The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts are in thousands, except per share data, number of units, or as otherwise noted)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Comstock Holding Companies, Inc. and subsidiaries (Comstock or the
Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form
10-Q
and Article 8 of Regulation
S-X.
Such financial statements do not include all of the disclosures required by GAAP for complete financial statements. In our opinion, all
adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included in the accompanying consolidated financial statements. For further information and a discussion of our significant
accounting policies, other than discussed below, refer to our audited consolidated financial statements in our Annual Report on Form
10-K
for the fiscal year ended December 31, 2016.
Comstock Holding Companies, Inc., incorporated in 2004 as a Delaware corporation, is a multi-faceted real estate development and construction
services company focused in the Washington, D.C. metropolitan area (Washington, D.C., Northern Virginia and Maryland suburbs of Washington, D.C.). We have substantial experience with building a diverse range of products, including multi-family
homes, single-family homes, townhouses,
mid-rise
condominiums, high-rise multi-family condominiums and
mixed-use
(residential and commercial) developments. 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 Companys Class A common stock is traded on the NASDAQ Capital Market under
the symbol CHCI and has no public trading history prior to December 17, 2004.
Throughout these consolidated financial
statements, amounts are in thousands, except per share data, number of units, or as otherwise noted.
For the three and nine months ended
September 30, 2017 and 2016, comprehensive income (loss) equaled net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying consolidated financial statements.
Liquidity and Capital Resources
We
require capital to operate, to post deposits on new potential acquisitions, to purchase and develop land, to construct homes, to fund related carrying costs and overhead and to fund various advertising and marketing programs to generate sales. These
expenditures include payroll, community engineering, entitlement, architecture, advertising, utilities and interest as well as the construction costs of our homes. Our sources of capital include, and we believe will continue to include, private
equity and debt placements (which has included significant participation from Company insiders), funds derived from various secured and unsecured borrowings to finance acquisition, development and construction on acquired land, cash flow from
operations, which includes the sale and delivery of constructed homes, finished and raw building lots and the potential sale of public debt and equity securities. 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 13 in the accompanying consolidated financial statements for more details on our credit facilities and Note 11 in the accompanying consolidated
financial statements for details on private placement offerings.
We have outstanding borrowings with various financial institutions and
other lenders that have been used to finance the acquisition, development and construction of real estate projects. The Company has generally financed its development and construction activities on a single or multiple project basis so it is not
uncommon for each of our projects or collection of our projects to have a separate credit facility. Accordingly, the Company typically has had numerous credit facilities and lenders.
4
As of September 30, 2017, $22.7 million of the Companys outstanding credit
facilities and project related loans mature at various periods through the end of 2017. We are in active discussions with our lenders seeking long term extensions and modifications to these loans. 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 loans 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. We are anticipating that with the 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, though no assurances can be made that the Company will be successful in its efforts. The Company
will also continue to focus on its cost structure in an effort to conserve cash and manage expenses. Such actions may include cost reductions and/or deferral arrangements with respect to current operating expenses.
Recent Developments
On July 17, 2017,
JK Environmental Services, LLC, (JK) a newly formed, wholly owned entity by CDS Capital Management, L.C., a subsidiary of Comstock, 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. Refer to
Note 16 for further information regarding this transaction.
Use of Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these consolidated financial statements
requires us to make estimates and judgments that affect the reported amounts for the reporting periods. We base these estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the
circumstances. We evaluate these estimates and judgements on an ongoing basis. Actual results may differ from those estimates under different assumptions or conditions.
Recently Issued Accounting Standards
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. In August 2015, the FASB issued
ASU 2015-14, which
deferred the effective date of
ASU 2014-09 for
one year, which would make the guidance effective for the Companys first
fiscal year beginning after December 15, 2017. Additionally, the FASB has also decided to permit entities to early adopt the standard, which allows for either full retrospective or modified retrospective methods of adoption, for reporting
periods beginning after December 15, 2016. The Company has completed its preliminary evaluation of the impact of the adoption of ASU 2014-09 for its homebuilding revenue, and believe that there will likely be no material impact to its
consolidated financial statements, except enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable consideration and the related judgments and estimates necessary to apply the new
standard. The Company is still in the process of evaluating the impact of the adoption of the standard as it pertains to the revenues from the newly formed entity, JK. The Company continues to evaluate the new standard against its existing
accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its consolidated financial statements and what changes to systems and controls may be warranted. The
Company expects to adopt the modified retrospective method.
In February 2016, the FASB issued
ASU 2016-02, Leases. The
core principle of the standard is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its
statement of financial position a liability to make lease payments (the lease liability) and
a right-of-use asset
representing its right to use the underlying
asset for the lease term.
ASU 2016-02 is
effective for public companies for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Early
adoption is permitted. We are currently evaluating the impact this new standard will have on our consolidated financial statements.
