What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-04-15 · 62 added, 54 removed, 82 unchanged (59% of the section changed)

Management’s Discussion and Analysis o f Financial Condition and Results of Operations

Management’s Discussion and Analysis of 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.

1 unchanged sentence

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 heading “Cautionary Notes Regarding Forward-looking Statements.”

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin.

In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations.

Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for fiscal year 2020.

The following discussions are subject to the future effects of the COVID-19 outbreak.

In early 2018, the Company transitioned its operating platform from being primarily focused on the development and sale of residential homes to our current fee-based services model focused on commercial and mixed-use real estate primarily in the greater Washington, D.C.

14 unchanged sentences

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, including both a discounted cash flow model as well as a market multiple model, 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 occurr ed.

Investments in real estate ventures at fair value

3 unchanged sentences

Revenue recognition

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 recognized over time.

Revenues generated through real estate professional services such as asset and property management, 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 and property management, pricing is generally in the form of monthly management fees based on a cost-plus agreement, percentage of property-level cash receipts, square footage under management or some other variable metric recognized over time.

For Real Estate Services, pricing is generally in the form of cost-plus contracts recognized over time.

15 unchanged sentences

Adjustments to the valuation allowance are a component of the deferred income tax expense or benefit in the Consolidated Statement of Operations.

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 investments at fair value, valuation of deferred tax assets, analysis of goodwill impairment, valuation of equity-based compensation, capitalization of costs and consolidation of variable interest entities.

Results of Operations

2 unchanged sentences

Revenue from asset management for the years ended December 31, 2020 and 2019 was $21.9 million and $19.6 million, respectively.

Revenue increased primarily due to increased headcount and other costs that are reimbursable from CDS under the 2019 AMA and the other asset management agreements.

The 11.8% year over year growth of $2.3 million in revenue was primarily due to increased headcount and other costs that are reimbursable from Comstock Development Services ("CDS") under the 2019 AMA and the other asset management agreements.

The reimbursable costs are recognized as revenue in the period in which the related costs are incurred.

The increased headcount and associated personnel costs are primarily attributable to the additional real estate assets being managed along with the additional management agreements year over year.

On April 30, 2019, CAM, an entity wholly owned by the Company, entered into the 2019 AMA with CDS, which amends and restates in its entirety the asset management agreement between the parties dated March 30, 2018 with an effective date as of January 1, 2018.

Pursuant to the 2019 AMA, CDS has engaged CAM to manage and administer CDS’s commercial portfolio (“Anchor Portfolio”) and the day to-day operations of CDS and each property-owning subsidiary of CDS (collectively, the “CDS Entities”).

Pursuant to the 2019 AMA, the Company provides asset management services related to the build out, lease-up and stabilization, and management of the Anchor Portfolio.

CDS pays the Company and its subsidiaries annual fees equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5% of revenues generated by properties included in the Anchor Portfolio;

(b) a construction management fee equal to 4% of all costs associated with Anchor Portfolio projects in development;

(c) a property management fee equal to 1% of the Anchor Portfolio revenues, (d) an acquisition fee equal to up to 0.5% of the purchase price of acquired assets;

and (f) a disposition fee equal to 0.5% of the sales price of an asset on disposition (collectively, the “Market Rate Fee”);

or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of the Company related to maintaining the public listing of its shares and complying with related regulatory and reporting obligations, and (z) a fixed annual payment of $1,000,000 (collectively the “Cost Plus Fee”).

The Company believes that the Cost-Plus Fee feature of the 2019 AMA provides a stable foundation of revenue to enable the Company to further expand its asset management business and AUM.

In addition to the annual payment of the greater of either the Market Rate Fee or the Cost Plus Fee, the Company also is entitled on an annual basis to the following additional fees:

(i) an incentive fee equal to 10% of the free cash flow of each of the real estate assets comprising the Anchor Portfolio after calculating a compounding preferred return of 8% on CDS invested capital (the “Incentive Fee”);

(ii) an investment origination fee equal to 1% of raised capital, (iii) a leasing fee equal to $1.00/sf for new leases and $0.50/sf for renewals;

and (iv) mutually agreeable loan origination fees related to the Anchor Portfolio.

Please see Note 2 - Summary of Significant Accounting Policies for more information on the additional management agreements.

Revenue – real estate services

Revenue from real estate services for the years ended December 31, 2020 and 2019 was $6.8 million and $5.7 million, respectively.

The increase is primarily attributable to continued organic revenue growth within our Comstock Environmental business and closing financing transactions which generated incremental revenue of $1.1 million during the year ended December 31, 2019.

