the areas in which we conduct our operations. The inability to contract with skilled
subcontractors or general contractors at reasonable costs on a timely basis could limit our ability to build and deliver homes and could erode our profit margins and
adversely affect our results of operations and cash flows.
Construction defect and product liability litigation and claims that arise in the ordinary course of business may be costly or negatively impact sales, which
could adversely affect our results of operations and cash flows.
Our homebuilding business is subject to construction defect and product liability claims arising in the ordinary course of business. These claims are
common in the homebuilding industry and can be costly. Among the claims for which developers and builders have financial exposure are property damage,
environmental claims and bodily injury claims and latent defects that may not materialize for an extended period of time. Damages awarded under these suits may
include the costs of remediation, loss of property and health-related bodily injury. In response to increased litigation, insurance underwriters have attempted to limit
their risk by excluding coverage for certain claims associated with environmental conditions, pollution and product and workmanship defects. As a developer and a
home builder, we may be at risk of loss for mold-related property, bodily injury and other claims in amounts that exceed available limits on our comprehensive
general liability policies and those of our subcontractors. In addition, the costs of insuring against construction defect and product liability claims are high and the
amount of coverage offered by insurance companies is limited. Uninsured construction defect, product liability and similar claims, claims in excess of the limits
under our insurance policies, defense costs and the costs of obtaining insurance to cover such claims could have a material adverse effect on our revenues, earnings
and cash flows.
We are subject to warranty claims arising in the ordinary course of business that could be costly.
We provide service warranties on our homes for a period of one year or more following closing and provide warranties on occasion as required by
applicable statutes for extended periods. We self-insure our warranties from time to time and reserve an amount we believe will be sufficient to satisfy any
warranty claims on homes we sell and periodically purchase insurance related coverage to cover the costs associated with potential claims. Additionally, we
attempt to pass much of the risk associated with potential defects in materials and workmanship on to the subcontractors performing the work and the suppliers and
manufacturers of the materials and their insurance carriers. In such cases, we still may incur unanticipated costs if a subcontractor, supplier, manufacturer or its
insurance carrier fails to honor its obligations regarding the work or materials it supplies to our projects. If the amount of actual claims materially exceeds our
aggregate warranty reserves, any available insurance coverage and/or the amounts we can recover from our subcontractors and suppliers, our results of operations,
cash flows, and financial condition may be adversely affected.
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Risks Related to our Operations and Lines of Business
We are subject to substantial regulation and numerous contractual obligations and internal policies, and failure to comply with these provisions could have a
material adverse effect on our business, financial condition and results of operations.
We are subject to substantial regulation and numerous contractual obligations and internal policies. We are subject to regulation by the SEC, The Nasdaq
Stock Market LLC, or Nasdaq, and other federal, state and local governmental bodies and agencies or self-regulatory organizations. We are also responsible for
managing or assisting with the regulatory aspects of certain of our clients. The level of regulation and supervision to which we and our clients are subject varies
from jurisdiction to jurisdiction and is based on the type of business activity involved. Our or our clients’ failure to comply with any of the regulations, contractual
obligations or policies may subject us to extensive investigations, as well as substantial penalties and reputational risk, and our business and operations could be
materially adversely affected.
Our lack of compliance with applicable law could result in, among other things, our inability to enforce contracts, our default under contracts (including our
management agreements or advisory agreements with our clients) and our ineligibility to contract with, and receive revenue from, governmental authorities and
agencies, our clients or other third parties. We have numerous contractual obligations with which we must comply on a continuous basis to operate our business,
the default of which could have a material adverse effect on our business and financial condition. We have established internal policies designed to ensure that we
manage our business in accordance with applicable law and regulation and in accordance with our contractual obligations. These internal policies may not be
effective in all regards; and, if we fail to comply with our internal policies, we could be subjected to additional risk and liability.
We are subject to certain environmental laws and the cost of compliance could adversely affect our business, results of operations and cash flows.
As a current or previous owner or operator of real property, we may be liable under federal, state, and local environmental laws, ordinances and regulations
for the costs of removal or remediation of hazardous or toxic substances on, under or in the properties or in the proximity of the properties we develop. These laws
often impose liability whether or not we knew of, or were responsible for, the presence of such hazardous or toxic substances. The cost of investigating,
remediating or removing such hazardous or toxic substances may be substantial. The presence of any such substance, or the failure to promptly remediate any such
substance, may adversely affect our ability to sell the property, to use the property for our intended purpose, or to borrow funds using the property as collateral. In
addition, the construction process involves the use of hazardous and toxic materials. We could be held liable under environmental laws for the costs of removal or
remediation of such materials. In addition, our existing credit facilities also restrict our access to the loan proceeds if the properties that are used to collateralize the
loans are contaminated by hazardous substances and require us to indemnify the bank against losses resulting from such occurrence for significant periods of time,
even after the loan is fully repaid.
Increased insurance risk could negatively affect our business, results of operations and cash flows.
Insurance and surety companies frequently reassess many aspects of their business and, as a result, may take actions that could negatively affect our
business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, requiring additional collateral on
surety bonds, reducing limits, restricting coverage’s, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions
may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business.
Additionally, coverage for certain types of claims, such as claims relating to mold, is generally unavailable. Further, we rely on surety bonds, typically provided by
insurance companies, as a means of limiting the amount of capital utilized in connection with the public improvement sureties that we are required to post with
governmental authorities in connection with land development and construction activities. The cost of obtaining these surety bonds is, from time to time,
unpredictable and these surety bonds may be unavailable to us for new projects. These factors can delay or prohibit commencement of development projects and
adversely affect revenue, earnings and cash flows.
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Employee , vendor or other third-party misconduct could harm us by subjecting us to significant legal liability, reputational harm and loss of business.
There is a risk that our employees or vendors or other third parties that we use in our business could engage in misconduct that adversely affects our
business. We are subject to a number of obligations and standards arising from our business and our authority over the companies and assets we manage. The
violation of these obligations and standards by any of our employees may adversely affect our clients and us. Our business often requires that we deal with
confidential matters of great significance to our clients. If our employees or any vendors or third parties improperly use or disclose confidential information, we and
the affected client could suffer serious harm to our and its reputation, financial position and current and future business relationships and face potentially significant
litigation. It is not always possible to detect or deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all
cases. If any of our employees or any vendors or third parties were to engage in or be accused of misconduct, our business and our reputation could be adversely
affected. Misconduct by an employee or an employee of our vendors might rise to the level of a default that would permit a client to terminate its management
agreements or advisory agreements with us for cause and without paying a termination fee, which could materially adversely affect our business, results of
operations and financial condition.
If we are unable to continue to access credit on acceptable terms, our business may be adversely affected.
The changing nature of the global credit markets could make it more difficult for us to access funds, refinance our existing indebtedness, enter into
agreements for uncommitted bond facilities and new indebtedness, replace our existing revolving and term credit agreements or obtain funding through the
issuance of our securities. We use credit facilities to support our working capital and acquisition needs. There is no guarantee that we can continue to renew our
credit facility on terms as favorable as those in our existing credit facility and, if we are unable to do so, our costs of borrowing and our business may be adversely
affected.
Our ability to use our Net Operating Losses (“NOLs”) and, in certain circumstances, future built-in losses and depreciation deductions can be negatively
affected if there is an “ownership change” as defined under Section 382 of the Internal Revenue Code.
We currently have approximately $147 million in federal and state NOLs with a potential value of up to approximately $38 million in tax savings. These
deferred tax assets are currently fully reserved. If unused, these NOLs will begin expiring in 2027. Under Internal Revenue Code Section 382 rules, if a change of
ownership is triggered, our NOL asset and possibly certain other deferred tax assets may be impaired. We estimate that as of December 31, 2018, the cumulative
shift in the Company’s stock would not cause an inability to utilize any of our NOLs.
The Company’s ability to use its NOLs (and in certain circumstances, future built-in losses and depreciation deductions) can be negatively affected if there
is an “ownership change” as defined under Internal Revenue Code Section 382. In general, an ownership change occurs whenever there is a shift in ownership by
more than 50 percentage points by one or more 5% stockholders over a specified time period (generally three years). Given Internal Revenue Code Section 382’s
broad definition, an ownership change could be the unintended consequence of otherwise normal market trading in the Company’s stock that is outside of the
Company’s control. In an effort to preserve the availability of these NOLs, in 2011, Comstock adopted an Internal Revenue Code Section 382 rights agreement,
which expired in May 2014. In June 2015, the Company’s stockholder’s approved a new Section 382 rights agreement (the “Rights Agreement”) to protect
stockholder value. The Rights Agreement expires on March 27, 2025. The Rights Agreement was adopted to reduce the likelihood of such an unintended
“ownership change”, thus preserving the value of these tax benefits.
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An impairment charge of goodwill could have a material adverse impact on our financial condition and results of operations.
Because we have grown in part through acquisitions, and as we continue to wind down on balance sheet homebuilding, goodwill and intangible assets-net
will represent a larger portion of our assets. Under generally accepted accounting principles in the United States (GAAP), we are required to test goodwill carried in
our Consolidated Balance Sheets for possible impairment on an annual basis based upon a fair value approach and whenever events occur that indicate impairment
could exist. These events or circumstances could include a significant change in the business climate, including a significant sustained decline in a reporting unit’s
market value, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of our business, a significant sustained decline
in our market capitalization and other factors.
In addition, if we experience a decrease in our stock price and market capitalization over a sustained period, we would have to record an impairment charge
in the future. The amount of any impairment could be significant and could have a material adverse impact on our financial condition and results of operations for
the period in which the charge is taken.
We are dependent on the services of certain key employees, and the loss of their services could harm our business.
Our success largely depends on the continuing services of certain key employees, including Christopher Clemente, our Chairman and Chief Executive
Officer; Christopher Guthrie, our Chief Financial Officer; and Jubal Thompson, our General Counsel and Secretary. Our continued success also depends on our
ability to attract and retain qualified personnel. We believe that Messrs. Clemente, Guthrie and Thompson each possess valuable industry and Company knowledge,
experience and leadership abilities that would be difficult in the short term to replicate. The loss of these or other key employees could harm our operations,
business plans and cash flows.
Our operating results, including revenue, earnings, and losses, have varied over time due to a number of conditions. If we are unable to successfully manage
these conditions or factors, our operating results may continue to vary and may also suffer.
The homebuilding industry is cyclical and we expect to experience variability in our revenues and net income. The volume of sales contracts and closings
typically varies from month to month and from quarter to quarter depending on several factors, including the stages of development of our projects, the uncertain
timing and cost of real estate closings, weather and other factors beyond our control. In the early stages of a project’s development, we incur significant start-up
costs associated with, among other things, project design, land acquisition and development, construction and marketing expenses. Since revenues from sales of
properties are generally recognized only upon the transfer of title at the closing of a sale, no revenue is recognized during the early stages of a project unless land
parcels or residential home sites are sold to other developers. Periodic sales of properties may be insufficient to fund operating expenses. Further, if sales and other
revenues are not adequate to cover operating expenses, we will be required to seek sources of additional operating funds. Accordingly, our financial results will
vary from community to community and from time to time.
We do not own the Comstock brand or trademark, but use the brand and trademark pursuant to the terms of a perpetual license granted by Christopher
Clemente, our Chief Executive Officer and Chairman of the Board.
Our Chief Executive Officer and Chairman of the Board, Christopher Clemente, has licensed his ownership interest in the “Comstock” brand and trademark
to us in perpetuity and free of charge. We routinely take steps, and occasionally take legal action, to protect it against infringement from third parties. Mr. Clemente
has retained the right to continue to use the “Comstock” brand and trademark individually and through his affiliates, with respect to real estate development
projects in our current or future markets that are unrelated to the Company but excluding products developed as new homes for sale. We will be unable to control
the quality of projects undertaken by Mr. Clemente or others using the “Comstock” brand and trademark and therefore will be unable to prevent any damage to its
goodwill that may occur. Consequently, our brand’s reputation could be damaged which could have a material adverse effect on our business, operations and cash
flows.
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Information technology failures or data security b reaches could harm our business.
We use information technology and other computer resources to perform important operational and marketing activities and to maintain our business
records. Certain of these resources are provided to us and/or maintained by data hosting facilities and third party service providers to assist in conducting our day to
day operations. Our computer systems and those of our third-party providers are subject to damage or interruption from power outages, computer and
telecommunication failures, computer viruses, hackers, malware, unauthorized accesses, IT security breaches, natural disasters, usage errors by our employees or
contractors, etc. Any future significant compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or
Company data, could result in significant costs, lost sales, fines, lawsuits, and damage to our reputation. Although we and our third-party service providers have
implemented administrative and technical controls to address, mitigate and minimize these security issues, there is no guarantee that these measures will be
adequate to safeguard against the evolving threats posed by data security breaches, system compromises and misuse of data. In addition, as the regulatory
environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements
applicable to our business, compliance with those requirements could also result in additional costs.
Our business, results of operations and financial condition may be affected by adverse weather conditions or natural disasters.
Adverse weather conditions, such as extended periods of rain, snow or cold temperatures, and natural disasters, such as hurricanes, tornadoes, floods and
fires, can delay completion and sale of real estate, damage partially complete or other construction in our inventory and/or decrease the demand for real estate or
increase the cost of building projects. To the extent that natural disasters or adverse weather events occur, our business and results may be adversely affected. To
the extent our insurance is not adequate to cover business interruption losses or repair costs resulting from these events, our results of operations and financial
conditions may be adversely affected.
The impact of climate change presents a risk to our business.
The potential effects of climate change could impact our operations and the operations of properties we manage or provide services to. Natural disasters and
extreme weather events linked to climate change could cause damage to assets we manage. Concerns about the potential effects of climate change could
increasingly impact the decisions and analysis that we make with respect to the properties we manage or consider for acquisition by clients, since climate change
considerations can impact the relative desirability of locations and the cost of operating and insuring acquired properties. Around the world, many countries are
enacting stricter regulations to protect the environment and preserve their natural resources. Those regulations are likely to become more rigorous over time. If the
United States were to enact similar regulations, we could face additional costs and use of resources to comply with such requirements.
Acts of war or terrorism may seriously harm our business.
Acts of war, any outbreak or escalation of hostilities between the United States and any foreign power or acts of terrorism may cause disruption to the entire
U.S. economy, or the Washington, D.C. metro area, affect job growth and consumer confidence, increase costs associated with construction or cause economic
changes that we cannot anticipate, all of which could reduce demand for our homes and adversely impact our revenues, earnings and cash flows.
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Risks Related to our Common Stock and Level of Indebtedness
Our level of indebtedness may harm our financial condition and results of operations.
Our consolidated indebtedness as of December 31, 2018 is approximately $18.9 million, net of discounts and deferred financing charges, and matures at
different periods in fiscal years 2019 through 2023. We are in active discussions with our lenders with respect to these maturities and are seeking extensions and
modifications to the credit facilities and loans as necessary. If, for any reason, we are unable to refinance, extend or modify the existing indebtedness, these projects
may be in default of their existing obligations, which may result in a foreclosure on the project collateral and loss of the project. Any such events could have a
material adverse effect on our business, financial condition and results of operations.
Our level of indebtedness could impact our future operations in many important ways, including, without limitation, by:
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Requiring a portion of our cash flows from operations to be dedicated to the payment of any interest or amortization required with respect to
outstanding indebtedness;
Increasing our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and
Limiting our ability to obtain additional financing for working capital, acquisitions, capital expenditures, general corporate and other purposes.
At the scheduled maturity of our credit facilities or in the event of an acceleration of a debt facility following an event of default, the entire outstanding
principal amount of the indebtedness under such facility, together with all other amounts payable thereunder from time to time, will become due and payable. It is
possible that we may not have sufficient funds to pay such obligations in full at maturity or upon such acceleration. If we default and are not able to pay any such
obligations due, our lenders have liens on substantially all of our assets and could foreclose on our assets in order to satisfy our obligations.
Our sources of liquidity are limited and may not be sufficient to meet our needs.
We are largely dependent on private placements of debt and equity (which rely heavily on insider participation) to cover our operating expenses and/or fund
our liquidity needs. If we are unable to secure capital from private placements, we may be forced to reduce our capital expenditures, delay investments, seek other
forms of financing or restructure our indebtedness. These alternative measures may not be successful or may not be on desirable terms that could have an adverse
impact on our operations.
Our stock price has been volatile and we expect that it will continue to be volatile.
Our stock price has been volatile, and we expect it will continue to be volatile. During the year ended December 31, 2018, the price of our common stock
ranged from a high of $5.15 to a low of $1.29. The volatility of our stock price may also be due to many factors including:
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quarterly variations in our operating results;
general conditions in the homebuilding industry;
interest rate changes;
changes in the market’s expectations about our operating results;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning our Company or of the homebuilding industry in general;
operating and stock price performance of other companies that investors deem comparable to us;
news reports relating to trends in our markets;
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changes in laws and regulations affecting our business;
material announcements by us or our competitors;
material announcements by our construction lenders or the manufacturers and suppliers we use;
sales of substantial amounts of Class A common stock by our directors, executive officers or significant stockholders or the perception that such
sales could occur; and
general economic and political conditions such as recessions and acts of war or terrorism.
Investors in our Class A common stock may not be able to resell their shares of Class A common stock following periods of volatility because of the
market’s adverse reaction to the volatility of the stock price. Our Class A common stock may not trade at the same levels as the stock of other homebuilders, and
the market in general may not sustain its current prices.
We may not be able to maintain compliance with The NASDAQ Capital Market’s continued listing requirements.