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. This standard reduces the number of transactions that need to be further evaluated. ASU
2017-01
is effective for public business entities for
annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in ASU
2017-01
should be applied prospectively on or after the effective date. We do not
expect the adoption of ASU
2017-01
to have a material effect on our consolidated financial statements.
In May 2017, the FASB issued ASU
2017-09,
CompensationStock Compensation (Topic
718)Scope of Modification Accounting. ASU
2017-09
reduces both diversity in practice and cost and complexity when changing the terms or conditions of a share-based payment award. 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, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments in this update
should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU
2017-09
to have a material effect on our consolidated financial statements.
5
We assessed other accounting pronouncements issued or effective during the three and nine months
ended September 30, 2017 and deemed they were not applicable to us and are not anticipated to have a material effect on our consolidated financial statements.
2. REAL ESTATE INVENTORIES
After
impairments and write-offs, real estate held for development and sale consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Land and land development costs
|
|
$
|
27,810
|
|
|
$
|
33,355
|
|
Cost of construction (including capitalized interest and real estate taxes)
|
|
|
20,691
|
|
|
|
16,487
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,501
|
|
|
$
|
49,842
|
|
|
|
|
|
|
|
|
|
|
3. 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 this reserve as they arise.
The following table is a
summary of warranty reserve activity which is included in Accounts payable and accrued liabilities within the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
282
|
|
|
$
|
294
|
|
|
$
|
288
|
|
|
$
|
312
|
|
Additions
|
|
|
48
|
|
|
|
111
|
|
|
|
144
|
|
|
|
197
|
|
Releases and/or charges incurred
|
|
|
(58
|
)
|
|
|
(46
|
)
|
|
|
(160
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
272
|
|
|
$
|
359
|
|
|
$
|
272
|
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. 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 sold.
6
The following table is a summary of interest and real estate taxes incurred and capitalized and
interest and real estate taxes expensed for units settled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Interest incurred and capitalized
|
|
$
|
1,063
|
|
|
$
|
811
|
|
|
$
|
3,338
|
|
|
$
|
2,404
|
|
Real estate taxes incurred and capitalized
|
|
|
64
|
|
|
|
53
|
|
|
|
243
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and real estate taxes incurred and capitalized
|
|
$
|
1,127
|
|
|
$
|
864
|
|
|
$
|
3,581
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensed as a component of cost of sales
|
|
$
|
829
|
|
|
$
|
579
|
|
|
$
|
1,838
|
|
|
$
|
1,285
|
|
Real estate taxes expensed as a component of cost of sales
|
|
|
66
|
|
|
|
64
|
|
|
|
183
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and real estate taxes expensed as a component of cost of sales
|
|
$
|
895
|
|
|
$
|
643
|
|
|
$
|
2,021
|
|
|
$
|
1,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For the three and nine months ended September 30, 2017, the Company expensed $0 of interest
from entity level borrowings. For the three and nine months ended September 30, 2016, the Company expensed $133 and $645, respectively, of interest from entity level borrowings.
Additionally, when a project becomes inactive or is not a qualifying entity, its interest, real estate taxes and indirect production overhead
costs are no longer capitalized but rather expensed in the period they are incurred. For the three and nine months ended September 30, 2017, the Company expensed $16 of interest and real estate taxes. For the three and nine months ended
September 30, 2016, the Company expensed $0 and $10 of interest and real estate taxes.
5. LOSS PER SHARE
The weighted average shares and share equivalents used to calculate basic and diluted earnings (loss) per share for the three and nine months
ended September 30, 2017 and 2016 are presented in the accompanying consolidated statements of operations. Restricted stock awards, stock options and warrants are included in the diluted earnings (loss) per share calculation using the treasury
stock method and average market prices during the periods, unless their inclusion would be anti-dilutive.
As a result of the net
loss attributable to common stockholders for the three months ended September 30, 2017, approximately 23 restricted stock awards and 15 warrants were included in the computation of dilutive loss per share. As a result of the net loss
attributable to common stockholders for the nine months ended September 30, 2017, approximately 29 restricted stock awards and 18 warrants were included in the computation of dilutive loss per share. For the three and nine months ended
September 30, 2016, there were no anti-dilutive shares, therefore, no shares were excluded from the computation of dilutive loss per share.
6.
SEGMENT DISCLOSURES
We operate our business through three segments: Homebuilding, Multi-family, and Real Estate Services. We are
currently focused on the Washington, D.C. area 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. Our
for-sale
products are designed to attract first-time, early
move-up,
and secondary
move-up
buyers. We focus on products that we are able to offer for sale in the middle price points within the markets where we operate, avoiding the
very
low-end
and
high-end
products.
In our Multi-family
segment, we focus on projects ranging from approximately 75 to 200 units in locations that are supply constrained with demonstrated demand for stabilized assets. We seek opportunities in the multi-family rental market where our experience and core
capabilities can be leveraged. We will either position the assets for sale when completed or operate the asset within our own portfolio as rental property. Operating the asset for our own account affords us the flexibility of converting the units to
condominiums in the future.
