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.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share data, number of units, or as otherwise noted)
1. ORGANIZATION
Comstock Holding
Companies, Inc. is a multi-faceted real estate development and construction services company focused on the Washington, D.C. metropolitan area (Washington, D.C., Northern Virginia and Maryland suburbs of Washington, D.C.). The Company builds
products including multi-family units, 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 (NASDAQ) under the symbol CHCI.
On September 25, 2015, the Company effected a
1-for-7 reverse stock split of its issued and outstanding Class A common stock and Class B common stock. Throughout these consolidated financial statements, a reference to a number of shares of the Companys common stock, refers to the number
of shares of common stock after giving effect to the reverse stock split, unless otherwise indicated.
Liquidity Developments
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 have historically included, 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 order to obtain additional growth capital to fund various new business opportunities. See Note 8 for more details on our credit facilities and Note 3 for details on
private placement offerings in 2016 and 2015.
As of December 31, 2016, $21.7 million of the Companys secured project related notes
were set to mature at various periods through the end of 2017. As of April 17, 2017, the Company has successfully extended or repaid all obligations with Lenders through April 27, 2017, as more fully described in Note 8 and Note 19, 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 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 if we default on an obligation, all debt with that particular institution could be called into default.
At December 31, 2016, $15.8 million of our notes payable to affiliates were set to mature at the end of 2017. These funds were primarily
obtained from entities wholly owned by our Chief Executive Officer, who has unilateral ability to extend the maturity dates beyond 2017 as needed.
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, the recently completed 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. Refer to Note 19 for further
discussion regarding extensions and other subsequent events impacting our credit facilities.
F-8
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 (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 in 50% or less 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, 2016 and 2015.
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. We monitor the cash balances in our bank accounts and adjust the balance as appropriate. 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, 2016 and 2015, the Company had restricted cash of
$1.2 million and $2.6 million, respectively, related to restricted purchaser escrow deposits and cash held in escrow as collateral for letters of credit.
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. 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 and are tangible assets or services performed to obtain regulatory approval of sales. Other selling costs are expensed as
incurred.
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 managements 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 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. As of December 31, 2016 and 2015, the Company did not have any development projects considered to be held for sale.
F-9
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:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
Total interest incurred and capitalized
|
|
$
|
3,227
|
|
|
$
|
3,295
|
|
Total real estate taxes incurred and capitalized
|
|
|
240
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Total interest and real estate taxes incurred and capitalized
|
|
$
|
3,467
|
|
|
$
|
3,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensed as a component of cost of sales
|
|
$
|
1,833
|
|
|
$
|
2,346
|
|
Real estate taxes expensed as a component of cost of sales
|
|
|
235
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Interest and real estate taxes expensed as a component of cost of sales
|
|
$
|
2,068
|
|
|
$
|
2,604
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December
|
|
|
|
2016
|
|
|
2015
|
|
Interest incurred and expensed from entity level borrowings
|
|
$
|
876
|
|
|
$
|
530
|
|
Interest incurred and expensed for inactive projects
|
|
|
5
|
|
|
|
4
|
|
Real estate taxes incurred and expensed for inactive projects
|
|
|
5
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
886
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
7 years
|
|
Office equipment
|
|
|
5 years
|
|
Computer equipment and capitalized software
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
Life of related lease
|
|
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.
F-10
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:
|
|
|
|
|
|
|
|
|
|
|
Years ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
312
|
|
|
$
|
492
|
|
Additions
|
|
|
233
|
|
|
|
246
|
|
Releases and/or charges incurred
|
|
|
(258
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
287
|
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
|
Revenue recognition
The Company recognizes revenues and related profits or losses from the sale of residential properties and units, finished lots and land sales
when closing has occurred, full payment has been received, title and possession of the property has transferred to the buyer and the Company has no significant continuing involvement in the property. Other revenues include revenue from land sales,
rental revenue from leased multi-family units which is recognized ratably over the terms of the respective leases, revenue from construction services which is recognized under the
percentage-of-completion
method, and revenue earned from management and administrative support services provided to related parties which is recognized as the services are provided.
Advertising costs
The total
amount of advertising costs charged to operations for the year ended December 31, 2016 was $586, of which $542 was charged to sales and marketing and $44 was charged to general and administrative expenses. The total amount of advertising costs
charged to operations for the year ended December 31, 2015 was $725, of which $714 was charged to sales and marketing and $11 was charged to general and administrative expenses.
Stock compensation
As discussed
in Note 12, 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 vesting period based on their fair values at the date of grant. For the year ended December 31, 2016, total
stock based compensation cost was $86 of which, $69 was charged to expenses within general and administrative and cost of sales-other in the consolidated statement of operations, and $17 was capitalized to Real estate
inventories. For the year ended December 31, 2015, total stock based compensation cost was $124, and of this amount, $93 was charged to expenses within general and administrative and cost of sales-other in the
consolidated statement of operations, and $31 was capitalized to Real estate inventories.
F-11
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.
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, 2016 and 2015 are presented on the consolidated statement of operations. Restricted stock awards, stock options and
warrants for the years ended December 31, 2016 and 2015 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 net losses for the years ended December 31, 2016 and 2015, the following shares have
been excluded from the diluted share computation as their inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December
|
|
|
|
2016
|
|
|
2015
|
|
Restricted stock awards
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
For the years ended December 31, 2016 and 2015, comprehensive income equaled net income; therefore, a separate statement of comprehensive
income is not included in the consolidated financial statements.