Our Class A common stock is listed on The NASDAQ Capital Market. In order to maintain the listing of our Class A common stock on The NASDAQ
Capital Market, we must meet minimum financial, operating and other requirements, including requirements for a minimum amount of capital, a minimum price
per share and active operations. We may fail to satisfy certain of these listing requirements. In the past, we have at times not met the minimum trading price and
stockholders’ equity amount required for continued listing on the NASDAQ Capital Market. We have taken steps to remedy these deficiencies, including by
completing a reverse stock split to increase our trading price. However, if we fail to satisfy these or other continued listing requirements, we would be required to
take steps to satisfy the applicable continued listing requirement or suffer delisting from The NASDAQ Capital Market. A delisting of our Class A common stock
could adversely affect the market liquidity of our common stock, our ability to obtain financing and our ability to fund our operations.
Investors in our Class A common stock may experience dilution with the future issuance of stock, exercise of stock options and warrants, the grant of restricted
stock and issuance of stock in connection with our capital raising transactions and acquisitions of other companies.
From time to time, we have issued and we will continue to issue stock options or restricted stock grants to employees and non-employee directors pursuant
to our equity incentive plan. We expect that these options or restricted stock grants will generally vest commencing one year from the date of grant and continue
vesting over a four-year period. Investors may experience dilution as the options vest and are exercised by their holders and the restrictions lapse on the restricted
stock grants. In addition, we may issue stock to raise capital to fund our growth initiatives, in connection with acquisitions of other companies, or warrants in
connection with the settlement of obligations and or indebtedness with vendors and suppliers, which may result in investors experiencing dilution.
Substantial sales of our Class A common stock, or the perception that such sales might occur, could depress the market price of our Class A common stock.
A substantial amount of the shares of our Class A common stock are eligible for immediate resale in the public market. Any sales of substantial amounts of
our Class A common stock in the public market, or the perception that such sales might occur, could depress the market price of our Class A common stock.
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The holders of our Class B common stock exert control over us and thus limit the ability of other stockholders to influence corporate matters.
As of December 31, 2018, Mr. Christopher Clemente, our Chief Executive Officer, owned 100% of our outstanding Class B common stock, which, together
with his shares of Class A common stock, represent approximately 60% of the combined voting power of all classes of our voting stock. As a result, Mr. Clemente
has control over the election of our board of directors and our management and policies. Mr. Clemente, also has control over all matters requiring stockholder
approval, including the amendment of certain provisions of our amended and restated certificate of incorporation, the approval of any equity-based employee
compensation plans and the approval of significant corporate transactions, including mergers or acquisition transactions. In light of this control, other companies
could be discouraged from initiating a potential merger, takeover or any other transaction resulting in a change of control. Such a transaction potentially could be
beneficial to our business or to our stockholders. This may in turn reduce the price that investors are willing to pay in the future for shares of our Class A common
stock.
The limited voting rights of our Class A common stock could limit its attractiveness to investors and its liquidity and, as a result, its market value.
The holders of our Class A common stock and Class B common stock generally have identical rights, except that holders of our Class A common stock are
entitled to one vote per share and holders of our Class B common stock are entitled to 15 votes per share on all matters to be voted on by stockholders. The
difference in the voting rights of the Class A common stock and Class B common stock could diminish the value of the Class A common stock to the extent that
investors or any potential future purchasers of our Class A common stock ascribe value to the superior voting rights of the Class B common stock.
It may be difficult for a third party to acquire us, which could inhibit stockholders from realizing a premium on their stock price.
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging
in business combinations with any stockholder, including all affiliates and employees of a stockholder, who owns 15% or more of the corporation’s outstanding
voting stock, for three years following the date that the stockholder acquired 15% or more of the corporation’s voting stock unless specified conditions are met.
Our amended and restated certificate of incorporation and bylaws contain provisions that have the effect of delaying, deferring or preventing a change in
control that stockholders could consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for stockholders to
elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our
common stock. These provisions include:
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a staggered board of directors, so that it would take three successive annual meetings to replace all directors;
a prohibition of stockholders taking action by written consent; and
advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that
can be acted upon by stockholders at a meeting.
Our issuance of shares of preferred stock could delay or prevent a change of control of us.
Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, up to 20,000,000 shares of Series A
Junior Participating Preferred Stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation
preferences of such series. The issuance of shares of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without
further action by the stockholders, even where stockholders are offered a premium for their shares. The issuance of shares of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of Class A common stock, including the loss of voting control. Any issuance of this type of
preferred stock could impact the perception of potential future purchasers of our Class A common stock and could depress its market price.
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During the period ended D ecember 31, 2015, the Company authorized 3,000,000 shares of a new series of preferred stock designated as Series B Non-
Convertible Preferred Stock (the “Series B Preferred Stock”). The shares of Series B Preferred Stock have a par value of $0.01 per share and a stated value of $5.00
per share. The Series B Preferred Stock has no conversion rights or voting rights other than required by applicable law. The Series B Preferred Stock earn dividends
at a rate of 8.75% per annum. The dividends will accrue whethe r or not declared. The dividends are also cumulative and payable quarterly in arrears at the last day
of each quarterly reporting period in the form of additional Series B Preferred Stock or in the sole discretion of the board of directors, in cash. On Dec ember 29,
2015, the Company issued 772,210 shares of Series B Preferred Stock in exchange for the conversion of an outstanding promissory note.
On March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Company’s Series B Preferred Stock pursuant to which
the Company exchanged 858,210 shares of the Company’s Series B Preferred Stock for 772,210 shares of the Company’s newly created Series C Non-
Convertible Preferred Stock, par value $0.01 per share and a stated value of $5.00 per share. The Series C Preferred Stock has a discretionary dividend feature, as
opposed to the mandatory dividend feature in the Series B Preferred Stock. The Series B Preferred Stock, together with all accrued dividends earned through the
conversion date, was retired upon re-acquisition and the fair value of the Series C Preferred Stock is recorded in ‘Stockholders’ equity’ in the accompanying
consolidated balance sheets.
On May 23, 2018, the Company entered into a Note Exchange and subscription agreement in which a note (“CGF2 Note”) with an outstanding principal
and accrued interest balance of $3.7 million was exchanged for 738,390 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, issued by the Company to Comstock Growth Fund II, L.C. (“CGF2”), a Company wholly owned by our
Chief Executive Officer. The CGF2 Note was cancelled in its entirety effective as of the Effective Date. Refer to Note 16 and Note 20 to the consolidated financial
statements for further discussion of these transactions.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Since December 31, 2009, the Company, through its affiliate, Comstock Property Management, L.C., has been leasing office space located at 1886 Metro
Center Drive, Reston, Virginia for its corporate headquarters from Comstock Asset Management, L.C., an affiliate wholly-owned by our Chief Executive Officer.
Currently the amount of the leased space is 15,714 square feet. The term of the lease expires on September 30, 2019. See related party transactions in Note 16 in the
accompanying consolidated financial statements for additional information.
On July 17, 2017, the Company, through its subsidiary, JK Environmental Services, LLC (“JK”), acquired the assets and liabilities of Monridge
Environmental, LLC. On August 1, 2017, JK entered into a lease through February 29, 2020 for approximately 2,800 square feet of office space at 806 Fayette
Street, Conshohocken, Pennsylvania. During 2018, JK also opened operations in the Washington, DC metropolitan area from the Company’s corporate offices.
The Company believes that its properties are adequately maintained and suitable for their intended use and the Company’s needs. For information regarding
our projects, see Item 1 ‘Business – Our Developed Communities.’
Item 3. Legal Proceedings
Currently, we are not subject to any material legal proceedings. From time to time, however, 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 expect that any such liability will have a material adverse effect on our financial position, operating results or cash flows. We believe that we have
obtained adequate insurance coverage, rights to indemnification, or where appropriate, have established reserves in connection with these legal proceedings.
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Item 4. Mine Saf ety Disclosures
Not applicable.
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Common Stock
Our Class A common stock is traded on NASDAQ under the symbol “CHCI”.
Holders
As of December 31, 2018, there were approximately 34 record holders of our Class A common stock. As of December 31, 2018, there was one holder of
our Class B common stock.
Issuer Purchases of Equity Securities
In November 2014, our board of directors approved a new share repurchase program authorizing the Company to repurchase up to 429,000 shares of our
Class A common stock in one or more open market or privately negotiated transactions. During 2018 and 2017, no shares of our Class A common stock were
repurchased. As of December 31, 2018, 404,000 shares remained available for purchase. The share repurchase program does not have an expiration date.
Item 6. Selected Financial Data
Not Applicable.
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Item 7. Management’s Discuss ion and Analysis o f Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors
including, but not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under the headings “Risk Factors” and
“Cautionary Notes Regarding Forward-looking Statements.”
Overview
We are a multi-faceted real estate asset management, development and services company primarily focused in the Washington, D.C. MSA. In 2018, the
Company changed its focus to asset management and the provision of complementary real estate related services, transitioning from its primary reliance upon
revenue generated by production-oriented, for-sale homebuilding. To accomplish the transition from homebuilding to the new lines of business, the Company will
operate through two real estate focused platforms – CDS Asset Management (“CAM”) and Comstock Real Estate Services (“CRES”). These business segments
include asset and property management and service-oriented companies providing services to clients primarily in the real estate sector as further discussed in Note
2 of our consolidated financial statements.
CDS
Asset
Management
In our Asset Management segment, we focus on providing asset management and development services to a wide range of commercial real estate uses,
including apartments, hotels, office buildings, commercial garages, leased lands, retail stores, mixed-use developments, and urban transit oriented developments.
We have significant experience with construction, development, property and asset management services. The properties and businesses we currently manage are
located primarily along the Washington, D.C. Metro Silver Line in Fairfax and Loudoun Counties, but also include projects in Montgomery County, Maryland and
the Town of Herndon, Virginia.
Comstock
Real
Estate
Services
In our Real Estate Services segment, our experienced real estate services-based 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, 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. This business line not only allows us to generate positive fee income from our highly
qualified personnel but also serves as a potential catalyst for joint venture and acquisition opportunities.
Homebuilding
In our Homebuilding segment, we continue to wind down the homebuilder by developing, constructing, and building out the Company’s remaining
homebuilding projects. The wind-down of this segment on the balance sheet should be largely accomplished by the second quarter of 2019. For our remaining
homebuilding inventory, we will continue to develop properties with the intent that they be sold either as fee-simple properties or condominiums to individual unit
buyers or we may sell raw or finished lot inventories to third party developers or homebuilders who will then develop or build out the homes in our remaining
projects. We anticipate residual land development activities and finished lot sales to regional or national homebuilders continuing beyond 2019 and the Company
may engage in homebuilding activities from time to time if self-performance of our residual lot pipeline is deemed the best financial alternative. Any future
homebuilding activity is expected to be provided off-balance sheet on an asset management basis.
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Recent Accoun ting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 in the accompanying consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), which
require us to make certain estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates
including those related to the consolidation of variable interest entities (“VIEs”), revenue recognition, impairment of real estate inventories, warranty reserve and
our environmental liability exposure. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ materially from these estimates.
A summary of significant accounting policies is provided in Note 2 in the accompanying consolidated financial statements. The following section is a
summary of certain aspects of those accounting policies that require the most difficult, subjective or complex judgments and estimates.
Real estate inventories
Real estate inventories include land, land development costs, construction and other costs. Real estate held for development and use is stated at cost, or
when circumstances or events indicate that the real estate is impaired, at estimated fair value. Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Land, land development and indirect land development costs are accumulated by specific project and allocated to various units within
that project using specific identification and allocation based upon the relative estimated sales value method. Direct construction costs are assigned to units based
on specific identification, when practical, or based upon the relative sales value method. Construction costs primarily include direct construction costs and
capitalized field overhead. Other costs are comprised of fees, capitalized interest and real estate taxes. We also use our best estimate at the end of a reporting period
to capitalize estimated construction and development costs. Costs incurred to sell real estate are capitalized to the extent they are reasonably expected to be
recovered from the sale of the project or are incurred to obtain regulatory approval of sales. Other selling costs are expensed as incurred.
For assets held for development and use, a write-down to estimated fair value is recorded when the net carrying value of the property exceeds its estimated
undiscounted future cash flows. Estimated fair value is based on comparable sales of real estate in the normal course of business under existing and anticipated
market conditions. These evaluations are made on a property-by-property basis whenever events or changes in circumstances indicate that the net book value may
not be recoverable.
Goodwill impairment
We test our goodwill for impairment on an annual basis, and more frequently when an event occurs or circumstances indicate that the carrying value of the
asset may not be recoverable. We believe the methodology that we use to review impairment of goodwill, which includes a significant amount of judgment and
estimates, provides us with a reasonable basis to determine whether impairment has occurred.
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Revenue recognition
We recognize revenues and related profits or losses from the sale of residential properties and units, finished lots and land sales on the settlement date at the
contract sales price, when control is transferred to our customers. We consider revenue to be from homebuilding when there is a structure built or being built on the
lot at closing, and control is transferred. Sales of lots occur, and are included in homebuilding revenues, when we sell raw land or finished home sites in advance of
any home construction.
Revenues generated through real estate professional services such as asset management and administrative support, environmental design, engineering and
remediation represent a series of daily performance obligations delivered over time due to the continuous transfer of control to our clients. For asset management
and administrative support, pricing is generally in the form of monthly management fees based on a cost plus agreement, property-level cash receipts, square
footage under management or some other variable metric. For Real Estate Services, pricing is generally in the form of cost-plus contracts.
Warranty reserve
Warranty reserves for units settled are established to cover potential costs for materials and labor with regard to warranty-type claims expected to arise
during the typical one-year warranty period provided by the Company or within the two-year statutorily mandated structural warranty period for condominiums.
Because the Company typically subcontracts its homebuilding work, subcontractors are required to provide the Company with an indemnity and a certificate of
insurance prior to receiving payments for their work. Claims relating to workmanship and materials are generally the primary responsibility of the subcontractors
and product manufacturers. The warranty reserve is established at the time of closing and is calculated based upon historical warranty cost experience and current
business factors. Variables used in the calculation of the reserve, as well as the adequacy of the reserve based on the number of homes still under warranty, are
reviewed on a periodic basis. Warranty claims are directly charged to the reserve as they arise. This reserve is an estimate and actual warranty costs could vary
from these estimates.
Equity-based compensation
Compensation costs related to our equity-based compensation plans are recognized within our income statement or capitalized to real estate inventories for
awards issued to employees that are involved in production. The costs recognized are based on the grant-date fair value. Compensation costs for share-based grants
are recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting
portion of the grant).
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The fair value of each option award is calculated on the date of grant using the Black-Scholes option pricing model which includes certain subjective
assumptions. Expected volatilities are calculated based on our historical tra ding activities. We recognize forfeitures as they occur. The risk-free rate for the periods
is based on the U.S. Treasury rates in effect at the time of grant. The expected term of options is based on the simplified method which assumes that the option wil l
be exercised midway between the vesting date and the contractual term of the option. The Company is able to use the simplified method as the options qualify as
“plain vanilla” options as defined by Accounting Standards Codification (“ASC”) 718, Stock
Com
pensation
.
Income taxes
Income taxes are accounted for under the asset and liability method in accordance with ASC 740, Accounting
for
Income
Taxes
. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date. We provide a valuation allowance when we consider it “more likely than not” (greater than a 50%
probability) that a deferred income tax asset will not be fully recovered. Adjustments to the valuation allowance are a component of the deferred income tax
expense or benefit in the consolidated statement of operations.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 with an effective date of January 1, 2018. The results of the Tax Act include, among others,
a reduction to the corporate federal income tax rate from 35% to 21%, the repeal of the Alternative Minimum Tax, and the allowance of net operating losses arising
in tax years ending after 2017 to be carried forward indefinitely, subject to limitation. The law introduces substantial changes to the Internal Revenue Code, with
extensive implications for our federal current and deferred income tax provision. For further information, see Note 19 of the Notes to Consolidated Financial
Statement included in this report.
Use of estimates
The preparation of the financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates are utilized in the valuation of real
estate inventories, including estimated construction and development costs, valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-
based compensation, capitalization of costs, consolidation of variable interest entities and warranty reserves.
Results of Operations
Year ended December 31, 2018 compared to year ended December 31, 2017
Revenue
–
asset
management
Revenue from asset management for year ended December 31, 2018 was $12.5 million. Effective January 2, 2018, the Company entered into the AMA with
CDS. Pursuant to the AMA, CDS will pay CAM an annual cost-plus fee in aggregate amount equal to the sum of (i) the employment expenses of the personnel
dedicated to providing the services to the Comstock Real Estate 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
$1.0 million.
Revenue
–
real
estate
services
Revenue from real estate services for the year ended December 31, 2018 increased by $1.0 to $3.0 million, as compared to $2.0 million for the year ended
December 31, 2017. The increase is attributable to the Company’s acquisition of Comstock Environmental on July 17, 2017.
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Orders,
backlog
and
cancellations
The following table summarizes certain information related to new orders, settlements and backlog for the twelve months ended December 31, 2018 and
2017. The table excludes seven lot sales at the Estates at Leeland project as well as the Momentum | Shady Grove land sale.
Gross new orders
Cancellations
Net new orders
Gross new order revenue
Cancellation revenue
Net new order revenue
Average gross new order price
Settlements
Settlement revenue - finished units
Average settlement price
Backlog units
Backlog revenue
Average backlog price
Twelve Months Ended
December 31,
2018
2017
54
4
50
37,909 $
2,144 $
35,765 $
702 $
54
37,909 $
702 $
16
10,395 $
650 $
88
14
74
47,863
7,509
40,354
544
89
43,399
488
20
13,918
696
$
$
$
$
$
$
$
$
Revenue
–
homebuilding
The number of finished units (finished units excludes lot and land sales) delivered for the year ended December 31, 2018 decreased by 34 to 54 as
compared to 89 units for the year ended December 31, 2017. Average revenue per finished unit delivered increased by $214,000 to $702,000 for the year ended
December 31, 2018 as compared to $488,000 for the year ended December 31, 2017. Revenue from homebuilding decreased by $2.2 million to $41.2 million for
the year ended December 31, 2018 as compared to $43.4 million for the year ended December 31, 2017. Of the $41.2 million in revenue from homebuilding in
2018, $37.9 was from the sale of finished units, $496,000 was from the sale of seven lots at the Estates at Leland and $2.8 million was from the Momentum | Shady
Grove land sale. For the year ended December 31, 2018, the Company settled 54 finished units (16 units at Marwood, 1 units at Emerald Farm, 4 units at Leeland
Station, 14 units at The Townes at 1333, 6 units at The Woods at Spring Ridge, and 13 units at Totten Mews), as compared to 89 units (31 units at Falls Grove, 6
units at Townes at Hallcrest, 2 units at Villas at Two Rivers, 7 units at Estates at Leeland, 18 units at Marrwood East, 6 units at Emerald Farm, 4 units at Powhatan,
1 unit at Redland Road, 3 units at The Woods at Spring Ridge, and 11 units at Totten Mews) for the year ended December 31, 2017. Gross new order revenue,
consisting of revenue from all finished units sold, for the year ended December 31, 2018 was $37.9 million on 54 units as compared to $47.9 million on 88 units for
the year ended December 31, 2017. Net new order revenue, representing revenue for all units sold less revenue from cancellations, for the year ended December 31,
2018 was $35.8 million on 50 units as compared to $40.4 million on 74 units for the year ended December 31, 2017. The increase noted in revenue and average
sales price were a result of the mix of units settled. Our total homebuilding gross margin percentage for the year ended December 31, 2018 decreased by 10.3% to
(3.7)%, as compared to 6.5% for the year ended December 31, 2017. The decrease in gross margins was the result of the number of units settled and the mix of
homes, which included the sales of 7 lots at Leeland Station, 110 multi-family units at Momentum | Shady Grove, and the model unit at Solomons Choice.
Cost
of
sales
–
asset
management
Cost of sales – asset management for the year ended December 31, 2018 was $11.3 million compared to $0 for the year ended December 31, 2017. This
increase from the year ended December 31, 2017 was a result services provided under the AMA.
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Cost
of
sales
–
real
estate
services
Cost of sales – real estate services increased by $0.8 million to $3.1 million during the year ended December 31, 2018, as compared to $2.3 million during
the year ended December 31, 2017. The increase primarily relates to our new initiatives within our real estate services segment to expand our footprint in the real
estate consulting and environmental study fields.
Cost
of
sales
–
homebuilding,
excluding
effects
of
impairment
charges
Cost of sales – homebuilding for the year ended December 31, 2018 increased by $2.2 million to $42.8 million as compared to $40.6 million for the year
ended December 31, 2017. The mix of homes settled during the year ended December 31, 2018 accounted for the increase in cost of sales.
Impairment
charges
We evaluate all of our projects to the extent of the existence of any impairment indicators requiring evaluation to determine if recorded carrying amounts
were recoverable by evaluating discount rates, sales prices, absorption and our analysis of the best approach to marketing our projects for sale.
During 2018 and 2017, as a result of our impairment analysis, the Company wrote off $2.2 million and $0.5 million, respectively, in feasibility, site
securing, predevelopment, design, carry costs and related costs for certain of our communities in the Washington, D.C. metropolitan area due to unsuccessful
negotiations and changes in market conditions.
General
and
administrative
General and administrative expenses for the year ended December 31, 2018 decreased $4.0 million to $1.3 million, as compared to $5.3 million for the year
ended December 31, 2017. The year-over-year decrease is attributable to attrition in employee headcount and general overhead saving measures, in addition to the
AMA, which was effective January 2, 2018. Under the AMA, 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, along with the employment expenses of personnel are to be included as
Cost of sales – Asset Management, as opposed to ‘General and administrative’ expenses as they were historically presented.
Interest
and
real
estate
tax
expense
Interest and real estate tax expense for the year ended December 31, 2018 increased to $171,000 from $41,000 for the year ended December 31, 2017. The
primary reasons for the increase is due to one of our real estate projects having interest and taxes expensed rather than capitalized to inventory during a period of
inactivity, as well as the full year inclusion of Comstock Environmental interest and real estate tax expense.
Income
taxes
During the year ended December 31, 2018, the Company recognized income tax benefit of $1.0 million related to the conversion of Comstock Growth Fund
I & II to Series C Preferred Stock. Refer to Note 10 – Debt to the consolidated financial statements for more information. During the year ended December 31,
2018, the Company recognized income tax benefit of $920,000 and the effective tax rate was 0.24%. During the year ended December 31, 2017, the Company
recognized income tax expense of $38,000 and the effective tax rate was 0.91%.
Liquidity and Capital Resources
We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds,
borrowings from our credit facilities and long-term debt. The winding down of on balance sheet Homebuilding activities will require capital to develop land, to
construct homes, to fund related carrying costs and overhead and to fund various advertising and marketing programs to generate sales. Homebuilding activities
will continue to be funded by private equity and debt placements (which has included
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significant participation from Company insiders), funds derived from various secured and unsecured borrowings to finance construction on acquired land, cash
flow from operations, which includes the sale and delivery of constructed homes, finished and raw building lots. The Company is involved in ongoing discussions
with lenders and equity sources in an effort to provide additional growth capital to fund various new business opportunities , unrelated to the wind down of our
homebuilding operations . See N ote 10 in the accompanying consolidated financial statements for more details on our debt and credit facilities and Note 1 6 in the
accompanying consolidated financial statements for details on private placement offerings in 2018 and 2017.
As of December 31, 2018, $1.8 million of the Company’s secured project related notes were set to mature at various periods through the end of 2019. As of
March 29, 2019, the Company has successfully extended or repaid all obligations with Lenders through March 29, 2019, as more fully described in Note 10 and
Note 21, and we are actively engaging our lenders seeking long term extensions and modifications to the loans where necessary. These debt instruments impose
certain restrictions on our operations, including speculative unit construction limitations, curtailment obligations and financial covenant compliance. If we fail to
comply with any of these restrictions, an event of default could occur. Additionally, events of default could occur if we fail to make required debt service payments
or if we fail to come to agreement on an extension on a certain facility prior to a given loan’s maturity date. Any event of default would likely render the
obligations under these instruments due and payable as of that event. Any such event of default would allow certain of our lenders to exercise cross default
provisions in our loan agreements with them, such that all debt with that institution could be called into default.
At December 31, 2018, $4.9 million of our notes payable to affiliates are set to mature prior to the end of 2019. These funds were originally obtained from
entities wholly owned by our Chief Executive Officer, and the Company maintains the unilateral ability to extend the maturity dates beyond 2019 as needed. The
CEO has historically provided financing in the form of debt and equity to the Company, as needed, through investment vehicles as further described in Notes 10
and 15.
The current performance of our projects has met all required servicing obligations required by the facilities. We are anticipating that with successful
resolution of the debt extension discussions with our lenders, capital raises from our private placements, current available cash on hand, and additional cash from
settlement proceeds at existing and under development communities, the Company will have sufficient financial resources to sustain its operations through the next
12 months. Refer to Note 10 and 22 for further discussion regarding our debts, extension of loan maturity date and other subsequent events impacting our credit
facilities.
Cash Flow
Net cash provided by operating activities was $16.2 million for the year ended December 31, 2018. The $16.2 million net cash provided by operations in
2018 was primarily due to $22.4 million of releases of real estate inventories associated with the settlements at our various communities during the year, an
impairment charge of $2.2 million, offset by the net loss for the year of $4.0 million, and the deferred income tax benefit of $0.9 million recognized as a result of
the conversion of the Comstock Growth Fund I & II notes payable to Series C Preferred Stock. The cash provided by operating activities was $4.7 million for the
year ended December 31, 2017. The $4.7 million net cash provided by operations in 2017 was primarily due to $4.8 million of releases of real estate inventories
associated with the settlements at our various communities during the year, an impairment charge of $0.5 million, increases in accounts payable and accrued
liabilities of $1.4 million, amortization of loan fees and intangible assets of $1.1 million, increases in other assets of $0.8 million, issuances of stock compensation
of $0.3 million, offset by the net loss for the year of $4.8 million. The increase of cash provided by releases of real estate was higher in 2018 due primarily to the
wind down of our homebuilding operations.
Net cash used in investing activities was $41,000 for the year ended December 31, 2018. This was primarily attributable to the purchase of $80,000 in fixed
assets, partially offset by $39,000 in principal received from a note we originated. Net cash used in investing activities was $596,000 for the year ended
December 31, 2017. The greater amount of net cash used in investing activities for the year ended December 31, 2017 was primarily attributable to the cash paid
for the acquisition of Monridge Environmental, LLC of $579,000.
Net cash used in financing activities was $12.1 million for the year ended December 31, 2018. This was primarily attributable to payments on notes
payable, net of proceeds, of $10.2 million and distributions paid to non-
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controlling interests, net of contributions, of $1.8 million. Net cash used in financing activities was $8.2 million for the year ended December 31, 2017. Thi s was
primarily attributable to an increase in distributions paid to non-controlling interests, net of contributions, of $1.4 million and payments on notes payable, net of
proceeds, of $6.4 million.
Share Repurchase Program
In November 2014, our board of directors approved a new share repurchase program authorizing the Company to repurchase up to 429,000 shares of our
Class A common stock in one or more open market or privately negotiated transactions.
As of December 31, 2018 and 2017, 404,000 shares of our Class A common stock remain available for repurchase pursuant to our share repurchase
program.
Inflation
Inflation can have a significant impact on our business performance and the homebuilding industry in general. Rising costs of land, transportation costs,
utility costs, materials, labor, overhead, administrative costs and interest rates on floating credit facilities can adversely affect our business performance. In
addition, rising costs of certain items, such as lumber, can adversely affect the expected profitability of our backlog. Generally, we have been able to recover any
increases in costs through increased selling prices. However, there is no assurance we will be able to increase selling prices in the future to cover the effects of
inflation in addition to other cost increases.
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Item 7A. Quantitative and Qualita tive Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
Reference is made to the consolidated financial statements, the notes thereto, and the report thereon, commencing on page F-1 of this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreem ents with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2018. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, as of December 31, 2018, that our disclosure controls and procedures were
effective, and designed to ensure that (a) information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in the SEC’s rules and instructions, and (b) information is accumulated and communicated to our management, including
our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Limitations on the Effectiveness of Controls
We do not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and
operated, can provide only assurance, at the reasonable assurance level, that the objectives of the control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in
conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f)
and 15d-15(f) of the Exchange Act.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, based on criteria set forth in the
framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation
included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a
conclusion on this evaluation. Our management determined that, as of December 31, 2018, our internal control over financial reporting is effective.
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Changes in Internal Control Over Financial Reporting
No change has occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our last
fiscal quarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The certifications of our principal executive officer and principal financial officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) are filed with
this Annual Report on Form 10-K as Exhibits 31.1 and 31.2. The certifications of our principal executive officer and principal financial officer pursuant to 18
U.S.C.1350 are furnished with this Annual Report on Form 10-K as Exhibit 32.1.
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2019 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K, except that the information relating to our
executive officers is included in Item 1, “Business – Executive Officers” of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2019 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2019 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2019 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2019 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K.
39
Table of Contents
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Annual Report on Form 10-K:
PART IV
(1) Consolidated Financial Statements are listed in the Index to Financial Statements on page F-1 of this Annual Report on Form 10-K.
(2) Schedules have been omitted because they are not applicable or because the information required to be set forth therein is included in the consolidated
financial statements or notes thereto.
(3) Exhibits
40
Table of Contents
Exhibit
Number
Exhibit
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
10.1
10.2
10.3
10.4
10.5
Amended and Restated Certificate of Incorporation (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 16, 2015).
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Comstock Holding Companies, Inc. (incorporated by reference to
an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on February 19, 2019).
Amended and Restated Bylaws (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission
on March 31, 2005).
Certificate of Elimination of the Series A Junior Participating Preferred Stock of the Company filed with the Secretary of State of the State of
Delaware on March 26, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on
March 27, 2015).
Certificate of Designation of Series A Junior Participating Preferred Stock of the Company filed with the Secretary of State of the State of Delaware
on March 26, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March 27,
2015).
Certificate of Designation of Series B Non-Convertible Preferred Stock of the Company filed with the Secretary of State of the State of Delaware on
December 29, 2015 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed on January 4, 2016).
Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock Holding Companies, Inc., filed with the Secretary of the State
of Delaware on March 22, 2017 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission
on March 28, 2017).
Certificate of Amendment of Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock Holding Companies, Inc. filed
with the Secretary of State of the State of Delaware on February 15, 2019 (incorporated by reference to an exhibit to the Registrant’s Current Report
on Form 8-K filed with the Commission on February 19, 2019).
Specimen Stock Certificate (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1, as amended, initially
filed with the Commission on August 13, 2004 (No. 333-118193)).
Form of Indemnification Agreement (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1, as amended,
initially filed with the Commission on August 13, 2004 (No. 333-118193)).
2004 Long-Term Incentive Compensation Plan (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1, as
amended, initially filed with the Commission on August 13, 2004 (No. 333-118193)). +
Form Of Stock Option Agreement under the 2004 Long-Term Incentive Compensation Plan (incorporated by reference to an exhibit to the
Registrant’s Registration Statement on Form S-1, as amended, initially filed with the Commission on August 13, 2004 (No. 333-118193)). +
Form Of Restricted Stock Grant Agreement under the 2004 Long-Term Incentive Compensation Plan(incorporated by reference to an exhibit to the
Registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2005). +
Employee Stock Purchase Plan (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1, as amended, initially
filed with the Commission on August 13, 2004 (No. 333-118193)). +
41
Table of Contents
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Services Agreement, dated March 4, 2005, with Comstock Asset Management, L.C. (incorporated by reference to an exhibit to the Registrant’s
Annual Report on Form 10-K filed with the Commission on March 31, 2005).
Employment Agreement with Christopher Clemente (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1,
as amended, initially filed with the Commission on August 13, 2004 (No. 333-118193)). +
Confidentiality and Non-Competition Agreement with Christopher Clemente (incorporated by reference to an exhibit to the Registrant’s Registration
Statement on Form S-1, as amended, initially filed with the Commission on August 13, 2004 (No. 333-118193)). +
Trademark License Agreement (incorporated by reference to an exhibit to the Registrant’s Registration Statement on Form S-1, as amended, initially
filed with the Commission on August 13, 2004 (No. 333-118193)).
Loan and Security Agreement, dated as of February 2008, by and between the Registrant and Stonehenge Funding, LC. (incorporated by reference to
an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 24, 2008).
Lease Agreement, dated on or about December 31, 2009, with Comstock Asset Management, L.C. by Comstock Property Management, L.C., a
subsidiary of Registrant (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on
March 31, 2010).
Credit Enhancement and Indemnification Agreement, dated February 17, 2011, by and between Registrant and Christopher D. Clemente and
Gregory V. Benson (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on
May 13, 2011).
Right of First Refusal and First Offer Agreement, dated as of July 12, 2011, between Comstock Homebuilding Companies, Inc. and BridgeCom
Development I, LLC (incorporated by reference to an exhibit to the Current Report on Form 8-K filed with the Commission on July 15, 2011).
Loan agreement, dated as of March 25, 2013, by and between Eagle Commercial Ventures, LLC and Comstock Redland Road, L.C. (incorporated
by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 27, 2013).
Loan agreement, dated as of March 25, 2013, by and between Eagle Commercial Ventures, LLC and Comstock Redland Road, L.C. (incorporated
by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 27, 2013).
Loan agreement, dated as of March 25, 2013, by and between Eagle Bank and Comstock Redland Road, L.C. (incorporated by reference to an
exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 27, 2013).
Loan agreement, dated as of March 25, 2013, by and between Eagle Bank and Comstock Redland Road, L.C. (incorporated by reference to an
exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 27, 2013).
Form of Subscription Agreement, dated March 14, 2013, between Comstock Investors VII, L.C. and Subscriber, with accompanying Schedule A
identifying the other Subscription Agreements (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with
the Commission on May 15, 2013).
10.19
Loan agreement, dated as of May 8, 2013, by and between Cardinal Bank and Comstock Yorkshire, L.C. (incorporated by reference to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2013).
42
Table of Contents
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
Form of Subscription Agreement, dated December 12, 2013, between Comstock Investors VIII L.C., and [-], with accompanying Schedule A
identifying other Subscription (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on
March 31, 2014).
Loan agreement, dated December 30, 2013, between Comstock Hall Road, L.C. and Cardinal Bank (incorporated by reference to an exhibit to the
Registrant’s Annual Report on Form 10-K filed with the Commission on March 31, 2014).
Guidance Line of Credit and Security Agreement, dated July 15, 2014 between the Registrant and Eagle Bank (incorporated by reference to an
exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 13, 2014).
Revolving Line of Credit Note, dated July 15, 2014, between the Registrant and Eagle Bank (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 13, 2014).
Revolving Line of Credit Note, dated July 23, 2014, between Comstock Yorkshire, L.C. and Cardinal Bank (incorporated by reference to an exhibit
to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 13, 2014).
Amended and Restated Promissory Note, dated December 18, 2014, between Comstock Holding Companies, Inc. and Comstock Growth Fund, L.C.
(incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on April 14, 2015).
Form of warrant issued in connection with private placement by Comstock Growth Fund, L.C. (incorporated by reference to an exhibit to the
Registrant’s Annual Report on Form 10-K filed with the Commission on April 14, 2015).