In our Real Estate Services segment, we pursue projects in all aspects of real estate management, including
strategic planning, land development, entitlement, property management, sales and marketing, workout and turnaround strategies, financing and general construction. We are able to provide a wide range of construction management and general
contracting services to other property owners. Our newly formed entity, JK, also provides real estate related environmental services.
7
The following table includes the Companys three reportable segments of Homebuilding,
Multi-family, and Real Estate Services. The Homebuilding and Multi-family segments operate solely within the Companys single Washington, D.C. area reportable geographic segment, while the Real Estate Services operates in the Washington, D.C.,
New Jersey, and Pennsylvania geographic segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
Multi-family
|
|
|
Real
Estate
Services
|
|
|
Total
|
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
13,076
|
|
|
$
|
|
|
|
$
|
739
|
|
|
$
|
13,815
|
|
Gross profit (loss)
|
|
|
594
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
484
|
|
Net loss
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
(201
|
)
|
|
|
(1,201
|
)
|
Depreciation and amortization
|
|
|
15
|
|
|
|
|
|
|
|
83
|
|
|
|
98
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
Total assets
|
|
|
53,258
|
|
|
|
|
|
|
|
2,755
|
|
|
|
56,013
|
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
12,880
|
|
|
$
|
|
|
|
$
|
223
|
|
|
$
|
13,103
|
|
Gross profit (loss)
|
|
|
895
|
|
|
|
|
|
|
|
138
|
|
|
|
1,033
|
|
Net (loss) income
|
|
|
(894
|
)
|
|
|
|
|
|
|
138
|
|
|
|
(756
|
)
|
Depreciation and amortization
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
Interest expense
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
Total assets
|
|
|
56,427
|
|
|
|
|
|
|
|
148
|
|
|
|
56,575
|
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
33,375
|
|
|
$
|
|
|
|
$
|
1,228
|
|
|
$
|
34,603
|
|
Gross profit (loss)
|
|
|
2,571
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
2,433
|
|
Net loss
|
|
|
(2,168
|
)
|
|
|
|
|
|
|
(232
|
)
|
|
|
(2,400
|
)
|
Depreciation and amortization
|
|
|
125
|
|
|
|
|
|
|
|
126
|
|
|
|
251
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
Total assets
|
|
|
53,258
|
|
|
|
|
|
|
|
2,755
|
|
|
|
56,013
|
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
32,102
|
|
|
$
|
|
|
|
$
|
685
|
|
|
$
|
32,787
|
|
Gross profit (loss)
|
|
|
2,287
|
|
|
|
|
|
|
|
356
|
|
|
|
2,643
|
|
Net (loss) income
|
|
|
(3,861
|
)
|
|
|
|
|
|
|
356
|
|
|
|
(3,505
|
)
|
Depreciation and amortization
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
Interest expense
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
650
|
|
Total assets
|
|
|
56,427
|
|
|
|
|
|
|
|
148
|
|
|
|
56,575
|
|
The Company allocates sales, marketing and general and administrative expenses to the individual segments
based upon specifically allocable costs.
7. INCOME TAX
For the three and nine months ended September 30, 2017 the Company recognized income tax expense of $29, and the effective tax rate is 1%.
For the three and nine months ended September 30, 2016, the Company recognized income tax expense of $0 and $57, respectively, and the effective tax rate was 2%.
The Company has not recorded any accruals related to uncertain tax positions as of September 30, 2017 and 2016. We file U.S. and state
income tax returns in jurisdictions with varying statutes of limitations. The 2014 through 2016 tax years remain subject to examination by federal and most state tax authorities.
At September 30, 2017 and December 31, 2016, due to the uncertainties surrounding the realization of the deferred tax assets, the
Company recorded a full valuation allowance.
8
The Company currently has approximately $139 million in federal and state Net Operating
Losses (NOLs), which based on current statutory tax rates, have potential fair value of approximately $54 million in tax savings. If unused, these NOLs will begin expiring in 2027. Under Code Section 382
(Section 382) rules, if a change of ownership is triggered, the Companys NOL assets and possibly certain other deferred tax assets may be impaired. We estimate that as of September 30, 2017, the cumulative shift in
ownership of the Companys stock would not cause an impairment of our NOL asset. However, if an ownership change were to occur, the Section 382 limitation would not be expected to materially impact the Companys financial position or
results of operations as of September 30, 2017, because of the Companys full valuation allowance on its net deferred tax assets.
8.
COMMITMENTS AND CONTINGENCIES
Litigation
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 and cash flows. We believe that we have obtained adequate insurance coverage, rights to indemnification, or where appropriate, have established appropriate reserves in connection with any
such legal proceedings.