Segment reporting
We operate our business through three segments: Homebuilding, Multi-family and Real Estate Services. We are currently 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. 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. 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.
F-12
The following disclosure includes the Companys three reportable segments of Homebuilding,
Multi-family and Real Estate Services. Each of these segments operates within the Companys single Washington, D.C. reportable geographic segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homebuilding
|
|
|
Multi-Family
|
|
|
Real
Estate
Services
|
|
|
Total
|
|
Twelve Months Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
40,696
|
|
|
$
|
|
|
|
$
|
884
|
|
|
$
|
41,580
|
|
Gross profit
|
|
|
2,460
|
|
|
|
|
|
|
|
457
|
|
|
|
2,917
|
|
Net (loss) income
|
|
|
(7,219
|
)
|
|
|
|
|
|
|
457
|
|
|
|
(6,762
|
)
|
Total assets
|
|
|
59,688
|
|
|
|
|
|
|
|
133
|
|
|
|
59,821
|
|
Depreciation, amortization, and stock based compensation
|
|
|
258
|
|
|
|
|
|
|
|
10
|
|
|
|
268
|
|
Interest expense
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
881
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
60,132
|
|
|
$
|
|
|
|
$
|
1,244
|
|
|
$
|
61,376
|
|
Gross profit
|
|
|
8,549
|
|
|
|
|
|
|
|
693
|
|
|
|
9,242
|
|
Net (loss) income
|
|
|
(2,656
|
)
|
|
|
|
|
|
|
693
|
|
|
|
(1,963
|
)
|
Total assets
|
|
|
58,069
|
|
|
|
|
|
|
|
91
|
|
|
|
58,160
|
|
Depreciation, amortization, and stock based compensation
|
|
|
269
|
|
|
|
|
|
|
|
19
|
|
|
|
288
|
|
Interest expense
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
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, capitalization of
costs, consolidation of variable interest entities and warranty reserves.
Reclassifications
Certain amounts in the prior year consolidated financial statements have been reclassified to the current year presentation. The impact of the
reclassifications made to prior year amounts is not material and did not affect net loss.
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. 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 is continuing to evaluate the impact of ASU
2014-09.
In April
2015, the FASB issued ASU
2015-03,
Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (ASU
2015-03).
ASU
2015-03
requires debt issuance costs to be presented on the balance sheet as a direct deduction from the related debt liability, similar to the presentation of debt discounts or premiums. The costs will continue to
be amortized to interest expense using the effective interest method. ASU
2015-03
requires retrospective application to all prior periods presented in the financial statements. Upon transition, an entity is
required to comply with the applicable disclosures for a change in accounting principle. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements. As of December 31, 2016 and 2015,
$0.3 million was reclassified from Other assets to Notes payable within the consolidated balance sheets.
In
July 2015, the FASB issued ASU
2015-11,
Inventory: Simplifying the Measurement of Inventory (ASU
2015-11). The
standard simplifies the subsequent
measurement of inventory by requiring inventory to be measured at the lower of cost or net realizable value. The amendments in the standard do not apply to inventory that is measured using
last-in,
first-out
(LIFO) or the retail inventory method. The standard became effective for us on January 1, 2017. The amendments in the standard are to be applied prospectively. The adoption of this guidance is
not expected to have a material impact on our consolidated financial statements.
F-13
In February 2016, the FASB issued ASU
No. 2016-02,
Leases (ASU
2016-02).
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 financial statements.
In March 2016, the FASB issued ASU
No. 2016-09,
Compensation Stock Compensation (ASU
2016-09).
The standard simplifies and clarifies certain aspects of share-based payment
accounting and presentation. ASU
2016-09
is effective for public companies for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is
permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In August
2016, the FASB issued ASU
2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU
2016-15).
ASU
2016-15
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice for certain cash receipts and cash payments. The amendments in this guidance are effective for
public companies for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on our
consolidated financial statements.
In December 2016, the FASB issued ASU
No. 2016-18,
Statement of Cash Flows Restricted Cash (ASU
2016-18).
ASU
2016-18
will require companies to include restricted cash and restricted cash equivalents
when reconciling the
beginning-of-period
and
end-of-period
total amounts shown on the
statement of cash flows. It also requires a reconciliation between the statement of financial position and the statement of cash flows when the statement of financial position includes more than one line item for cash, cash equivalents, restricted
cash, and restricted cash equivalents. Entities that have material restricted cash and restricted cash equivalents will be required to disclose the nature of the restrictions. ASU
2016-18
is effective for
public companies for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the impact this new standard will have on our consolidated financial statements.
Other accounting pronouncements issued or effective during the year ended December 31, 2016 are not applicable to us or are not
anticipated to have a material effect on our consolidated financial statements.
3. 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 VIEs 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, are accounted for under the equity method.
Comstocks variable interests in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets and/or (3) loans provided and or guaranteed to 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 Companys real estate inventories at December 31, 2016 and 2015 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 2016 and 2015, New Hampshire Ave. Ventures, LLC distributed $1.9 million and $2.0 million to its
non-controlling
interest
member, 6000 New Hampshire Avenue, LLC, respectively.