Loan agreement, dated December 19, 2014, between Comstock Two Rivers II, L.C. and Cardinal Bank (incorporated by reference to an exhibit to
the Registrant’s Annual Report on Form 10-K filed with the Commission on April 14, 2015).
Section 382 Rights Agreement between Comstock Holding Companies, Inc. and American Stock Transfer & Trust Company, LLC dated March 27,
2015 (incorporated by reference to an Exhibit to the current report on Form 8-K filed with the Commission on March 27, 2015).
Loan agreement, dated February 20, 2015, between Comstock Stone Ridge, L.C. and Cardinal Bank (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2015).
Loan agreement, dated March 17, 2015, between Comstock Two Rivers I, L.C. and Eagle Bank (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on May 15, 2015).
Subscription Agreement and Operating Agreement, dated June 26, 2015, between Comstock Investors IX, L.C., and [-], with accompanying
Schedule A identifying other Subscription (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the
Commission on August 14, 2015).
Note Exchange and Subscription Agreement, dated December 29, 2015, between Comstock Holding Companies, Inc. and Stonehenge Funding, LC
(incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on April 4, 2016).
Revolving Line of Credit Promissory Note, dated December 29, 2015, between Comstock Holding Companies, Inc. and Comstock Growth Fund II,
L.C. (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on April 4, 2016).
43
Table of Contents
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
Form of Subscription Agreement and Operating Agreement dated August 15, 2016, between Comstock Investors X, L.C. and [-], with
accompanying Schedule A identifying subscribers (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed
with the Commission on November 14, 2016).
Form of Warrant issued in connection with private placement by Comstock Investors X, L.C. (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016).
Land Purchase Agreement, between Comstock Sixth Street, LLC and Thos. Somerville Co. (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016).
Membership Interests Agreement, between Comstock Beshers, L.C. and Dresden, LLC (incorporated by reference to an exhibit to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016).
Loan agreement, between Dresden, LLC, Comstock Emerald Farm, L.C. and Cardinal Bank (incorporated by reference to an exhibit to the
Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016).
Promissory note, between Comstock Beshers, L.C. and Year 2003 Trust for Descendants, Pleasants Associates Limited Partnership, and CJC, LLC
(incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2016).
Loan agreement, between Comstock Powhatan, L.C. and Cardinal Bank (incorporated by reference to an exhibit to the Registrant’s Quarterly Report
on Form 10-Q filed with the Commission on November 14, 2016).
Purchase and Sale Agreement, dated October 24, 2016, between Comstock Redland Road II, L.C. and Momentum Apartments, LLC (incorporated
by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on April 17, 2017).
Operating Agreement, dated October 24, 2016, between Comstock Redland Road III, L.C. and SCG Development Partners, LLC to form Momentum
General Partners, LLC (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on
April 17, 2017).
Share Exchange Agreement between Comstock Holding Companies, Inc. and Investor Management, L.C., Christopher Clemente and Teresa A. Schar
dated March 22, 2017 (incorporated by reference to an exhibit to the Registrant’s Current Report on Form 8-K filed with the Commission on March
28, 2017).
Loan agreement between Comstock Sixth Street, LLC and Eagle Bank (incorporated by reference to an exhibit to the Registrant’s Quarterly Report
on Form 10-Q filed with the Commission on May 15, 2017).
Series C Repurchase Agreement between the Company and Investor Management, L.C. (incorporated by reference to an exhibit to the Registrant’s
Quarterly Report on Form 10-Q filed with the Commission on May 15, 2017).
Asset Purchase Agreement, dated July 14, 2017, between CDS Capital Management, L.C., and Monridge Environmental, LLC (incorporated by
reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 16, 2017).
Amendment to the Operating Agreement, dated October 13, 2017, between Comstock Investors X, L.C. and Comstock Development Services, L.C.
(incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 16, 2017).
Form of Warrant, dated October 13, 2017, between Comstock Investors X, L.C. and Comstock Development Services, L.C. (incorporated by
reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on November 16, 2017).
44
Table of Contents
10.49
10.50
10.51
10.52
10.53
10.54
Master Asset Management Agreement, dated January 2, 2018, between CDS Asset Management, L.C. and Comstock Development Services, LC
(incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on May 16, 2018) .
Third Amended and Restated Promissory Note, dated May 22, 2018, between Comstock Holding Companies, Inc. and Comstock Growth Fund, L.C.
(incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
Second Amended and Restated Operating Agreement of Comstock Growth Fund, L.C., dated May 22, 2018 (incorporated by reference to an exhibit
to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
Membership Interest Exchange and Subscription Agreement, dated May 23, 2018, between Comstock Holding Companies, Inc., Comstock Growth
Fund, L.C., and certain members of Comstock Growth Fund (incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form
10-Q filed on August 14, 2018).
Note Exchange and Subscription Agreement, dated May 23, 2018, between Comstock Holding Companies, Inc. and Comstock Growth Fund II, L.C.
(incorporated by reference to an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
Comstock Holding Companies, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Annex B to the Registrant’s Definitive Proxy
Statement on Schedule 14A filed on January 22, 2019).+
14.1(2)
Code of Ethics (incorporated by reference to an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Commission on March 31,
2005).
21.1*
23.1*
31.1*
31.2*
32.1*
101*
*
+
List of subsidiaries
Consent of BDO USA, LLP
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in eXtensible Business
Language (XBRL): (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes
in Stockholder’s Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
Filed herewith.
Management contracts or compensatory plans, contracts or arrangements
45
Table of Contents
SIGNA TURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2019
COMSTOCK HOLDING COMPANIES, INC.
By:
/s/ Christopher Clemente
Christopher Clemente
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
Signature
/s/ Christopher Clemente
Christopher Clemente
/s/ Christopher Guthrie
Christopher Guthrie
/s/ David Guernsey
David M. Guernsey
/s/ James MacCutcheon
James A. MacCutcheon
/s/ Norman Chirite
Norman D. Chirite
/s/ Robert Pincus
Robert P. Pincus
/s/ Socrates Verses
Socrates Verses
/s/ Joseph Squeri
Joseph M. Squeri
Capacity
Chairman of the Board of Directors and
Chief Executive Officer (Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
46
Date
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
March 29, 2019
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Operations for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
Table of Contents
Stockholders and Board of Directors
Comstock Holding Companies, Inc.
Reston, Virginia
Report of Independent Regist ered Public Accounting Firm
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Comstock Holding Companies, Inc. (the “Company”) and subsidiaries as of December 31, 2018
and 2017, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December
31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/ s/ BDO USA, LLP
We have served as the Company’s auditor since 2016.
McLean, Virginia
March 29, 2019
F-2
COMSTOCK HOLDING COMPANIE S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
December 31,
2018
December 31,
2017
Table of Contents
ASSETS
Cash and cash equivalents
Restricted cash
Trade receivables
Trade receivables - related parties
Real estate inventories
Fixed assets, net
Goodwill
Intangible assets, net
Other assets, net
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities
Deferred revenue
Notes payable - secured by real estate inventories, net of deferred financing charges
Notes payable - due to affiliates, unsecured, net of discount
Notes payable - unsecured, net of deferred financing charges
Income taxes payable
TOTAL LIABILITIES
Commitments and contingencies (Note 11)
STOCKHOLDERS’ EQUITY
Series C preferred stock, $0.01 par value, 3,000,000 shares authorized,
2,799,848 and 579,158 shares issued and outstanding with a
liquidation preference of $13,999 and $2,896 at December 31, 2018
and 2017, respectively
Class A common stock, $0.01 par value, 11,038,071 shares authorized,
3,703,513 and 3,295,518 issued and 3,617,943 and 3,209,948
outstanding at December 31, 2018 and 2017, respectively
Class B common stock, $0.01 par value, 220,250 shares authorized,
issued and outstanding at December 31, 2018 and 2017
Additional paid-in capital
Treasury stock, at cost (85,570 shares Class A common stock)
Accumulated deficit
TOTAL COMSTOCK HOLDING COMPANIES, INC. DEFICIT
Non-controlling interests
TOTAL EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
$
$
5,780 $
1,231
1,329
2,950
20,253
221
1,702
170
1,464
35,100 $
7,614 $
1,875
13,432
4,903
595
51
28,470
$
7,193 $
37
2
180,673
(2,662)
(194,319)
(9,076)
15,706
6,630
35,100 $
$
1,806
1,141
491
145
44,711
309
1,702
237
616
51,158
9,116
—
23,215
14,893
1,285
39
48,548
442
33
2
177,612
(2,662)
(189,803)
(14,376)
16,986
2,610
51,158
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
For the years ended December 31,
2017
2018
Revenues
Revenue—homebuilding
Revenue—asset management
Revenue—real estate services
Total revenue
Expenses
Cost of sales—homebuilding, excluding impairment charges
Cost of sales—asset management
Cost of sales—real estate services
Impairment charges
Sales and marketing
General and administrative
Interest and real estate tax expense
Operating loss
Other income, net
Loss before income tax benefit (expense)
Income tax benefit (expense)
Net loss
Net income attributable to non-controlling interests
Net loss attributable to Comstock Holding Companies, Inc.
Paid-in-kind dividends on Series B Preferred Stock
Extinguishment of Series B Preferred Stock
Net loss attributable to common stockholders
Basic loss per share
Diluted loss per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
$
$
$
$
41,245
$
12,473
3,031
56,749
42,799
11,291
3,090
2,232
1,005
1,262
171
(5,101)
135
(4,966)
920
(4,046)
470
(4,516)
—
—
(4,516)
$
(1.22)
$
(1.22)
$
3,705
3,705
43,399
—
2,031
45,430
40,585
—
2,297
526
1,490
5,297
41
(4,806)
66
(4,740)
(38)
(4,778)
247
(5,025)
78
(1,011)
(4,092)
(1.21)
(1.21)
3,370
3,370
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Balance at January 1, 2017
Stock compensation and issuances
Series B conversion to Series C
Stock repurchases and issuances
Dividends paid in-kind
Non-controlling interest contributions
Non-controlling interest distributions
Net (loss) income
Balance at December 31, 2017
Stock compensation and issuances
Accrued Liability settled through
issuance
of stock
Shares withheld related to net share
settlement of restricted stock awards
Series C preferred stock conversion
of CGF I & II
Non-controlling interest distributions
Net (loss) income
Balance at December 31, 2018
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands, except per share data)
Series B
Preferred Stock
Series C
Preferred Stock
Class A
Class B
Shares
842
—
(858 )
—
16
—
—
—
—
—
Amount
1,280
$
—
(1,304 )
—
24
—
—
—
—
—
Shares
—
—
772
(193 )
—
—
—
—
579
—
Amount
—
—
589
(147 )
—
—
—
—
442
—
Shares
3,035
90
—
170
—
—
—
—
3,295
427
$
$
Amount
30
$
1
—
2
—
—
—
—
33
4
$
$
Shares
390
—
—
(170 )
—
—
—
—
220
—
Amount
4
$
—
—
(2 )
—
—
—
—
2
—
$
$
Additional
paid-in
capital
Treasury
stock
Accumulated
deficit
Non-
controlling
interest
Total
$
176,251
531
715
58
(24 )
81
—
—
177,612
257
$
(2,662 ) $
—
—
—
—
—
—
—
(2,662 ) $
—
(184,778 ) $
—
—
—
—
—
—
(5,025 )
(189,803 ) $
—
$
18,252
—
—
—
—
4,919
(6,432 )
247
16,986
—
$
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
—
2,221
—
—
2,800
$
6,751
—
—
7,193
—
(19 )
—
—
—
3,703
$
—
—
—
—
—
37
—
—
—
—
—
220
$
—
—
—
—
—
2
131
(38 )
—
—
—
—
—
—
2,711
—
—
180,673
$
—
—
—
(2,662 ) $
—
—
(4,516 )
(194,319 ) $
—
(1,750 )
470
15,706
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
8,377
532
—
(89 )
—
5,000
(6,432 )
(4,778 )
2,610
261
131
(38 )
9,462
(1,750 )
(4,046 )
6,630
Table of Contents
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except per share data)
Cash flows from operating activities:
Net loss
Adjustment to reconcile net loss to net cash provided by operating activities
Amortization of loan discount, loan commitment and deferred financing fees
Deferred income tax benefit
Depreciation expense
Earnings from unconsolidated joint venture, net of distributions
Stock compensation
Impairment charges
Changes in operating assets and liabilities:
Trade receivables
Real estate inventories
Other assets
Accrued interest
Accounts payable and accrued liabilities
Income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Business acquisition, net of cash acquired
Purchase of fixed assets
Principal received on note receivable
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from notes payable
Payments on notes payable
Loan financing costs
Distributions to non-controlling interests
Contributions from non-controlling interests
Repurchase of Series C Preferred Stock
Taxes paid related to net share settlement of equity awards
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash, restricted cash, and cash equivalents, beginning of period
Cash, restricted cash, and cash equivalents, end of period
Supplemental cash flow information:
Interest paid, net of interest capitalized
Income taxes paid
Supplemental disclosure for non-cash activity:
Business acquisition notes payable
Seller's note payable
Accrued liability settled through issuance of stock
Increase in Series B preferred stock value in connection with dividends paid in-kind
Conversion of Class B common stock to Class A common stock
Extinguishment of Series B preferred stock
Increase in Series C preferred stock upon conversion of CGF I & II
Increase in Additional Paid in Capital upon conversion of CGF I & II
Extinguishment of Notes payable - due to affiliates, net of discount
For the years ended December 31,
2017
2018
$
(4,046)
$
(4,778)
318
(936)
168
48
234
2,232
(3,643)
22,399
(935)
(103)
504
12
16,252
—
(80)
39
(41)
19,030
(29,191)
(198)
(1,750)
—
—
(38)
(12,147)
4,064
2,947
7,011
(190)
(8)
—
—
131
—
—
—
6,751
2,711
(10,402)
$
$
$
$
$
$
$
$
$
$
$
$
1,105
—
181
30
346
526
271
4,778
787
107
1,356
20
4,729
(579)
(54)
37
(596)
23,517
(29,947)
(234)
(6,432)
5,000
(89)
—
(8,185)
(4,052)
6,999
2,947
(493)
(18)
1,710
115
127
24
2
1,011
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
1. ORGANIZATION
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data, number of units, or as otherwise noted)
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted real estate development and services company
primarily focused in the mid-Atlantic region of the United States. In 2018, the Company has changed its focus to commercial development, asset management, and
provision of complementary real estate related services, transitioning from its primary reliance upon revenue generated by production-oriented, for-sale
homebuilding. To accomplish the transition from homebuilding to the new lines of business, the Company will operate through two real estate focused platforms –
CDS Asset Management, LC (“CAM”) and Comstock Real Estate Services, LC (“CRES”). 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 and any predecessor entities unless the
context suggests otherwise.
The Company’s Class A common stock is traded on the Nasdaq Capital Market (“NASDAQ”) under the symbol “CHCI”.
Liquidity Developments
We finance our Asset Management and Real Estate Services operations, capital expenditures, and business acquisitions with internally generated funds,
borrowings from our credit facilities and long-term debt. The winding down of on balance sheet Homebuilding activities will require capital to develop land, to
construct homes, to fund related carrying costs and overhead and to fund various advertising and marketing programs to generate sales. Homebuilding activities
will continue to be funded by private equity and debt placements (which has included significant participation from Company insiders), funds derived from various
secured and unsecured borrowings to finance construction on acquired land, cash flow from operations, which includes the sale and delivery of constructed homes,
finished and raw building lots. The Company is involved in ongoing discussions with lenders and equity sources in an effort to provide additional growth capital to
fund various new business opportunities. See Note 10 in the accompanying consolidated financial statements for more details on our debt and credit facilities and
Note 17 in the accompanying consolidated financial statements for details on private placement offerings in 2018 and 2017.
As of December 31, 2018, $1.8 million of the Company’s secured project related notes were set to mature on March 15, 2019. On March 14, 2019 the
Company paid in full the secured project related note. As of March 29, 2019, the Company has successfully repaid all obligations with Lenders through March 29,
2019, as more fully described in Note 10 and Note 21. These debt instruments impose certain restrictions on our operations, including speculative unit construction
limitations, curtailment obligations and financial covenant compliance. If we fail to comply with any of these restrictions, an event of default could occur.
Additionally, events of default could occur if we fail to make required debt service payments or if we fail to come to agreement on an extension on a certain facility
prior to a given loan’s maturity date. Any event of default would likely render the obligations under these instruments due and payable as of that event. Any such
event of default would allow certain of our lenders to exercise cross default provisions in our loan agreements with them, such that if we default on an obligation,
all debt with that particular institution could be called into default.
At December 31, 2018, $4.9 million of our notes payable to affiliates were set to mature prior to the end of 2019. These funds were primarily obtained from
entities wholly owned by our Chief Executive Officer, and the Company maintains the unilateral ability to extend the maturity dates beyond 2019 as needed. The
CEO has historically provided financing in the form of debt and equity to the Company, as needed, through investment vehicles as further described in Notes 10
and 15.
F-7
Table of Contents
The current performance of our projects has met all required servicing obligati ons required by the facilities. We are anticipating that with successful
resolution of the debt extension discussions with our lenders, current available cash on hand, and additional cash from settlement proceeds at existing and under
development communiti es, the Company will have sufficient financial resources to sustain its operations through the next 12 months . Refer to Note 10 for further
discussion regarding extensions and Note 2 1 for other subsequent events impacting our credit facilities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies and practices used in the preparation of the consolidated financial statements is as follows:
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States
of America (“GAAP”) and include the accounts of the Company and all of its majority-owned and controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated. Investments less than 100% owned partnerships and affiliates are accounted for using the equity method unless it is
determined that the Company has control of the entity, in which case the entity would be consolidated. The Company had one joint venture investment accounted
for using the equity method as of December 31, 2018 and 2017.