Letters of credit, performance bonds and compensating balances
The Company has commitments as a result of contracts with certain third parties, primarily local governmental authorities, to meet certain
performance criteria 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 September 30, 2017 and 2016, the Company had $1.1 million and $1.4 million in outstanding letters of
credit, respectively. At September 30, 2017 and 2016, the Company had $4.0 million and $4.3 million in outstanding performance bonds, respectively. No amounts have been drawn against the outstanding 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 September 30, 2017 and December 31, 2016, we had approximately $0.9 million and
$0.8 million, respectively, in these escrow accounts, which are included in Restricted cash in the accompanying consolidated balance sheets.
9. RELATED PARTY TRANSACTIONS
The
Company leases its corporate headquarters from an affiliated entity that is wholly-owned by our Chief Executive Officer. Future minimum lease payments under this lease are as follows:
|
|
|
|
|
2017
|
|
$
|
54
|
|
2018
|
|
|
160
|
|
|
|
|
|
|
Total
|
|
$
|
214
|
|
|
|
|
|
|
For the three months ended September 30, 2017 and 2016, total payments made under this lease agreement
were $52 and $84, respectively. For the nine months ended September 30, 2017 and 2016, total payments made under this lease agreement were $156 and $246, respectively.
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 our Chief Executive Officer, to provide services related to real estate development and improvements, including legal, accounting, marketing, information technology and other additional
support services. For the three months ended September 30, 2017 and 2016, the Company billed Comstock Asset Management, L.C. $269 and $222, respectively, for services and
out-of-pocket
expenses. For the nine months ended September 30, 2017 and 2016, Comstock Asset Management, L.C. was billed $757 and $684, respectively. Revenues from
this arrangement are included within Revenue other in the accompanying consolidated statements of operations. As of September 30, 2017 and December 31, 2016, the Company was owed $91 and $132, respectively, under
this contract, which is included in Trade receivables in the accompanying consolidated balance sheets.
9
On October 17, 2014, Comstock Growth Fund (CGF), an administrative entity
managed by the Company, entered into a subscription agreement with Comstock Development Services, LC (CDS), an entity wholly-owned by our Chief Executive Officer, pursuant to which CDS purchased membership interests in CGF for a
principal amount of $10 million. Other purchasers who purchased interests in the private placement included members of the Companys management and board of directors and other third-party, accredited investors for an additional principal
amount of $6.2 million (the CGF Private Placement).
Simultaneously, 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 million and a maximum capacity of up to $20 million. On December 18, 2014, the loan agreement was amended and restated
to provide for a maximum capacity of $25 million. All of the other terms of the unsecured promissory note remained the same. The Company borrowed an additional principal loan amount of $6.2 million under the amended and restated CGF
promissory note bringing the total aggregate principal amount borrowed to $16.2 million. The CGF loan has a three year term carrying a floating interest rate of LIBOR plus 9.75% with a 10% floor. The loan requires an annual principal repayment
in the amount of 10% of the average outstanding balance and a monthly interest payment that will be made in arrears. Purchasers other than CDS who purchased membership interests in CGF received warrants that represent the right to purchase an amount
of shares of our Class A common stock, depending upon the investment amount. As of September 30, 2017, and December 31, 2016, there were 76 warrants issued in connection with the CGF Private Placement outstanding, representing the
right to purchase shares of our Class A common stock having an aggregate fair value of $433, which was considered as a debt discount. The Company amortizes the debt discount over the three year term of the loan to interest expense. As of
September 30, 2017, $11.6 million was outstanding in principal and accrued interest, net of discounts, on the CGF loan. For the three months ended September 30, 2017 and 2016, the Company made interest payments of $0.1 million
and $0.4 million, respectively, on the CGF loan. For the nine months ended September 30, 2017 and 2016, the Company made interest payments on the CGF loan of $0.9 million and $1.2 million, respectively.
On December 18, 2014, CGF entered into amended and restated subscription agreements with CDS, members of the Companys management
and board of directors and the other third party accredited investors who participated in the CGF Private Placement (the Amended CGF Private Placement). Under the Amended CGF Private Placement, in addition to the warrants described
above, the Company entered into a commitment to grant 226,857 shares of our Class A common stock to the purchasers in the Amended CGF Private Placement. On May 12, 2015, the Company issued 226,857
un-registered
shares of its Class A common stock to the purchasers in the Amended CGF Private Placement. The Amended CGF Private Placement was closed for additional investments on May 15, 2015.
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 Companys 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 earn
dividends at a rate of 8.75% per annum accruing from the effective date of the Note Exchange and Subscription Agreement.