The 19.1% increase of $1.1 million is primarily attributable to continued organic revenue growth within our Comstock Environmental business, partially offset by a decrease in closing financing transactions which generated incremental revenue of $0.6 million and $1.1 million during the years ended December 31, 2020 and 2019, respectively.

Direct costs – asset management

2 unchanged sentences

Direct costs – real estate services

Direct costs – real estate services increased by $1.5 million to $4.6 million during the year ended December 31, 2019, as compared to $3.1 million during the year ended December 31, 2018.

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.

Direct costs – real estate services decreased by $0.5 million to $4.1 million during the year ended December 31, 2020, as compared to $4.6 million during the year ended December 31, 2019.

The decrease is primarily due to the recognition of $419 thousand in direct costs related to the real estate services segment from the Paycheck Protection Program Loan ("PPP Loan") as a government grant.

Please see Note 9 - CARES Act for more information on the PPP Loan and the Paycheck Protection Program ("PPP").

The grant was recognized during the covered period of the PPP Loan in the second quarter of 2020 as the related payroll costs were incurred, and the Company has complied with the forgiveness conditions attached to the PPP Loan.

General and administrative

General and administrative expenses for the year ended December 31, 2020 increased $1.5 million to $3.0 million, as compared to $1.5 million for the year ended December 31, 2019.

The year-over-year increase is attributable to increases in employee headcount and general overhead increases.

The year-over-year increase is attributable to increases in employee headcount and general overhead increases associated with the increased headcount.

General overhead costs include such items as software expense and non-capitalized computer expenses.

Sales and marketing

Sales and marketing expenses was $383 thousand for the year ended December 31, 2019.

Sales and marketing expense for 2018 is reflected within ‘net (loss) from discontinued operations, net of tax’.

The increase in sales and marketing expense from continuing operations was primarily attributable to our new sales initiatives within our Real Estate Services segment.

Real Estate Services did not have sales and marketing expense in 2018.

Sales and marketing expenses was $661.0 thousand and $383.0 thousand for the years ended December 31, 2020 and 2019, respectively.

The increase is attributable to increased sales development programs launched by our Environmental business unit to grow the business.

The increase in sale development costs has helped drive our 19.1%$1.1 million increase in real estate services revenue year over year.

Interest expense

For the years ended December 31, 2020 and 2019 non-capitalized interest expense was $379.0 thousand and $474.0 thousand, respectively.

This was an increase of $384 thousand primarily driven by the April 30, 2019 Master Transfer Agreement (“MTA”).

This was a decrease of 20.0%.

The $95.0 thousand decrease was primarily related to the retiring of the Comstock Growth Fund loan in 2020 that carried a higher interest rate than the CDS Note, partially offset by the April 30, 2019 Master Transfer Agreement (“MTA”).

Prior to the MTA certain interest expense was capitalized to homebuilding projects and expensed when the projects were sold.

1 unchanged sentence

During the year ended December 31, 2020, the Company recognized an income tax expense related to continuing operations of $25.0 thousand.

During the year ended December 31, 2018, the Company recognized income tax benefit of $1.1 million primarily related to the conversion of Comstock Growth Fund I & II to Series C Preferred Stock.

Refer to Note 9 – Debt to the Consolidated Financial Statements for more information.

During the year ended December 31, 2019, the Company recognized an income tax expense related to continuing operations of $2.0 thousand.

The de minimis income tax expense in both years is primarily attributable to state tax obligations which our federal and state NOLs cannot offset.

Loss from discontinued operations

On April 30, 2019, the Company entered into the Master Transfer Agreement ("MTA") that sets forth certain transactions to complete the Company’s previously announced exit from the homebuilding and land development business in favor of a migration to an asset management model.

Refer to Note 13 – Consolidation of Variable Interest Entities

for further discussion regarding the accounting related to discontinued operations.

The operating results of the discontinued operations that are reflected on the Consolidated Statement of Operations within the net loss from discontinued operations are as follows:

Year Ended December 31, 2019

Revenue—homebuilding

Total revenue

Cost of sales—homebuilding

Sales and marketing

General and administrative

Operating loss (273)

Income tax benefit (15)

Net loss from discontinued operations (258)

Net income attributable to non-controlling interests

Net loss attributable to Comstock Holding Companies, Inc.

Liquidity and Capital Resources

We finance our Asset management and Real Estate Services operations, capital expenditures, business acquisitions and real estate investments with internally generated funds, borrowings from our credit facilities and long-term debt.