Cash and cash equivalents and restricted cash
Cash and cash equivalents are comprised of cash and short-term investments with maturities of three months or less when purchased. At times, the
Company may have deposits with institutions in excess of federally insured limits. To date, we have not experienced loss or lack of access to our invested cash or
cash equivalents; however, we can provide no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial
market. At December 31, 2018 and 2017, the Company had restricted cash of $1.2 million and $1.1 million, respectively, related to restricted purchaser escrow
deposits and cash held in escrow as collateral for letters of credit.
Trade Receivables
Trade receivables are recorded at the amount invoiced. We reduce accounts receivable by estimating an allowance for amounts that may become
uncollectible in the future. Management determines the estimated allowance for uncollectible amounts based on their judgements in evaluating the aging of the
receivables and the financial condition of our clients, which may be dependent on the type of client and the client’s current financial condition.
Real estate inventories
Real estate inventories include land, land development costs, construction and other costs. Real estate held for development and use is stated at cost, or
when circumstances or events indicate that the real estate is impaired, at estimated fair value. Real estate held for sale is carried at the lower of cost or fair value
less estimated costs to sell. Land, land development and indirect land development costs are accumulated by specific project and allocated to various units within
that project using specific identification and allocation based upon the relative sales value, unit or area methods. Direct construction costs are assigned to units
based on specific identification. Construction costs primarily include direct construction costs and capitalized field overhead. Other costs are comprised of fees,
capitalized interest and real estate taxes. Costs incurred to sell real estate are capitalized to the extent they are reasonably expected to be recovered from the sale of
the project and are tangible assets or services performed to obtain regulatory approval of sales. Other selling costs are expensed as incurred.
F-8
Table of Contents
If the project is considered held for sale, it is valued at the lower of cos t or fair value less estimated selling costs. The evaluation takes into consideration
the current status of the property, carrying costs, costs of disposition, various restrictions and any other circumstances that may affect fair value including
management ’s plans for the property. For assets held for development and use, a write-down to estimated fair value is recorded when the net carrying value of the
property exceeds its estimated undiscounted future cash flows. Estimated fair value is based on comparab le sales of real estate in the normal course of business
under existing and anticipated market conditions. These evaluations are made on a property-by-property basis whenever events or changes in circumstances
indicate that the net book value may not be re coverable. As of December 31, 201 8 and 201 7 , the Company did not have any development projects considered to
be held for sale .
Capitalized interest and real estate taxes
Interest and real estate taxes incurred relating to the development of lots and parcels are capitalized to real estate inventories during the active development
period, which generally commences when borrowings are used to acquire real estate assets and ends when the properties are substantially complete or the property
becomes inactive. A project becomes inactive when development and construction activities have been suspended indefinitely. Interest is capitalized based on the
interest rate applicable to specific borrowings or the weighted average of the rates applicable to other borrowings during the period. Interest and real estate taxes
capitalized to real estate inventories are expensed as a component of cost of sales as related units are settled.
The following table is a summary of interest and real estate taxes incurred, capitalized and expensed for units settled:
Total interest incurred and capitalized
Total real estate taxes incurred and capitalized
Total interest and real estate taxes incurred and
capitalized
Interest expensed as a component of cost of sales
Real estate taxes expensed as a component of cost of
sales
Interest and real estate taxes expensed as a component
of cost of sales
$
$
$
Twelve Months Ended
December 31,
2018
2017
2,415 $
306
2,721 $
3,299 $
4,223
354
4,577
2,604
340
267
$
3,639 $
2,871
The amount of interest from entity level borrowings that we are able to capitalize in accordance with Accounting Standards Codification (“ASC”) 835 is
dependent upon the average accumulated expenditures that exceed project specific borrowings. Additionally, when a project becomes inactive, its interest, real
estate taxes and indirect production overhead costs are no longer capitalized but rather expensed in the period they are incurred.
The following is a breakdown of the interest and real estate taxes expensed in the consolidated statement of operations for the periods presented:
Interest incurred and expensed from entity level
borrowings
Interest incurred and expensed for inactive projects
Real estate taxes incurred and expensed for inactive
projects
F-9
Twelve Months Ended
December 31,
2018
2017
$
$
97 $
61
13
171 $
—
41
—
41
Table of Contents
Fixed assets
Fixed assets are carried at cost less accumulated depreciation and are depreciated on the straight-line method over their estimated useful lives as follows:
Furniture and fixtures
Office equipment and vehicles
Leasehold improvements
Computer equipment
Capitalized software
7 years
5 years
life of related lease
3 years
3 years
When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from their separate accounts and any gain or loss on
sale is reflected in operations. Expenditures for maintenance and repairs are charged to expense as incurred.
Goodwill and Intangible Assets
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.
We perform our annual goodwill impairment review during our fiscal fourth quarter. 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.
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 its 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 its 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. 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. 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
F-10
Table of Contents
Warranty reserve
Warranty reserves for units settled are established to cover potential costs for materials and labor with regard to warranty-type claims expected to arise
during the typical one-year warranty period provided by the Company or within the two-year statutorily mandated structural warranty period for condominiums.
Because the Company typically subcontracts its homebuilding work, subcontractors are required to provide the Company with an indemnity and a certificate of
insurance prior to receiving payments for their work. Claims relating to workmanship and materials are generally the primary responsibility of the subcontractors
and product manufacturers. The warranty reserve is established at the time of closing and is calculated based upon historical warranty cost experience and current
business factors. This reserve is an estimate and actual warranty costs could vary from these estimates. Variables used in the calculation of the reserve, as well as
the adequacy of the reserve based on the number of homes still under warranty, are reviewed on a periodic basis. Warranty claims are directly charged to the
reserve as they arise. The following table is a summary of warranty reserve activity, which is included in accounts payable and accrued liabilities:
Balance at beginning of period
Additions
Releases and/or charges incurred
Balance at end of period
Years ended December 31,
2017
2018
258
$
108
(171)
195
$
287
178
(207)
258
$
$
Contract Liabilities
Progress payment balances in excess of revenue recognized, as well as advance payments received from customers, are classified as deferred contract
liabilities on the consolidated balance sheet in the financial statement line item titled “Deferred revenue.” Homebuilding purchase deposits are classified as deferred
contract liabilities on the consolidated balance sheet in the financial statement line item titled “Accounts payable and accrued liabilities.”
Contract liabilities consisted of the following:
Contract Liabilities: Customer Deposits and Deferred
Revenue
Homebuilding - Customer Deposits
Asset Management - Deferred revenue
Total Contract Liabilities
Years ended December 31,
2017
2018
$
$
1,189
$
1,875
3,064
$
575
—
575
Deferred Revenue – Asset Management relate to the AMA executed on March 30, 2018 and effective January 2, 2018. See Note 16 – Related Party
Transactions for details regarding this transaction.
The Company’s other contract liabilities, that consist of deposits received from customers (“Customer deposits”) on homes not settled, were $1.2 million
and $0.6 million as of December 31, 2018 and 2017, respectively. During the year ended December 31, 2018, the Company recognized in revenue approximately
$0.5 million of the customer deposits held as of December 31, 2017.
Customer deposits are also included in Note 9 – Accounts
Payable
and
Accrued
Liabilities
.
Revenue recognition
The Company’s revenues consist primarily of 1) buildout of the remaining projects under the homebuilding platform, 2) recurring fees earned under the
AMA, 3) property management, and 4) real estate management and consulting services. All of the Company’s revenue streams are U.S. based and substantially all
are accounted for as short-term contracts. As such, the performance obligations required to complete contracts have an expected duration of less than one year. As a
result, the Company does not disclose the value of unsatisfied performance obligations for contracts in accordance with the optional exemptions related to the
disclosure of transaction price allocation
F-11
Table of Contents
under ASC 606. Additionally, incremental costs of obtaining a contract are recognized as an e xpense when incurred because the amortization period of the asset
would have been recognized in one year or less.
The following table presents the Company’s sales from contracts with customers disaggregated by categories which best represents how the nature, amount,
timing and uncertainty of sales are affected by economic factors.
Revenue by customer
Individual customers
Related party
Commercial
Total Revenue by Customer
Revenue by contract type
Fixed-price
Cost-plus
Time and Material
Total Revenue by contract type
Years ended December 31,
2017
2018
$
$
$
$
41,245
$
12,900
2,604
56,749
$
42,386
$
12,040
2,323
56,749
$
43,399
—
2,031
45,430
43,399
—
2,031
45,430
Revenue and related profits or losses from homebuilding contracts include the sale of residential properties and units, finished lots and land sales is
recognized on the settlement date at the contract sales price, when control is transferred to our customers. These contracts meet the criteria for recognizing revenue
at a point in time. As such, these revenues are disaggregated in ‘Individual customers’ and ‘Fixed-price’ in the tables above.
Under the recently executed AMA and most of the Company’s real estate services contracts, performance obligations are satisfied over time. For
performance obligations satisfied over time, the objective is to measure progress in a manner which depicts the performance of transferring control to the customer.
As such, the Company recognizes revenue over time using the “right-to-invoice” cost-to-cost revenue recognition model, which includes cost-plus and fixed-prices
contracts, as this depicts when control of the promised goods and/or services are transferred to the customer. Sales are recognized as the ratio of actual costs of
work performed to the estimated costs at completion of the performance obligation (cost-to-cost). As such, these revenues are disaggregated in ‘Related party’ and
‘Commercial’ customers, and ‘Cost-plus’ and ‘Fixed-price’ in the tables above.
Other revenue earned from management, consulting and administrative support services provided, which may or may not be covered by a formal contract,
are generally time and material based. Revenue from these contracts is recognized as the services are provided. As such, these revenues are disaggregated in
‘Commercial’ and ‘Time and Material’ in the tables above.
Advertising costs
The total amount of advertising costs charged to operations for the year ended December 31, 2018 was $130, of which $129 was charged to sales and
marketing and $1 was charged to general and administrative expenses. The total amount of advertising costs charged to operations for the year ended December 31,
2017 was $568, of which $560 was charged to sales and marketing and $8 was charged to general and administrative expenses.
Stock compensation
As discussed in Note 14, the Company sponsors stock option plans and restricted stock award plans. The Company accounts for its share-based awards
pursuant to Accounting Standards Codification (“ASC”) 718, Share
Based
Payments
. ASC 718 requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements over the service period based on their fair values at the date of grant. For the year ended
December 31, 2018, total stock based compensation cost was $257 of which $234 was charged to expenses within ‘general and administrative’ and ‘cost of sales-
real estate services’ in the consolidated statement of operations, and $23 was capitalized to ‘Real estate inventories’. For the year ended December 31, 2017, total
stock based compensation cost was $405 of which $346 was charged to expenses within ‘general and administrative’ and ‘cost of sales-real estate services’ in the
consolidated statement of operations, and $59 was capitalized to ‘Real estate inventories’.
F-12
Table of Contents
Income taxes
Income taxes are accounted for under the asset and liability method in accordance with ASC 740, Accounting
for
Income
Taxes
. Deferred tax assets and
liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on the deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date. We provide a valuation allowance when we consider it “more likely than not” (greater than a 50%
probability) that a deferred income tax asset will not be fully recovered. Adjustments to the valuation allowance are a component of the deferred income tax
expense or benefit in the consolidated statement of operations.
The Tax Cuts and Jobs Act was enacted on December 22, 2017 with an effective date of January 1, 2018. The results of the Tax Act include, among others,
a reduction to the corporate federal income tax rate from 35% to 21%, the repeal of the Alternative Minimum Tax, and the allowance of net operating losses arising
in tax years ending after 2017 to be carried forward indefinitely, subject to limitation. The law introduces substantial changes to the Internal Revenue Code, with
extensive implications for our federal current and deferred income tax provision. For further information, see Note 19 of the Notes to Consolidated Financial
Statement included in this report.
Loss per share
The weighted average shares and share equivalents used to calculate basic and diluted loss per share for the years ended December 31, 2018 and 2017 are
presented on the consolidated statement of operations. Restricted stock awards, stock options and warrants for the years ended December 31, 2018 and 2017 are
included in the diluted loss per share calculation using the treasury stock method and average market prices during the periods, unless the restricted stock award,
stock options and warrants would be anti-dilutive.
As a result of the net losses for the years ended December 31, 2018 and 2017, diluted net loss per share excludes the effects of 450 and 400 warrants,
respectively; stock options of 441 and 489, respectively; and 138 and 243 restricted stock awards, respectively.
Comprehensive income (loss)
For the years ended December 31, 2018 and 2017, comprehensive income (loss) equaled net income (loss); therefore, a separate statement of
comprehensive income (loss) is not included in the consolidated financial statements.
Segment reporting
During 2018, we revised our business strategy and transitioned our business operations to three operating segments: Homebuilding, Asset Management and
Real Estate Services. Prior to this transition we operated our business through three segments: Homebuilding, Multi-family and Real Estate Services. We are
focused on the Washington, D.C. market.
In our Homebuilding segment, we develop properties with the intent to sell as fee-simple properties or condominiums to individual buyers or to private or
institutional investors.
In our Asset Management segment, we manage projects ranging from approximately 100-500 residential units in locations that are supply constrained with
demonstrated demand for stabilized assets. We also provide development and asset management services to a wide range of real estate assets and businesses that
include apartments, hotels, office buildings, leased lands, retail stores, mixed-use developments, and urban developments.
In our Real Estate Services segment we provide services in all aspects of real estate including strategic planning, land development, entitlement, sales and
marketing, workout and turnaround strategies, financing and general construction.
F-13
Table of Contents
The following disclosure includes the Company’s three reportable segments of Homebuilding, Asset Management and Real Estate Services. Each of these
segments operates within the Compa ny’s single Washington, D.C. reportable geographic segment.
Twelve Months Ended December 31, 2018
Gross revenue
Gross profit, excluding impairment charges
Net (loss) income
Total assets
Depreciation, amortization, and stock based
compensation
Interest expense
Twelve Months Ended December 31, 2017
Gross revenue
Gross profit
Net (loss) income
Total assets
Depreciation, amortization, and stock based
compensation
Interest expense
Asset
Management
Real Estate
Services
Homebuilding
Total
$
12,473 $
1,182
1,187
2,882
159
—
$
3,031 $
(59)
(849)
3,242
221
97
41,245 $
(1,554)
(5,304)
28,976
17
74
56,749
(431)
(4,966)
35,100
397
171
Real Estate
Services
Homebuilding
Total
2,031 $
(268)
(430)
3,684
177
41
43,399 $
2,814 $
(4,348) $
47,474 $
409 $
— $
45,430
2,546
(4,778)
51,158
586
41
The Company allocates sales, marketing and general and administrative expenses to the individual segments based upon specifically allocable costs.
Use of estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates are utilized in the valuation of real
estate inventories, valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-based compensation, capitalization of costs, consolidation
of variable interest entities and warranty reserves.
Reclassifications
Reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. For the years ended
December 31, 2018 and 2017, we reclassified restricted cash into the “cash, restricted cash, and cash equivalents” balance on the Consolidated Statements of Cash
Flows.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with
Customers” (“ASU 2014-09”). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU No. 2014-09 will require an entity to recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The Company adopted this standard using the modified retrospective method effective January 1, 2018. There were no material
adjustments to the financial statements as a result of this adoption.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"), to increase transparency and comparability among organizations' accounting for
leases. The guidance requires a company to recognize right-of-
F-14
Table of Contents
use assets and lease liabilities on the balance sheet, as well as to disclose key quantitative and qualitative information about leasing arrange ments. This guidance is
effective on a modified retrospective basis for reporting periods beginning after December 15, 2018, with early adoption permitted. As permitted by the guidance,
the Company will elect to retain the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date.
Furthermore, the Company will not have to reassess contracts entered into prior to the adoption date for the existence of a lease. The Company will also elect n ot
to restate prior periods for the impact of the adoption of the new standard and will instead recognize a cumulative-effect adjustment to beginning retained earnings
as of January 1, 2019 for any prior period income statement effects identified.
The Company has been assessing the changes required to support the adoption of the new standard, as well as the quantitative impact this guidance will
have on its financial statements and related disclosures. As a result, the Company expects this standard will result in no material recognition of Right of Use Assets
or Lease Liabilities on its consolidated balance sheet, as a result of existing office leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which creates a new framework to evaluate financial
instruments, such as trade receivables, for expected credit losses. This new framework replaces the existing incurred loss approach and is expected to result in more
timely recognition of credit losses. ASU No. 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is not until
years beginning after December 15, 2018. We are evaluating the effect this guidance will have on our financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain
Cash
Receipts
and
Cash
Payments
(“ASU
2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230,
Statement
of
Cash
Flows
, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash
flows. Additionally, in November 2016, the FASB issued ASU 2016-18, Statement
of
Cash
Flows
(Topic
230),
Restricted
Cash
(“ASU 2016-18”). ASU 2016-18
clarifies certain existing principles in ASC 230, Statement
of
Cash
Flows
, including providing additional guidance related to transfers between cash and restricted
cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. Both ASU
2016-15 and ASU 2016-18 became effective for the Company’s fiscal year beginning January 1, 2018. The adoption of ASU 2016-15 modified the Company’s
disclosures, resulting in a reclassification of $1.1 million of restricted cash for the year ended December 31, 2017 to be included in cash within the consolidated
statement of cash flows.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”, which provides a more
robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The standard requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets,
the set is not a business. ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017. The amendments in
ASU 2017-01 should be applied prospectively on or after the effective date. The adoption of ASU 2017-01on January 1, 2018 did not have a material effect on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes Step 2 from the goodwill impairment
test and replaces the qualitative assessment. Impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit.