On
March 22, 2017, the Company entered into a Share Exchange Agreement with the holders of the Companys Series B Preferred Stock pursuant to which the Company exchanged 772,210 shares of the Companys Series B Preferred Stock for
772,210 shares of the Companys 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 Stockholders equity in the accompanying consolidated balance sheets. For the three and nine months ended
September 30, 2016, 17,411 and 51,848 shares of the Series B Preferred Stock, respectively, with a liquidation value of $87 and $259, respectively, were paid
in-kind
as dividends, and are included in
Stockholders equity in the accompanying consolidated balance sheets. For the nine months ended September 30, 2017, 15,663 shares of the Series B Preferred Stock with a liquidation value of $78 were paid
in-kind
as dividends and are included in Stockholders equity in the accompanying consolidated balance sheets.
10
On March 24, 2017, the Company entered into a share repurchase agreement with Investor
Management, L.C., an entity owned by Gregory V. Benson, the former Chief Operating Officer of the Company, whereby the Company agreed to repurchase 193,052 shares of the Series C Preferred Stock held by Investor Management, L.C. for $89. The Series
C Preferred Stock acquisition closed on April 4, 2017, and the Series C Preferred Stock was retired.
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).
Simultaneously, on December 29, 2015, the Company and CGF II entered into an unsecured revolving line of credit promissory note 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. As of September 30, 2017 and December 31, 2016,
$3.5 million and $3.3 million, respectively, was outstanding in principal and accrued interest on the CGF II loan.
See Note 11
to the consolidated financial statements for a description of the Comstock VIII and Comstock X Private Placements and Note 13 to the consolidated financial statements for a description of the CGF Private Placement and the CGF II Private Placement.
10. NOTE RECEIVABLE
The Company
originated a note receivable to a third party in the amount of $180 in September 2014. This note has a maturity date of September 2, 2019 and is payable in monthly installments of principal and interest of $3. This note bears a fixed interest
rate of 6% per annum. As of September 30, 2017 and December 31, 2016, the outstanding balance of the note was $75 and $103, respectively, and is included within Other assets in the accompanying consolidated balance sheets.
The interest income of $1 and $2 for the three months ended September 30, 2017 and 2016, respectively, is included in Other income, net in the consolidated statements of operations. The interest income of $4 and $6 for the nine
months ended September 30, 2017 and 2016, respectively, is included in Other income, net in the consolidated statement of operations.
11. VARIABLE INTEREST ENTITY
Included
within the Companys real estate inventories at September 30, 2017 and December 31, 2016 are several projects that are determined to be variable interest entities (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 the nine months ended
September 30, 2016, New Hampshire Ave. Ventures, LLC distributed $1.9 million to its
non-controlling
interest member, 6000 New Hampshire Avenue, LLC. No such distributions were made during the three
and nine months ended September 30, 2017.
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 Companys Class A common stock to
the non-affiliated
accredited investors, having an aggregate fair value of $131. Comstock VIII Class B Members included unrelated third-party accredited investors along with members of the
Companys board of directors and the Companys 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 proceeds from the Comstock VIII Private Placement have been used for the construction of the following projects: The Townes at HallCrest in Sterling, Virginia consisting of 42 townhome units, and Townes at Maxwell
Square Condominium in Frederick, Maryland consisting of 45 townhome condominium units (collectively, the Investor VIII Projects). Proceeds of the Comstock VIII Private Placement were utilized to provide capital needed to complete
the Investor VIII Projects in conjunction with project financing for the Investor VIII Projects, to reimburse the Company for prior expenditures incurred on behalf of the Investor VIII Projects, and for general corporate purposes of the
Company. 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. During the nine months ended September 30, 2016, the Company paid distributions in the amount of
$2.5 million to its
non-controlling
interest member.
11
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 proceeds from the Comstock IX
Private Placement have been utilized (A) for the current construction of the Marrwood East project of 35 single family homes in Loudoun County Virginia, (B) to reimburse the Company for prior expenditures incurred on behalf of the Marrwood
East project and (C) for general corporate purposes of the Company. 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 consolidates this entity. During the three and nine months ended September 30, 2017, the Company paid distributions in the amount of $0.2 million to its
non-controlling
interest
member. No distributions were made in 2016. Subsequent to quarter end, in October 2017, the Company paid $3.3 million, fully redeeming the remaining equity interest of the Comstock IX Class B Member. Refer to Note 17 for further discussion of this
subsequent event.
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 Companys 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. Proceeds of the Comstock X Private Placement
are being utilized (A) to provide capital needed to complete the projects known as The Townes at Totten Mews, consisting of 40 townhomes in Washington, D.C., and The Towns at 1333, consisting of 18 townhomes in the City of Alexandria, Virginia
(collectively, the Investor X Projects), (B) to reimburse the Company for prior expenditures incurred on behalf of the Investor X Projects, and (C) for general corporate purposes of the Company. 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. On June 14, 2017, the Comstock X Private Placement
was amended to provide for the first $1.0 million of profit earned to be allocated first to the Company. During the nine months ended September 30, 2017, the Company paid distributions of $1.0 million to its
non-controlling
interest member. No distributions were made in 2016. Subsequent to quarter end, in October 2017, the Operating Agreement for Investor X was amended to increase the maximum capital raise to $19.5
million. The Company raised an additional $5.0 million through the Investor X entity. Refer to Note 17 for further discussion of this subsequent event.
The distributions to and contributions from the VIEs discussed above are included within the
Non-controlling
interest in the consolidated balance sheets for the periods presented.
At September 30, 2017 and December 31, 2016, total assets of these VIEs were approximately $31.5 million and $38.1 million,
respectively, and total liabilities were approximately $17.3 million and $18.5 million, respectively. The classification of these assets is primarily within Real estate inventories and the classification of liabilities are primarily
within Accounts payable and accrued liabilities and Notes payable secured by real estate inventories in the accompanying consolidated balance sheets.
12
12. UNCONSOLIDATED JOINT VENTURE
The Company accounts for its interest in its title insurance joint venture using the equity method of accounting and periodically adjusts the
carrying value for its proportionate share of earnings, losses and distributions. The carrying value of the investment is included within Other assets in the accompanying consolidated balance sheets and our proportionate share of the
earnings from the investment are included in Other income, net in the accompanying consolidated statements of operations for the periods presented. Our share of the earnings for the three and nine months ended September 30, 2017,
are $23 and $47, respectively. During the three and nine months ended September 30, 2016, our share of earnings from this joint venture was $34 and $50, respectively. During the nine months ended September 30, 2017 and 2016, the Company
collected total distributions of $62 and $75, respectively, as a return on investment.
Summarized financial information for the
unconsolidated joint venture is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
73
|
|
|
$
|
96
|
|
|
$
|
180
|
|
|
$
|
186
|
|
Total expenses
|
|
|
27
|
|
|
|
28
|
|
|
|
87
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
46
|
|
|
$
|
68
|
|
|
$
|
93
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comstock Holding Companies, Inc. share of net income
|
|
$
|
23
|
|
|
$
|
34
|
|
|
$
|
47
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. CREDIT FACILITIES
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Construction revolvers
|
|
$
|
8,305
|
|
|
$
|
6,429
|
|
Development and acquisition notes
|
|
|
14,719
|
|
|
|
16,278
|
|
Mezzanine notes
|
|
|
1,472
|
|
|
|
1,424
|
|
Line of credit
|
|
|
2,132
|
|
|
|
2,929
|
|
Secured-other
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured notes
|
|
|
27,728
|
|
|
|
27,060
|
|
Deferred financing charges, net of amortization
|
|
|
(156
|
)
|
|
|
(133
|
)
|
|
|
|
|
|
|
|
|
|
Net secured notes
|
|
|
27,572
|
|
|
|
26,927
|
|
Unsecured financing, net of unamortized deferred financing charges of $72 and $121
|
|
|
1,396
|
|
|
|
911
|
|
Notes payable, unsecured, net of $1.9 million and $2.1 million discount and unamortized
deferred financing charges, respectively
|
|
|
15,078
|
|
|
|
15,866
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
44,046
|
|
|
$
|
43,704
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017, maturities and/or curtailment obligations of all borrowings are as follows:
|
|
|
|
|
2017
|
|
$
|
22,713
|
|
2018
|
|
|
13,958
|
|
2019
|
|
|
5,543
|
|
2020
|
|
|
122
|
|
2021 and thereafter
|
|
|
1,710
|
|
|
|
|
|
|
Total
|
|
$
|
44,046
|
|
|
|
|
|
|
As of September 30, 2017, the Company had $22.7 million of its credit facilities and project related
loans scheduled to mature during the remainder of 2017, and we are in active discussions with our lenders seeking long-term extensions.
13
Construction, development and mezzanine debt secured
The Company enters into secured acquisition and development loan agreements from time to time 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.
As of September 30, 2017, and December 31, 2016, the Company had secured construction revolving credit facilities
with a maximum loan commitment of $24.8 million and $26.6 million, respectively. The Company may borrow under these facilities to fund its home building activities. The amount the Company may borrow is subject to applicable borrowing base
provisions and the number of units under construction, which may also limit the amount available or outstanding under the facilities. The facilities are secured by deeds of trust on the real property and improvements thereon, and the borrowings are
repaid with the net proceeds from the closings of homes sold, subject to a minimum release price. As of September 30, 2017, and December 31, 2016, the Company had approximately $16.5 million and $20.2 million, respectively, of
unused construction loan commitments. The Company had $8.3 million and $6.4 million of outstanding construction borrowings as of September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, the weighted average interest rate on the
Companys outstanding construction revolving facilities was 4.8% and 4.6% per annum, respectively. The construction credit facilities have maturity dates ranging from October 2017 to March 2019, including extensions subject to the Company
meeting certain conditions. Subsequent to September 30, 2017, $0.5 million of the outstanding construction revolving credit facilities matured. We are in active discussions with the lender to secure an extension on this borrowing.
As of September 30, 2017, and December 31, 2016, the Company had approximately $28.5 million and $27.8 million,
respectively, of aggregate acquisition and development maximum loan commitments of which $14.7 million and $16.3 million, respectively, were outstanding. These loans have maturity dates ranging from November 2017 to March 2019, including
extensions subject to certain conditions, and bear interest at a rate based on LIBOR and prime rate pricing options, with interest rate floors ranging from 4.75% to 12.0% per annum. As of September 30, 2017, and December 31, 2016, the
weighted average interest rate was 6.5% and 5.2% per annum, respectively.
As of September 30, 2017, the Company had one
mezzanine loan that is being used to finance the development of the Momentum | Shady Grove project. The maximum principal commitment amount of this loan was $1.1 million, of which $1.2 million and $1.4 million of principal and accrued
interest was outstanding at September 30, 2017 and December 31, 2016, respectively. This financing carries 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. This
financing has a maturity date of December 31, 2017 and is guaranteed by the Company and our Chief Executive Officer.
Line of credit
secured
At September 30, 2017 and December 31, 2016, the Company had a secured revolving line of credit with a maximum
capacity of $3.0 million, of which $2.1 million and $2.9 million, respectively, were outstanding at September 30, 2017 and December 31, 2016. This line of credit is secured by the first priority security interest in the
Companys wholly owned subsidiaries in the Washington, D.C. metropolitan area and guaranteed by our Chief Executive Officer. The Company uses this line of credit to finance the predevelopment related expenses and deposits for current and
future projects and bears a variable interest rate tied to a
one-month
LIBOR plus 3.25% per annum, with an interest rate floor of 5.0%. This line of credit calls for the Company to adhere to financial
covenants, as defined in the loan agreement such as, minimum net worth and minimum liquidity, measured quarterly and minimum EBITDA measured on an annual basis and matures on December 31, 2017. The Company obtained a waiver from the financial
institution for not meeting the minimum liquidity measure as of September 30, 2017, but it was in compliance with the minimum net worth requirement as dictated by the line of credit agreement as of September 30, 2017.
Secured other
As of
September 30, 2017, the Company had one secured loan related to the newly created entity, JK, with an outstanding balance of $1.1 million. This financing carries a fixed interest rate of 6.0%, and has a maturity date of October 17, 2022. This
financing is secured by the assets of JK and is guaranteed by our Chief Executive Officer.
Unsecured financing
As of September 30, 2017, and December 31, 2016, the Company had $0.7 million and $1.0 million, respectively, in outstanding
balances under a
10-year
unsecured note with a bank. Interest is charged on this financing on an annual basis at the Overnight LIBOR rate plus 2.2%. At September 30, 2017 and December 31, 2016, the
interest rate was 3.4% and 2.9% per annum, respectively. The maturity date of this financing is December 28, 2018. The Company is required to make monthly principal and interest payments through maturity.
As of September 30, 2017, the Company had two unsecured seller-financed promissory notes with outstanding balances totaling
$0.7 million. The first note, in the amount of $0.1 million, carries an annual interest rate of the prime rate plus 5%. This financing has a maturity date of February 27, 2020, and is guaranteed by our Chief Executive Officer. As of
September 30, 2017, the interest rate was 9.3%. The second note, resulting from the newly created entity, JK, on July 17, 2017, has an outstanding balance of $0.6 million as of September 30, 2017. This financing carries an annual interest rate
of LIBOR plus 3% and has a maturity date of July 17, 2022. See Note 16 for further discussion of the business acquisition.
14
Notes payable to affiliate unsecured
Comstock Growth Fund
On October 17, 2014, CGF entered into a subscription agreement with CDS, pursuant to which CDS purchased membership interests in CGF for a
principal amount of $10.0 million (the CGF Private Placement). Other investors who subsequently purchased interests in the CGF Private Placement included members of the Companys 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 (the
Original Promissory Note). On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity of $25 million. The loan bears interest at a floating rate based on the 30 day LIBOR plus
9.75% per annum with a 10% floor 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 loan will be used by
the Company (i) to finance the Companys current and future development pipeline, (ii) to repay all or a portion of the Companys prior private placements, (iii) to repay all or a portion of the Companys project
mezzanine loans, and (iv) for general corporate purposes. The Company is the administrative manager of CGF but does not own any membership interests. The Company had approximately $11.6 million and $11.3 million of outstanding
borrowings under the CGF loan, net of discounts, as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016, the interest rate was 11.0% and 10.4% per annum, respectively.
For the three months ended September 30, 2017 and 2016, the Company made interest payments of $0.1 million and $0.4 million, respectively. For the nine months ended September 30, 2017 and 2016, the Company made interest payments
of $0.9 million and $1.2 million, respectively. During the nine months ended September 30, 2017 and 2016, the Company made principal payments to CGF of $1.5 million and $1.6 million, respectively. Subsequent to the September
30, 2017 quarter end, the Company extended the CGF loan to April 16, 2018.
Comstock Growth Fund II
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. The funds obtained from the loan are being used by the Company (i) to capitalize the
Companys current and future development pipeline, (ii) to repay all or a portion of the Companys prior private placements, and (iii) for general corporate purposes. As of September 30, 2017 and December 31, 2016,
$3.5 million and $3.3 million, respectively, was outstanding in principal and accrued interest under the CGF II loan.
14. FAIR VALUE
DISCLOSURES
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities 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 market rates (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 carrying amount and the corresponding fair value of fixed and floating rate debt:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Carrying amount
|
|
$
|
44,046
|
|
|
$
|
43,704
|
|
Fair value
|
|
$
|
43,579
|
|
|
$
|
44,986
|
|
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 could significantly affect the estimates.
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.
15
15. RESTRICTED STOCK, STOCK OPTIONS AND OTHER STOCK PLANS
The Company did not issue restricted stock awards during the three months ended September 30, 2017. During the nine months ended
September 30, 2017, the Company issued 192 thousand stock options and 245 thousand restricted stock awards to employees. No stock options or restricted stock awards were issued during the three and nine months ended September 30,
2016.
Stock-based compensation expense associated with restricted stock and stock options is recognized based on the grant date fair
value of the award over its vesting period. The following table reflects the consolidated balance sheets and statements of operations line items for stock-based compensation for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Real estate inventories - Assets
|
|
$
|
17
|
|
|
$
|
4
|
|
|
$
|
41
|
|
|
$
|
13
|
|
General and administrative - Expenses
|
|
|
116
|
|
|
|
15
|
|
|
|
238
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133
|
|
|
$
|
19
|
|
|
$
|
279
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under net settlement procedures currently applicable to our outstanding restricted stock awards for employees,
upon each settlement date and election by the employees, restricted stock awards are withheld to cover the required withholding tax, which is based on the value of the restricted stock award on the settlement date as determined by the closing price
of our Class A common stock on the trading day immediately preceding the applicable settlement date. The remaining amounts are delivered to the recipient as shares of our Class A common stock.
As of September 30, 2017, the weighted-average remaining contractual term of unexercised stock options was 7 years. As of
September 30, 2017 and December 31, 2016, there was $0.6 million and $0.1 million, respectively, of unrecognized compensation cost related to stock grants.
16. BUSINESS ACQUISITION
On July 17,
2017, JK Environmental Services, LLC, (JK) an entity wholly owned by CDS Capital Management, L.C., a subsidiary of Comstock, purchased all of the business assets of Monridge Environmental, LLC for $2.3 million. The acquisition was
consummated as part of the Companys efforts to expand its footprint in the real estate services market. 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. JKs operations since the date of acquisition are included in the Companys consolidated statement of operations for the
three and nine months ended September 30, 2017.
16
Based on an evaluation of the provisions of Accounting Standards Codification Topic 805,
Business Combinations
, (ASC 805), JK Environmental Services, LLC was determined to be the acquirer for accounting purposes. The table below summarizes the provisional purchase price allocation based on the estimated fair value of
net assets acquired assumed at the date of acquisition. The purchase price allocation is provisional pending completion of the fair value analysis of the acquired assets and liabilities assumed:
|
|
|
|
|
ASSETS
|
|
|
|
|
Net Working Capital
|
|
$
|
141
|
|
Net Fixed Assets
|
|
|
180
|
|
Intangible Assets
(1)
|
|
|
268
|
|
Goodwill
(2)
|
|
|
1,702
|
|
|
|
|
|
|
Total Purchase Price
|
|
$
|
2,291
|
|
|
|
|
|
|
(1)
|
Intangible assets include a non-compete agreement and customer relationships. The amortization period for these intangible assets is one year for the noncompete agreement; and four years for the customer relationships.
|
(2)
|
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.
|
17. SUBSEQUENT EVENTS
On October 10,
2017, the Company extended its note payable with Comstock Growth Fund I. This loan had an initial maturity date of October 17, 2017 and the extension provides for a maturity date of April 16, 2018. As of September 30, 2017, the Company had $11.6
million of outstanding principal and interest, net of discounts under this facility.
On October 13, 2017, Comstock Investors X, L.C.
amended its Operating Agreement to increase the amount of the aggregate capital raise to $19.5 million. On October 19, 2017, Comstock Investors X received proceeds of $5.0 million under the amended Operating Agreement to be used for the planned
construction of the Companys Totten Mews, Towns at 1333, Richmond Station, and Marrwood East projects. As part of this private placement, 50,000 warrants were issued for the purchase of Class A Common Stock at a strike price of $1.73 per
share.
On October 16, 2017, the Company redeemed the remaining equity interest of the Comstock IX Class B Members by paying $3.3 million,
representing final priority returns and capital return.
17
COMSTOCK HOLDING COMPANIES, INC. AND SUBSIDIARIES