F-14
On September 27, 2012, the Company formed Comstock Eastgate, L.C., a joint venture of the
Company and BridgeCom Development II, LLC, for the purpose of acquiring, developing and constructing 66 condominium units in Loudoun County, Virginia (the Eastgate Project). 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 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. During 2015, Comstock Eastgate, L.C. distributed $73 to its
non-controlling
interest
member. No such distributions were made during 2016. The Company exited the Eastgate Project in the second quarter of 2014 after closing on all 66 units.
In March 2013, Comstock Investors VII entered into subscription agreements with certain accredited investors (Comstock VII
Class B Members), pursuant to which the Comstock VII Class B Members purchased membership interests in Comstock VII for an aggregate amount of $7.3 million (the Comstock VII Private Placement). Comstock VII
Class B Members included unrelated third-party accredited investors along with members of the Companys board of directors and the former Chief Financial Officer, the General Counsel and the former Chief Operating Officer, of the Company.
The proceeds from the Comstock VII Private Placement were used for the construction of the Companys following projects: Townes at Shady Grove Metro in Rockville, Maryland consisting of 36 townhomes, Momentum | Shady Grove consisting of 117
condominium units, City Homes at the Hampshires in Washington, D.C. consisting of 38 single family residences, Townes at the Hampshires in Washington, D.C. consisting of 73 townhomes, Single Family Homes at the Falls Grove project in Prince William
County, Virginia consisting of 19 single family homes and Townes at the Falls Grove project in Prince William County consisting of 110 townhomes (collectively, the Investor VII Projects). In connection with the Comstock VII Private
Placement, the Company issued 17 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 $146. In
October 2014, the Company fully redeemed the equity interest of the Comstock VII Class B Members.
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.
During 2016 and 2015, the Company paid distributions in the amount of $3.1 million and $0.3 million, respectively, to the Comstock VIII Class B Members. Subsequent to year end, in January 2017, the Company paid $1.9 million,
fully redeeming the remaining equity interest of the Comstock VIII Class B Members. Refer to Note 19 for further discussion of this subsequent event.
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. No distributions have been paid to the
Comstock IX Class B Members through December 31, 2016.
F-15
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. No distributions have been paid to the Comstock X
Class B Members through December 31, 2016.
At December 31, 2016 and December 31, 2015, the distributions and
contributions for the VIEs discussed above are included within the
non-controlling
interest classification in the consolidated statement of changes in stockholders equity.
At December 31, 2016 and December 31, 2015, total assets of these VIEs were approximately $38.1 million and $22.7 million,
respectively, and total liabilities were approximately $18.5 million and $13.0 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 Companys 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.
The Company does not share in an allocation of either the profit earned or loss incurred by any of these entities with which the 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 ASC
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 holders returns and may absorb some or all of an entitys 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 any 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 is 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.
F-16
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 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. 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 and are
tangible assets or 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 managements plans for the property. At December 31, 2016 and 2015, the Company had no projects classified as held for sale.
During 2016, as a result of our impairment analysis, the Company wrote off $2.4 million 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. Additionally, during 2016, the Company, through its subsidiaries, and
the land seller of a community in the Washington, D.C. area entered into a settlement agreement, and the Company received a refund of $0.7 million representing a portion of the deposit deemed impaired during the Companys impairment
analysis in 2015.
In 2015, we wrote off $2.8 million in feasibility, site securing, predevelopment, design, and related costs due to
inventory delivery delays and inefficiencies which led to the Company
re-evaluating
the lot takedown strategy. The inventory was deemed impaired in December 2015 and was written down due to changes made to the
scheduled lot take down strategy, offers received for the properties or changes in zoning requirement.
After impairments and write-offs,
real estate held for development and sale consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Land and land development costs
|
|
$
|
33,355
|
|
|
$
|
22,896
|
|
Cost of construction (including capitalized interest and real estate taxes)
|
|
|
16,487
|
|
|
|
15,327
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,842
|
|
|
$
|
38,223
|
|
|
|
|
|
|
|
|
|
|
F-17
5. FIXED ASSETS, NET
Fixed assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Computer equipment and capitalized software
|
|
$
|
704
|
|
|
$
|
669
|
|
Furniture and fixtures
|
|
|
52
|
|
|
|
52
|
|
Office equipment
|
|
|
45
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
801
|
|
|
|
766
|
|
Less: accumulated depreciation
|
|
|
(546
|
)
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
255
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense, included in general and administrative in the accompanying
consolidated statements of operations, amounted to $181 and $164 for the years ended December 31, 2016 and 2015, respectively.
6. OTHER ASSETS
Other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Prepaid project costs
|
|
$
|
989
|
|
|
$
|
1,630
|
|
Deposits on land purchase options
|
|
|
|
|
|
|
760
|
|
Deferred financing costline of credit
|
|
|
1,286
|
|
|
|
1,286
|
|
Other
|
|
|
1,067
|
|
|
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,342
|
|
|
|
4,778
|
|
Less: accumulated amortization
|
|
|
(1,230
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,112
|
|
|
$
|
4,197
|
|
|
|
|
|
|
|
|
|
|
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Trade and accrued payables
|
|
$
|
6,925
|
|
|
$
|
6,720
|
|
Warranty
|
|
|
287
|
|
|
|
312
|
|
Customer deposits
|
|
|
497
|
|
|
|
591
|
|
Other
|
|
|
12
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,721
|
|
|
$
|
7,638
|
|
|
|
|
|
|
|
|
|
|
F-18
8. CREDIT FACILITIES
Notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Construction revolvers
|
|
$
|
6,429
|
|
|
$
|
5,832
|
|
Development and acquisition notes
|
|
|
16,278
|
|
|
|
13,833
|
|
Mezzanine notes
|
|
|
1,424
|
|
|
|
1,367
|
|
Line of credit
|
|
|
2,929
|
|
|
|
3,791
|
|
|
|
|
|
|
|
|
|
|
Total secured notes
|
|
|
27,060
|
|
|
|
24,823
|
|
Deferred financing charges, net of amortization
|
|
|
(133
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
Net secured notes
|
|
|
26,927
|
|
|
|
24,692
|
|
|
|
|
Unsecured financing, net of unamortized deferred financing charges of $121 and $187
|
|
|
911
|
|
|
|
1,361
|
|
Notes payable to affiliates, unsecured, net of $ 2.1 million and $ 2.3 million discount and
unamortized deferred financing charges
|
|
|
15,866
|
|
|
|
19,028
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
43,704
|
|
|
$
|
45,081
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, maturities of all of our borrowings are as follows:
|
|
|
|
|
2017
|
|
$
|
37,434
|
|
2018
|
|
|
6,270
|
|
|
|
|
|
|
Total
|
|
$
|
43,704
|
|
|
|
|
|
|
We are in active discussions with our lenders with respect to the 2017 maturities and are seeking extensions
and modifications to the credit facilities and loans as necessary. See Note 19 for further discussion on repayments and extensions subsequent to December 31, 2016.
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.
As of December 31, 2016 and 2015, the Company had secured construction revolving credit facilities with a maximum loan commitment of
$26.6 million and $40.5 million, respectively. The Company may borrow under these facilities to fund its homebuilding 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 December 31, 2016 and 2015, the Company had approximately $20.2 million and $34.7 million, respectively, of unused loan commitments. The Company had
$6.4 million and $5.8 million of outstanding construction borrowings as of December 31, 2016 and 2015, 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, 2016 and 2015, the weighted average interest rate on the Companys outstanding construction revolving facility was 4.6% and 4.8%, respectively. The secured debt
facilities have maturity dates ranging from February 2017 to September 2018, including extensions subject to certain conditions. Subsequent to year end, during the first quarter of 2017, $2.2 million of the outstanding construction revolving
credit facilities at December 31, 2016 matured therefore, the Company paid off $1.3 million related to one of our communities and secured an extension for the remaining $0.9 million. See Note 19 for further discussions on the
extensions.
F-19
As of December 31, 2016 and 2015, the Company had approximately $27.8 million and
$37.8 million, respectively, of aggregate acquisition and development maximum loan commitments of which $16.3 million and $13.8 million, respectively, was outstanding, of which $5.2 million of the outstanding acquisition and
development loans related to two of our projects matured in the first quarter of 2017. All other loans have maturity dates ranging from May 2017 to September 2018, 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 4.5% to 5.5%. As of December 31, 2016 and 2015, the weighted average interest rates were 5.2% per annum and 4.7% per annum, respectively. Subsequent
to year end, the Company secured extensions on $5.2 million which was scheduled to mature in the first quarter of 2017. See Note 19 for further discussions on the extensions.
During 2016, 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 $1.4 million of principal and accrued interest was outstanding at December 31, 2016 and 2015. 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
December 31, 2016 and 2015, the Company had a secured revolving line of credit amounting to $3.0 million and $4.0 million, respectively, of which $2.9 million and $3.8 million was outstanding at December 31, 2016 and
2015, respectively. 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 is used to finance the predevelopment related expenses and
deposits for current and future projects. This line of credit bears a variable interest rate tied to
one-month
LIBOR plus 3.25% per annum, with an interest rate floor of 5.0%. This line of credit also
calls 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. The Company obtained a waiver from the
financial institution for not meeting the minimum EBITDA measure as of December 31, 2016, but was in compliance with the minimum liquidity and minimum net worth requirements as dictated by the line of credit agreement as of December 31,
2016. This line of credit is guaranteed by our Chief Executive Officer. This line of credit matures on December 31, 2017.
Unsecured note
At December 31, 2016 and December 31, 2015, the Company had $1.0 million and $1.5 million, respectively,
outstanding to a bank under a
10-year
unsecured note maturing December 28, 2018. Interest is charged on this financing at LIBOR plus 2.2%. At December 31, 2016 and 2015, the interest rate was 2.9%
and 2.5%, respectively. The Company is required to make monthly principal and interest payments through maturity.
Notes payable to
affiliateunsecured
Comstock Growth Fund
On October 17, 2014, Comstock Growth Fund (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 purchasers who subsequently 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.
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 $25.0 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 is being 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 $12.6 million and
$14.0 million of outstanding borrowings under the CGF loan, net of discounts, as of December 31, 2016 and 2015, respectively. As of December 31, 2016, and 2015, the interest rate was 10.4% and 10.0% per annum, respectively. For the
years ended December 31, 2016 and 2015, the Company made interest payments of $1.6 million and $1.5 million, respectively. During the second quarter of 2016, the Company made the first principal curtailment to CGF in the amount of
$1.6 million.
F-20
On December 18, 2014, CGF entered into amended and restated subscription agreements with
CDS, management and members of the Companys board of directors who participated in the CGF Private Placement (the Amended Private Placement). Under the Amended CGF Private Placement, the Company entered into a commitment to issue
226,857 shares of our Class A common stock to purchasers of membership interests of CGF. As of December 31, 2014, the fair value of the stock, $1,091, was included within Accounts payable and accrued liabilities with a
corresponding offset to Notes payable - due to affiliates in the form of debt discount on the consolidated balance sheets. For the year ended December 31, 2015, the resulting change in fair value of $696 was recorded as a gain on
derivative and was included within Other income on the consolidated statement of operations. In addition to the commitment to issue shares of our Class A common stock, the Company issued warrants which represent the right to
purchase an aggregate amount of up to 76 shares of our Class A common stock.
On May 12, 2015, the Company issued an aggregate
226,857 shares of our Class A common stock to the purchasers in the Amended CGF Private Placement. Upon issuance of these shares, the derivative liability was satisfied and was no longer an obligation, and therefore the value of the shares was
recorded within Stockholders equity as an increase to Class A common stock and Additional
paid-in
capital within the consolidated balance sheets based on the fair value the
stock on the date of issuance. The shares of our Class A common stock were issued pursuant to exemptions from the registration requirements of the Securities Act provided by Section 4(a)(2) thereof and Rule 506 promulgated thereunder.
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 December 31, 2016 and December 31, 2015, $3.3 million
and $5.0 million, respectively, was outstanding in principal and accrued interest under the CGF II loan.
9. WARRANTS
As part of the Comstock VII Private Placement discussed in Note 3, the Company issued warrants to purchase shares of the Companys
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. The
warrants represent the right to purchase an aggregate amount of up to 16 shares of the Companys Class A common stock. The warrants have an initial exercise price which is equal to the average of the closing price of the Companys
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 3, the Company issued warrants to purchase shares of the Companys 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. The warrants represent the right to purchase an aggregate amount of up to 15 shares of the Companys Class A common stock. The warrants have an initial exercise
price which is equal to the average of the closing price of the Companys 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 3, the Company issued warrants to purchase shares of the Companys
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 Companys Class A common stock. The warrants have an initial exercise price which
is equal to the average of the closing price of the Companys 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.
F-21
As discussed in Note 8, 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 Companys 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, 2016, the warrants represent the right to purchase an aggregate amount of up
to 76 shares of our Class A common stock.
In connection with entering into the SunBridge (BridgeCom) loan agreement in
2011, the Company issued warrants to purchase shares of the Companys Class A common stock to BridgeCom Development I, LLC, an affiliate of SunBridge. The warrants represent the right to purchase an aggregate amount of up to
143 shares of the Companys Class A common stock. The warrants have an initial exercise price of $7.21. 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 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,
2016.
10. RELATED PARTY TRANSACTIONS
The Company has a lease for its corporate headquarters from an affiliate wholly-owned by our CEO. Future minimum lease payments under this
lease are as follows:
|
|
|
|
|
2017
|
|
$
|
209
|
|
2018
|
|
|
160
|
|
|
|
|
|
|
Total
|
|
$
|
369
|
|
|
|
|
|
|
For each of the years ended December 31, 2016 and 2015, total rental payments made were
$0.3 million. Rent expense for the years ended December 31, 2016 and 2015 was $0.3 million.
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, 2016 and 2015, the Company billed Comstock Asset Management, L.C. $0.9 million, for
services and
out-of-pocket
expenses incurred. Revenues from this arrangement are included within Revenue other within the accompanying consolidated
statements of operations. As of December 31, 2016 and 2015, the Company was owed $132 and $81, respectively, under this contract, which is included in Trade receivables in the accompanying consolidated balance sheets.
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. Other purchasers who purchased interest 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.
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 $10.0 million and a maximum capacity of up to $20.0 million. On December 18, 2014, the loan agreement was amended and restated to provide for a maximum capacity
of $25.0 million. All of the other terms of the unsecured promissory note remained the same. The Company borrowed 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. See Note 8 for further discussion of transactions entered with CGF.
On December 29, 2015, the Company and 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 $4,500 issued by the Company to Stonehenge was 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 all accrued but unpaid interest under the note as of December 29, 2015, which was $3,861. The note was cancelled in its entirety on December 29, 2015. The holders of Series B Preferred Stock will earn dividends at a
rate of 8.75% per annum accruing from the effective date of the Note Exchange and Subscription Agreement. The dividends will accrue whether or not declared. The dividends are also cumulative and payable quarterly in arrears on the last day of each
quarterly reporting period in the form of additional Series B Preferred Stock (PIK) or in the sole discretion of the board of directors, in cash. For the year ended December 31, 2016, 69,639 shares, with a liquidation value of $348, were paid
in-kind,
and are included in Stockholders equity in the accompanying consolidated balance sheets. No dividends were paid
in-kind
during 2015.
F-22
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 upon payment of a $10 thousand
extension fee. 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 Company pays an origination fee of
1% on the amount of the advance, up to an aggregate amount of $100 thousand, and a maintenance fee of 0.25% of the average outstanding balance of the loan on a quarterly basis. As of December 31, 2016 and 2015, $3.3 million and
$5.0 million, respectively, was outstanding in principal and accrued interest. See Note 8 for further discussion of transactions entered with CGF II.
See Note 3 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 8 to the consolidated financial statements for further description of the CGF Private Placement and the CGF II Private Placement.
See Note 3 for a summary of the Comstock X Private Placement which involved a wholly owned entity of the Chief Executive Officer of the
Company.
11. 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 respective retirement accounts in an amount not to exceed the maximum allowed under the Code. The Company matches 100% of the employees
contribution, up to 3% of each participants gross salary and 50% of the employees contribution above 3% not exceeding 5% of the participants gross salary, per pay period. Contributions made by the Company become fully vested
after six years of service. The total amount matched during the years ended December 31, 2016 and 2015 was $56 and $70, respectively.
12.
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 provided an initial authorization of 0.4 million shares of Class A common stock for issuance and allows an automatic annual
increase equal to the lesser of (i) 3% of the Class A common stock outstanding (ii) 107 shares or (iii) such lesser amount as may be determined by the Companys board of directors. On April 27, 2012, the Company
authorized an increase in the number of shares of our Class A common stock reserve to 1.0 million. On June 22, 2012, the Companys stockholders approved the Amended and Restated 2004 Long-Term Incentive Compensation Plan,
including an increase in the reserve, 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, 2016 and
2015, there were 0.3 million shares available for issuance under the Plan (as amended). The authorization limits set forth in the Plan (as amended) have been proportionately reduced, as set forth above, as a result of the 1-for-7 reverse stock
split on September 25, 2015.
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. Our estimates of forfeitures will be
adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from their estimate. 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
.
No stock options were granted during the
years ended December 31, 2016 and 2015.
F-23
The following table summarizes information about stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2015
|
|
|
191
|
|
|
$
|
8.68
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(17
|
)
|
|
|
11.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
174
|
|
|
$
|
8.39
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or Expired
|
|
|
(62
|
)
|
|
|
8.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
112
|
|
|
$
|
8.16
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
94
|
|
|
$
|
7.93
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 and 2015, the weighted-average remaining contractual term of unexercised stock
options was 4.8 years and 5.6 years, respectively.
A summary of the Companys restricted share activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
Restricted nonvested at January 1, 2015
|
|
|
31
|
|
|
$
|
12.46
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(15
|
)
|
|
|
12.48
|
|
Forfeited or Expired
|
|
|
(4
|
)
|
|
|
12.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
12
|
|
|
$
|
12.42
|
|
Granted
|
|
|
20
|
|
|
|
1.89
|
|
Vested
|
|
|
(12
|
)
|
|
|
12.42
|
|
Forfeited or Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2016
|
|
|
20
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 and 2015, there was $0.1 million 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.
For the year ended December 31, 2015, we purchased 11 thousand shares of our Class A common stock under the repurchase program
for approximately $79 (including commissions of $2). No such repurchases were made during 2016. At December 31, 2016, 404 thousand shares of our Class A common stock remain available for repurchase pursuant to our share repurchase
agreement.
13. 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 fixed interest rate
of 6% per annum. As of December 31, 2016 and 2015, the outstanding balance of the note was $103 and $141, respectively, and was included within Other assets in the accompanying consolidated balance sheets, the interest income
of $7 and $9 for the years ended December 31, 2016 and 2015, respectively, was included in Other income, net in the consolidated statements of operations.
F-24
14. 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, 2016 and 2015, the Company had issued $1.1 million and $2.7 million, respectively, in
letters of credit. At December 31, 2016 and 2015, the Company had $4.2 million and $4.6 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, 2016 and 2015, we had approximately $0.8 million and
$1.0 million, respectively, in these escrow accounts, which are included in Restricted cash in the consolidated balance sheets.
15.
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 to be observable or unobservable in a marketplace. The three measurement input levels for determining 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 assets or liabilitys 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, accounts payable and accrued liabilities are reasonable estimates of their fair values based on their short maturities.
F-25
The fair value of fixed and floating rate debt is based on unobservable inputs (Level 3 inputs).
The fair value of the 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:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Carrying amount
|
|
$
|
43,704
|
|
|
$
|
45,081
|
|
Fair value
|
|
$
|
44,986
|
|
|
$
|
45,166
|
|
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 Stonehenge Note conversion discussed in Note 10, we issued
772,210 shares of Series B
Non-Convertible
Preferred Stock with a liquidation preference value of $5.00 per share. Dividends on the Series B Preferred Stock are cumulative and payable quarterly in arrears at
an annual rate of 8.75%. The dividends are paid in the form of additional Series B Preferred Stock or in the sole discretion of the board of directors, in cash. The Company recorded these shares based on the fair value calculation on the effective
date of the agreement. The Company used various assumptions and inputs such as current market condition and financial position in calculating the fair value of the Series B Preferred Stock by back solving from the Companys equity value using
the option pricing model adjusted for lack of marketability of the Series B Preferred Stock. During the year ended December 31, 2016, the Company recorded $348 of dividends
paid-in-kind
on its Series B Preferred Stock. See Note 19 for a discussion about the exchange of all the Series B Preferred Stock for the Companys newly created
Series C
Non-Convertible
Preferred Stock subsequent to December 31, 2016.
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 Notes 2 and 4 for further discussion of the valuation techniques and inputs used.
During 2016, as a result of our impairment analysis, the Company wrote off $2.4 million 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. Additionally, during 2016, the Company, through its subsidiaries, and
the land seller of a community in the Washington, D.C. area entered into a settlement agreement, and the Company received a refund of $0.7 million representing a portion of the deposit deemed impaired during the Companys impairment
analysis in 2015.
In 2015, we wrote off $2.8 million in feasibility, site securing, predevelopment, design, and related costs due to
inventory delivery delays and inefficiencies which led to the Company
re-evaluating
the lot takedown strategy. The inventory was deemed impaired in December 2015 and was written down due to changes made to the
scheduled lot take down strategy, offers received for the properties or changes in zoning requirement.
16. 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 is included within Other assets, net in the accompanying consolidated balance sheets. Earnings for the years ended
December 31, 2016 and 2015, from this unconsolidated joint venture of $87 and $129, respectively, is included in Other income, net in the accompanying consolidated statement of operations. During the years ended December 31,
2016 and 2015, the Company collected and recorded a distribution of $102 and $93, respectively, from this joint venture as a return on investment.
F-26
Summarized unaudited financial information for the unconsolidated joint venture is as follows:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
290
|
|
|
$
|
385
|
|
Total expenses
|
|
|
117
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
173
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comstock Holding Companies, Inc. share of net income
|
|
$
|
87
|
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
17. INCOME TAXES
During the year ended December 31, 2016, the Company recognized income tax expense of $55 thousand and the effective tax rate was 0.82%.
During the year ended December 31, 2015, the Company recorded an out of period adjustment to reverse its valuation allowance specific to its Washington, D.C. tax positions, resulting in the recognition of a deferred tax benefit of $0.1 million,
offset by income tax expense of $0.4 million, both related to the New Hampshire Avenue project. Because this error was not material to any previously filed consolidated financial statements and the impact of correcting this error in 2015 is not
material, the Company recorded the correction in the first quarter of 2015. The effective tax rate for the year ended December 31, 2015 was 5.64%.
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 Company currently has approximately $138 million in federal and state 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 December 31, 2016, 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 December 31, 2016, because of the Companys full valuation
allowance on its net deferred tax assets.
The Companys 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 382s broad definition, an ownership change could be the unintended consequence of otherwise
normal market trading in the Companys stock that is outside of the Companys 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 Companys 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, 2016 and 2015, respectively. We file U.S. and state income tax returns in jurisdictions with varying statutes of limitations. The 2012 through 2015 tax years remain subject to examination by federal and most state tax
authorities.
As a result of the conversion of the Stonehenge Note to Series B Preferred Stock in 2015, the Company realized a taxable
gain on conversion, and accordingly released $1.0 million of the Companys federal deferred tax asset valuation allowance. Pursuant to the requirements of ASC
740-20-45,
the tax on the conversion gain credited directly to equity is reported net in equity; whereas, the tax benefit realized from the reversal of the valuation
allowance was recorded in the income tax line in the Companys statement of operations.
F-27
Income tax provision consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
37
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
(327
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,967
|
|
|
|
918
|
|
State
|
|
|
742
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,709
|
|
|
|
1,098
|
|
Valuation allowance
|
|
|
(4,691
|
)
|
|
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
55
|
|
|
$
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
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 Companys deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,766
|
|
|
$
|
2,094
|
|
Warranty
|
|
|
113
|
|
|
|
122
|
|
Net operating loss and tax credit carryforwards
|
|
|
53,721
|
|
|
|
47,974
|
|
Accrued expenses
|
|
|
7
|
|
|
|
4
|
|
Stock based compensation
|
|
|
387
|
|
|
|
411
|
|
Investment in affiliates
|
|
|
|
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,994
|
|
|
|
51,085
|
|
Less - valuation allowance
|
|
|
(55,739
|
)
|
|
|
(51,048
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
255
|
|
|
|
37
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(46
|
)
|
|
|
(35
|
)
|
Investment in affiliates
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
(255
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory rate and the effective tax rate after adjustments for
non-includable
partnership income arising from
non-controlling
interest follows:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Federal statutory rate
|
|
|
(35.00
|
%)
|
|
|
(35.00
|
%)
|
State income taxes - net of federal benefit
|
|
|
(3.90
|
%)
|
|
|
(3.90
|
%)
|
Permanent differences
|
|
|
(12.87
|
%)
|
|
|
18.80
|
%
|
Return to provision adjustments
|
|
|
(18.16
|
%)
|
|
|
38.54
|
%
|
Change in valuation allowance
|
|
|
69.93
|
%
|
|
|
(19.46
|
%)
|
Current state income tax
|
|
|
0.82
|
%
|
|
|
7.81
|
%
|
Other, net
|
|
|
0.00
|
%
|
|
|
(1.15
|
%)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0.82
|
%
|
|
|
5.64
|
%
|
|
|
|
|
|
|
|
|
|
F-28
18. QUARTERLY RESULTS (unaudited)
Quarterly results for the years ended December 31, 2016 and 2015 are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2016
|
|
|
June 30,
2016
|
|
|
September 30,
2016
|
|
|
December 31,
2016
|
|
Revenues
|
|
$
|
9,706
|
|
|
$
|
9,978
|
|
|
$
|
13,103
|
|
|
$
|
8,793
|
|
Operating loss
|
|
|
(1,271
|
)
|
|
|
(1,442
|
)
|
|
|
(854
|
)
|
|
|
(3,297
|
)
|
Pretax loss
|
|
|
(1,263
|
)
|
|
|
(1,429
|
)
|
|
|
(756
|
)
|
|
|
(3,259
|
)
|
Net loss
|
|
|
(1,288
|
)
|
|
|
(1,461
|
)
|
|
|
(756
|
)
|
|
|
(3,257
|
)
|
Net loss attributable to common stockholders
|
|
|
(1,724
|
)
|
|
|
(1,995
|
)
|
|
|
(1,046
|
)
|
|
|
(4,576
|
)
|
Basic loss per share
|
|
|
(0.55
|
)
|
|
|
(0.60
|
)
|
|
|
(0.34
|
)
|
|
|
(1.38
|
)
|
Diluted loss per share
|
|
|
(0.55
|
)
|
|
|
(0.60
|
)
|
|
|
(0.34
|
)
|
|
|
(1.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
2015
|
|
|
June 30,
2015
|
|
|
September 30,
2015
|
|
|
December 31,
2015
|
|
Revenues
|
|
$
|
10,317
|
|
|
$
|
12,564
|
|
|
$
|
12,288
|
|
|
$
|
26,207
|
|
Operating loss
|
|
|
(930
|
)
|
|
|
(799
|
)
|
|
|
(1,015
|
)
|
|
|
(812
|
)
|
Pretax loss
|
|
|
(738
|
)
|
|
|
(217
|
)
|
|
|
(987
|
)
|
|
|
(753
|
)
|
Net (loss) income
|
|
|
(668
|
)
|
|
|
(274
|
)
|
|
|
(1,023
|
)
|
|
|
2
|
|
Net loss attributable to common stockholders
|
|
|
(943
|
)
|
|
|
(808
|
)
|
|
|
(1,091
|
)
|
|
|
(1,725
|
)
|
Basic loss per share
|
|
|
(0.31
|
)
|
|
|
(0.25
|
)
|
|
|
(0.33
|
)
|
|
|
(0.54
|
)
|
Diluted loss per share
|
|
|
(0.31
|
)
|
|
|
(0.25
|
)
|
|
|
(0.33
|
)
|
|
|
(0.54
|
)
|
19. SUBSEQUENT EVENTS
On January 26, 2017, the Company redeemed the remaining equity interest of the Comstock VIII Class B Members by paying
$1.9 million, representing final priority returns and capital return.
On February 13, 2017, the Company paid off the
construction note related to the Hallcrest project of $1.3 million that was outstanding at December 31, 2016.
On
February 15, 2017, the Company entered into a secured construction loan for $4.9 million in connection with its Totten Mews townhome project in Washington, D.C. The loan provides for a variable interest rate of LIBOR plus 3.5% per annum,
with an interest rate floor of 4.75% per annum. This loan matures in February 2019.
On February 20, 2017, the Company extended its
revolving construction, acquisition, and development loans related to the Marrwood East project. The loans had an initial maturity date of February 20, 2017 and the extension provides for a maturity date of May 20, 2017. All other terms of
the original agreements remain in full force and effect. As of December 31, 2016, the Company had $5.1 million in outstanding borrowings under this revolving credit facility.
On February 24, 2017, the Company extended its acquisition and development loan related to the Estates at Leeland project. This loan had
an initial maturity date of March 27, 2017 and the extension provides for a maturity date of May 31, 2018. The loan was further modified to include quarterly lot take down schedule effective second quarter of 2017. All other terms of the
original agreement remain in full force and effect. As of December 31, 2016, the Company had $0.6 million in outstanding borrowings under this credit facility.
On March 6, 2017, the Company extended its revolving construction loan related to the Two Rivers II project. This loan had an initial
maturity date of March 19, 2017 and the extension provides for a maturity date of June 19, 2017. All other terms of the original agreement remain in full force and effect. As of December 31, 2016, the Company had $0.3 million in
outstanding borrowings under this credit facility.
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 state value of $5.00 per share (the Series C Preferred Stock). 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 dividend earned through the conversion date, was retired upon
re-acquisition.
F-29
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 193,052.50 shares of the Series C Preferred Stock held by Investor Management, L.C. for $88,619.33.
The Series C Preferred Stock acquisition closed on April 4, 2017, and the Series C Preferred Stock was retired.
On March 24,
2017, Comstock Acquisitions II, L.C. (Purchaser), an entity wholly owned by certain officers, directors, and employees of the Company, entered into a share repurchase agreement with Mr. Benson and Clareth, LLC, an entity wholly
owned by Mr. Benson (Clareth), pursuant to which it agreed to purchase 64,563 shares of the Companys Class A common stock and 170,250 shares of the Companys Class B common stock held by Clareth for $234,813.
The purchase transaction closed on April 4, 2017. Upon Purchasers repurchase of the Companys Class B common stock, pursuant to the Amended and Restated Certificate of Incorporation of the Company, the Class B common stock
automatically converted to Class A common stock.
On March 24, 2017, Christopher Clemente, the Chief Executive Officer of the
Company entered into a share repurchase agreement with Clareth pursuant to which he agreed to purchase 25,000 shares of the Companys Class B common stock held by Clareth for $25,000. The purchase transaction closed on April 4, 2017.
On March 31, 2017, the Company entered into a secured acquisition and construction loan for $3.0 million in connection with its Solomons
Choice project in Anne Arundel County, Maryland. The loan provided for a variable interest rate of Prime plus one half percent, with a rate of no less than 4.5%. This loan has an initial maturity date of March 31, 2019, with a potential for two
automatic extensions, if the Company meets certain sales criteria.
F-30