Under this revised guidance, failing Step 1 will always result in a goodwill impairment. The amendments in this update should be applied prospectively for annual
and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests with measurement dates after
January 1, 2017. The Company early adopted this guidance during the fourth quarter of 2018 and the early adoption did not have a material impact on the
Company’s consolidated financial statements.
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In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting.” The amendments
in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.
ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, b eginning after December 15, 2017. The amendments in this update
should be applied prospectively to an award modified on or after the adoption date. T he adoption of ASU 2017-09 did not have a material effect on our
consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 118” (“ASU 2018-05”). The Tax Cuts and Jobs Act (the “Act”) changes existing United States tax law and includes numerous provisions that will affect
businesses. The Act, for instance, introduces changes that impact U.S. corporate tax rates, business-related exclusions, and deductions and credits. ASC Topic 740
provides accounting and disclosure guidance regarding the recognition of taxes payable or refundable for the current year and the recognition of deferred tax
liabilities and deferred tax assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. In
accordance with SEC Staff Accounting Bulletin (SAB) 118, entities that elect to record provisional amounts must base them on reasonable estimates and may
adjust those amounts for a period of up to a year after the December 22, 2017 enactment date. The amendments of ASU 2018-05 did not have a material effect on
our consolidated financial statements.
In August 2018, the 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. We do not expect the adoption of this pronouncement to have a material impact on our
consolidated financial statements.
Other accounting pronouncements issued or effective during the year ended December 31, 2018 are not applicable to us or are not anticipated to have a
material effect on our consolidated financial statements.
3. TRADE RECEIVABLES & TRADE RECEIVABLES – RELATED PARTIES
Trade receivables include amounts due from real estate services, asset management, commercial development, home sales transactions and amounts due
from related parties with whom we have service arrangements. There is no allowance for doubtful accounts recorded.
Trade
Due from Settlement Attorneys
Other
December 31,
2018
December 31,
2017
$
$
804 $
441
84
1,329 $
432
—
59
491
As of December 31, 2018 and 2017, the Company had $3.0 million and $.1 million, respectively, of receivables from related parties, primarily related to
initial AMA.
4. REAL ESTATE INVENTORIES
Real estate inventories include land, land development costs, construction and other costs. Real estate held for development and use is stated at cost, or
when circumstances or events indicate that the real estate is impaired, at
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estimated fair value. Real estate held for sale is carried at the lower of cost or fair value less estimated costs to sell. Land, land development and indirect land
development costs are accumulated by specific project and allocated to various units within that project using specif ic identification and allocation based upon the
relative sales value, unit or area methods. Direct construction costs are assigned to units based on specific identification. Construction costs primarily include direct
construction costs and capitalized fie ld overhead. Other costs are comprised of fees, capitalized interest and real estate taxes. Costs incurred to sell real estate are
capitalized to the extent they are reasonably expected to be recovered from the sale of the project and are tangible assets o r services performed to obtain regulatory
approval of sales. Other selling costs are expensed as incurred.
For assets held for development and use, a write-down to estimated fair value is recorded when the net carrying value of the property exceeds its estimated
undiscounted future cash flows. Estimated fair value is based on comparable sales of real estate in the normal course of business under existing and anticipated
market conditions. These evaluations are made on a property-by-property basis whenever events or changes in circumstances indicate that the net book value may
not be recoverable.
If the project is considered held for sale, it is valued at the lower of cost or fair value less estimated selling costs. The evaluation takes into consideration the
current status of the property, carrying costs, costs of disposition, various restrictions and any other circumstances that may affect fair value including
management’s plans for the property. At December 31, 2018 and 2017, the Company had no projects classified as held for sale.
During 2018 and 2017, as a result of our impairment analysis, the Company wrote off $2.2 million and $0.5 million, respectively, in feasibility, site
securing, predevelopment, design, carry costs and related costs for certain of our communities in the Washington, D.C. metropolitan area due to unsuccessful
negotiations and changes in market conditions.
After impairments and write-offs, real estate held for development and sale consists of the following:
Land and land development costs
Cost of construction (including capitalized interest
and real estate taxes)
5. FIXED ASSETS, NET
Fixed assets consist of the following:
Computer equipment and capitalized software
Furniture and fixtures
Office equipment
Vehicles
Less : accumulated depreciation
December 31,
2018
December 31,
2017
9,741 $
24,304
10,512
20,253 $
20,407
44,711
$
$
December 31,
2018
December 31,
2017
$
$
767 $
56
209
88
1,120
(899)
221 $
731
51
209
42
1,033
(724)
309
Depreciation expense, included in ‘general and administrative’ in the accompanying consolidated statements of operations, amounted to $81 and $178 for
the years ended December 31, 2018 and 2017, respectively.
6. NOTE RECEIVABLE
The Company originated a note receivable to a third party in the amount of $180 during 2014. This note has a maturity date of September 2, 2019 and is
payable in monthly installments of principal and interest. The note bears a
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fixed interest rate of 6% per annum. As of December 31, 201 8 and 201 7 , the outstanding balance of the note was $ 27 and $ 66 , respectively, and was included
within ‘Other assets’ in the accompanying consol idated balance sheets, the interest income of $ 3 and $ 5 for the years ended December 31, 201 8 and 201 7 ,
respectively, was included in ‘Other income, net’ in the consolidated statements of operations.
7. GOODWILL AND INTANGIBLES
On July 17, 2017, JK Environmental Services, LLC, (“JK”) an entity wholly owned by CDS Capital Management, L.C., a subsidiary of the Company,
purchased all of the business assets of Monridge Environmental, LLC for $2.3 million. JK has its principal office located in Conshohocken, Pennsylvania, and
operates in Maryland, Pennsylvania, New Jersey, and Delaware. JK operates as an environmental services company, providing consulting, remediation, and other
environmental services.
The table below summarizes the purchase price allocation based on the estimated fair value of net assets acquired at the date of acquisition.
ASSETS
Net Working Capital
Fixed Assets
Intangible Assets
Goodwill
Total Purchase Price
$
$
141
180
268
1,702
2,291
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, and it is not deductible for income tax
purposes. 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.
Intangible assets include customer relationships which has an amortization period of four years. During the years ended December 31, 2018 and 2017,
$67,000 and $31,000 of intangible asset amortization, respectively, was recorded in General and Administrative expense on the Consolidated Statement of
Operations.
Intangibles
Less : accumulated amortization
December 31,
2018
$
$
268
(98)
170
As of December 31, 2018, the future estimated amortization expense related to these intangible assets was:
2019
2020
2021
Total
Amortization
Expense
$
$
67
67
36
170
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8. OTHER ASSETS , NET
Other assets, net consist of the following:
Bonds and escrow deposits
Prepaid Insurance
Other
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
Trade and accrued payables
Accrued wages and commissions
Customer deposits
Warranty
Other
10. DEBT
Notes payable consisted of the following:
Construction revolvers
Development and acquisition notes
Mezzanine notes
Line of credit
Secured-other
Total secured notes
Unsecured financing, net of unamortized
deferred financing charges of $0 and $55
Notes payable, unsecured, net of $0.8 and $2.0
million discount and unamortized deferred
financing charges, respectively
Total notes payable
December 31,
2018
December 31,
2017
$
$
1,100 $
60
304
1,464 $
381
46
189
616
$
$
$
December 31,
2018
December 31,
2017
4,727 $
1,396
1,189
195
107
7,614 $
8,240
39
575
258
4
9,116
December 31,
2018
December 31,
2017
2,220 $
10,290
—
13
909
13,432
7,237
9,533
3,253
2,123
1,069
23,215
595
1,285
$
4,903
18,930 $
14,893
39,393
As of December 31, 2018, maturities of our borrowings, net of discounts and unamortized deferred financing costs, are as follows:
2019
2020
2021
2022
2023 and thereafter
Total
$
$
6,664
6,312
4,437
1,483
34
18,930
See Note 21 for further discussion on repayments subsequent to December 31, 2018.
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Construction, development and mezzanine debt—secured
The Company enters into secured acquisition and development loan agreements to purchase and develop land parcels. In addition, the Company enters into
secured construction loan agreements for the construction of its real estate inventories. The loans are repaid with proceeds from home closings based upon a
specific release price, as defined in each respective loan agreement.
The Company had $2.2 million and $7.3 million of outstanding secured construction borrowings as of December 31, 2018 and 2017, respectively. Interest
rates charged under these facilities include the London Interbank Offered Rate (“LIBOR”) and prime rate pricing options, subject to minimum interest rate floors.
At December 31, 2018 and 2017, the weighted average interest rate on the Company’s outstanding construction revolving facility was 5.7% and 4.7%, respectively.
The secured debt facilities have maturity dates ranging from March 15, 2020 to July 31, 2020, including extensions subject to certain conditions.
As of December 31, 2018 and 2017, the Company had approximately $10.3 million and $9.5 million, respectively, of aggregate acquisition and
development loans outstanding The acquisition and development loans have maturity dates ranging from March 15, 2019 to July 25, 2021, including auto
extension subject to certain conditions and bear interest at a rate based on LIBOR and Prime Rate pricing options, with interest rate floors ranging from 4.25% to
5.5%. As of December 31, 2018 and 2017, the weighted average interest rates were 6.6% per annum and 7.1% per annum, respectively.
During 2018, the Company had a mezzanine loan that is being used to finance the development of the Momentum | Shady Grove Metro project. This
mezzanine loan was paid in full prior to June 30, 2018. The maximum principal commitment amount of this loan was $1.1 million, of which $1.2 million of
principal and accrued interest was outstanding at December 31, 2017. This financing carried an annual interest rate of 12% of which 6% is paid on a monthly basis
with the remaining 6% being accrued and paid at maturity.
During 2018, the Company also had a mezzanine loan that was being used to finance the development of finished lots at its Richmond Station project
located in Prince William County, Virginia. This mezzanine loan was paid in full prior to September 30, 2018. The maximum principal commitment amount of this
loan was $2.0 million, of which $2.0 million of principal and accrued interest was outstanding at December 31, 2017. This financing carried an annual interest rate
of 12% annually.
Line of credit – secured
During 2018, the Company utilized a secured revolving line of credit with a maximum capacity of $3.0 million, which was paid in full prior to September
30, 2018. As of December 31, 2017, $2.1 million was outstanding under this revolving line of credit. This line of credit was secured by the first priority security
interest in the Company’s wholly owned subsidiaries in the Washington, D.C. metropolitan area and guaranteed by our Chief Executive Officer. The Company
used this line of credit to finance the predevelopment related expenses and deposits for current and future projects and carried a variable interest rate tied to a one-
month LIBOR plus 3.25% per annum, with an interest rate floor of 5.0%. At December 31, 2017, the interest rate was 5.00%. This line of credit also called for the
Company to adhere to financial covenants such as minimum net worth and minimum liquidity, measured quarterly and minimum EBITDA, as defined in the
agreement, measured on a twelve-month basis.
Additionally, during 2018, the Company opened a secured line of credit, with a maximum capacity of $0.2 million. Interest charged on this line of credit is
based on the prime rate plus 2.50%. As of December 31, 2018, there was $13 thousand of principal and interest outstanding on this line of credit, and the interest
rate was 6.75%.
Secured – other
As of December 31, 2018 and 2017, the Company had one secured loan related to Comstock Environmental. The loan was used to finance the acquisition
of Comstock Environmental, and carries a fixed interest rate of 6.5%, and has a maturity date of October 17, 2022. At December 31, 2018 and 2017, this financing
had an outstanding
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balance of $0. 9 million and $1.1 million, respectively. This financing is secured by the assets of Comstock Environmental and is guaran teed by our Chief
Executive Officer.
Unsecured notes
During 2018 the Company the company paid in full a 10-year unsecured note with a bank. At December 31, 2017, the Company had $0.6 million
outstanding. Interest was charged on this financing at LIBOR plus 2.2%. At December 31, 2017, the interest rate was 3.6%.
As of December 31, 2018 and December 31, 2017, the Company had one unsecured seller-financed promissory note with an outstanding balance of $0.6
million. This financing carries an annual interest rate of LIBOR plus 3% and has a maturity date of July 17, 2022. At December 31, 2018 and 2017, the interest rate
was 6.0% and 4.6%, respectively. Additionally, as of December 31, 2017, the Company had another unsecured seller financed promissory note, which was paid in
full prior to September 30, 2018. As of December 31, 2017, $0.1 million was outstanding. This financing carried an annual interest rate of the prime rate plus 5%.
At December 31, 2017, the interest rate was 9.5%.
Notes payable to affiliate—unsecured
Comstock Growth Fund
On October 17, 2014, Comstock Growth Fund (“CGF”) entered into a subscription agreement with Comstock Development Services (“CDS”), pursuant to
which CDS purchased membership interests in CGF for a principal amount of $10.0 million (the “CGF Private Placement”). Other purchasers who subsequently
purchased interests in the private placement included members of the Company’s management and board of directors and other third party accredited investors for
an additional principal amount of $6.2 million.
On October 17, 2014, the Company entered into an unsecured promissory note with 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, LLC (“CDS”), a Company wholly owned by our Chief Executive Officer. The Company exchanged the preferred equity for 91.5% of CDS
membership interest in the Comstock Growth Fund promissory note. Concurrently, the face amount of the CGF Note was reduced to $5.7 million as of the
Effective Date. The loan bears interest at a fixed rate of 10% per annum. Interest payments will be made monthly in arrears. There is a principal curtailment
requirement of 10% annually based on the average outstanding balance for the prior year. The Company is the administrative manager of CGF but does not own
any membership interests. The Company had approximately $4.9 million and $11.3 million of outstanding borrowings and accrued interest under the CGF loan, net
of discounts, as of December 31, 2018 and 2017, respectively. As of December 31, 2018 and 2017 the interest rate was 10.0% and 11.9% per annum, respectively.
The maturity date for the CGF loan is April 16, 2019.
During the years ended December 31, 2018 and 2017, the Company made interest payments of $0.6 million and $1.6 million, respectively.
During the year ended December 31, 2018 the Company did not make principal payments to CGF. During the year ended December 31, 2017, the
Company made principal payments to CGF of $1.5 million.
Comstock Growth Fund II
On December 29, 2015, the Company entered into a revolving line of credit promissory note with Comstock Growth Fund II (“CGF II”) whereby CGF II
made a loan to the Company in the initial principal amount of $5.0
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million and a maximum amount available for borrowing of up to $10.0 million w ith a two-year term, which may be extended an additional year. The interest rate is
10% per annum, and interest payments will be accrued and paid in kind monthly for the first year, and then paid current monthly in arrears beginning December 31,
2016. Effe ctive December 31, 2017, the CGF II loan was extended one year to December 31, 2018. On May 23, 2018, Comstock Holding Companies, Inc.
(“Comstock” , “CHCI” or the “Company”) entered into a Note Exchange and Subscription Agreement (the “Note Exchange Agreem ent”) in which a note (“CGF2
Note”) with an outstanding principal and accrued interest balance of $3.7 million was exchanged for 738,390 shares of the Company’s Series C Non-Convertible
Preferred Stock, par value $0.01 per share and a stated liquidation va lue of $5.00 per share (the “Series C Preferred Stock”), issued by the Company to Comstock
Growth Fund II, L.C. (“CGF2”), a Company wholly owned by our Chief Executive Officer. The CGF2 Note was cancelled in its entirety effective as of the
Effective Date. As a result of the conversion of the CGF & CGF2 notes , the Company recognized a gain of $3.7 million, which was recorded in ‘Additional paid-in
capital’ in the consolidated balance sheet net of an income tax benefit of $0.9 million which was recorded in t he consolidated statement of operations for the year
ended December 31, 2018. Refer to Note 12 – Fair
Value
Disclosures
for further information regarding the assumptions and methods utilized in determining the
fair value of the Preferred Stock issued. As o f December 31, 2017, $3.6 million was outstanding in principal and accrued interest under the CGF II loan.
11. 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 expect that any such liability will have a material adverse effect on our financial position, operating results or cash flows. We have obtained insurance
coverage, rights to indemnification, or where appropriate, have established reserves in connection with these legal proceedings.
Letters of credit, performance bonds and compensating balances
The Company has commitments as a result of contracts entered into with certain third parties, primarily local governmental authorities, to meet certain
performance criteria as outlined in such contracts. The Company is required to issue letters of credit and performance bonds to these third parties as a way of
ensuring that the commitments entered into are met. These letters of credit and performance bonds issued in favor of the Company and/or its subsidiaries mature on
a revolving basis, and if called into default, would be deemed material if assessed against the Company and/or its subsidiaries for the full amounts claimed. In some
circumstances, we have negotiated with our lenders in connection with foreclosure agreements for the lender to assume certain liabilities with respect to the letters
of credit and performance bonds. We cannot accurately predict the amount of any liability that could be imposed upon the Company with respect to maturing or
defaulted letters of credit or performance bonds. At December 31, 2018 and 2017, the Company had issued $1.1 million and $1.1 million, respectively, in letters of
credit. At December 31, 2018 and 2017, the Company had $8.2 million and $4.0 million in performance and payment bonds, respectively, outstanding to third
parties. No amounts have been drawn against these letters of credit or performance bonds.
We are required to maintain compensating balances in escrow accounts as collateral for certain letters of credit, which are funded upon settlement and
release of units. The cash contained within these escrow accounts is subject to withdrawal and usage restrictions. As of December 31, 2018 and 2017, we had
approximately $1.0 million in these escrow accounts, which are included in ‘Restricted cash’ in the consolidated balance sheets.
12. FAIR VALUE DISCLOSURES
ASC 820, Fair
Value
Measurement
, establishes a framework for measuring fair value, expands disclosures regarding fair value measurements and defines
fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered
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to be observable or unobservable in a marketplace. The three measurement input levels for deter mining fair value are as follows
•
•
•
Fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to
access.
Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or
liability. An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement.
The carrying amounts reported in the consolidated balance sheets for cash and 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 inputs (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 fair value of fixed and floating rate debt and the corresponding carrying value of fixed and floating rate debt as of:
Carrying amount
Fair value
December 31,
2018
December 31,
2017
$
$
18,930 $
18,608 $
39,393
38,899
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,
such as an acceleration of amounts due and payable, could significantly affect the estimates.
In connection with the CGF I & II conversions discussed in Note 10 – Debt
and Note 16 – Related
Party
Transactions
, we issued 2,220,690 shares of
Series C Non-Convertible Preferred Stock with a liquidation preference of $5.00 per share. The Series C Preferred Stock has a discretionary dividend feature, as
opposed to the mandatory dividend feature in the Series B Preferred Stock. The Company recorded these shares based on the fair value calculation on the effective
date of the agreement. The Company used various assumptions and level 3 inputs such as current market condition and financial position in calculating the fair
value of the Series C Preferred Stock by back solving from the Company’s equity value using the option pricing and the probability-weighted expected return
models, adjusted for marketability of the Series C Preferred Stock.
The Company may also value its non-financial assets and liabilities, including items such as real estate inventories and 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.
See Note 2 for further discussion of the valuation techniques and inputs used.
During 2018 and 2017, as a result of our impairment analysis, the Company wrote off $2.2 million and $0.5 million, respectively, in feasibility, site
securing, predevelopment, design, carry costs and related costs for certain of our communities in the Washington, D.C. metropolitan area due to unsuccessful
negotiations and market conditions.
13. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code (the “Code”). Eligible
participants may contribute a portion of their compensation to their
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respective retirement accounts in an amount not to exceed the maximum allowed under the Code. The Company matches 100% of the employee’s contribution, up
to 3% of each participant’s gross salary and 50% of the employee’s contribution above 3% not exceeding 5 % of the participant’s gross salary, per pay period. Safe
Harbor Matching Contrib utions made by the Company are 100% vested immediately. The total amount matched during the years ended December 31, 201 8 and
201 7 was $ 38 and $ 35 , respectively.
14. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
On December 14, 2004, the Company adopted the 2004 Long-Term Compensation Plan (the “Plan”). The Plan provides for the issuance of stock options,
stock appreciation rights, or SARs, restricted stock, deferred stock, dividend equivalents, bonus stock and awards in lieu of cash compensation, other stock-based
awards and performance awards. Any shares issued under the Plan typically vest over service periods that range from one to five years. Stock options issued under
the plan expire 10 years from the date they are granted.
The Plan authorized 1.0 million shares of our Class A Common Stock with an automatic annual increase on January 1 of each successive year of the lesser
of (i) 3% of the Class A common stock outstanding or (ii) 107 shares. As of December 31, 2018 and 2017, there were 0.06 million and 0.4 million shares,
respectively, available for issuance under the Plan (as amended).
The fair value of each option award is calculated on the date of grant using the Black-Scholes option pricing model and certain subjective assumptions.
Expected volatilities are calculated based on our historical trading activities. We estimate forfeitures using a weighted average historical forfeiture rate. We
recognize forfeitures as they occur. The risk-free rate for the periods is based on the U.S. Treasury rates in effect at the time of grant. The expected term of options
is based on the simplified method which assumes that the option will be exercised midway between the vesting date and the contractual term of the option. The
Company is able to use the simplified method as the options qualify as “plain vanilla” options as defined by ASC 718, Stock
Compensation
.
The following table summarizes the assumptions used to calculate the fair value of options during 2018 and 2017.
Weighted average fair value of options granted
Dividend yields
Expected volatility
Weighted average expected volatility
Risk free interest rates
Weighted average expected term (in years)
F-24
2018
2017
$
1.80 $
—
72.21%-83.47%
81.76%
2.74%
6
1.20
—
70.60%-
79.40%
72.73%
2.15%
6
Table of Contents
The following table summarizes information about stock option activity:
Outstanding at January 1, 2017
Granted
Exercised
Forfeited or Expired
Outstanding at December 31, 2017
Granted
Exercised
Forfeited or Expired
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Shares
112 $
345
—
(21)
436 $
84
—
(102)
418 $
179 $
Weighted
Average
Exercise Price
8.16
1.89
—
7.06
3.25
2.90
—
2.28
3.42
5.10
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
8.50
—
7.67 $
6.18 $
9
2
As of December 31, 2018 and 2017, the weighted-average remaining contractual term of unexercised stock options was 7.7 years and 8.5 years,
respectively.
A summary of the Company’s restricted share activity is presented below:
Restricted nonvested at January 1, 2017
Granted
Vested
Forfeited or Expired
Outstanding at December 31, 2017
Granted
Vested
Forfeited or Expired
Nonvested at December 31, 2018
Weighted
Average
Grant Date
Fair Value
Shares
20 $
245
(22)
—
243 $
—
(68)
(37)
138 $
1.89
2.13
1.88
—
2.16
—
2.13
2.11
2.18
As of December 31, 2018 and 2017, there was $0.3 million and $0.6 million, respectively, of unrecognized compensation cost related to stock options and
restricted stock issuances granted under the Plan. The Company intends to issue new shares of its common stock upon vesting of restricted stock grants or the
exercise of stock options.
In November 2014, our board of directors approved a share repurchase program authorizing the Company to repurchase up to 429 thousand shares of our
Class A common stock in one or more open market or privately negotiated transactions depending on market price and other factors.
At December 31, 2018 and 2017, 404 thousand shares of our Class A common stock remain available for repurchase pursuant to our share repurchase
agreement.
15. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
GAAP requires a VIE to be consolidated by the company that is the primary beneficiary. The primary beneficiary of a VIE is the entity that has both of the
following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to
absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Entities determined to be VIEs, for which we are not the primary beneficiary,
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are accounted for under the equity method. Comstock’s variable interests in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets
and/or (3) loans provided to and or guaranteed for a VIE. We examine specific criteria and use judgment when determining if Comstock is the primary beneficiary
of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other
partner(s), voting rights, involvement in day-to-day capital and operating decisions and contracts to purchase assets from VIEs.
Consolidated Real Estate Inventories
Included within the Company’s real estate inventories at December 31, 2018 and 2017 are several projects that are 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 its majority voting and complete operational control of the entities.
On August 23, 2012, the Company formed New Hampshire Ave. Ventures, LLC, a joint venture of its subsidiary, Comstock Ventures XVI, L.C, and 6000
New Hampshire Avenue, LLC, for the purpose of acquiring, developing and constructing a 111-unit project (the “NHA Project”) in Washington, D.C. The
Company evaluated the joint venture and determined that the equity investment at risk is not sufficient to permit the entity to finance its activities without
additional financial support. The Company determined that it 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 obligation to absorb losses, or receive benefits. The Company contributed its ownership interest in
Comstock Ventures XVI, L.C. to Comstock Investors VII, L.C. (“Comstock VII”) on March 13, 2013. During 2018 and 2017, New Hampshire Ave. Ventures, LLC
did not make any distributions to its non-controlling interest member, 6000 New Hampshire Avenue, LLC.
In December 2013, Comstock Investors VIII, L.C. (“Comstock VIII”) entered into subscription agreements with certain accredited investors (“Comstock
VIII Class B Members”), pursuant to which Comstock VIII Class B Members purchased membership interests in Comstock VIII for an aggregate amount of
$4.0 million (the “Comstock VIII Private Placement”). In connection with the Comstock VIII Private Placement, the Company issued 15 warrants for the purchase
of shares of the Company’s Class A common stock to the non-affiliated accredited investors, having an aggregate fair value of $131 thousand. Comstock VIII
Class B Members included unrelated third-party accredited investors along with members of the Company’s board of directors and the Company’s former Chief
Operating Officer and the former Chief Financial Officer. The Comstock VIII Class B Members are entitled to a cumulative, preferred return of 20% per annum,
compounded annually on their capital account balances. The Company has the right to repurchase the interests of the Comstock VIII Class B Members at any time,
provided that (i) all of the Comstock VIII Class B Members’ interests are acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the
Comstock VIII Class B Members’ capital accounts plus an amount necessary to cause the preferred return to equal a cumulative cash on cash return equal to
20% per annum. The Company evaluated Comstock VIII 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 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 accordingly, the Company consolidates this entity. In January
2017, the Company fully redeemed the remaining equity interest of Class B Members in Comstock VIII after paying $1.9 million in distributions.
In June 2015, Comstock Investors IX, L.C. (“Comstock IX”) entered into subscription agreements with third-party accredited investors (“Comstock IX
Class B Members”), pursuant to which Comstock IX Class B Members purchased membership interests in Comstock IX for an aggregate amount of $2.5 million
(the “Comstock IX Private Placement”). The Comstock IX Class B Members are entitled to a cumulative, preferred return of 20% per annum, compounded
annually on their capital account balances. The Company has the right to repurchase the interests of the Comstock IX Class B Members at any time, provided that
(i) all of the Comstock IX Class B Members’ interests are acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the Comstock IX Class B
Members’ capital accounts plus any amount necessary to cause the preferred return to equal a cumulative cash on cash return equal to 20% per annum. The
Company evaluated Comstock IX 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 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. Accordingly, the Company
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Table of Contents
consolidates this entity. In October 2017, the Company fully redeemed the remaining equity interest of Class B Members in Comstock IX after paying $3.5 million
in distributions.
In August 2016, Comstock Investors X, L.C. (“Comstock X”) entered into a subscription agreement with an accredited investor (“Comstock X Class B
Member”), pursuant to which the Comstock X Class B Member purchased membership interests in Comstock X for an initial amount of $5.0 million, which is part
of an aggregate capital raise of $14.5 million (the “Comstock X Private Placement”). The Comstock X Class B Member is Comstock Development Services, LC
(“CDS”), an entity wholly owned by Christopher Clemente, our Chief Executive Officer. In October 2016, the Comstock X Class B Member purchased additional
interests in the Comstock X Private Placement in an amount of $9.5 million resulting in an aggregate subscription amount of $14.5 million. In connection with the
Comstock X Private Placement, the Company issued a total of 150 warrants for the purchase of shares of the Company’s Class A common stock, having an
aggregate fair value of $258. The Comstock X Member is entitled to a cumulative, preferred return of 6% per annum, compounded annually on the capital account
balance. The Company has the right to repurchase the interest of the Comstock X Class B Member at any time, provided that (i) all of the Comstock X Class B
Members’ interest is acquired, (ii) the purchase is made in cash and (iii) the purchase price equals the Comstock X Class B Members’ capital account plus accrued
priority return. In October 2017, the Operating Agreement for Comstock X was amended to increase the maximum capital raise to $19.5 million. Additionally, in
October 2017, Comstock X received proceeds of $5.0 million under the amended Operating Agreement to be used for the planned construction of the Company’s
Totten Mews, Towns at 1333, Richmond Station, and Marwood East projects. As part of this additional contribution, 50,000 warrants for the purchase of the
Company’s Class A common stock, having an aggregate fair value of $258. The Company evaluated Comstock 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.
Accordingly, the Company consolidates this entity. During 2018 and 2017, the Company distributed $1.8 million and $1.0 million, respectively, to its non-
controlling interest member.
At December 31, 2018 and December 31, 2017, the distributions and contributions for the VIEs discussed above are included within the ‘non-controlling
interest’ classification in the consolidated statement of changes in stockholder’s equity.
At December 31, 2018 and December 31, 2017, total assets of these VIEs were approximately $19.3 million and $30.6 million, respectively, and total
liabilities were approximately $12.6 million and $15.9 million, respectively. The classification of these assets is primarily within ‘real estate inventories’ and the
classification of liabilities are primarily within ‘notes payable – secured by real estate inventories’ and ‘accounts payable and accrued liabilities’ in the consolidated
balance sheets.
Land purchase options
The Company typically acquires land for development at market prices under fixed price purchase agreements. The purchase agreements require deposits
that may be forfeited if the Company fails to perform under the agreements. The deposits required under the purchase agreements are in the form of cash or letters
of credit in varying amounts. The Company may, at its option, choose for any reason and at any time not to perform under these purchase agreements by delivering
notice of its intent not to acquire the land under contract. The Company’s sole legal obligation and economic loss for failure to perform under these purchase
agreements is typically limited to the amount of the deposit pursuant to the liquidated damages provision contained within the purchase agreement. As a result,
none of the creditors of any of the entities with which the Company enters into forward fixed price purchase agreements have recourse to the general credit of the
Company.
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Table of Contents
The Company does not share in an allocation of either the profit earned or loss incurred by any of these entities with which t he Company has fixed price
purchase agreements. The Company has concluded that whenever it options land or lots from an entity and pays a significant non-refundable deposit as described
above, a variable interest entity is created under the provisions of A SC 810-10, Consolidation
. This is because the Company has been deemed to have provided
subordinated financial support, which creates a variable interest which limits the equity holder’s returns and may absorb some or all of an entity’s expected
theoretical losses if they occur. The Company, therefore, examines the entities with which it has fixed price purchase agreements for possible consolidation by the
Company under the provision of ASC 810-10. The Company does not have a ny contractual or ownership interests in the entities with which it contracts to buy the
land. The Company concluded that it does not have the power to direct the activities that most significantly impact the economic performance of the VIEs,
including the power to site plan and engineer the developments, finance the parcels under option contract, and develop the raw parcels under option contract into
finished lots. The third party retains these rights under the fixed purchase price agreements until title i s transferred to the Company upon settlement of the
transaction, or a portion of the transactions as defined. Therefore, the Company has not consolidated these VIEs in the consolidated balance sheets. As of
December 31, 201 8 and 2017 , the Company did not h ave any outstanding land purchase options.
16. RELATED PARTY TRANSACTIONS
Lease for Corporate Headquarters
The Company has a lease for its corporate headquarters from an affiliate wholly-owned by our CEO. Future minimum lease payments under this lease,
which expires on September 30, 2019, is $0.4 million.
For each of the years ended December 31, 2018 and 2017, total rental payments made were $0.4 million and $0.2 million, respectively. Rent expense for
the years ended December 31, 2018 and 2017 was $0.4 million and $0.2 million, respectively.
Asset Management Agreement
On March 30, 2018, CDS Asset Management, L.C. (“CAM”), an entity wholly owned by the Company, entered into a master asset management agreement
(the “AMA”) with Comstock Development Services LC (“CDS”), an entity wholly owned by Christopher Clemente, the Chief Executive Officer of the Company.
The effective date of this Agreement 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. 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 Comstock Real Estate 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. During the year ended December 31, 2018, the Company recorded revenue of $12.0 million which is included in ‘Revenue-
asset management’ in the consolidated statement of operations).
F-28
Table of Contents
Private Placements and Promissory Notes
On December 29, 2015, the Company and Stonehenge Funding, L.C. (“Stonehenge”), an entity wholly owned by our Chief Executive Officer, entered into
a Note Exchange and Subscription Agreement pursuant to which the note in the original principal amount of $4.5 million issued to the Company by Stonehenge
was cancelled in its entirety and exchanged for 772,210 shares of the Company’s Series B Non-Convertible Preferred Stock, par value $0.01 per share and a stated
value of $5.00 per share (the “Series B Preferred Stock”). The number of shares of Series B Preferred Stock received by Stonehenge in exchange for the note
represented the principal amount outstanding plus accrued interest under the note as of December 29, 2015, which was $3.9 million. The holders of Series B
Preferred Stock earned dividends at a rate of 8.75% per annum accruing from the effective date of the Note Exchange and Subscription Agreement.
On December 29, 2015, Comstock Growth Fund II, L.C. (“CGF II”), an administrative entity managed by the Company, was created for the purpose of
extending loans to the Company. CGF II entered into a subscription agreement with CDS pursuant to which CDS purchased membership interests in CGF II for an
initial aggregate principal amount of $5.0 million (the “CGF II Private Placement”). Also on December 29, 2015, the Company entered into a revolving line of
credit promissory note with CGF II whereby CGF II made a loan to the Company in the initial principal amount of $5.0 million and a maximum amount available
for borrowing of up to $10.0 million with a two-year term, which may be extended an additional year. The interest rate is 10% per annum, and interest payments
will be accrued and paid in kind monthly for the first year, and then paid current monthly in arrears beginning December 31, 2016. On December 29, 2017, the
CGF II loan was extended one year to December 31, 2018. On May 23, 2018, Comstock Holding Companies, Inc. (“Comstock” , “CHCI” or the “Company”)
entered into a Note Exchange and Subscription Agreement (the “Note Exchange Agreement”) in which a note (“CGF2 Note”) with an outstanding principal and
accrued interest balance of $3.7 million was exchanged for 738,390 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 Growth Fund II, L.C. (“CGF2”), a Company
wholly owned by our Chief Executive Officer. The CGF2 Note was cancelled in its entirety effective as of the Effective Date. As a result of the conversion of CGF
& CGF2 notes, the Company recognized a gain of $3.7 million, which was recorded in ‘Additional paid-in capital’ in the consolidated balance sheet and an income
tax benefit of $0.5 million, which was recorded in the consolidated statement of operations for the three and nine months ended September 30, 2018. As of
December 31, 2017, $3.6 million was outstanding in principal and accrued interest under the CGF II loan (Note 10).
See Note 15 for a summary of the Comstock VII Private Placement and the Comstock VIII Private Placement which involved certain of our officers and
directors and Note 10 to the consolidated financial statements for further description of the CGF Private Placement and the CGF II Private Placement.
See Note 15 for a summary of the Comstock X Private Placement which involved a wholly owned entity of the Chief Executive Officer of the Company
Share Exchange Agreement
On March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Company’s Series B Preferred Stock pursuant to which
the Company exchanged 858,210 shares of the Company’s Series B Preferred Stock for 772,210 shares of the Company’s newly created Series C Non-
Convertible Preferred Stock, par value $0.01 per share and a stated value of $5.00 per share. The Series C Preferred Stock has a discretionary dividend feature, as
opposed to the mandatory dividend feature in the Series B Preferred Stock. The Series B Preferred Stock, together with all accrued dividends earned through the
conversion date, was retired upon re-acquisition and the fair value of the Series C Preferred Stock is recorded in ‘Stockholders’ equity’ in the accompanying
consolidated balance sheets. The difference in fair value from the extinguishment of the Series B Preferred Stock and issuance of the Series C Preferred Stock of
$1,011 was recorded in the accompanying consolidated statement of operations. For the year ended December 31, 2017, 15,663 shares of the Series B Preferred
Stock, with a liquidation value of $78 thousand, were paid-in-kind, and were retired in the conversion.
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Table of Contents
Services Agreement
On February 23, 2009, Comstock Homes of Washington, L.C., a wholly-owned subsidiary of the Company, entered into a Services Agreement with
Comstock Asset Management, L.C., an entity wholly-owned by the Chief Executive Officer, to provide services related to real estate development and
improvements, legal, accounting, marketing, information technology and additional support services. For the years ended December 31, 2018 and 2017, the
Company billed Comstock Asset Management, L.C. $0.12 million and $1.1 million, respectively, for services and out-of-pocket expenses incurred. Revenues from
this arrangement are included within ‘Revenue – asset management’ within the accompanying consolidated statements of operations. As of December 31, 2018 and
2017, the Company was owed $0 thousand and $145 thousand, respectively, under this contract, which is included in ‘Trade receivables’ in the accompanying
consolidated balance sheets
17. WARRANTS
As part of the Comstock VII Private Placement discussed in Note 15, the Company issued warrants to purchase shares of the Company’s Class A common
stock to the Comstock VII Class B Members who are not officers, directors or affiliates of the Company and who purchased membership interests in the offering
that equaled or exceeded an initial investment amount of $250 thousand. The warrants represent the right to purchase an aggregate amount of up to 16 shares of the
Company’s Class A common stock. The warrants have an initial exercise price which is equal to the average of the closing price of the Company’s Class A
common stock of the 20 trading days preceding the issuance of the warrants. The warrants contain a cashless exercise provision. In the event the purchasers
exercise the warrants on a cashless basis, the Company will not receive any proceeds. The warrants may be exercised at any time prior to March 14, 2023.
In addition, as part of the Comstock VIII Private Placement discussed in Note 15, the Company issued warrants to purchase shares of the Company’s
Class A common stock to the Comstock VIII Class B Members who are not officers, directors or affiliates of the Company and who purchased membership
interests that equaled or exceeded an initial investment amount of $250 thousand. The warrants represent the right to purchase an aggregate amount of up to 15
shares of the Company’s Class A common stock. The warrants have an initial exercise price which is equal to the average of the closing price of the Company’s
Class A common stock of the 20 trading days preceding the issuance of the warrants. The warrants contain a cashless exercise provision. In the event the purchasers
exercise the warrants on a cashless basis, the Company will not receive any proceeds. The warrants may be exercised at any time prior to December 12, 2023.
Also, as part of the Comstock X Private Placement discussed in Note 15, the Company issued warrants to purchase shares of the Company’s Class A
common stock to the Comstock X Class B Member. The warrants represent the right to purchase an aggregate amount of up to 150 shares of the Company’s
Class A common stock. The warrants have an initial exercise price which is equal to the average of the closing price of the Company’s Class A common stock of
the 20 trading days preceding the issuance of the warrants. The warrants contain a cashless exercise provision. In the event the purchasers exercise the warrants on
a cashless basis, the Company will not receive any proceeds. The warrants may be exercised at any time prior to August 15, 2026.
As part of the additional $5.0 million contribution received from Comstock X in October 2017, an additional 50 warrants to purchase the Company’s
Class A common stock were issued. These warrants have the same terms and provisions as the original 150 warrants issued in August 2016. These warrants may be
exercised any time prior to October 16, 2027.
As discussed in Note 10, as part of the CGF Private Placement, depending upon the investment amount, purchasers of interests in CGF other than CDS
received warrants that represent the right to purchase a certain number of shares of the Company’s Class A common stock. For purchasers who are not affiliates or
insiders, the warrants have initial exercise prices ranging from $4.91 to $7.63. The exercise prices of the warrants to affiliates and insiders range from $7.30 to
$7.63. The warrants contain a cashless exercise provision. In the event a purchaser exercises the warrant on a cashless basis, the Company will not receive any
proceeds. The warrants may be exercised at any time within ten years from the date of issuance. As of December 31, 2018, the warrants represent the right to
purchase an aggregate amount of up to 76 shares of our Class A common stock.
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Table of Contents
In connection with entering into the SunBridge (“BridgeCom”) loan agreement in 2011, the Company issued warrants to purchase shares of the Company’s
Class A common stock to BridgeCom Developm ent I, LLC, an affiliate of SunBridge. The warrants represent the right to purchase an aggregate amount of up to
143 shares of the Company’s Class A common stock. The warrants have an initial exercise price of $7.21. The warrants contain a cashless exercis e provision. In
the event the purchasers exercise the warrants on a cashless basis, the Company will not receive any proceeds. The warrants may be exercised at any time prior to
July 12, 2021. On May 29, 2012, the Company repaid the SunBridge loans in full and the SunBridge warrants remain unexercised as of December 31, 201 8 .
18. 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 $72 and $27 as of December 31, 2018 and 2017,
respectively, and is included within ‘Other assets, net’ in the accompanying consolidated balance sheets. Earnings for the years ended December 31, 2018 and
2017, from this unconsolidated joint venture of $137 and $53, respectively, is included in ‘Other income, net’ in the accompanying consolidated statement of
operations. During the years ended December 31, 2018 and 2017, the Company collected and recorded a distribution of $89 and $83, respectively, from this joint
venture as a return on investment.
Summarized unaudited financial information for the unconsolidated joint venture is as follows:
Statement of Operations:
Total net revenue
Total expenses
Net income
Comstock Holding Companies, Inc. share of net
income
Twelve Months Ended December 31,
2018
2017
$
$
$
391
117
274
$
$
137
$
219
114
105
53
19. INCOME TAXES
During the year ended December 31, 2018, the Company recognized income tax expense of $12 thousand and the effective tax rate was 0.24%. During the
year ended December 31, 2017, the Company recognized income tax expense of $38 thousand and the effective tax rate was 0.91%.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company recorded valuation allowances for certain tax attributes and other deferred tax assets. At this
time, sufficient uncertainty exists regarding the future realization of these deferred tax assets through future taxable income. If, in the future, the Company believes
that it is more likely than not that these deferred tax benefits will be realized, the valuation allowances will be reversed. With a full valuation allowance, any change
in the deferred tax asset or liability is fully offset by a corresponding change in the valuation allowance.
The Tax Cuts and Jobs Act was enacted on December 22, 2017, resulting in significant changes to the taxation of corporations and individuals. For
corporate taxpayers, the Tax Act lowers the corporate tax rate, from 35% to 21%, which requires the Company to re-measure net deferred tax assets in the period of
enactment as a discrete item within the income tax provision. As of result of the decrease in the federal tax rate, a decrease of net deferred tax assets of
approximately $20 million was recorded. This decrease is substantially offset by the Company’s valuation allowance.
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Table of Contents
The Company currently has approximately $ 147 million in federal and state Net Operating Losses (“NOLs), which based on current statutory tax rates,
including the lower corporate tax rate enacted by the Tax Act. If unused, these NOLs will begin expiring in 2027. Under Code Section 382 (“Section 382”) rules, if
a change of ownership is triggered, the Company’s NOL assets and possibly certain other deferred tax assets may be impaired. We est imate that as of December
31, 201 8 , the three-year cumulative shift in ownership of the Company’s stock has not triggered an impairment of our NOL asset. However, if an ownership
change were to occur, the Section 382 limitation would not be expected to mat erially impact the Company’s financial position or results of operations as of
December 31, 201 8 , because the Company has recorded a full valuation allowance on substantially all of its net deferred tax assets.
The Company’s ability to use its NOLs (and in certain circumstances, future built-in losses and depreciation deductions) can be negatively affected if there
is an “ownership change” as defined under Section 382. In general, an ownership change occurs whenever there is a shift in ownership by more than 50 percentage
points by one or more 5% stockholders over a specified time period (generally three years). Given Section 382’s broad definition, an ownership change could be
the unintended consequence of otherwise normal market trading in the Company’s stock that is outside of the Company’s control. In an effort to preserve the
availability of these NOLs, Comstock adopted a Section 382 rights agreement, which expired in May 2014. In June 2015, at the 2015 Annual Meeting of
Stockholders, the Company’s stockholders approved a new Internal Revenue Code Section 382 Rights Agreement (the “Rights Agreement”) to protect stockholder
value. The Rights Agreement expires on March 27, 2025. The Rights Agreement was adopted to reduce the likelihood of such an unintended “ownership change”,
thus preserving the value of these tax benefits. Similar plans have been adopted by a number of companies holding similar significant tax assets over the past
several years.
The Company has not recorded any accruals related to uncertain tax positions as of December 31, 2018 and 2017, respectively. We file U.S. and state
income tax returns in jurisdictions with varying statutes of limitations. The 2015 through 2017 tax years remain subject to examination by federal and most state tax
authorities. The income tax provision consists of the following as of December 31:
Current:
Federal
State
Deferred:
Federal
State
Valuation allowance
Total income tax expense
2018
2017
— $
18
18
(607)
(111)
(718)
712
12 $
—
24
24
15,171
2,724
17,895
(17,881)
38
$
$
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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the Company’s deferred tax assets and liabilities at December 31, 201 8 and 201 7 are as
follows:
Deferred tax assets:
Inventory
Warranty
Net operating loss and tax credit carryforwards
Accrued expenses
Stock based compensation
Investment in affiliates
Less - valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Depreciation and amortization
Investment in affiliates
Goodwill amortization
Net deferred tax liabilities
Net deferred tax assets (liabilities)
2018
2017
500 $
63
37,937
4
379
—
38,883
(38,809)
74
(11)
(28)
(44)
(83)
(9) $
834
67
37,045
4
352
48
38,350
(38,328)
22
(21)
—
(15)
(36)
(14)
$
$
A reconciliation of the statutory rate and the effective tax rate after adjustments for non-includable partnership income arising from non-controlling interest
follows:
Federal statutory rate
State income taxes - net of federal benefit
Permanent differences
Return to provision adjustments
Change in valuation allowance
Current state income tax
Change in enacted rate
Other, net
Effective tax rate
2018
2017
(21.00%)
(4.74%)
16.52%
(4.29%)
14.32%
0.36%
1.52%
(2.45%)
0.24%
(35.00%)
(3.90%)
(10.94%)
5.18%
(417.08%)
0.56%
462.23%
(0.15%)
0.91%
20. PREFERRED STOCK
On March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Company’s Series B Preferred Stock pursuant to which
the Company exchanged 858,210 shares of the Company’s Series B Preferred Stock for 772,210 shares of the Company’s newly created Series C Non-
Convertible Preferred Stock, par value $0.01 per share and a stated value of $5.00 per share. The Series C Preferred Stock has a discretionary dividend feature, as
opposed to the mandatory dividend feature in the Series B Preferred Stock. The Series B Preferred Stock, together with all accrued dividends earned through the
conversion date, was retired upon re-acquisition and the fair value of the Series C Preferred Stock is recorded in ‘Stockholders’ equity’ in the accompanying
consolidated balance sheets. The difference in fair value from the extinguishment of the Series B Preferred Stock and issuance of the Series C Preferred Stock of
$1,011 was recorded in the accompanying consolidated statements of operations. For the year ended December 31, 2017, 15,663 shares of the Series B Preferred
Stock, with a liquidation value of $78, were paid-in-kind, and were retired in the conversion.
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Table of Contents
On May 23, 2018, the Company entered into a Note Exchange and subscription agreement in which a note (“CGF2 Note) with an outstanding principal and
accrued interest balance of $3.7 million was exchanged for 738,390 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, issued by the Company to Comstock Growth Fund II, L.C. (“CGF2”), a Company wholly owned by our Chief
Executive Officer. The CGF2 Note was cancelled in its entirety effective as of the Effective Date. As a result of the conversion of CGF and CGF2, t he Company
recognized a gain of $3.7 million, which was recorded in ‘Additional paid-in capital’ in the consolidated balance sheet and an income tax benefit of $0.5 million,
which was recorded in the consolidated statement of operations.
21. SUBSEQUENT EVENTS
On February 12, 2019, the Company held a special meeting of stockholders (the “2019 Special Meeting”), at
which its stockholders approved and adopted the Comstock Holding Companies, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”).
The Company’s board of directors previously approved the 2019 Plan on December 12, 2018, subject to
stockholder approval. At the 2019 Special Meeting, the Company’s stockholders approved an amendment
to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of Class A common stock from 11,038,071 to
59,779,750 and a corresponding increase to the number of authorized shares of all classes of capital stock from 31,428,571 to 80,000,000 (the “Amendment”). The
Amendment became effective upon filing with the Secretary of State of the State of Delaware on February 15, 2019 (the “Certificate of Amendment”). Also on
February 15, 2019 the Company filed a Certificate of Amendment of the Certificate of Designation of Series C Non-Convertible Preferred Stock of Comstock
Holding Companies, Inc. (the “Series C Certificate of Amendment”) with the Secretary of the State of Delaware. The Series C Certificate of Amendment amended
the Certificate of Designation to increase the number of shares of Series C Preferred Stock from 3,000,000 to 4,500,000.
On March 14, 2019, the Company paid in full a loan related to The Woods at Spring Ridge project. The loan had a maturity date of March 15, 2019. As of
December 31, 2018, the Company had $1.8 million in outstanding borrowings under this loan.
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Name
1. Comstock Emerald Farm, L.C.
2. Comstock Ventures XVI, L.C.
3. New Hampshire Ave. Ventures, L.L.C.
4. Comstock Homes of North Carolina, L.L.C.
5. Comstock Homes of Washington, L.C.
6. Comstock Property Management, L.C.
7. Comstock Realty, LLC
8. Comstock Real Estate Services, L.C
9. Comstock Yorkshire, L.C
10. Comstock Contracting, L.C.
11. Comstock Eastgate, L.C.
12. Comstock Redland Road, L.L.C.
13. Comstock Quarry Road, L.C.
14. Comstock Maxwell Square, L.C.
15. Comstock Hall Road, L.C.
16. Comstock Highlands, L.C.
17. Comstock Investors VIII, L.C.
18. Comstock Redland Road II, L.C.
19. Comstock Homes of the Carolinas, L.L.C.
20. Comstock Sixth Street, L.L.C.
21. Comstock Two Rivers I, L.C.
22. Comstock Two Rivers II, L.C.
23. Comstock Growth Fund, L.C.
24. Superior Title Services, L.C.
25. Richmond Station Ventures, L.C.
26. Comstock Stone Ridge, L.C.
27. Comstock Stone Ridge II, L.C.
28. Comstock Investors IX, L.C.
29. Comstock Growth Fund II, L.C.
30. Comstock Beshers, L.C.
31. New Hampshire Avenue Ventures, L.C.
32. Comstock Powhatan, L.C.
33. Comstock Investors X, L.C.
34. Dresden, LLC
35. Comstock Solomons, L.C.
36. Comstock Redland Road III, L.C.
37. CDS Florida, LLC
38. JK Environmental Services, LLC
39. Florida Homebuilding Group, LLC
40. BC Ventures 40, LLC
41. BC Ventures 50, LLC
42. Comstock Environmental Solutions, L.C.
List of Subsidiaries
Exhibit 21.1
State of Incorporation
or Organization
Virginia
Virginia
Virginia
North Carolina
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
North Carolina
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
Maryland
Virginia
Virginia
Virginia
Maryland
Maryland
Maryland
Virginia
Virginia
Virginia
Virginia
Virginia
Virginia
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File number 333-196260) and Form S-8 (File numbers
333-123709 and 333-182838) of Comstock Holding Companies, Inc., of our report dated March 29, 2019 relating to the consolidated financial statements which
appears in this Form 10-K.
Exhibit 23.1
/s/ BDO USA, LLP
McLean, Virginia
March 29, 2019
Exhibit 31.1
CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Clemente, certify that:
1. I have reviewed this annual report on Form 10-K of Comstock Holding Companies, Inc. for the fiscal year ended December 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 29, 2019
/s/ Christopher Clemente
Christopher Clemente
Chairman and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher Guthrie, certify that:
1. I have reviewed this annual report on Form 10-K of Comstock Holding Companies, Inc. for the fiscal year ended December 31, 2018;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 29, 2019
/s/ Christopher Guthrie
Christopher Guthrie
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Comstock Holding Companies, Inc. (the “Company”) for the year ended December 31, 2018, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Christopher Clemente, Chairman and Chief Executive Officer of the
Company and Christopher Guthrie, Chief Financial Officer of the Company, certifies, to his best knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 29, 2019
Date: March 29, 2019
/s/ Christopher Clemente
Christopher Clemente
Chairman and Chief Executive Officer
/s/ Christopher Guthrie
Christopher Guthrie
Chief Financial Officer