Pursuant to Master Transfer Agreement (the “MTA”), the Company transferred to CDS management of its Class A membership interests in Investors X, the entity owning the Company’s residual homebuilding operations in exchange for residual cash flows estimated to be $7.5 million over the next three years.

Refer to Note 13 – Consolidation of Variable Interest Entities for further discussion regarding the accounting related to discontinued operations.

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.

Pursuant to the Master Transfer Agreement (the "MTA"), the Company transferred to CDS management of its Class A membership interests in Investors X, the entity owning the Company’s residual homebuilding operations in exchange for residual cash flows.

The associated debt obligations were also transferred to CDS.

See Note 8 in the accompanying consolidated financial statements for more details on our debt and credit facilities.

At December 31, 2019, $5.7 million of our notes payable to affiliates are set to mature prior to the end of 2020.

These funds were originally obtained from entities wholly owned by our Chief Executive Officer.

On March 19, 2020, the Company entered into a revolving line of credit with CDS for $10 million.

The Company utilized a portion of the line of credit to retire the $5.7 million in notes payable to affiliates.

See Note 21 – Subsequent Events for additional information about the transaction.

On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement (the “Loan Documents”) with CDS, pursuant to which the Company secured a $10.0 million capital line of credit (the “Revolver”).

Under the terms of the Loan Documents, the Revolver provides for an initial variable interest rate of the WSJ Prime Rate plus 1.00% per annum on advances made under the Revolver, payable monthly in arrears.

The five-year term facility allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CDS.

On March 27, 2020 the Company borrowed $5.5 million under the Revolver.

The $5.5 million borrowing has a maturity date of April 30, 2023.

On April 10, 2020, the capital provided to the Company by the Revolver was utilized to retire all of the Company’s 10% corporate indebtedness maturing in 2020 owed to Comstock Growth Fund, L.C.

On April 20, 2020, the Company was granted the PPP Loan in the aggregate amount of $1.95 million pursuant to the PPP under the CARES Act, which was enacted March 27, 2020.

Under the terms of the PPP, PPP loans and accrued interest are forgivable after twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the forgiveness period.

As of December 31, 2020, the Company had used the entire loan proceeds to fund its payroll and rent expenses.

As a result, the Company believes that it has met the PPP eligibility criteria for forgiveness and has concluded that the loan represents, in substance, a government grant that is expected to be forgiven.

As such, in accordance with IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance”, the Company has recognized the entire loan amount as a reduction to the associated expenses as at December 31, 2020.

The Company does not anticipate taking any action that would cause any portion of the PPP Loan to be ineligible for forgiveness.

However, to the extent that any amount is deemed unforgivable, such amount is payable over 2 to 5 years at an interest rate of 1%, with a deferral of payments for the first 6 months.

Net cash provided by operating activities was $3.4 million for the year ended December 31, 2020.

The $3.4 million net cash provided by operations in 2020 was primarily due to $2.1 million of net income generated during the year.

Net cash provided by operating activities was $8.4 million for the year ended December 31, 2019.

The $8.4 million net cash provided by operations in 2019 was primarily due to $7.8 million in cash provided by discontinued operations.

Net cash used in investing activities attributable to continuing operations was immaterial for the years ended December 31, 2019 and 2018.

Net cash used in financing activities attributable to continuing operations was immaterial for the year ended December 31, 2019.

Net cash used in investing activities was $1.7 million for the year ended December 31, 2020.

This was primarily attributable to the purchase of fixed assets for the new headquarters lease.

Net cash used in investing activities attributable to continuing operations was immaterial for the years ended December 31, 2019.

Net cash used in financing activities was $1.6 million for the year ended December 31, 2020.

This was primarily attributable to the retirement of debt partially offset by proceeds under the Revolver of $5.5 million.

Net cash used in financing activities was immaterial for the year ended December 31, 2019 .

Net cash used in financing activities from discontinued operations was $6.0 million primarily as a result of note payoff related to each lot or unit sale in the Investors X communities.

Net cash used in financing activities attributable to continuing operations was $4.7 million during the year ended December 31, 2018.

This was primarily attributable to the pay downs on notes payable of $3.1 million along with distributions of $1.8 million to the Investor X Class B Members.

Share Repurchase Program

10 unchanged sentences

While we have not seen a significant impact on our business resulting from COVID-19 to date, if the virus continues to cause significant negative impacts to economic conditions or consumer confidence, our results of operations and financial condition could be adversely impacted.

Quantitative and Qualita tive Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

1 unchanged sentence

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.

Change s in and Disagreements with Accountants on Accounting and Financial Disclosure

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis