Comstock Holding Companies, Inc 10-Q for FY2022 Q1
Comstock Holding Companies, Inc. (CHCI)
10-Q
2022-05-16
For: 2022-03-31
View Original
Added on
April 09, 2026
About this 10-Q
Comstock Holding Companies, Inc filed this 10-Q on May 16, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.73M
- up 27.6% from $6.84M a year earlier
- Net income
- $1.75M
- up 607.3% from net income of $247K a year earlier
- Diluted EPS
- $0.19
- up 533.3% from $0.03 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________
FORM 10-Q
__________________________________________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 1-32375
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
__________________________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(703 ) 230-1985
(Address, including zip code, and telephone number, including area code, of principal executive offices)
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||
| ☒ | Smaller reporting company | |||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of April 30, 2022, 8,199,678 shares of Class A common stock, par value $0.01 per share, and 220,250 shares of Class B common stock, par value $0.01 per share, of the registrant were outstanding.
COMSTOCK HOLDING COMPANIES, INC.
Form 10-Q
For the Quarter Ended March 31, 2022
TABLE OF CONTENTS
Item 1. | ||||||||
Consolidated Balance Sheets ............................................................................................................................. | ||||||||
Consolidated Statements of Operations.............................................................................................................. | ||||||||
Consolidated Statements of Changes in Stockholders’ Equity........................................................................... | ||||||||
Consolidated Statements of Cash Flows............................................................................................................. | ||||||||
Notes to Condensed Consolidated Financial Statements.................................................................................... | ||||||||
| Item 2. | Management's Discussion and Analysis of Financial Condition............................................................................. | |||||||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk ............................................................................... | |||||||
| Item 4. | Controls and Procedures ......................................................................................................................................... | |||||||
| Item 1. | Legal Proceedings.................................................................................................................................................... | |||||||
| Item 6. | Exhibits.................................................................................................................................................................... | |||||||
SIGNATURES.......................................................................................................................................................................... | ||||||||
PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
COMSTOCK HOLDING COMPANIES, INC.
Consolidated Balance Sheets
(Unaudited; in thousands, except per share data)
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Accounts receivable - related parties | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Current assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Fixed assets, net | |||||||||||
| Leasehold improvements, net | |||||||||||
| Investments in real estate ventures | |||||||||||
| Operating lease assets | |||||||||||
| Deferred income taxes, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders' Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accrued personnel costs | $ | $ | |||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Current operating lease liabilities | |||||||||||
| Current liabilities held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Credit facility - due to affiliates | |||||||||||
| Operating lease liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders' equity: | |||||||||||
Series C preferred stock; $ | |||||||||||
Class A common stock; $ | |||||||||||
Class B common stock; $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
See accompanying Notes to Consolidated Financial Statements.
1
COMSTOCK HOLDING COMPANIES, INC.
Consolidated Statements of Operations
(Unaudited; in thousands, except per share data)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue | $ | $ | |||||||||||||||||||||
| Operating costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Selling, general, and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total operating costs and expenses | |||||||||||||||||||||||
| Income (loss) from operations | |||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||||||||
| Gain (loss) on real estate ventures | |||||||||||||||||||||||
| Other income (expense), net | |||||||||||||||||||||||
| Income (loss) from continuing operations before income tax | |||||||||||||||||||||||
| Provision for (benefit from) income tax | ( | ||||||||||||||||||||||
| Net income (loss) from continuing operations | |||||||||||||||||||||||
| Net income (loss) from discontinued operations, net of tax | ( | ( | |||||||||||||||||||||
| Net income (loss) | $ | $ | |||||||||||||||||||||
| Weighted-average common stock outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic - Continuing operations | $ | $ | |||||||||||||||||||||
| Basic - Discontinued operations | ( | ( | |||||||||||||||||||||
| Basic net income (loss) per share | $ | $ | |||||||||||||||||||||
| Diluted - Continuing operations | $ | $ | |||||||||||||||||||||
| Diluted - Discontinued operations | ( | ( | |||||||||||||||||||||
| Diluted net income (loss) per share | $ | $ | |||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
2
COMSTOCK HOLDING COMPANIES, INC.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited; in thousands)
| Series C | Class A | Class B | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Common Stock | Treasury | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | APIC | stock | deficit | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of shares withheld for taxes | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of shares withheld for taxes | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements
3
COMSTOCK HOLDING COMPANIES, INC.
Consolidated Statements of Cash Flows
(Unaudited; in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities - Continuing Operations | |||||||||||
| Net income (loss) from continuing operations | $ | $ | |||||||||
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| (Gain) loss on real estate ventures | ( | ( | |||||||||
| Deferred income taxes | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Accrued personnel costs | ( | ( | |||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Other assets and liabilities | |||||||||||
| Net cash provided by (used in) operating activities | ( | ( | |||||||||
| Investing Activities - Continuing Operations | |||||||||||
| Investments in real estate ventures | ( | ||||||||||
| Proceeds from sale of CES | |||||||||||
| Distributions from real estate ventures | |||||||||||
| Purchase of fixed assets | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Financing Activities - Continuing Operations | |||||||||||
| Loan proceeds | |||||||||||
| Loan payments | ( | ||||||||||
| Payment of taxes related to the net share settlement of equity awards | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ( | |||||||||
| Discontinued Operations | |||||||||||
| Operating cash flows, net | ( | ||||||||||
| Investing cash flows, net | |||||||||||
| Financing cash flows, net | ( | ||||||||||
| Net cash provided by (used in) discontinued operations | ( | ||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental Cash Flow Information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities | |||||||||||
| Accrued liability settled through issuance of common stock | $ | $ | |||||||||
| Right of use assets and lease liabilities at commencement | |||||||||||
See accompanying Notes to Consolidated Financial Statements.
4
COMSTOCK HOLDING COMPANIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited; in thousands except per share data or otherwise indicated)
1. Company Overview
Comstock Holding Companies, Inc. ("Comstock" or the "Company"), founded in 1985 and incorporated in the state of Delaware in 2004, is a leading developer and manager of mixed-use and transit-oriented properties in the Washington, D.C. metropolitan area. As a vertically integrated and multi-faceted asset management and real estate services company, Comstock has designed, developed, constructed, acquired, and managed thousands of residential units and millions of square feet of commercial and mixed-use properties.
On March 31, 2022, the Company completed the sale of its wholly-owned subsidiary Comstock Environmental Services, LLC ("CES") to August Mack Environmental, Inc. ("August Mack") for approximately $1.4 million of total consideration, composed of $1.0 million in cash and $0.4 million held in escrow that is subject to net working capital and other adjustments, as set forth in the executed Asset Purchase Agreement with August Mack. For additional information, see Note 3.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the requirements of the U.S. Securities and Exchange Commission (the “SEC”). As permitted, certain information and footnote disclosures have been condensed or omitted. Intercompany balances and transactions have been eliminated and certain prior period amounts have been reclassified to conform to current period presentation.
In management’s opinion, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of the Company’s financial position and operating results. The results of operations presented in these interim condensed consolidated financial statements are unaudited and are not necessarily indicative of the results to be expected for the full fiscal year.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s fiscal year 2021 Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”) filed with the SEC on March 31, 2022. The consolidated balance sheet as of December 31, 2021 was derived from the audited financial statements contained in the 2021 Annual Report.
The Company has reflected CES as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures throughout these Notes to Consolidated Financial Statements relate to the Company's continuing operations. For additional information, see Note 3.
Recent Accounting Pronouncements - Adopted
None.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments.” This guidance is intended to introduce a revised approach to the recognition and measurement of credit
5
3. Discontinued Operations
On March 31, 2022, the Company completed the sale of its wholly-owned subsidiary CES to August Mack in accordance with the Asset Purchase Agreement for approximately $1.4 million of total consideration, composed of $1.0 million in cash and $0.4 million held in escrow that is subject to net working capital and other adjustments. The Company executed this divestiture to enhance its focus and pursue continued growth initiatives for its core asset management business.
The following table reconciles major line items constituting pretax income (loss) from discontinued operations to net income (loss) from discontinued operations as presented in the consolidated statements of operations (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue | $ | $ | |||||||||||||||||||||
| Cost of revenue | ( | ( | |||||||||||||||||||||
| Selling, general, and administrative | ( | ( | |||||||||||||||||||||
| Depreciation and amortization | ( | ||||||||||||||||||||||
| Other income (expense) | |||||||||||||||||||||||
| Pre-tax income (loss) from continuing operations | ( | ( | |||||||||||||||||||||
| Provision for (benefit from) income tax | ( | ||||||||||||||||||||||
| Net income (loss) from discontinued operations | $ | ( | $ | ( | |||||||||||||||||||
The Company recognized an estimated gain of $0.2 million on the divestiture of CES, calculated by comparing the purchase price to the carrying value of the net assets sold in the transaction as of March 31, 2022. This gain on sale is reflected in other income (expense) in the above table and does not include the impact of $0.4 million of transaction costs that are included in selling, general, and administrative expense. These amounts may be adjusted in future periods as ongoing changes to the net working capital and transaction costs related to the sale are finalized.
The following table reconciles the carrying amounts of major classes of assets and liabilities of discontinued operations to total assets and liabilities of discontinued operations that were classified as held for sale in the consolidated balance sheet as of December 31, 2021 (in thousands):
| Carrying amounts of major classes of assets held for sale: | |||||
| Accounts receivable | $ | ||||
| Prepaid expenses and other current assets | |||||
| Total current assets | |||||
| Fixed assets, net | |||||
| Intangible assets, net | |||||
| Total assets | $ | ||||
| Carrying amounts of major classes of liabilities held for sale: | |||||
| Accrued personnel costs | $ | ||||
| Accounts payable and accrued liabilities | |||||
| Loans payable | |||||
| Total liabilities | $ | ||||
4. Investments in Real Estate Ventures
6
| March 31, | December 31, | |||||||||||||
| Description | 2022 | 2021 | ||||||||||||
| Investors X | $ | $ | ||||||||||||
| The Hartford | ||||||||||||||
| BLVD Forty Four | ||||||||||||||
| BLVD Ansel | ||||||||||||||
| Total | $ | $ | ||||||||||||
Investors X
On April 30, 2019, the Company entered into a Master Transfer agreement with CP Real Estate Services, LC (“CPRES”), formerly Comstock Development Services, LC, an entity wholly owned by the Company’s CEO, Christopher Clemente, which entitled the Company to priority distribution of residual cash flow from its Class B membership interest in Comstock Investors X, L.C. ("Investors X"), an unconsolidated variable interest entity that owns the Company's residual homebuilding operations. As of March 31, 2022, the residual cash flow primarily relates to anticipated returns of cash backing outstanding letters of credit and cash collateral posted for land development work performed by subsidiaries owned by Investors X. The cash will be released as bond release work associated with these projects is completed. In addition, a subsidiary of Investors X is undergoing a re-zoning of land from commercial to residential and the Company will be entitled to 50 % of the profit from the anticipated residential lot sales after re-zoning and land development work is completed. Expected future cash flows include contractually fixed revenues and expenses, as well as estimates for future revenues and expenses where contracts do not currently exist. These estimates are based on prior experience as well as comparable, third-party data. See Note 13 for further information.
The Hartford
In December 2019, the Company partnered with Comstock Partners, LC (“Partners”), an entity that is controlled by our CEO, and wholly-owned by Mr. Clemente and certain family members, to acquire a Class-A office building immediately adjacent to Clarendon Station on Metro’s Orange Line in Arlington County’s premier transit-oriented office market, the Rosslyn-Ballston Corridor. Built in 2003, the 211,000 square foot mixed-use Leadership in Energy and Environmental Design (“LEED”) GOLD building is approximately 76 % leased to multiple high-quality tenants. In February 2020, the Company arranged for DivcoWest to purchase a majority ownership stake in the Hartford Building and secured a $87 million loan facility from MetLife. As part of the transaction, the Company entered into asset management and property management agreements to manage the property. Fair value is determined using an income approach and sales comparable approach models. As of March 31, 2022, the Company’s ownership interest in the Hartford was 2.5 %. See Note 13 for further information.
BLVD Forty Four
In October 2021, the Company entered into a joint venture with Partners to acquire BLVD Forty Four, a 15-story, luxury high-rise apartment building located one block from the Rockville Metro Station and in the heart of the I-270 Technology and Life Science Corridor in Montgomery County. Built in 2015, the 263 -unit mixed use property includes approximately 16,000 square feet of retail and a commercial parking garage. In connection with the transaction, the Company received an acquisition fee and will also receive investment related income and incentive fees in connection with its equity interest in the asset. The Company also provides asset, residential, retail and parking property management services for the property in exchange for market rate fees. Fair value is determined using an income approach and sales comparable approach models. As of March 31, 2022, the Company’s ownership interest in BLVD Forty Four was 5 %. See Note 13 for further information.
BLVD Ansel
In March 2022, the Company entered into a joint venture with Partners to acquire BLVD Ansel, an 18-story, luxury high-rise apartment building with 250 units located adjacent to BLVD Forty Four in Rockville, Maryland. In connection with the transaction, the Company received an acquisition fee and is entitled to receive investment related income and incentive fees in connection with its equity interest in the asset. The Company will also provide asset, residential, retail and parking property management services for the property in exchange for market rate fees. Fair value is determined using an income approach and sales comparable approach models. As of March 31, 2022, the Company’s ownership interest in BLVD Forty Ansel was 5 %. See Note 13 for further information.
7
The following table below summarizes the activity of the Company’s unconsolidated investments in real estate ventures that are reported at fair value (in thousands):
| Balance as of December 31, 2021 | $ | ||||
| Investments | |||||
| Distributions | ( | ||||
| Change in fair value | |||||
| Balance as of March 31, 2022 | $ | ||||
Other Investments
5. Leases
The Company has operating leases for office space leased in various buildings for its own use. The Company's leases have remaining terms ranging from 5 to 10 years. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Lease costs related to the Company's operating leases are primarily reflected in "cost of revenue" in the consolidated statements of operations, as they are a reimbursable cost under the 2019 Asset Management Agreement ("2019 AMA", see Note 13 for further information).
The following table summarizes operating lease costs, by type (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Operating lease costs | |||||||||||||||||||||||
| Fixed lease costs | $ | $ | |||||||||||||||||||||
| Variable lease costs | |||||||||||||||||||||||
| Total operating lease costs | $ | $ | |||||||||||||||||||||
The following table presents supplemental cash flow information related to the Company's operating leases (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Cash paid for amounts included in measurement of lease liabilities: | |||||||||||||||||||||||
| Operating cash flows from operating lease liabilities | $ | $ | |||||||||||||||||||||
As of March 31, 2022, the Company's operating leases had a weighted-average remaining lease term of 6.67 years and a weighted-average discount rate of 4.25 %.
8
The following table summarizes future lease payments (in thousands):
| Year Ending December 31, | Operating Leases | ||||
| 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total future lease payments | |||||
| Imputed interest | ( | ||||
| Total lease liabilities | $ | ||||
The Company does not have any leases which have not yet commenced as of March 31, 2022.
6. Debt
Credit Facility - Due to Affiliates
On March 19, 2020, the Company entered into a Revolving Capital Line of Credit Agreement with CP Real Estate Services, LC (“CPRES”), formerly known as Comstock Development Services, LC, pursuant to which the Company secured a $10.0 million capital line of credit (the “Credit Facility”). Under the terms, the Credit Facility provides for an initial variable interest rate of the Wall Street Journal Prime Rate plus 1.00 % per annum on advances made under the Credit Facility, payable monthly in arrears. The Credit Facility also allows for interim draws that carry a maturity date of 12 months from the initial date of the disbursement unless a longer initial term is agreed to by CPRES. On March 27, 2020, the Company borrowed $5.5 million under the Credit Facility and signed an unsecured promissory note to repay principal and interest borrowed by the April 30, 2023 maturity date.
7. Commitments and Contingencies
The Company maintains certain non-cancelable operating leases that contain various renewal options. See Note 5 for further information on the Company's operating lease commitments.
The Company is subject to litigation from time to time in the ordinary course of business; however, the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity. The Company records a contingent liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. The Company expenses legal defense costs as they are incurred.
8. Fair Value Disclosures
As of March 31, 2022, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and accrued liabilities approximated fair value because of the short-term nature of these instruments.
As of March 31, 2022, based upon unobservable market rates (Level 3), the fair value of the Company’s floating rate debt was estimated to approximate carrying value.
As of March 31, 2022, the Company had certain equity method investments in real estate ventures that it elected to record at fair value using significant unobservable inputs (Level 3). For further information on these investments, see Note 4.
9
9. Stockholders' Equity
Common Stock
The Company's certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock, each with a par value of $0.01 one vote per share and holders of Class B common stock are entitled to fifteen votes per share. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. As of March 31,2022, the Company had not declared any dividends.
Preferred Stock
The Company's certificate of incorporation authorizes the issuance of Series C non-convertible preferred stock with a par value of $0.01 per share and a stated value of $5.00 per share. The Series C Preferred Stock has a discretionary, non-cumulative, dividend feature and is redeemable for $5.00 per share. The Series C Preferred Stock is redeemable by holders in the event of liquidation or change in control of the Company.
Stock-based Compensation
On February 12, 2019, the Company approved the 2019 Omnibus Incentive Plan (the “2019 Plan”), which replaced the 2004 Long-Term Compensation Plan (the “2004 Plan”). The 2019 Plan provides for the issuance of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units, dividend equivalents, performance awards, and stock or other stock-based awards. The 2019 Plan mandates that all lapsed, forfeited, expired, terminated, cancelled and withheld shares, including those from the predecessor plan, be returned to the 2019 Plan and made available for issuance. The 2019 Plan originally authorized 2.5 million shares of the Company's Class A common stock for issuance. As of March 31, 2022, there were 1.4 million shares of Class A common stock available for issuance under the 2019 Plan.
During the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $0.2 million and $0.2 million, respectively. Stock-based compensation costs are included in selling, general, and administrative expense on the Company's consolidated statements of operations. As of March 31, 2022, there was $1.4 million of total unrecognized stock-based compensation.
Restricted Stock Units
Restricted stock unit (“RSU”) awards granted to employees are subject to continued employment and generally vest in four annual installments over the four years period following the grant dates. The Company also grants certain RSU awards to management that contain additional vesting conditions tied directly to a defined performance metric for the Company (“PSUs”). The actual number of PSUs that will vest can range from 60 % to 120 % of the original grant target amount, depending upon actual Company performance below or above the established performance metric targets. The Company estimates performance in relation to the defined targets when calculating the related stock-based compensation expense.
The following table summarizes all restricted stock unit activity (in thousands, except per share data):
| RSUs Outstanding | Weighted-Average Grant Date Fair Value | ||||||||||
| Balance as of December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Released | ( | ||||||||||
| Canceled/Forfeited | ( | ||||||||||
| Balance as of March 31, 2022 | $ | ||||||||||
Stock Options
Non-qualified stock options generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in four annual installments over the four-year period following the grant dates.
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The following table summarizes all stock option activity (in thousands, except per share data and time periods):
| Options Outstanding | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Canceled/Forfeited | ( | ||||||||||||||||||||||
| Expired | ( | ||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | |||||||||||||||||||||
| Exercisable as of March 31, 2022 | $ | $ | |||||||||||||||||||||
10. Revenue
All of the Company's revenue for the three months ended March 31, 2022 and December 31, 2021 was generated in the United States. The following tables summarize the Company’s revenue by line of business, customer type, and contract type (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue by Line of Business | |||||||||||||||||||||||
| Asset management | $ | $ | |||||||||||||||||||||
| Property management | |||||||||||||||||||||||
| Parking management | |||||||||||||||||||||||
| Total revenue | $ | $ | |||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue by Customer Type | |||||||||||||||||||||||
| Related party | $ | $ | |||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Total revenue | $ | $ | |||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenue by Contract Type | |||||||||||||||||||||||
| Fixed-price | $ | $ | |||||||||||||||||||||
| Cost-plus | |||||||||||||||||||||||
| Time and material | |||||||||||||||||||||||
| Total revenue | $ | $ | |||||||||||||||||||||
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11. Income Taxes
For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the entire fiscal year. The interim annual estimated effective tax rate is based on the statutory tax rates then in effect, as adjusted for estimated changes in temporary and estimated permanent differences, and excludes certain discrete items whose tax effect, when material, is recognized in the interim period in which they occur. These changes in temporary differences, permanent differences, and discrete items result in variances to the effective tax rate from period to period. We also have elected to exclude the impacts from significant pre-tax, non-recognized subsequent events from our interim estimated annual effective rate until the period in which they occur.
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. Prior to 2021, the Company had recorded valuation allowances for certain tax attributes and deferred tax assets due the existence of sufficient uncertainty regarding the future realization of those deferred tax assets through future taxable income. In June 2021, based on its recent financial performance and current forecasts of future operating results, the Company determined that it was more likely than not that a portion of the deferred tax assets related to its net operating loss carryforwards would be utilized in future periods.
12. Net Income (Loss) Per Share
The following table sets forth the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) from continuing operations - Basic and Diluted | $ | $ | |||||||||||||||||||||
| Net income (loss) from discontinued operations - Basic and Diluted | ( | ( | |||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding - Basic | |||||||||||||||||||||||
| Effect of common share equivalents | |||||||||||||||||||||||
| Weighted-average common shares outstanding - Diluted | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic - Continuing operations | $ | $ | |||||||||||||||||||||
| Basic - Discontinued operations | ( | ( | |||||||||||||||||||||
| Basic net income (loss) per share | $ | $ | |||||||||||||||||||||
| Diluted - Continuing operations | $ | $ | |||||||||||||||||||||
| Diluted - Discontinued operations | ( | ( | |||||||||||||||||||||
| Diluted net income (loss) per share | $ | $ | |||||||||||||||||||||
The following common share equivalents have been excluded from the computation of diluted net income (loss) per share because their effect was anti-dilutive (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Warrants | |||||||||||||||||||||||
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13. Related Party Transactions
Lease for Corporate Headquarters
On November 1, 2020, the Company relocated its corporate headquarters to a new office space pursuant to a ten-year lease agreement with an affiliate controlled and owned by our Chief Executive Officer and family, as landlord.
2019 Asset Management Agreement
On April 30, 2019, CHCI Asset Management, LC ("CAM") entered into the 2019 Asset Management Agreement ("2019 AMA") with CP Real Estate Services, LC (“CPRES”), formerly Comstock Development Services, LC, which amended and restated in its entirety the prior asset management agreement between the parties with an effective date as of January 1, 2018. Pursuant to the 2019 AMA, CPRES engages CAM to manage and administer the Anchor Portfolio and the day to-day operations of CPRES and each property-owning subsidiary of CPRES (collectively, the “CPRES Entities”).
Pursuant to the 2019 AMA, the Company provides asset management services related to the build out, lease-up and stabilization, and management of the Anchor Portfolio. CPRES pays the Company and its subsidiaries annual fees equal to the greater of either (i) an aggregate amount equal to the sum of (a) an asset management fee equal to 2.5 % of revenues generated by properties included in the Anchor Portfolio; (b) a construction management fee equal to 4 % of all costs associated with Anchor Portfolio projects in development; (c) a property management fee equal to 1 % of the Anchor Portfolio revenues, (d) an acquisition fee equal to up to 0.5 % of the purchase price of acquired assets; and (f) a disposition fee equal to 0.5 % of the sales price of an asset on disposition; or (ii) an aggregate amount equal to the sum of (x) the employment expenses of personnel dedicated to providing services to the Anchor Portfolio pursuant to the 2019 AMA, (y) the costs and expenses of the Company related to maintaining the public listing of its shares and complying with related regulatory and reporting obligations, and (z) a fixed annual payment of $1.0 million.
In addition to the annual payment of the greater of either the Market Rate Fee or the Cost Plus Fee, the Company also is entitled on an annual basis to the following additional fees: (i) an incentive fee equal to 10 % of the free cash flow of each of the real estate assets comprising the Anchor Portfolio after calculating a compounding preferred return of 8 % on CPRES invested capital (ii) an investment origination fee equal to 1 % of raised capital, (iii) a leasing fee equal to $1.00 /sf for new leases and $0.50 /sf for renewals; and (iv) mutually agreeable loan origination fees related to the Anchor Portfolio.
The 2019 AMA is currently scheduled to terminate on December 31, 2027 (“Initial Term”) and will automatically renew for successive additional one-year terms (each an “Extension Term”) unless CPRES delivers written notice of non-renewal at least 180 days prior to the termination date. Twenty-four months after the effective date of the 2019 AMA, CPRES is entitled to terminate the 2019 AMA without cause provided 180 days advance written notice is delivered to CAM. In the event of such a termination, and in addition to the payment of any accrued annual fees due and payable as of the termination date under the 2019 AMA, CPRES is required to pay a termination fee equal to (i) the Market Rate Fee or the Cost Plus Fee paid to CAM for the calendar year immediately preceding the termination , and (ii) a one-time payment of the Incentive Fee as if the CRE Portfolio were liquidated for fair market value as of the termination date; or the continued payment of the Incentive Fee as if a termination had not occurred.
Residential, Commercial, and Parking Property Management Agreements
The Company entered into separate residential property management agreements with properties owned by CPRES Entities under which the Company receives fees to manage and operate the properties including tenant communications, leasing of apartment units, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight.
The Company entered into separate commercial property and parking management agreements with several properties owned by CPRES Entities under which the Company receives fees to manage and operate the office and retail portions of the properties, including tenant communications, rent collections, building maintenance and day-to-day operations, engagement and supervision of contractors and vendors providing services for the buildings, and budget preparation and oversight. These property management agreements each have initial terms of one year with successive, automatic one year renewal terms. The Company generally receives base management fees under these agreements based upon a percentage of gross rental revenues for the portions of the buildings being managed in addition to reimbursement of specified expenses, including employment expenses of personnel employed by the Company in the management and operation of each property.
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Construction Management Agreements
The Company has construction management agreements with properties owned by CPRES Entities under which the Company receives fees to provide certain construction management and supervision services, including construction supervision and management of the buildout of certain tenant premises. The Company receives a flat construction management fee for each engagement under a work authorization based upon the construction management or supervision fee set forth in the applicable tenant’s lease, which fee is generally 1 % to 4 % of the total costs (or total hard costs) of construction of the tenant’s improvements in its premises, or as otherwise agreed to by the parties.
Lease Procurement Agreements
The Company has lease procurement agreements with properties owned by CPRES Entities under which the Company receives certain leasing fees in connection with the procurement of new leases for such properties where external brokers are not involved. Such leasing fees are supplemental to the fees generated from the AMA and above-referenced management agreements.
Business Management Agreements
On April 30, 2019, CAM entered into a Business Management Agreement with Investors X, whereby CAM provides Investors X with asset and professional services related to the wind down of the Company’s divested homebuilding operations and the continuation of services related to the Company’s divested land development activities. The aggregate fee payable to CAM from Investors X under the Business Management Agreement is $0.94 million payable in 15 quarterly installments of $0.06 million each.
On July 1, 2019, CAM entered into a Business Management Agreement (the “BC Management Agreement”) with CPRES, whereby CAM provides CPRES with professional management and consultation services, including, without limitation, consultation on land development and real estate transactions, for a residential community located in Monteverde, Florida. The initial term of the BC Management Agreement expired on December 31, 2020, subject to automatic, successive one (1 ) year extensions, unless sooner terminated in accordance with the terms of the BC Management Agreement. The current term of the BC Management Agreement expires on December 31, 2022. The BC Management Agreement provides that CPRES will pay CAM an annual management fee equal to $0.34 million, payable in equal monthly installments during the term commencing on July 1, 2019, and will reimburse CAM for certain expenses.
The Hartford
In December 2019, the Company made an investment related to the purchase of the Hartford, a stabilized commercial office building located at 3101 Wilson Boulevard in the Clarendon area of Arlington County, Virginia. In conjunction with the investment, the Company entered into an operating agreement with Partners to form Comstock 3101 Wilson, LC, to purchase the Hartford. Pursuant to the Operating Agreement, the Company held a minority membership interest of the Hartford and the remaining membership interests of the Hartford are held by Partners.
In February 2020, the Company, Partners and DWF VI 3101 Wilson Member, LLC (“DWF”), an unaffiliated, third party, equity investor in the Hartford, entered into a limited liability company agreement (the “DWC Operating Agreement”) to form DWC 3101 Wilson Venture, LLC (“DWC”) to, among other things, acquire, own and hold all interests in the Hartford. In furtherance thereof, on February 7, 2020, the Original Operating Agreement was amended and restated (the “A&R Operating Agreement”) to memorialize the Company’s and Partners’ assignment of 100 % of its membership interests in the Hartford to DWC. As a result thereof, DWC is the sole member of the Hartford Owner. The Company and Partners, respectively, hold minority membership interests in, and DWF holds the majority membership interest in, DWC. See Note 4 for further information.
BLVD Forty Four/BLVD Ansel
In October 2021 and March 2022, the Company entered into joint ventures with Partners to acquire BLVD Forty Four and BLVD Ansel, respectively, two adjacent mixed-use luxury high-rise apartment buildings located near the Rockville Metro Station in Montgomery County, Md. The Company considers BLVD Forty Four and BLVD Ansel to be variable interest entities upon which it exercises significant influence; however, considering key factors such as the Company’s ownership interest and participation in policy-making decisions by majority equity holders, the Company concluded that it does not have a controlling financial interest in either property. See Note 4 for further information.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto and Management’s Discussion and Analysis included in our 2021 Annual Report on Form 10-K and our Condensed Consolidated Financial Statements and the notes thereto included elsewhere in this document. Unless otherwise indicated, references to “2022” refer to the three months ended March 31, 2022 and references to “2021” refer to the three months ended March 31, 2021. The following discussion may contain forward-looking statements that reflect our plans and expectations. Our actual results could differ materially from those anticipated by these forward-looking statements. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
Overview
We are a leading developer and manager of mixed-use and transit-oriented properties in the Washington, D.C. metropolitan area. As a vertically integrated and multi-faceted asset management and real estate services company, we have designed, developed, constructed, acquired, and managed thousands of residential units and millions of square feet of commercial and mixed-use properties in since 1985.
We provide a broad range of asset management and real estate services, including services related to the acquisition, development, and operation of real estate assets. Our customers and partners are composed primarily of private and institutional owners, investors in commercial, residential, and mixed-use real estate, and various governmental bodies seeking to leverage the potential of public-private partnerships.
Our revenue is primarily generated by fees from the asset management and real estate services that we provide. In addition, we invest capital both on our own account and on behalf of clients and institutional investors seeking above average risk-adjusted returns. These strategic real estate investments tend to focus on office, retail, residential and mixed-use properties in which we generally retain an economic interest while also providing property management and other real estate services.
Our managed portfolio is composed of 36 operating assets, including 15 commercial assets totaling approximately 2.2 million square feet, 6 multifamily assets totaling 1,636 units, and 15 commercial garages with over 12,000 parking spaces. Included in our managed portfolio are Reston Station and Loudoun Station, two of the largest transit-oriented, mixed-use developments in the Washington, D.C. metropolitan area. The following tables provide a high-level summary of our managed portfolio:
| Anchor Portfolio | |||||
| Reston Station | Mixed-use development on Metro's Silver Line (Phase I); strategically located between Tyson's Corner, Va. and Dulles International Airport | ||||
| Loudoun Station | Mixed-use development on Metro's Silver Line (Phase II); first Metro-connected development in Loudoun County, Va. | ||||
| Herndon Station | Mixed-use development in the historic downtown portion of Herndon, Va.; focus of public-private partnership with Town of Herndon | ||||
| Investments/Assets Under Management | |||||
| The Hartford Building | Joint venture; 211,000 square foot mixed-use building on Metro's Orange Line in Arlington, Va. | ||||
| BLVD Forty Four | Joint venture; 15-story, luxury high-rise apartment building near Rockville Metro Station in Montgomery County, Md.; adjacent to BLVD Ansel | ||||
| BLVD Ansel | Joint venture; 18-story, luxury high-rise apartment building near Rockville Metro Station in Montgomery County, Md.; adjacent to BLVD Forty Four | ||||
| International Gateway | Various real-estate services provided for two privately-owned mixed-use buildings located in Tyson's Corner, Va. | ||||
| Investors X | Investment in company that owns residual homebuilding operations | ||||
Additionally, we have the following assets under construction: (i) one commercial asset totaling approximately 330,000 square feet, (ii) one multifamily asset with 415 units and (iii) one hotel/condominium asset with 240 keys and 95 condos. Our development pipeline consists of 12 assets consisting of approximately 1.4 million square feet of additional planned commercial development, approximately 2,600 multifamily units and one hotel asset that will include 160 keys.
Substantially all the properties included in our managed portfolio are covered by long-term, full-service asset management agreements encompassing all aspects of design, development, construction, and operations management relating to the subject
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properties. The services we provide pursuant to the asset management agreements covering our managed portfolio vary by property and client.
Anchoring our asset management services platform is a long-term full service asset management agreement with an affiliated company owned by the Comstock’s Chief Executive Officer, Christopher Clemente (the “2019 AMA”). The 2019 AMA encompasses the majority of the properties we currently manage, including Reston Station and Loudoun Station. For additional details on the 2019 AMA, see Note 13 in the Notes to Consolidated Financial Statements.
CES Divestiture
On March 31, 2022, we completed the sale of Comstock Environmental Services, LLC ("CES"), a subsidiary of Comstock, to August Mack Environmental, Inc. ("August Mack") in accordance with the Asset Purchase Agreement for approximately $1.4 million of total consideration, composed of $1.0 million in cash and $0.4 million held in escrow that is subject to net working capital and other adjustments. We executed this divestiture to enhance its focus pursue continued future growth initiatives for its core asset management business.
We have reflected CES as a discontinued operation in its consolidated statements of operations for all periods presented. Unless otherwise noted, all amounts and disclosures relate to our continuing operations. For additional information, see Note 3 in the Notes to Consolidated Financial Statements.
COVID-19 Update
We continue to monitor the ongoing impact of the COVID-19 pandemic, including the effects of recent notable variants of the virus. While we have not experienced a significant impact on our business resulting from COVID-19 to date, future developments may have a negative impact on our results of operations and financial condition. The health and safety of our employees, customers, and the communities in which we operate remains our top priority. Although the long-term impact of the COVID-19 pandemic on the commercial real estate market in the greater Washington, D.C. area remains uncertain, we believe that our Anchor Portfolio is well positioned to withstand any future potential negative impacts of the COVID-19 pandemic.
Outlook
Our management team is committed to executing our goal to provide exceptional experiences to those we do business with while maximizing shareholder value. We believe that we are properly staffed for current market conditions and the foreseeable future and feel that we will maintain the ability to manage risk and pursue opportunities for additional growth as market conditions warrant. Our real estate development and asset management operations are primarily focused on the greater Washington, D.C. area, where we believe our 35-plus years of experience provides us with the best opportunity to continue developing, managing, and investing in high-quality real estate assets and capitalizing on positive growth trends.
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Results of Operations
The following tables set forth consolidated statement of operations data for the periods presented (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | 8,731 | $ | 6,840 | |||||||
| Operating costs and expenses: | |||||||||||
| Cost of revenue | 6,935 | 6,078 | |||||||||
| Selling, general, and administrative | 387 | 299 | |||||||||
| Depreciation and amortization | 44 | 20 | |||||||||
| Total operating costs and expenses | 7,366 | 6,397 | |||||||||
| Income (loss) from operations | 1,365 | 443 | |||||||||
| Other income (expense) | |||||||||||
| Interest expense | (59) | (58) | |||||||||
| Gain (loss) on equity method investments | 252 | 6 | |||||||||
| Other income | — | 1 | |||||||||
| Income (loss) from continuing operations before income tax | 1,558 | 392 | |||||||||
| Provision for (benefit from) income tax | (456) | 2 | |||||||||
| Net income (loss) from continuing operations | 2,014 | 390 | |||||||||
| Net income (loss) from discontinued operations, net of tax | (267) | (143) | |||||||||
| Net income (loss) | $ | 1,747 | $ | 247 | |||||||
Comparison of the Three Months Ended March 31, 2022 and March 31, 2021
Revenue
The following table summarizes revenue by line of business (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||||||||||||||||||||
| Net Sales | % | Net Sales | % | $ | % | ||||||||||||||||||||||||||||||
| Asset management | $ | 5,997 | 68.7 | % | $ | 4,893 | 71.5 | % | $ | 1,104 | 22.6 | % | |||||||||||||||||||||||
| Property management | 2,131 | 24.4 | % | 1,630 | 23.8 | % | 501 | 30.7 | % | ||||||||||||||||||||||||||
| Parking | 603 | 6.9 | % | 317 | 4.7 | % | 286 | 90.2 | % | ||||||||||||||||||||||||||
| Total revenue | $ | 8,731 | 100.0 | % | $ | 6,840 | 100.0 | % | $ | 1,891 | 27.6 | % | |||||||||||||||||||||||
Revenue increased 27.6% in 2022. The $1.9 million comparative increase was primarily driven by a $0.5 million increase in acquisition fees, a $0.4 million increase in leasing fees, and growth in our managed portfolio, including the addition of 2 managed residential projects, 1 commercial project, and 4 parking garages. Also driving the increase was the improved performance of our managed portfolio, as property management fees are generally billed as a percentage of revenue of the managed project, as well as comparative increases in reimbursable staffing charges due to market and merit-based compensation increases for our allocated employees.
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Operating costs and expenses
The following table summarizes operating costs and expenses (in thousands):
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Cost of revenue | $ | 6,935 | $ | 6,078 | $ | 857 | 14.1 | % | |||||||||||||||
| Selling, general, and administrative | 387 | 299 | 88 | 29.4 | % | ||||||||||||||||||
| Depreciation and amortization | 44 | 20 | 24 | 120.0 | % | ||||||||||||||||||
| Total operating costs and expenses | $ | 7,366 | $ | 6,397 | $ | 969 | 15.1 | % | |||||||||||||||
Operating costs and expenses increased 15.1% in 2022. The $1.0 million comparative increase was primarily due a $1.1 million increase in personnel expenses stemming from market and merit-based compensation increases along with increases in our headcount, partially offset by a $0.2 million decrease in recoverable expenses.
Other income (expense)
The following table summarizes other income (expense) (in thousands):
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Interest expense | $ | (59) | $ | (58) | $ | (1) | 1.7 | % | |||||||||||||||
| Gain (loss) on equity method investments | 252 | 6 | 246 | 4100.0 | % | ||||||||||||||||||
| Other income | — | 1 | (1) | (100.0) | % | ||||||||||||||||||
| Total other income (expense) | $ | 193 | $ | (51) | $ | 244 | (478.4) | % | |||||||||||||||
Other income (expense) increased $0.2 million in 2022, primarily driven by higher mark-to-market valuations of the fixed-rate debt associated our equity method investments that brought comparative gains. We also recognized additional gains on the performance of our title insurance joint venture with Superior Title Services, Inc., driven by higher volume as compared to the prior period.
Income taxes
Benefit from income taxes was $0.5 million in 2022, compared to an immaterial expense in 2021. The benefit in 2022 was due to the tax impact from a $0.7 million release of a deferred tax asset valuation allowance in the period. This recognized tax benefit was supported by our recent trend of positive net income from continuing operations and our expectation that current operations will continue to generate future taxable income.
Non-GAAP Financial Measures
To provide investors with additional information regarding our financial results, we prepare certain financial measures that are not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”), specifically Adjusted EBITDA.
We define Adjusted EBITDA as net income (loss) from continuing operations, excluding the impact of interest expense (net of interest income), income taxes, depreciation and amortization, stock-based compensation, and gain (loss) on equity method investments.
We use Adjusted EBITDA to evaluate financial performance, analyze the underlying trends in our business and establish operational goals and forecasts that are used when allocating resources. We expect to compute Adjusted EBITDA consistently using the same methods each period.
We believe Adjusted EBITDA is a useful measure because it permits investors to better understand changes over comparative periods by providing financial results that are unaffected by certain non-cash items that are not considered by management to be indicative of our operational performance.
While we believe that Adjusted EBITDA is useful to investors when evaluating our business, it is not prepared and presented in accordance with GAAP, and therefore should be considered supplemental in nature. Adjusted EBITDA should not be considered
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in isolation, or as a substitute, for other financial performance measures presented in accordance with GAAP. Adjusted EBITDA may differ from similarly titled measures presented by other companies.
The following table presents a reconciliation of net income (loss) from continuing operations, the most directly comparable financial measure as measured in accordance with GAAP, to Adjusted EBITDA (in thousands):
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net income (loss) from continuing operations | $ | 2,014 | $ | 390 | |||||||||||||||||||
| Interest expense, net | 59 | 58 | |||||||||||||||||||||
| Income taxes | (456) | 2 | |||||||||||||||||||||
| Depreciation and amortization | 44 | 20 | |||||||||||||||||||||
| Stock-based compensation | 197 | 153 | |||||||||||||||||||||
| (Gain) loss on equity method investments | (252) | (6) | |||||||||||||||||||||
| Adjusted EBITDA | $ | 1,606 | $ | 617 | |||||||||||||||||||
Liquidity and Capital Resources
Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities.
Our principal sources of liquidity as of March 31, 2022 were our cash and cash equivalents of $11.6 million and our $4.5 million of available borrowings on our Credit Facility.
Significant factors which could affect future liquidity include the adequacy of available lines of credit, cash flows generated from operating activities, working capital management and investments.
Our primary capital needs are for working capital obligations and other general corporate purposes, including investments and capital expenditures. Our primary sources of working capital are cash from operations and distributions from investments in real estate ventures. We have historically financed our operations with internally generated funds and borrowings from our credit facilities. For further information on our debt, see Note 6 in the Notes to Consolidated Financial Statements.
We believe we currently have adequate liquidity and availability of capital to fund our present operations and meet our commitments on our existing debt.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Continuing operations | |||||||||||
| Net cash provided by (used in) operating activities | $ | (1,952) | $ | (2,040) | |||||||
| Net cash provided by (used in) investing activities | (1,785) | 1,653 | |||||||||
| Net cash provided by (used in) financing activities | (297) | (105) | |||||||||
| Total net increase (decrease) in cash - continuing operations | (4,034) | (492) | |||||||||
| Discontinued operations, net | (229) | 117 | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | (4,263) | $ | (375) | |||||||
Operating Activities
Net cash used in operating activities decreased by $0.1 million in 2022, primarily driven by a $1.0 million increase in net income from continuing operations after adjustments for non-cash items, partially offset by a $0.9 million incremental cash outflow stemming from changes to our net working capital. The net working capital impact included increased accounts receivable and accrued personnel costs, partially offset by decreases in accounts payable.
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Investing Activities
Net cash used investing activities was $1.8 million in 2022, compared to $1.7 million provided by investing activities in 2021. The net $3.4 million change was primarily driven by our $2.7 million real estate investment in BLVD Ansel and a $1.6 million decrease in distributions from real estate investments, partially offset by $1.0 million in proceeds from the CES divestiture.
Financing Activities
Net cash used in financing activities increased by $0.2 million in 2022, primarily driven by a $0.1 million decrease in net loan activity and a $0.1 million increase in tax payments related to the net share settlement of equity awards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2022, management, including the CEO and CFO, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)).
Based on that evaluation, management, including the CEO and CFO, concluded that as of March 31, 2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. We maintain a system of internal control over financial reporting that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
Changes in Internal Control over Financial Reporting
There have been no material changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. We do not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, therefore internal control over financial reporting may not prevent or detect misstatements.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference from Note 7 in the Notes to Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q.
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Item 6. Exhibits
| Exhibit Number | Incorporated by Reference | |||||||||||||||||||||||||
| Description | Form | Exhibit | Filing Date | |||||||||||||||||||||||
| 3.1 | 10-Q | 3.1 | November 16, 2015 | |||||||||||||||||||||||
| 3.2 | 10-K | 3.2 | March 31, 2005 | |||||||||||||||||||||||
| 3.3 | 8-K | 3.1 | March 27, 2015 | |||||||||||||||||||||||
| 3.4 | 8-K | 3.2 | March 27, 2015 | |||||||||||||||||||||||
| 3.5 | 8-K | 3.1 | January 4, 2016 | |||||||||||||||||||||||
| 3.6 | 8-K | 3.1 | March 28, 2017 | |||||||||||||||||||||||
| 3.7 | 8-K | 3.2 | February 19, 2019 | |||||||||||||||||||||||
| 3.8 | 8-K | 3.1 | February 19, 2019 | |||||||||||||||||||||||
| 4.1 | S-1 | 4.1 | August 13, 2004 | |||||||||||||||||||||||
| 10.1* | ||||||||||||||||||||||||||
| 10.2* | ||||||||||||||||||||||||||
| 10.3* | ||||||||||||||||||||||||||
| 31.1* | ||||||||||||||||||||||||||
| 31.2* | ||||||||||||||||||||||||||
| 32.1‡ | ||||||||||||||||||||||||||
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||||||||||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||
| * Filed herewith | ||||||||||||||||||||||||||
| ‡ Furnished herewith | ||||||||||||||||||||||||||
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Pursuant to Rule 405 of Regulation S-T, the following interactive data files formatted in Inline Extensible Business Reporting Language (iXBRL) are attached as Exhibit 101 to this Quarterly Report on Form 10-Q:
| (i) | the Consolidated Balance Sheets as of March 31, 2022 and 2021; | ||||
| (ii) | the Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021; | ||||
| (iii) | the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2022 and 2021; | ||||
| (iv) | the Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021; and | ||||
| (v) | the Notes to Condensed Consolidated Financial Statements. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COMSTOCK HOLDING COMPANIES, INC. | ||||||||
| Date: May 16, 2022 | By: | /s/ CHRISTOPHER CLEMENTE | ||||||
| Christopher Clemente Chairman and Chief Executive Officer | ||||||||
| Date: May 16, 2022 | By: | /s/ CHRISTOPHER GUTHRIE | ||||||
| Christopher Guthrie Chief Financial Officer | ||||||||
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LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF COMSTOCK 33 MONROE HOLDINGS, L C THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT (the “Agreement”) of COMSTOCK 33 MONROE HOLDINGS, L C (the “Company”) is made and entered into as of the 21st day of March, 2022 by Comstock Partners, LC, a Virginia limited liability company, and Comstock Holding Companies, Inc., a Delaware corporation, as members of the Company (herein referred to collectively as the “Members”), and Ricardo Orozco and Sean Prewitt, as Independent Directors. W I T N E S S E T H: WHEREAS, the Company was formed as a limited liability company under and pursuant to the Act by the filing of Articles of Organization (the “Articles”) Maryland State Department of Assessments and Taxation on February 25, 2022; and WHEREAS, the Company was formed for the purpose of certain business activities stated below including, without limitation, acquiring, owning, holding and managing the membership interests in Comstock 33 Monroe, L C, a Maryland limited liability company (the “Property Owner”); and WHEREAS, on the date hereof, the Property Owner shall enter into that certain Loan Agreement (the “Loan Agreement”) with Athene Annuity and Life Company (“AAIA MOD”) and Athene Annuity and Life Company (“AAIA NON MOD”), each an Iowa corporation, individually or collectively, as the context may require, together with successors and/or assigns (herein, the “Lender”) pursuant to which Lender shall make a loan to the Property Owner in the original principal sum of $84,000,000 as evidenced by that certain Promissory Note (such loan as evidenced by the Note and the Loan Agreement being hereinafter referred to as the “Loan”); and WHEREAS, the Loan is secured, inter alia, by certain real property to be acquired as of the date hereof by the Property Owner, which is located at 33 Monroe Street and 198 East Montgomery Avenue, Rockville, Maryland 20850 (“Property” and sometimes herein as the “Mortgaged Premises”); and WHEREAS, in addition thereto, Members desire to set forth in this Agreement rules, regulations, and provisions regarding the management of the business of the Company, the regulations of the affairs of the Company, the governance of the Company, the conduct of the Company’s business and the rights and privileges of the Members. NOW, THEREFORE, the Members hereby provide and agree as follows:
-2- ARTICLE I DEFINITIONS 1.1 Definitions. As used herein the following terms shall have the indicated meanings, and all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined. Terms not otherwise defined herein shall have the meanings set forth in the Act or the Loan Agreement. “Act” means the Maryland Limited Liability Company Act (Maryland Corporations and Associations Code Ann. §4A-101, et seq.) in effect on the date hereof and as may be hereafter amended. “Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by or is under common control with such Person or is a director or officer of such Person or of an Affiliate of such Person. “Agreement” means this Limited Liability Company Operating Agreement of the Company and as the same may be hereafter amended. “Bankruptcy” shall mean with respect to any Person (a) such Person filing a voluntary petition under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law; (b) the filing of an involuntary petition against such Person under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law, or soliciting or causing to be solicited petitioning creditors for any involuntary petition against such Person; (c) such Person filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code or any other federal or state bankruptcy or insolvency law, or soliciting or causing to be solicited petitioning creditors for any involuntary petition from any Person; (d) such Person consenting to or acquiescing in or joining in an application for the appointment of a custodian, receiver, trustee, assignee, sequestrator (or similar official), liquidator, or examiner for such Person or any portion of the Property; (e) the filing of a petition against a Person seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the Bankruptcy Code or any other applicable law; (f) under the provisions of any other law for the relief or aid of debtors, an action taken by any court of competent jurisdiction that allows such court to assume custody or Control of a Person or of the whole or any substantial part of its property or assets or (g) such Person making an assignment for the benefit of creditors, or admitting, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due, other than as may be required by Legal Requirements. “Bankruptcy Code” shall mean Title 11 of the United States Code, 11 U.S.C. § 101, et seq., as the same may be amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws relating to bankruptcy, insolvency or creditors’ rights or any other federal or state bankruptcy or insolvency law.
-3- “Business Day” means any day other than a Saturday, Sunday or any other day on which national banks in New York, New York are not open for business. “Cash Flow of the Company” means the cash receipts generated from the ordinary day-to-day operations of the business of the Company and from all other sources available to the Company, including sales of assets and refinancings, without deduction of depreciation, cost recovery, and other non-cash charges, but after deductions for (i) the payment or the accrual for payment, of all operating expenses, capital costs relating to the business of the Company and its assets including, without limitation, interest, amortization and other charges or provisions (i.e., escrows) pursuant to Company indebtedness, the cost of the Company’s tax returns, tax shelter registration and reporting costs, if any, filing fees and any fees, taxes or costs required to be paid by the Company to maintain its existence as a valid business enterprise in good standing in the State of Maryland; (ii) provisions for the reasonable current and future working capital requirements of the Company or for the preservation of the Company assets, as determined by the Manager; and (iii) other reserves which, in the discretion of the Manager, are necessary for the operation of the Company’s business. “Cause” shall mean with respect to an Independent Director, (i) acts or omissions by such Independent Director, that constitute willful disregard of, or gross negligence with respect to, such Independent Director’s duties, (ii) such Independent Director has engaged in or has been charged with or has been indicted or convicted for any crime or crimes of fraud or other acts constituting a crime under any law applicable to such Independent Director, (iii) such Independent Director has breached its fiduciary duties of loyalty and care as and to the extent of such duties in accordance with the terms of this Agreement, (iv) there is a material increase in the fees charged by such Independent Director or a material change to such Independent Director’s terms of service, (v) such Independent Director is unable to perform his or her duties as Independent Director due to death, disability or incapacity, or (vi) such Independent Director no longer meets the definition of Independent Director. “Certificate of Formation” shall have the meaning set forth in the recitals. “Code” means the Internal Revenue Code of 1986, as amended, as it may be further amended from time to time, and any successor statutes thereto, and all applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form. “Company” means COMSTOCK 33 MONROE HOLDINGS, L C, the Maryland limited liability company formed by the Member. “Control” (and the correlative terms “controlled by” and “controlling”) shall mean, the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of the business and affairs of the entity in question by reason of the ownership of beneficial interests, by contract or otherwise.
-4- “Disregarded Entity” shall mean an entity disregarded from its owner for federal income tax purposes under United States Treasury regulations Section 301.7701-3. “Indebtedness” shall have the meaning ascribed thereto in the Loan Agreement. “Independent Director” means Ricardo Orozco, and/or Sean Prewitt. “Lender” shall have the meaning set forth in the recitals. “Loan” shall have the meaning set forth in the recitals. “Loan Agreement” shall have the meaning set forth in the recitals. “Loan Documents” shall mean, collectively, the Loan Agreement, the Note, the Mortgage, the Assignment of Leases, the Environmental Indemnity, the Lockbox Agreement, the Assignment of Agreements Affecting Real Estate, the Assignment of Management Agreement, the Guaranty, the Completion Guaranty, the Cash Management Agreement, the Assignment of Asset Management Agreement, the Assignment of Parking Management Agreement, the Assignment of Purchase and Sale Agreement, and all other documents and certificates contemplated thereby or delivered in connection with the Loan, as each may be further amended, restated, replaced, supplemented or otherwise modified in accordance with the Loan Agreement. “Manager” means CP Management Services, LC, a Virginia limited liability company, or such other member or other Person designated by the Member(s) in accordance with Sections 6.6 and 8.1 below. Manager is hereby designated as a “manager” of the Company within the meaning of the Act. “Material Action” shall mean, as to any Person, (i) to the fullest extent permitted by law, to dissolve, wind up or liquidate such Person or engage in or permit any Division, (ii) to sell or otherwise dispose of all or substantially all of the assets of such Person, (iii) to merge, combine or consolidate with any other Person, or (iv) to take any Bankruptcy Action. “Member” means Comstock Partners, LC, a Virginia limited liability company, and Comstock Holding Companies, Inc., a Delaware corporation, includes any Person admitted as an additional member of the Company or a substitute member of the Company pursuant to the provisions of this Agreement, each in its capacity as a member of the Company. “Member Cessation Event” shall have the meaning set forth in Section 6.9. “Membership Interest” means the Member’s entire limited liability company interest in the Company. “Mortgage” means that certain Deed of Trustand Security Agreement by the Property Owner for the benefit of Lender dated as of the date hereof, as amended on or prior to the date hereof, as the same may be further amended, restated, replaced, supplemented or otherwise modified in accordance with the Loan Agreement.
-5- “Mortgaged Premises” shall have the meaning set forth in the recitals. “Note” shall have the meaning ascribed thereto in the Loan Agreement. “Permitted Indebtedness” means customary unsecured payables incurred in the ordinary course of owning the Property Owner provided the same are not evidenced by a promissory note, do not exceed, in the aggregate, at any time a maximum amount of $10,000 and are paid within 60 days of the date incurred. “Person” means any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated organization, any federal, State, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing. “Primary Springing Member” means Ricardo Orozco. “Property” shall have the meaning set forth in the recitals. “Rating Agencies” shall mean each of S&P, Moody’s, Fitch, Realpoint and any other nationally-recognized statistical rating agency which has been approved by Lender and has rated the Securities; provided, if the Loan is not part of a Securitization, any action that would otherwise require a consent by a Rating Agency (but would not otherwise require the consent of Lender hereunder) shall instead require the consent of Lender. “Rating Agency Condition” means (i) with respect to any action taken at any time before the Loan evidenced and secured by the Loan Documents has been sold or assigned to a securitization trust, that the Lender thereunder has consented in writing to such action, and (ii) with respect to any action taken at any time after such Loan has been sold or assigned to a securitization trust, that each Rating Agency shall have notified the Company in writing that such action will not result in a reduction or withdrawal, downgrade or qualification of the then current rating by such Rating Agency of the Loan or any pool of the loans of which the Loan forms a part, or any of securities issued by such securitization trust. “Related Provisions” shall have the meaning set forth in Section 12.7. “Secondary Springing Member” means Sean Prewitt. “Securities” shall have the meaning ascribed thereto in the Loan Agreement. “Securitization” shall have the meaning ascribed thereto in the Loan Agreement “Special Purpose Provisions” shall have the meaning set forth in Section 12.7. “Treasury Regulations” mean the regulations and all amendments thereto issued by the U. S. Treasury Department in interpretation of the Code.
-6- ARTICLE II FORMATION 2.1 Formation. The Member hereby acknowledges formation of the Company by the filing of the Articles of the Company with the Maryland State Department of Assessment and Taxation. The Member was admitted to the Company as a member of the Company upon execution of a counterpart signature page to this Agreement. The existence of the Company as a separate legal entity shall continue until cancellation of the Articles as provided in the Act. 2.2 Name. The name of the Company is COMSTOCK 33 MONROE HOLDINGS, L C. The Company may adopt and conduct its business under such assumed or trade names as the Manager may from time to time determine. The Company shall file any assumed or fictitious name certificates as may be required to conduct business in any state. 2.3 Formation. The Company was formed as a limited liability company pursuant to the Act. The terms and provisions hereof will be construed and interpreted in accordance with the terms and provisions of the Act; provided, that, if any of the terms and provisions of this Agreement should be deemed inconsistent with those of the Act, this Agreement will be controlling. The Members shall execute, deliver and file any other certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in any jurisdiction in which the Company may wish to conduct business. 2.4 Limited Liability Company Agreement. The Members hereby state that except as otherwise required by the Act, the Company shall be operated subject to the terms and conditions of this Agreement. 2.5 Offices. The principal executive office of the Company shall be 1900 Reston Metro Plaza, 10th Floor, Reston, Virginia 20190. The business of the Company may also be conducted at such other or additional place or places or offices as may hereafter be designated by the Manager. ARTICLE III PURPOSE AND POWER 3.1 Purpose. Notwithstanding anything to the contrary in this Agreement or in any other document governing the formation, management or operation of the Company, the purposes for which the Company is formed are limited solely to acquiring, owning, holding, operating and managing the member interest in the Property Owner, and engaging in any lawful act or activity and exercising any powers permitted to limited liability companies organized under the laws of the State of Maryland that are related or incidental to and necessary, convenient or advisable to accomplish the foregoing. Also, it is the stated intent and purpose of the Company to operate under this Agreement and the Act and to be characterized as a limited liability company under the Act and to be characterized, for federal tax purposes, as a disregarded entity under federal tax laws. Subject to the terms of this Agreement, the Manager shall revise this Agreement and/or otherwise restructure the Company if such action is necessary to continue the status of the Company as a limited
-7- liability company under the Act and to continue the Company’s characterization as a disregarded entity under federal tax laws. 3.2 Powers. In furtherance of the foregoing purposes, the Company shall have the full power and authority to conduct its business as provided by this Agreement, the Act and applicable law. The Company, or the Manager on behalf of the Company and on behalf of the Property Owner, and the Member are hereby authorized to execute, deliver and perform the Loan Documents and any documents contemplated thereby or related thereto and any amendments thereto, without any further act, vote or approval of any Person, notwithstanding any other provision of this Agreement. Each of the Members and the Manager is hereby authorized to enter into the documents described in the preceding sentence on behalf of the Company, but such authorization shall not be deemed a restriction on the power of the Members or the Manager to enter into other documents on behalf of the Company and on behalf of the Property Owner. Any action heretofore taken by or on behalf of the Company in connection with the foregoing is hereby ratified and confirmed notwithstanding any other provisions of this Agreement. Notwithstanding any other provision of this Agreement and any provision of law that otherwise so empowers the Company, the Members or any Officer or any other Person, so long as any Obligation is outstanding, neither the Members nor any Officer nor any other Person shall be authorized or empowered on behalf of the Company to, nor shall they permit the Company to, and the Company shall not, without the prior unanimous written consent of the Members and all Independent Directors, take any Material Action or Bankruptcy Action, provided, however, that, so long as any Obligation is outstanding, the Member may not authorize the taking of any Material Action, unless there are at least two Independent Directors then serving in such capacity and each such Independent Director has consented thereto. ARTICLE IV PERCENTAGE INTEREST AND CAPITAL 4.1 Capital Contribution. As of the date of this Agreement, the Members of the Company are listed on Exhibit “A” attached hereto. The Members are not required to make any additional capital contribution to the Company. However, the Members may make additional capital contributions to the Company at any time upon the written consent of such Members. The provisions of this Agreement, including this Section 4.1, are intended to benefit the Members and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (and no such creditor of the Company shall be a third-party beneficiary of this Agreement) and the Members shall not have any duty or obligation to any creditor of the Company to make any contribution to the Company or to issue any call for capital pursuant to this Agreement. 4.2 Capital Accounts. The Company will maintain for each Member an account designated as his/her/its “Capital Account” in accordance with Treasury Regulations Section 1.704-1(b).
-8- ARTICLE V PROFITS, LOSSES AND DISTRIBUTIONS 5.1 Cash Flow Distributions. The Cash Flow of the Company, if any, shall be distributed to the Member subject to any limitations on the Company’s ability to make distributions imposed by the Lender pursuant to the Loan Documents, if any. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a distribution to the Members on account of its interest in the Company if such distribution would violate the Act or any other applicable law, or would constitute a default under the Loan Documents. 5.2 Allocation of Profits and Losses. After giving effect to the special allocations and other matters addressed in the attached Tax Matters Addendum, the Profits and Losses of the Company shall be determined by the Manager in accordance with the Tax Matters Addendum and other generally acceptable accounting practices and, unless the Manager determines that some other allocation is necessary or appropriate, shall be allocated among the Members as follows: (A) The Profits of the Company for each Fiscal Year shall be allocated among the Members participating in the Company as follows: (i) first, to the extent that the aggregate Losses previously allocated to the Members pursuant to Sections 5.(B) exceed the aggregate Profits previously allocated to such Members pursuant to this Section 5.2(A)(i), the amount of such excess shall be allocated to such Members in the reverse order of priority in which such Losses were previously allocated (to the extent not theretofore charged back hereunder); (ii) next, to the Members, pro rata, based on their respective preferred return accrued pursuant to Section 5.3(C), until such time as the Members have been allocated Profits equal to such preferred return; and (iii) thereafter, any remaining Profits shall be allocated among the Members, pro rata, in accordance with their percentage Interests in the Company. (B) The Losses of the Company for each Fiscal Year, shall be allocated among the Members who bear the actual economic loss, pro rata, in accordance with their actual economic loss; and if no Member bears the corresponding economic loss, then to CP. All allocations hereunder are subject to the limitations contained in the Tax Matters Addendum. 5.3 Discretionary Distributions. Subject to Section 5.1, the Manager may, from time to time, distribute all or any portion of the balance of the Cash Flow of the Company to the Members in the following priority:
-9- (A) First, to the Members in accordance with their respective percentage Interests until CP has received a 9% Internal Rate of Return (“IRR”) in respect of its Capital Contributions; (B) Second, (i) 90% in accordance with their percentage Interests and (ii) 10% equally to CP and CHCI until CP receives a 13% IRR in respect of its Capital Contributions pursuant to clauses (A) and (B) herein; and (C) Thereafter, (x) 80% pro-rata to the Members in accordance with their percentage Interests and (y) 20% equally to CP and CHCI. ARTICLE VI MEMBERS, MEMBER MEETINGS, AND VOTING RIGHTS 6.1 Admission of Additional Members and Transfers of Indirect Interests. (a) Except for a member admitted to the Company pursuant to Section 11.1, and for so long as any Obligation (as defined in the Loan Agreement) remains outstanding, subject to the Loan Documents, no other Person shall be admitted to the Company as a member of the Company without the unanimous consent of the Members existing at the time such membership decision is to be made and in accordance with the Loan Documents. The Secretary or Manager shall revise Exhibit “A” attached hereto to reflect the admission of new Members. (b) So long as any Obligation (as defined in the Loan Agreement) remains outstanding, no transfer of any direct or indirect ownership interest in the Company may be made except as permitted by the Loan Documents. 6.2. Assignments. (a) Subject to Section 6.1, and any transfer restrictions contained in the Loan Documents, the Members may assign their respective limited liability company interest in the Company. Subject to Section 6.1, if a Member transfers its limited liability company interest in the Company pursuant to this Section 6.2, the transferee shall be admitted to the Company as a member of the Company upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. If a Member transfers all of its limited liability company interest pursuant to this Section 6.2, such admission shall be deemed effective immediately prior to the transfer and, immediately following such admission, the transferor Member shall cease to be a member of the Company. Any successor to a Member by merger or consolidation in compliance with the Loan Documents shall, without further act, be a Member hereunder, and such merger or consolidation shall not constitute an assignment for purposes of this Agreement, and the Company shall continue without dissolution. (b) Notwithstanding anything to the contrary contained in this Agreement, so long as any Obligations remain outstanding, the Company shall always have at least (1) one Member.
-10- 6.3 Resignation. So long as any Obligation (as defined in the Loan Agreement) remains outstanding, the Members may not resign, except as permitted under the Loan Documents and if an additional member is admitted to the Company pursuant to Section 6.1. If a Member is permitted to resign pursuant to this Section 6.3, an additional member of the Company shall be admitted to the Company, subject to Section 6.1, upon its execution of an instrument signifying its agreement to be bound by the terms and conditions of this Agreement, which instrument may be a counterpart signature page to this Agreement. Such admission shall be deemed effective immediately prior to the resignation and, immediately following such admission, the resigning Member shall cease to be a member of the Company. 6.4 Meetings. Meetings of the Company may be called by the Manager or any Member by giving written notice to all Members, stating the date, the time, the place and the purpose(s) of the meeting. Any such meetings shall be held at the principal executive office of the Company, or such other place as may be designated in the notice. Such notice must be given no fewer than ten (10) days nor more than two (2) months before the meeting date. 6.5 Quorum Requirements for Meetings. The Members holding a majority of the total voting power of Members entitled to vote at any meeting shall constitute a quorum for the transaction of business. Once a Membership Interest is represented at any meeting, it is deemed to be present for the remainder of that meeting and for any adjournment unless a new record date is or must be set for that adjourned meeting. A meeting may be adjourned and notice of any adjourned meeting is not necessary if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. 6.6 Voting. Each Member shall have voting power proportionate to his/her/its Membership Interest. Except as otherwise expressly provided in this Agreement, the Members shall only be entitled to vote on the selection of the Managers. Unless otherwise provided by law or this Agreement, action on a matter (other than the election of Manager) by Members at a meeting at which a quorum is present is approved if the votes cast favoring the action exceed the votes cast opposing the action. Managers shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. 6.7 Action Without a Meeting. Action required or permitted to be taken at a meeting of the Members may be taken in lieu of a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the Members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present and voted. Such action by written consent in lieu of a meeting shall be delivered to the Manager of the Company for filing with the Company records or as otherwise permitted by law. 6.8 Limited Liability. Except as otherwise expressly provided by the Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be the debts, obligations and liabilities solely of the Company, and the Member nor any Manager shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member or Manager of the Company.
-11- 6.9 Springing Members and Independent Directors. Upon the occurrence of any event that causes the Member to cease to be a member of the Company (other than upon continuation of the Company without dissolution upon (i) an assignment by the Member of all of its limited liability company interest in the Company and the admission of the transferee pursuant to Sections 6.2 and 6.1 or (ii) the resignation of the Member and the admission of an additional member of the Company pursuant to Sections 6.3 and 6.1) (a “Member Cessation Event”), the Primary Springing Member shall, without any action of any Person and simultaneously with the Member Cessation Event, automatically be admitted to the Company as a Special Member and shall continue the Company without dissolution. If, however, at the time of a Member Cessation Event, the Primary Springing Member is no longer able to step into the role of Special Member, then in such event, the Secondary Springing Member shall, without any action of any Person and simultaneously with the Member Cessation Event, automatically be admitted to the Company as Special Member and shall continue the Company without dissolution. It is the intent of these provisions that the Company never have more than one Special Member at any particular point in time. No Special Member may resign from the Company or transfer its rights as Special Member unless a successor Special Member has been admitted to the Company as Special Member by executing a counterpart to this Agreement. The Special Member shall automatically cease to be a member of the Company upon the admission to the Company of a substitute Member. The Special Member shall be a member of the Company that has no interest in the profits, losses and capital of the Company and has no right to receive any distributions of Company assets. Pursuant to Section § 4A-601 of the Act, a Special Member shall not be required to make any capital contributions to the Company and shall not receive a limited liability company interest in the Company. A Special Member, in its capacity as Special Member, may not bind the Company. Except as required by any mandatory provision of the Act, a Special Member, in its capacity as Special Member, shall have no right to vote on, approve or otherwise consent to any action by, or matter relating to, the Company, including, without limitation, the merger, consolidation or conversion of the Company. In order to implement the admission to the Company of the Special Member, each of the Primary Springing Member and the Secondary Springing Member shall execute a counterpart to this Agreement. Prior to its admission to the Company as Special Member, each Person acting as a Primary Springing Member or Secondary Springing Member shall not be a member of the Company. (b) The Company shall at all times have a Primary Springing Member and a Secondary Springing Member. No resignation or removal of a Springing Member, and no appointment of a successor Springing Member, shall be effective unless and until such successor shall have executed a counterpart to this Agreement. In the event of a vacancy in the position of Primary Springing Member or Secondary Springing Member, the Member shall, as soon as practicable, appoint a successor Springing Member to fill such vacancy. By signing this Agreement, a Springing Member agrees that, should such Springing Member become a Special Member, such Springing Member will be subject to and bound by the provisions of this Agreement applicable to a Special Member. (c) As long as any Obligation is outstanding, the Member shall cause the Company at all times to have at least two Independent Directors who will be appointed by the Member. To the fullest extent permitted by law, and notwithstanding any duty otherwise existing at law or in equity, the Independent Directors shall consider only the interests of the Company, including its creditors, and shall have a duty of loyalty and care to the Company and its creditors similar to that of a director of a business corporation. In addition to the duties to the Company as set forth in the immediately
-12- preceding sentence (but excluding (i) the interests of Affiliates of the Company, and (ii) the interests of any group of Affiliates of which the Company is a part), the Independent Directors shall have fiduciary duties of loyalty and care similar to that of a director of a business corporation organized under the General Corporate Law of the State of Maryland. The foregoing shall not eliminate the implied contractual covenant of good faith and fair dealing. To the fullest extent permitted by law, an Independent Director shall not be liable to the Company, the Member or any other Person bound by this Agreement for breach of contract or breach of duties (including fiduciary duties), unless the Independent Director acted in bad faith or engaged in willful misconduct. No resignation or removal of an Independent Director, and no appointment of a successor Independent Director, shall be effective until such successor shall have accepted his or her appointment as an Independent Director by executing a counterpart to this Agreement. In the event of a vacancy in the position of Independent Director, the Member shall, as soon as practicable, appoint a successor Independent Director. Notwithstanding anything to the contrary contained in this Agreement, no Independent Director shall be removed or replaced without Cause and unless the Company provides the Lender with no less than three (3) business days' prior written notice of (a) any proposed removal of such Independent Director, together with a statement as to the reasons for such removal, and (b) the identity of the proposed replacement Independent Director, together with a certification that such replacement satisfies the requirements for an Independent Director set forth in this Agreement. All right, power and authority of the Independent Director shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement. No Independent Director shall at any time serve as trustee in bankruptcy for any Affiliate of the Company. ARTICLE VII MANAGEMENT 7.1 Management of Company. The overall management of the business and affairs of the Company shall be vested in the Manager. All decisions with respect to the management of the Company shall be made by the Manager. Unless authorized to do so by this Agreement or by the Manager, no officer, attorney-in-fact, employee or other agent of the Company shall have any power or authority to bind the Company in any way, to pledge its credit or to render it liable for any purpose. The initial number of Independent Directors shall be two. Subject to Section 6.9(c), the Member may determine at any time in its sole and absolute discretion the number of Independent Directors. The initial Independent Directors designated by the Member are means Ricardo Orozco and Sean Prewitt. 7.2 Major Decisions. Notwithstanding anything in this Article VII to the contrary, CP may solely direct the Manager to enter into any of the following transactions without the consent or approval of CHCI (each individually a “Major Decision” and collectively referred to as the “Major Decisions”): (A) propose or enter into any financing, refinancing, or securitization of the Property and the use of any proceeds thereof, including, without limitation, interim and permanent financing, and any other financing or refinancing of the operations of the Company or tender of a deed in lieu of foreclosure of any of the Property and the execution and delivery of any documents, agreements, or instruments evidencing, securing or relating to any such financing;
-13- (B) the approval of any budget and/or operating Plan, and any amendments or modifications thereto; (C) exercise a buyout of the interest of CHCI in the Company by CP at fair market value, with fair market value of CHCI’s interest to be determined by a third party appraisal subject to the reasonable approval of CP; and (D) any sale or otherwise disposal of the Property. ARTICLE VIII MANAGER 8.1 Election, Withdrawal and Removal of Managers. The Company shall at all times have a Manager. The initial Manager shall be CP Management Services, LC, a Virginia limited liability company, who shall hold office until removal from office or until his/her/its respective successor is duly elected and qualified. A Manager need not be a Member. Subject to any requirements under the Loan Documents, the Member may (i) at any time, elect new, additional or substitute Managers, or (ii) at any time and without cause, remove any Manager. Any Manager may, at any time and upon thirty (30) days prior written notice to the Member, resign as a Manager, but such resignation shall not affect his/her/its status as a Member, if any. 8.2 Authority of the Manager. Unless otherwise specifically stated herein, all decisions relating to the operation and management of the Company and its assets and affairs shall be made by the Manager of the Company. The Manager of the Company shall be entitled to take action with respect to all matters relative to the Company and its assets. 8.3 Manager. The Manager shall: (a) Sign and deliver in the name of the Company any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the Company, except in cases in which the authority to sign and deliver is required by law to be exercised by another Person or is expressly delegated or limited by this Agreement; (b) Carry out the day to day operations of the Company; (c) Perform other duties prescribed by this Agreement, or by the Act; and (d) In the event the Company has a vacancy in the office of Secretary, receive any notices, documents or other matters that otherwise are required to go to the Secretary. 8.4 Compensation of Managers. No payment will be made by the Company to any Manager for the services of such Manager or any partner or employee of the Manager.
-14- 8.5 Conflict of Interest Transaction. A contract or transaction between the Company and a Manager in which the Manager has a direct or indirect interest is not voidable by the Company solely because of the Manager’s interest in the contract or transaction, if the material facts of the transaction and the Manager’s interests are disclosed or known to the Company and the transaction is authorized, approved or ratified by the Member or if the transaction is fair to the Company. 8.6 Other Interests. Notwithstanding any duty otherwise existing at law or in equity, any Manager or member of the Company may engage in other business, including business of a nature which is the same as or similar to the business of the Company, without any duty or obligation to account to the Company in connection therewith. 8.7 Standard of Conduct. Notwithstanding any duty otherwise existing at law or in equity, each Manager shall discharge the duties of his/her/its office in good faith, in a manner the Manager reasonably believes to be in the best interests of the Company, subject to Section 7.1, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. ARTICLE IX SPECIFIC COVENANTS This Article IX is being adopted in order to comply with certain provisions required in order to qualify the Company as a “special purpose” entity. Notwithstanding any provision in this Agreement to the contrary or in any other document governing the formation, management or operation of the Company and except as otherwise expressly permitted in the Loan Documents, until such time as no Obligation remains outstanding (including, without limitation, until such time as the Debt is paid in full), the below covenants shall apply and be binding on the Member, Manager and the Company, and no Member or any Manager of the Company shall amend, modify or otherwise change this Agreement or any other organizational documents of the Company in any manner that violates any of the Special Purpose Provisions (as defined below in Section 12.7). 9.1 Limitation on Indebtedness. The Company will not incur any debt, secured or unsecured, direct or contingent (including guaranteeing any obligation) other than Permitted Indebtedness. 9.2 Limitation on Dissolution, Liquidation, Consolidation, Merger or Sale of Assets. The Company is, to the fullest extent permitted by law, prohibited from engaging in any dissolution, winding up, liquidation, consolidation, merger or sale of all or substantially all its assets. 9.3 Separateness Covenants. Notwithstanding anything to the contrary in this Agreement or in any other document governing the formation, management, or operation of the Company and any provision of law that so empowers the Company, so long as any Obligation is outstanding, the Member shall cause the Company to, and the Company shall not:
-15- (a) engage in any business or activity other than the ownership of its interest in Property Owner, and activities incidental thereto; (b) acquire or own any material assets other than its interest in Property Owner; (c) merge into or consolidate with any Person, divide or otherwise engage in or permit any Division or have the power to engage in or permit any Division or dissolve, terminate, liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure. As used herein, the term “Division” shall mean, as to any Person, such Person dividing and/or otherwise engaging in and/or becoming subject to, in each case, any division (whether pursuant to plan of division or otherwise), including, without limitation and to the extent applicable, pursuant to §18-217 of the Limited Liability Company Act of the State of Delaware (or the corresponding provision in the Maryland Limited Liability Company Act if such entity is a Maryland limited liability company); (d) (i) fail to observe its organizational formalities or preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, and qualification to do business in the State where the Property is located, if applicable, or (ii) without the prior written consent of Lender, amend, modify, terminate or fail to comply with the provisions of the Company’s Articles, this Agreement or similar organizational documents, as the case may be,; (e) other than Company’s owner interest in Property Owner, own any subsidiary or make any investment in, any Person without the prior written consent of Lender; (f) other than as provided in the Cash Management Agreement, commingle its assets with the assets of any of its members, general partners, Affiliates, principals or of any other Person, participate in a cash management system with any other Person or fail to use its own separate stationery, telephone number, invoices and checks; (g) incur any debt secured or unsecured, direct or contingent (including guaranteeing any obligations); (h) intend to become insolvent and intend to fail to pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due (to the extent there fails to exists sufficient cash flow from the operations of the Property to do so, provided that such insufficiency does not arise from the conversion, misappropriation, or intentional misapplication of revenues by or on behalf of Company or any other Borrower Related Party); (i) (i) fail to maintain its records (including financial statements), books of account and bank accounts separate and apart from those of the members, general partners, principals and Affiliates of the Company, the Affiliates of a member, general partner or principal of the Company, and any other Person, (ii) permit its assets or liabilities to be listed as assets or liabilities on the financial statement of any other Person or (iii) include the assets or liabilities of any other Person on its financial statements; provided, however, that the Company’s assets may be included in a consolidated financial statement of its Affiliates provided that (x) appropriate
-16- notation shall be made on such consolidated financial statements to indicate the separateness of the Company and such Affiliates and to indicate that the Company’s assets and credit are not available to satisfy the debts and other obligations of such Affiliates or any other Person, and (y) such assets shall be listed on the Company’s own separate balance sheet; (j) enter into any contract or agreement with any member, general partner, principal or Affiliate of the Company, Guarantor, or any member, general partner, principal or Affiliate thereof (other than the Property Management Agreement, Parking Management Agreement and Asset Management Agreement, or any other business management services agreement with an Affiliate the Company, provided that (i) such other business management services agreement is acceptable to Lender, (ii) the manager, or equivalent thereof, under such other business management services agreement holds itself out as an agent of the Company and (iii) such other business management services agreement meets the standards set forth in this subsection (j) following this parenthetical), except upon terms and conditions that are commercially reasonable, intrinsically fair and substantially similar to those that would be available on an arms-length basis with third parties other than any member, general partner, principal or Affiliate of the Company, Guarantor, or any member, general partner, principal or Affiliate thereof; (k) seek the dissolution or winding up in whole, or in part, of the Company; (l) fail to correct any known misunderstandings regarding the separate identity of the Company, or any member, general partner, principal or Affiliate thereof or any other Person; (m) guarantee or become obligated for the debts of any other Person or hold itself out to be responsible for the debts of another Person; (n) make any loans or advances to any third party, including any member, general partner, principal or Affiliate of the Company, or any member, general partner, principal or Affiliate thereof, and shall not acquire obligations or securities of any member, general partner, principal or Affiliate of the Company, or any member, general partner, or Affiliate thereof; (o) fail to file its own tax returns or be included on the tax returns of any other Person except as required by Applicable Law, except to the extent that (A) it has been or is required to file consolidated Tax returns by Applicable Law or (B) it is treated as a “disregarded entity” for tax purposes and is not required to file tax returns under Applicable Law; (p) fail either to hold itself out to the public as a legal entity separate and distinct from any other Person or to conduct its business solely in its own name or a name franchised or licensed to it by an entity other than an Affiliate of Property Owner or of Principal, as the case may be, and not as a division or part of any other entity in order not (i) to mislead others as to the identity with which such other party is transacting business, or (ii) to suggest that the Company is responsible for the debts of any third party (including any member, general partner, principal or Affiliate of the Company, or any member, general partner, principal or Affiliate thereof);
-17- (q) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations (provided, however, the foregoing shall not require any shareholder, partner or member of such entity, as applicable, to make additional capital contributions, loans, or advances to such entity); (r) hold itself out as or be considered as a department or division of (i) any general partner, principal, member or Affiliate of the Company, (ii) any Affiliate of a general partner, principal or member of the Company, or (iii) any other Person; provided, however that the foregoing will not prohibit the Company from utilizing the Comstock logo or name at or in connection with the Property; (s) fail to allocate fairly and reasonably any overhead expenses that are shared with an Affiliate, including paying for office space and services performed by any employee of an Affiliate; (t) pledge its assets for the benefit of any other Person, other than with respect to the Loan; (u) fail to maintain a sufficient number of employees in light of its contemplated business operations (provided, however, the foregoing shall not require any shareholder, partner or member of such entity, as applicable, to make additional capital contributions, loans, or advances to such entity); (v) for so long as the Loan is outstanding pursuant to the Note, the Loan Agreement and the other Loan Documents, it shall not file or consent to the filing of any petition, either voluntary or involuntary, to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors without the affirmative vote of the Independent Director and of all other general partners/managing members/directors; (w) fail to hold its assets in its own name; (x) intentionally omitted; (y) have any of its obligations guaranteed by an Affiliate, except for guarantees and indemnities that are expressly contemplated by the Loan Documents (including the Guaranty, Completion Guaranty and Environmental Indemnity); (z) violate or cause to be violated the assumptions made with respect to the Company in the Insolvency Opinion; (aa) fail at any time to have at least one Independent Director; or (bb) permit its board of directors or board of managers to take any action which, under the terms of any certificate of incorporation, by-laws, voting trust agreement with respect to any common stock or other applicable organizational documents, requires the
-18- unanimous vote of one hundred percent (100%) of the members of the board without the vote of the Independent Director. For purposes of this Section 9.3, all capitalized terms that are not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. ARTICLE X FISCAL MATTERS 10.1 Books and Records. Full and accurate books and records of the Company (including, without limitation, all information and records required by the Act) shall be maintained at its principal executive office showing all receipts and expenditures, assets and liabilities, profits and losses, and all other records necessary for recording the Company’s business and affairs. 10.2 Fiscal Year. The fiscal year of the Company shall end on December 31 of each year. ARTICLE XI DISSOLUTION 11.1 Dissolution. Subject to the terms of the Loan Documents, for so long as any Obligation(as defined in the Loan Agreement) remains outstanding, the Company shall be dissolved, and its affairs shall be wound up upon the first to occur of the following: (i) the termination of the legal existence of the last remaining member of the Company or the occurrence of any other event which terminates the continued membership of the last remaining member of the Company in the Company unless the business of the Company is continued in a manner permitted by this Agreement or the Act, or (ii) the entry of a decree of judicial dissolution under§ 4A-903 of the Act. Upon the termination of the legal existence of the last remaining member of the Company or the occurrence of any other event which terminates the continued membership of the last remaining member of the Company in the Company, to the full extent permitted by law, the Company shall be continued in a manner permitted by this Agreement or the Act. Notwithstanding any other provision of this Agreement, the Bankruptcy of the Member or a Special Member or any other member of the Company shall not cause such member to cease to be a member of the Company and, upon the occurrence of such an event, the Company shall continue without dissolution. Additionally, notwithstanding any other provision of this Agreement, the Member and each Special Member waive any right it might have to agree in writing to dissolve the Company upon the Bankruptcy of the Member or any Special Member, or the occurrence of an event that causes the Member or any Special Member to cease to be a member of the Company. Upon the occurrence of any event that causes the last remaining member of the Company to cease to be a member of the Company or that causes the Member to cease to be a member of the Company (other than upon continuation of the Company without dissolution upon (i) an assignment by the Member of all of its limited liability company interest in the Company and the admission of
-19- the transferee pursuant to Sections 6.2 and 6.1 or (ii) the resignation of the Member and the admission of an additional member of the Company pursuant to Sections 6.3 and 6.1), to the fullest extent permitted by law, the personal representative of such member is hereby authorized to, and shall, within ninety (90) days after the occurrence of the event that terminated the continued membership of such member in the Company, agree in writing (i) to continue the Company and (ii) to the admission of the personal representative or its nominee or designee, as the case may be, as a substitute member of the Company, effective as of the date of the occurrence of the event that terminated the continued membership of such member in the Company. 11.2 Winding Up; Cancellation of Certificate of Formation. In the event of dissolution, the Company shall conduct only such activities as are necessary to wind up its affairs (including the sale of the assets of the Company in an orderly manner), and the assets of the Company shall be applied in the manner, and in the order of priority, set forth in§ 4A-906 of the Act. The Company shall terminate when (i) all of the assets of the Company, after payment of or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Member in the manner provided for in this Agreement and (ii) the Certificate of Formation shall have been canceled in the manner required by the Act. ARTICLE XII GENERAL PROVISIONS 12.1 Notices. All notices, consents, waivers, directions, requests, votes or other instruments or communications provided for under this Agreement shall be in writing, signed by the party giving the same, and shall be deemed properly given three (3) Business Days after mailing if sent by registered or certified United States mail, postage prepaid, addressed; (a) in the case of the Company, to the address set forth in Section 2.5; (b) in the case of any Member, to the address set forth on Exhibit “A”; or to such address as any party may specify in writing to the other parties. 12.2 Integration. This Agreement embodies the entire agreement and understanding among the Member and supersedes all prior agreements and understandings, if any, relating to the subject matter hereof. 12.3 Applicable Law. This Agreement and the rights of the Member, Springing Members and Managers shall be governed by and construed and enforced in accordance with the laws of the State of Maryland (without regard to conflict of laws principles). 12.4 Severability. In case any one or more of the provisions contained in this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and any other application thereof shall not in any way be affected or impaired thereby.
-20- 12.5 Binding Effect. Except as herein otherwise provided to the contrary, this Agreement shall be binding upon, and inure to the benefit of, the Member and its respective heirs, executors, administrators, successors, transferees and assigns.. Notwithstanding any other provision of this Agreement, the Member agrees that this Agreement constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member by the Independent Directors, in accordance with its terms. 12.6 Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine, or neuter gender, shall include all other genders; and the singular shall include the plural, and vice versa. Titles of Articles and Sections are for convenience only and neither limit nor amplify the provisions of this Agreement itself. 12.7 Amendment. Notwithstanding anything to the contrary contained in or implied by any other provision of this Agreement or of any other document governing the formation, management or operation of the Company, so long as any Obligations are outstanding, then except as to any correction of an obvious typographical error or correction of an obvious clerical mistake that does not change the substance of the provisions of the portions of this Agreement referenced immediately hereafter, the Company and the Member are prohibited from amending (a) the provisions of Articles IX or XI or Sections 3.1, 3.2, 4.1, 5.1, 6.1, 6.2, 6.3, 6.9, 8.1, 8.2, 12.7 or 12.8 of this Agreement (the “Special Purpose Provisions”) or (b) any defined term used in the Special Purpose Provisions, any provisions of Sections 2.2, 5.1, 12.2, 12.3, 12.5, 12.9 or 12.10 or any other provision of this Agreement so as to repeal, override or substantially alter the effect of any of the Special Purpose Provisions (the “Related Provisions”), without the written consent of the Lender, its successors or assigns, and with respect to matters in Article IX, if the Rating Agency Condition is satisfied. Thereafter, this Agreement may be amended, modified or supplemented only by a writing executed by each of the Members. To the fullest extent permitted by law, no amendment to the Certificate of Formation shall be made that is inconsistent with the Special Purpose Provisions. In the event of any conflict between any of the Special Purpose Provisions or the Related Provisions and any other provision of this Agreement or any other document governing the formation, management or operation of the Company, the Special Purpose Provisions and the Related Provisions shall control. 12.8 Waiver of Partition; Nature of Interest. To the fullest extent permitted by law, each of the Member and the Special Members hereby irrevocably waives any right or power that such Person might have to cause the Company or any of its assets to be partitioned, to cause the appointment of a receiver for all or any portion of the assets of the Company, to compel any sale of all or any portion of the assets of the Company pursuant to any applicable law or to file a complaint or to institute any proceeding at law or in equity to cause the dissolution, liquidation, winding up or termination of the Company. The Member shall not have any interest in any specific assets of the Company, and the Member shall not have the status of a creditor with respect to any distribution pursuant to Section 5.1 hereof. The interest of the Member in the Company is personal property. 12.9 Benefits of Agreement; No Third-Party Rights. Except for the Lender, its successors or assigns as holders of the Loan with respect to the Special Purpose Provisions, (1) none of the provisions of this Agreement shall be for the benefit of or enforceable by any creditor of the Company or by any creditor of the Member or a Special Member, and (2) nothing in this
-21- Agreement shall be deemed to create any right in any Person not a party hereto, and this Agreement shall not be construed in any respect to be a contract in whole or in part for the benefit of any third Person. The Lender, its successors or assigns are intended third-party beneficiaries of this Agreement and may enforce the Special Purpose Provisions. 12.10 Indemnification. The Company shall be authorized and shall indemnify the Member and the Manager pursuant to, in accordance with and to the extent allowed under the Act and other applicable law. Notwithstanding the foregoing, any such indemnification shall be fully subordinate to the Loan and, to the fullest extent permitted by law, shall not constitute a claim against the Company in the event that the Company’s cash flow is insufficient to pay its obligations under the Loan Documents. [Signatures on the Following page(s)]
IN WITNESS WHEREOF, this Agreement is executed effective as of the date first set forth above. MEMBER: --LC\ ' ' \ I [Signature Page to Limited Liability Company Agreement of COMSTOCK 33 MONROE HOLDINGS, L C - Member] -21- J APPR. BY L1 f }
-24- EXHIBIT “A” TO LIMITED LIABILITY COMPANY AGREEMENT OF COMSTOCK 33 MONROE HOLDINGS, L C Members Cash Contributed or Percentage Agreed Value of Other Name, Address Interest Property or Services Comstock Partners, LC 95% As set forth in the c/o Comstock Companies books and records of 1900 Reston Metro Plaza the Company 10th Floor Reston, Virginia 20190 Comstock Holding Companies, Inc. 5% As set forth in c/o Comstock Companies books and records of 1900 Reston Metro Plaza the Company 10th Floor Reston, Virginia 20190
-25- TAX MATTERS ADDENDUM TO OPERATING AGREEMENT The terms of this Tax Matters Addendum (“Addendum”) are hereby incorporated into the Operating Agreement of COMSTOCK 33 MONROE HOLDINGS, L C (“Agreement”) to which it is attached. ARTICLE I – DEFINITIONS 1.01 Adjusted Capital Account Deficit. The deficit balance, if any, in such Member’s Capital Account at the end of any taxable year, with the following adjustments: (A) Credit to such Capital Account any amount that such Member is obligated to restore under Treas. Reg. Section 1.704-1(b)(2)(ii)(c), as well as any addition thereto pursuant to the penultimate sentences of Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (B) Debit to such Capital Account the items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4) through (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treas. Reg. Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. 1.02 Capital Accounts. The Company shall maintain a Capital Account for each Member in accordance with Treas. Reg. Section 1.704-1(b)(2)(iv) or other provision of similar import. To each Member’s Capital Account there shall be credited such Member’s Capital Contributions, his or her distributive share of Profits, any item in the nature of income or gain allocated to him or her under Sections 2.02 through 2.09 of this Addendum, and the amount of any Company liabilities that are assumed by such Member or which are secured by any Company property distributed to such Member. To each Member’s Capital Account there shall be debited the amount of cash and the fair market value (as of the date of distribution) of any Company property distributed to such Member pursuant to any provision of this Agreement, such Member’s distributive share of Losses, any items in the nature of expenses or deductions that are allocated to him or her pursuant to Sections 2.02 through 2.09 of this Addendum, and the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company. To each Member’s Capital Account there shall be debited or credited such other adjustments as are required by Treas. Reg. Section 1.704-1(b)(2)(iv) to the extent not already reflected as a consequence of the foregoing, including, without limitation, adjustments arising from a revaluation of Company property, which adjustments shall reflect the manner in which any unrealized appreciation or depreciation in the property would be allocated if the property were sold. In the event any Interest in the Company is Transferred pursuant to the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Interest. No Member shall be required to pay to the Company any deficit in its Capital Account upon liquidation or otherwise except to the extent provided by the Act. 1.03 Code. The Internal Revenue Code of 1986, as amended from time to time.
-26- 1.04 Company Minimum Gain. The amount determined by (i) computing, with respect to each Company Nonrecourse Liability, the amount of gain (of whatever character) that would be realized by the Company if it disposed of the property subject to such liability in a taxable transaction in full satisfaction of such liability (and for no other consideration), and (ii) aggregating the amounts so computed. Company Minimum Gain shall be determined in a manner consistent with the rules of Treas. Reg. §1.704-2(d). 1.05 Company Nonrecourse Liability. Any nonrecourse liability of the Company, or portion thereof, for which no Member or related Persons (within the meaning of Treas. Reg. §1.752-4(b)) bears the economic risk of loss. 1.06 Economic Risk of Loss. The determination of whether a Member bears the economic risk of loss with respect to any Company liability shall be made in accordance with Treas. Reg. §1.752 (without regard to whether that section applies to such liability). 1.07 Member Minimum Gain. With respect to each Member Nonrecourse Liability, the amount of gain (of whatever character) that would be realized by the Company if it disposed of the property subject to such liability in a taxable transaction in full satisfaction of such liability (and for no other consideration). Member Minimum Gain shall be determined in a manner consistent with the rules of Treas. Reg. §1.704-2(i)(3). 1.08 Member Nonrecourse Liability. Any nonrecourse liability of the Company with respect to which any Member (or a party related to such Member, within the meaning of Treas. Reg. §1.752-4(b)) bears the Economic Risk of Loss. 1.09 Profits and Losses. An amount equal to the Company’s taxable income or loss for each taxable year determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, deduction or loss required to be separately stated pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), except that taxable income shall be adjusted to (i) include tax exempt income; (ii) treat as a deduction expenditures described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i); and (iii) exclude allocations of Company income, gain, deduction and loss under Sections 2.02 through 2.09 of this Addendum. If the Company’s taxable income or loss as so adjusted is a positive amount, such amount shall be the Company’s Profit for such taxable year or period; if negative, such amount shall be the Company’s Loss for such taxable year or period. It is further provided that if the book value (i.e. the value at which property is reflected on the books of the Company in accordance with the provisions of Treas. Reg. Section 1.704-1(b)) of property differs from its adjusted tax basis (due to contributions or distributions of appreciated property or re-valuations of Company property), Profit or Loss shall be computed with reference to book depreciation and book gain or loss on such property. ARTICLE II – ALLOCATION OF PROFITS AND LOSSES 2.01 In General. Except as expressly provided to the contrary in this Article II, for purposes of determining Capital Account balances, Profit and Loss with respect to any Company
-27- taxable year shall be allocated prior to reducing Capital Accounts by any distributions with respect to such Company taxable year. For purposes of applying this Section 2.01, a Member’s Capital Account balance shall be deemed to be increased by such Member’s share of Company Minimum Gain and Member Minimum Gain determined as of the end of such Company taxable year. 2.02 Minimum Gain Chargeback – Company Nonrecourse Liabilities. If there is a net decrease in Company Minimum Gain during a taxable year, items of income and gain for such year (and, if necessary, for subsequent years) shall be allocated to the Members in proportion to, and to the extent of, their shares of such net decrease in Company Minimum Gain as determined under Treas. Reg. Section 1.704-2(g)(2). Any such allocations shall be made in accordance with, and only to the extent required by, Treas. Reg. Sections 1.704-2(f) and 1.704-2(j)(2)(i). 2.03 Minimum Gain Chargeback – Member Nonrecourse Liabilities. If there is a net decrease in Member Minimum Gain during a taxable year, items of income and gain for such year (and, if necessary, for subsequent years) shall be allocated to the Members in proportion to, and to the extent of, their shares of such net decrease in Member Minimum Gain as determined under Treas. Reg. Section 1.704-2(i)(5). Any such allocations shall be made in accordance with, and only to the extent required by, Treas. Reg. Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii). 2.04 Qualified Income Offset. If any Member unexpectedly receives any adjustments, allocations or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4) through (6) which results in an Adjusted Capital Account Deficit, such Member shall be allocated items of income and book gain in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible. 2.05 Limitation on Loss Allocations. Notwithstanding anything in Section 2.01 of this Addendum to the contrary, Losses shall not be allocated to any Member to the extent such Losses would create an Adjusted Capital Account Deficit with respect to such Member. Such Losses shall be reallocated (subject to the immediately preceding sentence) to the other Members under this Section 2.05. 2.06 Company Nonrecourse Deductions. Items of Company loss, deduction, or Code Section 705(a)(2)(B) expenditure that are attributable to Company Nonrecourse Liabilities (“Company Nonrecourse Deductions”) shall be allocated among the Members in accordance with Section 5.2 of the Agreement. This provision is to be interpreted in a manner consistent with Treas. Reg. Section 1.704-2(e). 2.07 Member Nonrecourse Deductions. Items of Company loss, deduction, or Code Section 705(a)(2)(B) expenditure that are attributable to a Member Nonrecourse Liability (“Member Nonrecourse Deductions”) shall be allocated to the Members in the ratio in which they share the Economic Risk of Loss with respect to such liability within the meaning of Treas. Reg. Section 1.752-2. This provision is to be interpreted in a manner consistent with the requirements of Treas. Reg. Section 1.704-2(i). 2.08 Optional Basis Adjustments. To the extent an adjustment to the basis of any Company assets pursuant to Code Section 734(b) or 743(b) is required, pursuant to Treas. Reg. §1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of
-28- such adjustment to the Capital Accounts shall be treated as an item of gain or loss, as applicable, and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Regulation. 2.09 Curative Allocation. The allocations set forth in Sections 2.02 through 2.08 of this Addendum (the “Regulatory Allocations”) are intended to comply with certain requirements of Treas. Reg. Section 1.704-1(b) and Treas. Reg. Section 1.704-2. Notwithstanding any other provision of Article V of the Agreement or Article II of this Addendum, the Regulatory Allocations shall be taken into account in allocating other Profits, Losses, and items of income, gain, loss, deduction, and credit to the Members so that, to the extent possible, the net amount of such allocations of Profits and Losses and other items shall be equal to the amount that would have been allocated to each Member if the Regulatory Allocations had not occurred. 2.10 Recapture. Any income recognized pursuant to Code Sections 1245 and 1250 shall be allocated among the Members in the same proportions as the depreciation deductions giving rise to such income were allocated among such Members and their respective predecessors in interest. 2.11 Overriding Allocation. It is the intent of the Members that each Member’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be allocated in accordance with Sections 2.01 through 2.10 of this Addendum to the fullest extent permitted by Code Section 704(b). In order to preserve and protect the allocations provided for in Sections 2.01 through 2.10, the Manager are authorized and directed to allocate income, gain, loss, deduction or credit (or item thereof) arising in any year differently than otherwise provided for in this Article if, and to the extent that, the allocations under this Article would cause the allocations to violate Code Section 704(b). Any allocation made pursuant to this Section 2.11 shall be deemed to be a complete substitute for any allocation otherwise provided for in Sections 2.01 through 2.10 of this Addendum, and no amendment of this Addendum or approval of any Member shall be required. 2.12 Tax Allocations: Section 704(c). Anything in the foregoing to the contrary notwithstanding, in accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated to the contributing Member so as to take into account any variation between the adjusted basis of the property for federal income tax purposes and its value upon contribution as reflected on the books of the Company. If the book value of Company property is subsequently adjusted, subsequent tax allocations of income, gain, loss and deduction with respect to such property shall take into account variations between its adjusted basis for federal income tax purposes and its book value as so adjusted in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. 2.13 Allocation to Transferred Interest. Profits, Losses and credits allocated to an Interest assigned or reissued during a taxable year of the Company shall be allocated to the Person who was the holder of such Interest during such taxable year, in proportion to the number of days that each such holder was recognized as the owner of such Interest during such taxable year or in any other proportion permitted by the Code and selected by the Manager in accordance with this Agreement, without regard to the results of Company operations during the period in which each such holder was recognized as the owner of such Interest during such taxable year, and without
-29- regard to the date, amount or recipient or any distributions which may have been made with respect to such Interest. ARTICLE III – AUDITS AND TAX RETURNS 3.01 Audits and Tax Returns. The accounts of the Company may be reviewed, compiled or audited by accountants designated by the Manager at such times as the Manager may deem necessary or desirable. The Manager shall cause to be prepared all tax returns required of the Company and shall make elections under the Code on behalf of the Company. The Company’s taxable year shall be the calendar year. 3.02 Tax Matters Partner. In the event the Company is subject to the unified audit procedures set forth in Sections 6221-6234 of the Code, Comstock Partners, LC shall be the “tax matters partner” of the Company for the purposes of such procedures and shall be authorized to take all actions reasonably necessary on behalf of the Company with respect to any audits of its tax returns.
72520263v19 EXECUTION VERSION ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of March 31, 2022, by and among August Mack Environmental, Inc., an Indiana corporation (the “Buyer”), Comstock Environmental Services, LLC, a Virginia limited liability company (the “Seller”), and Comstock Holding Companies, Inc., a Delaware corporation (the “CHCI” and, together with the Seller, the “Seller Parties”). The Buyer, the Seller and CHCI sometimes are collectively referred to as the “Parties” and sometimes are individually referred to as a “Party”. WITNESSETH THAT: WHEREAS, the Seller is in the business of providing environmental engineering, environmental consulting services and tank construction services (the “Business”); WHEREAS, the Seller owns all of the assets (real, personal, tangible, intangible and mixed) used, useful or held for use in the operation of the Business; WHEREAS, CHCI is the sole owner and manager of the entity that directly owns all of the issued and outstanding equity interests of Seller; and WHEREAS, the Seller desires to sell, and the Buyer desires to buy, substantially all of the assets (and assume certain of the liabilities) of the Seller used or useful in the operation of the Business, on the terms and subject to the conditions set forth in this Agreement. NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the Parties agree as follows: ARTICLE 1 ASSETS PURCHASED; LIABILITIES ASSUMED 1.1 Acquired Assets. On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Seller shall sell to the Buyer and the Buyer shall buy from the Seller, free and clear of any liens, restrictions, restrictions on transfer, options, pledges, rights of first refusal, mortgages, licenses, easements, security interests, claims, charges or encumbrances of any kind or nature whatsoever (collectively, “Liens”), substantially all of the assets of the Seller used or held for use by the Seller in or for the operation of the Business (whether personal, tangible, intangible or mixed) (collectively, the “Acquired Assets”), including without limitation the assets listed on Schedule 1.1 (but excluding the Excluded Assets). 1.2 Excluded Assets. Notwithstanding the foregoing, the Seller shall not be obligated to sell, and the Buyer shall not be obligated to purchase or acquire from the Seller, any assets of the Seller other than the Acquired Assets, including any of the Seller’s assets listed on Schedule 1.2 (collectively, the “Excluded Assets”). 1.3 Assumed Liabilities. On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Buyer shall assume the liabilities and obligations of the Seller solely with respect to (collectively, the “Assumed Liabilities”): (a) the obligations of the Seller for the future performance after the Closing pursuant to the Assumed Contracts (as defined on Schedule 1.1), other than for any act or omission (i) occurring prior to the Closing that resulted in or could result in any breach or default thereunder or violation of any law or (ii) that could obligate any party to indemnify, defend or hold the other
72520263v19 2 party thereto harmless from any claim, loss, obligation or expense in connection with any work performed on or prior to the Closing; (b) all trade accounts payable (other than trade accounts payable owed to Persons that are Affiliates of the Seller) and accrued expenses of the Seller that were incurred in the ordinary course of business, in all cases solely to the extent included in the Purchase Price adjustment set forth in Section 2.2 and that remain unpaid as of the Closing Date; and (c) any accrued but unused vacation or other paid time off (“PTO”) for each Transferred Employee. 1.4 Excluded Liabilities. The Buyer expressly does not assume and does not and shall not agree to assume any liability or obligation of the Seller or any owner thereof not expressly defined in this Agreement as an Assumed Liability (collectively, the “Excluded Liabilities”), including, but not limited to, the liabilities listed on Schedule 1.4. The Seller shall promptly pay, discharge and perform in full all Excluded Liabilities when and as the same become due. ARTICLE 2 PURCHASE PRICE 2.1 Purchase Price. The purchase price (the “Purchase Price”) for the Acquired Assets shall be the assumption of the Assumed Liabilities, plus an amount equal to (i) the amount of Actual Net Working Capital (as defined and ultimately determined in Section 2.2(a) below), plus (ii) $288,341.00. The Purchase Price shall be subject to adjustment in accordance with Section 2.2 below and shall be payable by the Buyer on the Closing Date as follows: (a) $150,000.00 in immediately available funds (the “Indemnity Escrow Amount”) will be delivered to U.S. Bank (the “Escrow Agent”), to be held or disbursed in accordance with the terms of an Escrow Agreement in substantially the form of Exhibit A (the “Escrow Agreement”) for the purposes of securing the Seller’s obligations under Article 7; (b) $250,000.00 in immediately available funds (the “Adjustment Escrow Amount” and, together with the Indemnity Escrow Amount and all earnings thereon, the “Escrow Fund”) will be delivered to the Escrow Agent, to be held or disbursed in accordance with the terms of the Escrow Agreement for the purposes of securing the Seller’s obligations under Section 2.2; and (c) an amount equal to $1,017,317.00 (the “Closing Payment”), which represents (i) the amount of Estimated Net Working Capital (as defined in Section 2.2(a) below), plus (ii) $288,341.00 minus (iii) the Escrow Fund, minus (iv) any debt, expenses, or other items directed by the Seller in writing to be paid by Buyer on the Seller’s behalf, will be delivered by wire transfer of immediately available funds to an account designated in writing by the Seller. 2.2 Purchase Price Adjustment. (a) The Seller shall deliver to the Buyer at the Closing its Net Working Capital as of the close of business on the Closing Date (the “Actual Net Working Capital”). The Parties estimate that Actual Net Working Capital is $1,128,976.00 (the “Estimated Net Working Capital”) for purposes of the Closing and the Purchase Price will be adjusted after the Closing on a dollar for dollar basis. The Seller shall deliver to the Buyer all requested work papers and other details for the Buyer and its advisors to agree upon the Estimated Net Working Capital. After the Closing, the Parties will true-up the amount equal to the Actual Net Working Capital minus the Estimated
72520263v19 3 Net Working Capital (the “Post-Closing Adjustment”) in accordance with the terms set forth in Section 2.2(b). Within thirty (30) days after Closing, the Buyer shall prepare in accordance with United States generally accepted accounting principles consistently applied (the “Commonly Accepted Accounting Principles”) and deliver to the Seller a report of the Actual Net Working Capital as of the Closing Date. Upon receipt of the Actual Net Working Capital, the Seller shall have thirty (30) days from receipt of the Actual Net Working Capital (the “Review Period”) to review the Actual Net Working Capital and have reasonable access to the books and records necessary to enable the Seller to verify the information and computations therein. If the Seller accepts the Actual Net Working Capital by written notice to the Buyer prior to the expiration of the Review Period, then the Actual Net Working Capital as delivered by the Buyer shall be final and binding upon the Parties and shall be deemed the “Actual Net Working Capital” as referenced herein. If the Seller disagrees with the Buyer’s delivery of the Actual Net Working Capital, the Seller shall provide written notice to the Buyer of such disagreement within the Review Period, which written notice must set forth in reasonable detail the nature of the Seller’s disagreement and its proposed resolution of such disagreement. If the Seller delivers written notice of disagreement, the Seller and the Buyer shall use commercially reasonable efforts to agree in writing as to the “Actual Net Working Capital” as referenced hereunder. If the Parties are unable to reach such agreement within thirty (30) days following the receipt by the Buyer of the Seller’s written notice of disagreement, then the matter shall be submitted to a mutually agreeable independent regional- based accounting firm (the “Settlement Accountant”). The Settlement Accountant shall determine all matters in dispute and establish the “Actual Net Working Capital”, which in no event shall be more favorable to either the Seller or the Buyer than what they had originally proposed, within thirty (30) days following the submission of the matter to the Settlement Accountant, which determination shall be final, non-appealable, binding and conclusive on the Parties, absent manifest calculation error. The fees and expenses of the Settlement Accountant shall be allocated ratably between the Seller, on one part, and the Buyer, on one part, in the same proportion that the aggregate dollar amount of items unsuccessfully disputed by each such party bears to the aggregate dollar amount of all disputed items submitted to the Settlement Accountant. (b) For purposes of clarity, within five (5) business days of the Post-Closing Adjustment being finally determined, either the Buyer or the Seller will pay to the other party an amount equal to the Post-Closing Adjustment in accordance with this Section 2.2(b). If the amount of the Post-Closing Adjustment is a positive number, then (i) the Buyer shall pay to the Seller an amount equal to the Post-Closing Adjustment; and (ii) the parties shall jointly instruct the Escrow Agent to release to the Seller such funds available in the escrow account relating to the Adjustment Escrow Amount. If the amount of the Post-Closing Adjustment is a negative number, then (y) the parties shall jointly instruct the Escrow Agent to release to the Buyer an amount equal to the Post- Closing Adjustment from the escrow account holding the Adjustment Escrow Amount; provided, however, that if the amount of the Post-Closing Adjustment that is owed to the Buyer exceeds the Adjustment Escrow Amount, then the Seller shall pay to the Buyer any remaining Post-Closing Adjustment in excess of the Adjustment Escrow Amount in wire transfer of immediately available funds to an account designated in writing by the Buyer; and (z) the parties shall jointly instruct the Escrow Agent to release to the Seller such funds remaining in the escrow account relating to the Adjustment Escrow Amount, if any, after payment of the Adjustment Escrow Amount to the Buyer. (c) For purposes of this Agreement, “Net Working Capital” means (x) only the current assets of the Business as of the close of business on the Closing Date that are Acquired Assets and are set forth on Schedule 2.2(c)(x), less (y) only the current liabilities of the Business as of the close of business on the Closing Date that are Assumed Liabilities and are set forth on Schedule 2.2(c)(y) and shall include amounts attributable to customer deposit liabilities and deferred revenue. Notwithstanding anything to the contrary set forth herein, if, prior to Closing, any accounts
72520263v19 4 receivable are deemed by the Buyer as uncollectible or otherwise impaired, such accounts receivable shall not be credited to the Seller for purposes of calculating Net Working Capital, Estimated Net Working Capital or Actual Net Working Capital (the “Impaired Accounts Receivable”). Seller shall retain the rights to any such Impaired Accounts Receivable and may pursue collection of such Impaired Accounts Receivable after the Closing; provided, however, that collection efforts shall be consistent with the past practices of the Seller, which include, among other things, commercially reasonable efforts not to injure any ongoing customer relationships of the Business as it relates to the Buyer after the Closing. (d) Notwithstanding the foregoing provisions of this Section 2.2, if any accounts receivable (or portion thereof) constituting part of the Actual Net Working Capital that are not retainage receivables are not collected within one hundred eighty (180) days after the Closing or if any accounts receivable (or portion thereof) constituting part of the Actual Net Working Capital that are retainage receivables are not collected within one year after the Closing, then the Buyer shall, at the Buyer’s sole discretion, have the right to: (i) require the Seller, and the Seller shall have an obligation with fifteen (15) days of any such request, to purchase all such uncollected accounts receivable at face value against assignment of such accounts receivable back to the Seller; and/or (ii) make a claim against the Indemnity Escrow Amount in accordance with the Escrow Agreement for the amount of any such uncollected accounts receivable. A list of the retainage receivables will be included in the calculation of Estimated Net Working Capital. With respect to any payments received after the Closing from an account debtor that had an accounts receivable constituting part of the Actual Net Working Capital, any such payments shall be first applied to any invoice as directed by such account debtor and, if not so directed, then against the oldest accounts receivable of such account debtor. Buyer shall use commercially reasonable efforts to collect all accounts receivable that are included in the Actual Net Working Capital; provided that Buyer shall have no obligation to file a complaint or pursue litigation against any account debtor. Once Seller has indemnified Buyer for any such uncollectible accounts receivable, Buyer shall assign such rights to the uncollectible receivable to the Seller, and Seller may pursue collection of such uncollectible receivable; provided, however, that collection efforts shall be consistent with the past practices of the Seller, which include, among other things, commercially reasonable efforts not to injure any customer relationships of the Business as it relates to the Buyer after the Closing. 2.3 Allocation of the Purchase Price. The Purchase Price (and any amount of Assumed Liabilities required to be treated as consideration for U.S. federal income tax purposes and any other relevant items) shall be allocated, including the Escrow Fund once paid to the Seller to the extent actually paid, among the Acquired Assets as set forth in Exhibit B. Seller and Buyer agree to report the allocation as provided in the applicable sections of the Internal Revenue Code of 1986, as amended (the “Code” and the regulations issued thereunder, the “Treasury Regulations”) and the rules and regulations promulgated thereunder and in accordance with such allocation and agree to prepare and file all income Tax Returns in a manner consistent with such allocation (including on Form 8594 of the United States Internal Revenue Service (“IRS”), or any successor to such form). Seller and Buyer shall make their respective IRS Forms 8594 (and any amendments thereof) filed or to be filed with the IRS available for inspection by the other party for the purpose of verifying compliance with this Section 2.4. For purposes of this Agreement, “Tax Return” shall mean any return, declaration, report, claim for refund, information return or statement or other document relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
72520263v19 5 ARTICLE 3 CLOSING 3.1 Closing. The consummation of the transactions contemplated by this Agreement (the “Closing”) shall be deemed to have taken place at 11:59 p.m. Pennsylvania time on the date of this Agreement (the “Closing Date”). Notwithstanding anything to the contrary set forth herein, the Closing will take place by facsimile, email or other electronic communication. 3.2 Seller’s Closing Deliveries. In addition to any other documents to be delivered under the provisions of this Agreement, the Seller shall deliver the following to the Buyer at the Closing, all of which shall be in form and substance reasonably satisfactory to the Buyer and its counsel: (a) a Bill of Sale and Assignment in substantially the form of Exhibit C, duly executed by the Seller; (b) an Assignment and Assumption Agreement in substantially the form of Exhibit D, duly executed by the Seller; (c) the Escrow Agreement in substantially the form of Exhibit A, duly executed by the Seller; (d) a certificate of the Secretary or Assistant Secretary of the Seller, certifying (i) the resolutions duly adopted by the Board of Managers, authorizing and approving the execution, delivery and performance of this Agreement by the Seller and the transactions contemplated by this Agreement, and (ii) the Articles of Organization and Operating Agreement of the Seller, as amended as of the Closing Date; (e) a Certificate of Good Standing (or its equivalent) of the Seller, certified by the Virginia State Corporation Commission, dated no earlier than ten (10) days prior to the Closing Date; (f) an Assignment and Assumption of lease agreement for the leased property at 806 Fayette Street, Conshohocken PA 19428, duly executed by the Seller; (g) an IRS Form W-9, duly executed by the Seller; (h) all necessary consents of third parties to the assignment of any Material Contracts that are included in the Assumed Contracts; (i) (i) payoff letters evidencing the payment and satisfaction in full of all indebtedness of the Seller related to the Business (including capital leases), and (as applicable) the release of the respective Liens of each holder’s portion of such indebtedness, and (ii) without limiting in any respect the foregoing, evidence of the release of any and all other Liens against the Acquired Assets; (j) a SUTA Account Termination or Transfer Request for the Pennsylvania Department of Labor and Industry reflecting that 100% of the Business is transferred, duly executed by the Seller; (k) originals of all certificates of titles of all vehicles or other equipment owned by the Seller and set forth on Schedule 4.6; and
72520263v19 6 (l) Employment Agreements and other employment documentation with employees of the Business listed in Schedule 3.2(l), in form and substance satisfactory to the Buyer. 3.3 Buyer’s Closing Deliveries. In addition to any other documents to be delivered under the provisions of this Agreement, the Buyer shall deliver the following to the Seller at the Closing, all of which shall be in form and substance reasonably satisfactory to the Seller and its counsel: (a) the Closing Payment, as set forth in Section 2.1 above; (b) counterparts to the agreements set forth in Section 3.2 above to which it is a party; (c) an Officer’s certificate of the Buyer certifying the resolutions duly adopted by the Board of Directors, authorizing and approving the execution, delivery and performance of this Agreement by Buyer and the transactions contemplated by this Agreement; and (d) a Certificate of Good Standing of the Buyer, certified by the Indiana Secretary of State, dated no earlier than ten (10) days prior to the Closing Date. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller Parties jointly and severally represent and warrant the following to the Buyer as of the Closing: 4.1 Organization and Good Standing. The Seller is a limited liability company duly organized, validly existing and in good standing under the laws of Virginia. CHCI is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Seller is duly qualified to do business as a foreign entity and is in existence or good standing (where such concept has meaning) under the laws of Pennsylvania and each state or other jurisdiction in which either the ownership or use of the properties owned or used by it, or the nature of the activities conducted by it, requires such qualification. 4.2 Authorization. The Seller Parties have full power and authority to execute and deliver this Agreement and to perform their obligations hereunder, and have full power and authority to own and operate their assets, properties and business and carry on their businesses as presently conducted. The execution, delivery and performance of this Agreement (and all related agreements hereto) has been duly authorized by all necessary corporate action on the part of the Seller Parties. 4.3 Validity; Binding Effect. This Agreement has been duly and validly executed and delivered by the Seller Parties. This Agreement constitutes a valid and legally binding obligation of the Seller Parties, enforceable against the Seller Parties in accordance with its terms (subject to applicable bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the rights of creditors generally and the availability of equitable remedies). 4.4 Noncontravention. Except as set forth in Schedule 4.4, the execution, delivery and performance of this Agreement by the Seller Parties, the consummation of the transactions contemplated by this Agreement and the compliance with or fulfillment of the terms and provisions hereof or of any other agreement or instrument contemplated hereby, does not and shall not (a) conflict with or result in a breach of any of the provisions of the Articles of Organization or Operating Agreement of the Seller; (b) contravene any Law which affects or binds the Seller Parties; (c) result in a breach of, constitute a default under or give rise to a right of termination or acceleration under any Material Contract; or (d) require the Seller Parties to
72520263v19 7 obtain the approval, consent or authorization of, or to make any declaration, filing or registration with, any third party or any federal, state, local, municipal, foreign or other governmental authority (“Governmental Authority”) which has not been obtained in writing prior to the Closing Date. 4.5 Financial Statements; Absence of Changes. (a) Attached hereto as Schedule 4.5(a) are true, accurate and complete copies of the following: (i) the internally prepared balance sheets of the Seller as of December 31, 2020, and December 31, 2021, and the related statements of income for the fiscal years then ended; and (ii) the internally prepared balance sheet of the Seller as of January 31, 2022 (the “Interim Balance Sheet”), and the related statement of income for the time period then ended (items in clauses (i) and (ii), collectively, the “Financial Statements”). (b) The Financial Statements (i) fairly present in all material respects the operating results and the financial condition on the dates and for the periods indicated; (ii) are correct and complete in all material respects; (iii) are consistent with the books and records of the Seller (which books and records are correct and complete in all material respects); and (iv) were prepared in accordance with the Commonly Accepted Accounting Principles. No financial statements of any person or entity other than the Seller are required to be included in the Financial Statements. The Seller has no liabilities or obligations of any nature (whether absolute, accrued, contingent or otherwise), except for (x) liabilities or obligations reflected or reserved against in the Interim Balance Sheet, (y) liabilities or obligations incurred since the date of the Interim Balance Sheet in the ordinary course of business and (z) liabilities or obligations set forth in Schedule 4.5(b). (c) Except as set forth in Schedule 4.5(c), since January 31, 2022, (i) there has not been any material adverse change in the business, operations, assets, prospects or condition of the Seller, and to the Knowledge of the Seller Parties, no event has occurred or circumstance exists that could reasonably be expected to result in such a change; (ii) the Seller has operated only in the ordinary course of business; (iii) no party has accelerated, terminated, modified or cancelled any material agreement, contract, lease or license to which the Seller is a party or by which the Seller is bound; (iv) the Seller has not experienced any material damage, destruction or loss (whether or not covered by insurance) to any of its material assets; and (v) the Seller has not changed its accounting, invoicing or collection practices. 4.6 Title to and Sufficiency of Acquired Assets. Except as set forth on Schedule 4.6, the Seller has good and marketable title to all of the Acquired Assets, free and clear of any and all Liens and other than the Excluded Assets and such assets set forth on Schedule 4.6, the Acquired Assets constitute all of the assets used by the Seller in the Business and constitute all of the assets necessary for the Buyer to continue the operations of the Business after the Closing as it has been conducted prior to the Closing. The Acquired Assets are in good operating condition and repair, in all material respects, ordinary wear and tear excepted. Except for the vehicles or equipment set forth on Schedule 4.6, none of the Acquired Assets have, or are required by applicable Law to have, a certificate of title. 4.7 Real Estate. The Seller leases the properties described and set forth on Schedule 4.7 (the “Real Estate”) pursuant to those certain lease agreements set forth and described on Schedule 4.7. The Real Estate is the only real property used in the operation of the Business. There are no other leases, agreements, or understandings between the Seller and the applicable landlords relating to the Real Estate.
72520263v19 8 4.8 Taxes. (a) For purpose of this Agreement, “Taxes” means all income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative, add-on minimum, estimated, or other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever. The Seller has filed or caused to be filed all Tax Returns required to have been filed by the Seller, including with respect to the Acquired Assets or the Business. All such Tax Returns and reports were true, accurate, correct and complete in all material respects and all Taxes shown as due and owing on such Tax Returns and reports have been paid. All Taxes due and owing by the Seller (whether or not shown on any Tax Return), including with respect to the Acquired Assets or the Business, have been timely and fully paid. All Taxes due and owing by any Affiliate of the Seller with respect to the business, assets or activities of the Seller have been timely and fully paid (whether or not shown on any Tax Return). The Seller is not the beneficiary of any extension of time within which to file any Tax Return. “Affiliate” means, with respect to any person or entity, any other person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such person or entity; with the term “control” including the power to direct the management and policies of a person or entity. (b) The Seller, and each Affiliate of Seller, have withheld, deducted, collected and paid all Taxes required to have been withheld, deducted, collected or paid by the Seller. No claim has ever been made by a Governmental Authority in a jurisdiction where the Seller does not file Tax Returns that they are or may be subject to taxation by such jurisdiction. No Tax Return of the Seller has been audited or is currently under audit or examination. There is no current dispute between the Seller and any Governmental Authority with respect to Taxes. There are no Liens for Taxes (other than for Taxes not yet due and payable) upon any of the assets of the Seller. (c) There is no Tax sharing agreement, Tax allocation agreement, Tax indemnity obligation or similar written or unwritten agreement, arrangement, statutory or regulatory obligation, understanding or practice with respect to Taxes (including any advance pricing agreement, closing agreement or other arrangement relating to Taxes) that will require any payment by the Seller. The Seller is classified as a pass-through entity for U.S. federal income Tax purposes. (d) The Seller has not, nor has any Affiliate of the Seller with respect to the Seller, waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. The Seller has never been a party to any “listed transaction,” as defined in Section 6707A(c)(2) of the Code and Treasury Regulations Section 1.6011-4(b)(2). (e) The Seller has maintained adequate records and documentation with respect to customer exemptions from any applicable sales Tax. 4.9 Compliance with Law. The Seller is in compliance and at all times has been in compliance in all material respects with all applicable laws (including statutes, ordinances, requirements, rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of federal, state, local, municipal and foreign governments (and all agencies thereof) (the “Laws”), and no claims, actions, suits, proceedings, demands, charges, complaints, investigations, inquiries, notices, hearings, litigation, arbitration, or governmental or regulatory investigations, proceedings or audits (the “Actions”) have been filed or commenced against the Seller alleging any failure so to comply. To the Knowledge of the Seller, no event has occurred or circumstance exists that (with or without notice or lapse
72520263v19 9 of time) may constitute or result in a violation by the Seller of, or a failure on the part of the Seller to comply with, any Law. 4.10 Permits. Schedule 4.10 hereto sets forth a complete and accurate list of each authorization, license, certificate, certification, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Authority, pursuant to any Law or any business certification or licensing organization (the “Permits”) that is held by the Seller or that otherwise relates to the Business or the Acquired Assets. Each Permit listed or required to be set forth in Schedule 4.10 is valid and in full force and effect. The Seller is, and at all times has been, in material compliance with all of the terms and requirements of each Permit. The Permits set forth in Schedule 4.10 collectively constitute all of the Permits necessary or advisable to permit the Buyer to lawfully conduct and operate the Business in the manner in which the Seller currently conducts and operates the Business. 4.11 Litigation. There is no pending or, to the Knowledge of the Seller, threatened Actions by or against the Seller or that otherwise relates to or may affect the Business or the Acquired Assets, and except as set forth on Schedule 4.11, no such Litigation existed at any time within the past three (3) years. No event has occurred or circumstance exists that is reasonably likely to give rise to or serve as a basis for the commencement of any such Action. There is no Action that could have a material adverse effect on the business, operations, assets, condition, or prospects of the Seller or upon the Acquired Assets. 4.12 Material Contracts. Schedule 4.12 hereto sets forth all (i) customer contracts and agreements (whether oral or written) to which the Seller is a party and which the gross amounts invoiced by the Seller exceed $5,000.00 per annum and all Material Supplier agreements; and (ii) all agreements between the Seller and any employee, officer, manager or director (collectively, the “Material Contracts”). With respect to each Assumed Contract, (a) the agreement is legal, valid, binding, enforceable and in full force and effect, (b) other than the failure to obtain any consent to assignment that may be required in connection with the transactions contemplated by this Agreement, the Seller is in full compliance with all applicable terms and requirements of such agreement, (c) to the Seller’s Knowledge, each other person or entity that has or has had any obligation or liability under such agreement is, and at all times has been, in full compliance with all applicable terms and requirements of such agreement, (d) other than the failure to obtain any consent to assignment that may be required in connection with the transactions contemplated by this Agreement, no party is in breach or default thereof, and no event has occurred which with notice or lapse of time, or both, would constitute a breach or default thereof, or permit termination, modification or acceleration thereunder, and (e) no party has repudiated any provision of the agreement. The Seller has delivered to the Buyer a correct and complete copy of each Material Contract. 4.13 Labor and Employment Matters. (a) Schedule 4.13 hereto sets forth a complete and accurate list of the following information for each employee, manager, officer and director of the Seller, including each employee on leave of absence or layoff status: name; job title; date of hiring or engagement; date of commencement of employment or engagement; current compensation paid or payable; any bonuses payable or otherwise related to such person; sick and vacation leave that is accrued but unused; if such individual is employed in the Business; and service credited for purposes of vesting and eligibility to participate under any benefit plan of the Seller or that is made available to employees of the Seller. Except as set forth in Schedule 4.13 hereto, (i) the Seller is not, nor has ever been, a party to any collective bargaining agreement or other labor contract; (ii) there has not been, there is not presently pending or existing and, to the Knowledge of the Seller there is not threatened, any strike, slowdown, picketing, work stoppage, lock out or employee grievance process involving the Seller; (iii) there is no organizational activity or other labor dispute against or affecting the Seller and has not been any in the past three (3) years; (iv) no application or petition
72520263v19 10 for an election of or for certification of a collective bargaining agent is pending with respect to the Seller; and (v) there has been no charge of discrimination filed against or, to the Knowledge of the Seller, threatened against the Seller with the Equal Employment Opportunity Commission or similar Governmental Authority. (b) The Seller has complied in all material respects with all Laws and contracts and agreements relating to employment practices, terms and conditions of labor, employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, worker classification (including proper classification of employees as exempt or non-exempt and of independent contractors as such and not employees), overtime and collective bargaining and labor relations. The Seller is not materially delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for the Seller as of the date hereof or amounts required to be reimbursed to such employees. All agreements or contracts between the Seller and any employee, officer, manager, or director of the Seller are set forth on Schedule 4.13 and all such agreements. 4.14 Benefit Plans. (a) Schedule 4.14(a) contains a true and complete list of each pension, benefit, retirement, profit-sharing, deferred compensation, welfare, employment, severance, termination, bonus, incentive, retention, change in control, equity, equity-linked, fringe-benefit or other compensation, benefit or perquisite agreement, plan, policy, or program, whether or not written, including each “employee benefit plan” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), whether or not subject to ERISA, which is maintained, sponsored, contributed to, or required to be contributed to by the Seller for the benefit of any current or former employee or other service provider of the Seller or any spouse or dependent of such individual or as to which the Seller has any obligation or liability, contingent or otherwise (each, a “Benefit Plan”). (b) Each Benefit Plan and related trust agreement, annuity contract or other funding instrument complies with, and has been established, administered, operated and maintained in material compliance with its terms and any applicable Laws. There are no pending or, to the Seller’s Knowledge, threatened: (i) Actions, by or on behalf of any of the Benefit Plans, by any employee or beneficiary covered under any such Benefit Plans, or otherwise involving any such Benefit Plans or the assets thereof (other than routine claims for benefits) or (ii) Actions by any Governmental Authority with respect to any Benefit Plan. All benefits accrued under any unfunded Benefit Plan have been paid, accrued or otherwise adequately reserved to the extent required by, and in accordance with, the Commonly Accepted Accounting Principles. Each Benefit Plan that is intended to meet the requirements of a “qualified plan” under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service (or, if it is a prototype plan, is the subject of a favorable opinion letter issued by the Internal Revenue Service) to the effect that such Benefit Plan meets the requirements of Section 401(a) of the Code, and no events have occurred that could reasonably be expected to adversely affect such qualified status. The Seller has no liability with respect to any “employee benefit plan” (as defined in Section 3(3) of ERISA) subject to Title IV of ERISA, including by reason of being treated as a single employer under Section 414 of the Code with any person or entity other than the Seller. The Seller has no current or potential obligation to provide postemployment health, life or other welfare benefits other than as required under Section 4980B of the Code or any similar applicable Law. Except as set forth on Schedule 4.14(b), the consummation of the transactions contemplated by this Agreement and any other transfer instrument, certificate, document, agreement, writing or instrument delivered pursuant to this Agreement (collectively, “Ancillary Documents”) will not (A) entitle any current
72520263v19 11 or former employee or officer of the Seller to severance pay, unemployment compensation or any other payment, (B) accelerate the time of payment or vesting, or increase the amount of, compensation due any such employee or officer, or (C) result in the forfeiture of compensation or benefits under any Benefit Plan. Schedule 4.14(b) sets forth each Benefit Plan that is subject to Section 409A of the Code. Each such Benefit Plan has, since January 1, 2005, complied in all material respects in operation and form with Section 409A of the Code and the Treasury Regulations promulgated thereunder. 4.15 Customers and Suppliers. Schedule 4.15 lists the Seller’s top twenty-five (25) customers and top ten (10) suppliers by dollar volume of sales or purchases during the calendar year ended December 31, 2021, and year to date through February 28, 2022 (each, a “Material Customer or Supplier”). Except as set forth on Schedule 4.15, no Material Customer or Supplier has terminated, or, to the Knowledge of the Seller Parties, intends to terminate, its business relationship with the Seller or has materially reduced, or, to the Knowledge of the Seller Parties, intends to materially reduce, the dollar volume of business it does or intends to do with the Seller from historic levels. 4.16 Intellectual Property. (a) “Intellectual Property” means any and all of the following in any jurisdiction throughout the world: (i) trademarks and service marks, whether registered or unregistered, including all applications and registrations and the goodwill connected with the use of and symbolized by the foregoing; (ii) copyrights, whether registered or unregistered, including all applications and registrations related to the foregoing; (iii) trade secrets and confidential know- how; (iv) patents and patent applications; (v) internet domain name registrations; and (vi) other intellectual property and related proprietary rights, interests and protections (including all rights to sue and recover and retain damages, costs and attorneys’ fees for past, present and future infringement and any other rights relating to any of the foregoing). (b) Schedule 4.16(b) lists all Intellectual Property included in the Acquired Assets (“Acquired IP”). The Seller owns or has adequate, valid and enforceable rights to use all the Acquired IP, free and clear of all Liens. The Seller is not bound by any outstanding judgment, injunction, order or decree restricting the use of the Acquired IP, or restricting the licensing thereof to any person or entity. With respect to the registered Intellectual Property that is Acquired IP, (i) all such Intellectual Property is valid, subsisting and in full force and effect and (ii) the Seller has paid all maintenance fees and made all filings required to maintain the Seller’s ownership thereof. For all such registered Intellectual Property, Schedule 4.16(b) lists (A) the jurisdiction where the application or registration is located, (B) the application or registration number, and (C) the application or registration date. Notwithstanding anything herein or Schedule 4.16(b), Acquired IP shall not include any software ownership or licenses including, but not limited to, software programs commonly known and utilized as QuickBooks, Big Time and Salesforce. (c) The Seller’s prior and current use of the Acquired IP has not and does not infringe, violate, dilute or misappropriate the Intellectual Property of any person or entity and there are no claims pending or threatened by any person or entity with respect to the ownership, validity, enforceability, effectiveness or use of the Acquired IP. No person or entity is infringing, misappropriating, diluting or otherwise violating any of the Acquired IP, and neither the Seller nor any Affiliate of the Seller has made or asserted any claim, demand or notice against any person or entity alleging any such infringement, misappropriation, dilution or other violation. 4.17 Insurance. Schedule 4.17 hereto sets forth a summary of all insurance policies maintained by the Seller or that provide coverage for the Seller’s assets or the Business, including their coverages,
72520263v19 12 expiration dates, deductibles and limits. To the Knowledge of the Seller, all such insurance policies are valid, outstanding and enforceable and are sufficient for compliance with all Material Contracts and the operation of the Business as currently conducted. All premiums due and payable with respect to any such insurance policy have been paid. The Seller has not received any written notice of cancellation or termination or other indication that any insurance policy is no longer in full force or effect or will not be renewed. Schedule 4.17 sets forth, for the current policy year and each of the three (3) preceding policy years, claims loss or loss runs history for each such insurance policy (or equivalent that was then in effect). 4.18 Environmental Matters. Except as set forth on Schedule 4.18(a), the Seller is, and at all times in the past five (5) years has been, in compliance, in all material respects, with all environmental Laws and has not received any: (i) environmental claims or notices; or (ii) written requests for information pursuant to environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Closing. The Seller has obtained and is in material compliance with all federal, state, and local environmental Permits and approvals (each of which is listed on Schedule 4.18(b)) necessary for the ownership, lease, operation or use of the Business or assets of the Seller and all such environmental Permits and approvals are in full force and effect. No real property owned, operated or leased by the Seller in the past five (5) years is listed on, or has been proposed for listing on, the National Priorities List (or CERCLIS) under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq, or any similar state list (“CERCLA”). The Seller is not and has not been an arranger, handler, owner, operator, treater, storer, transporter, generator or disposer of hazardous waste under the Resource Conservation and Recovery Act, CERCLA, or any other Law. The Seller has removed and properly disposed of any and all hazardous, infectious, radioactive, asbestos, industrial and manufacturing, and construction demolition waste and debris stored at or associated with the business along with any equipment that is contaminated with the aforementioned waste or materials prior to the Closing. Except as set forth on Schedule 4.18(a), in the past five (5) years there has been no release of any hazardous materials in contravention of environmental Law with respect to the Business or assets of the Seller or any real property owned, operated or leased by the Seller during such period, and the Seller has not received an environmental notice that any real property owned, operated or leased during such period in connection with the Business (including soils, groundwater, surface water, buildings and other structure located on any such real property) has been contaminated with any hazardous material which would reasonably be expected to result in an environmental claim against, or a material violation of environmental Law or term of any environmental Permit by, the Seller. The Seller has made available to the Buyer true and complete copies of all sampling results, environmental or safety audits or inspections, or other written reports or documents concerning environmental, health or safety issues pertaining to the Real Estate, to the extent the same are in the Seller’s or its Affiliates’ possession. 4.19 Affiliate Transactions. Neither the Seller nor any of its shareholders, affiliates, directors or officers or their family members (collectively, “Affiliates”) owns or has owned, of record or as a beneficial owner, an equity interest or any other financial or profits interest in any person or entity that has: (a) had business dealings with the Seller (and each such business dealing has been conducted in the ordinary course of business at substantially prevailing market prices and on substantially prevailing market terms) or (b) engaged in competition with the Seller. The Seller does not have, and in the past three (3) years has not had, any contractual relationship (other than with employees solely for the purposes of employment with the Seller) with any equity holder of the Seller or any of its Affiliates. 4.20 Broker’s Fees. The Seller Parties do not, nor do any of their Affiliates, have any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated.
72520263v19 13 4.21 Disclosure. Except as set forth in this Article 4, neither the Seller nor any of its agents, employees, Affiliates, or other representatives have made, nor are any of them making any representation or warranty, express or implied, in respect of the Seller or the Business, and any other representations or warranties are hereby expressly disclaimed. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BUYER The Buyer represents and warrants to the Seller that the following statements are true and correct as of the Closing: 5.1 Organization and Good Standing. The Buyer is a corporation duly organized and validly existing under the laws of the State of Indiana. 5.2 Authorization. The Buyer has full corporate power and company authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Buyer. 5.3 Validity; Binding Effect. This Agreement has been duly and validly executed and delivered by the Buyer. This Agreement constitutes a valid and legally binding obligation of the Buyer, enforceable against the Buyer in accordance with its terms. 5.4 Noncontravention. The execution, delivery and performance of this Agreement by the Buyer, the consummation of the transactions contemplated by this Agreement and the compliance with or fulfillment of the terms and provisions hereof or of any other agreement or instrument contemplated hereby, do not and shall not (a) conflict with or result in a breach of any of the provisions of the Articles of Incorporation or the Bylaws of the Buyer; (b) contravene any Law which affects or binds the Buyer or any of its properties; or (c) require the Buyer to obtain the approval, consent or authorization of, or to make any declaration, filing or registration with, any third party or any Governmental Authority which has not been obtained in writing. 5.5 Broker’s Fees. The Buyer does not, nor does any of its Affiliates, have any liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Seller could become liable or obligated. ARTICLE 6 COVENANTS 6.1 Employees and Employee Benefits. (a) Employment of Employees by Buyer. The Buyer may (in its sole discretion), but is not obligated to, offer to hire each person employed by the Seller in the Business on the Closing Date (each a “Transferred Employee”). Subject to applicable Law, the Buyer will have reasonable access to personnel records (including performance appraisals, disciplinary actions and grievances) of the Seller for all such persons. Effective immediately before Closing, the Seller will terminate the employment of all such persons that the Buyer agrees to hire. Any employment offered by the Buyer is “at will” and may be terminated by the Buyer or by an employee at any time for any reason (subject to any written commitments to the contrary made by the Buyer or an employee and applicable Law). Nothing in this Agreement shall be deemed to prevent or restrict in any way the right of the Buyer to terminate, reassign, promote or demote any such person after the Closing or to change adversely or favorably the title, powers, duties, responsibilities, functions, locations,
72520263v19 14 salaries, employee benefits, other compensation or terms or conditions of employment of such persons. (b) Salaries and Benefits. The Seller shall be responsible for the payment of, and shall pay, all wages and other remuneration and/or compensation due to its employees with respect to their services as employees of the Seller through the close of business on the Closing Date, bonus payments (including without limitation any stay bonuses), the payment of any termination, severance or stay-bonus payments, and the provision of health plan continuation coverage in accordance with the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (and the regulations and other guidance promulgated thereunder), and Sections 601 through 608 of ERISA. The Seller shall remain solely responsible for all workers’ compensation claims of any current or former employees, directors, independent contractors or consultants which relate to events occurring on or prior to the Closing Date. The Seller shall also be liable for any claims made or incurred by their employees, directors, independent contractors or consultants or the spouses, dependents or beneficiaries thereof through the Closing Date under the benefit plans of Seller. For purposes of the immediately preceding sentence, a charge will be deemed incurred, in the case of hospital, medical or dental benefits, when the services that are the subject of the charge are performed and, in the case of other benefits (such as disability or life insurance), when an event has occurred or when a condition has been diagnosed that entitles the employee to the benefit. The Seller shall pay, or cause to be paid, all such amounts to the appropriate persons as and when due. 6.2 Customer and Other Business Relationships. Following the Closing, the Seller and its officers, employees, and agents will (a) reasonably cooperate with the Buyer to obtain any consents required under the Assumed Contracts and (b) refer to the Buyer all inquiries relating to the Business. Following the Closing: (i) the Buyer shall have the right to receive all payments related to the Acquired Assets or under the Assumed Contracts, and the Seller shall promptly deliver to the Buyer any and all payments received by the Seller related to the Acquired Assets or under the Assumed Contracts or otherwise related to the Business as operated by the Buyer after the Closing; and (ii) the Seller shall be required to pay, settle and discharge all accounts payable or other liabilities that are Excluded Liabilities. 6.3 Restrictive Covenants. In consideration of the sale of the Acquired Assets and in order to protect the value of the Business after the Closing, the Seller Parties hereby acknowledge, covenant and agree as follows: (a) During the Restricted Period, the Seller Parties shall not (and shall cause their Affiliates, not to) directly or indirectly, invest in, own, manage, operate, finance, control, advise, render services to, provide financial assistance to or guarantee the obligations of any person or entity engaged in or planning to become engaged in the Business anywhere in the Restricted Territory; provided, however, that the Seller Parties may purchase or otherwise acquire up to (but not more than) five percent (5%) of any class of the securities of any entity (but may not otherwise participate in the activities of such entity) engaged in the Business if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 6.3, (i) “Restricted Period” means the period commencing on the Closing Date and expiring on the second (2nd) anniversary of this Agreement (which shall be extended by the length of any period during which a Restricted Party is in violation of this Section 6.3), and (ii) “Restricted Territory” means anywhere in the areas described on Exhibit E hereto.
72520263v19 15 (b) During the Restricted Period, the Seller Parties shall not (and shall cause their Affiliates, not to) directly or indirectly (i) solicit any customer that was a party to an Assumed Contract for the purpose of selling or providing any competitive Business products or services, or (ii) sell or provide any products or services, that are competitive Business’s products or services, to any such customer. (c) During the Restricted Period, the Seller Parties shall not (and shall cause their Affiliates, not to), directly or indirectly, hire, employ, engage or solicit the employment or engagement of any individual that was employed by Seller immediately prior to the Closing and who is employed in the Business by Buyer after the Closing. (d) The Seller Parties shall not (and it shall cause their Affiliates, not to), directly or indirectly, disparage, denigrate or make any inaccurate, untruthful or incorrect statement (whether verbally, in writing, electronically, through social media, by word or by gesture, or through any other means of communication) about Buyer, the Business or any of its employees, agents, Affiliates or representatives. 6.4 Confidentiality. The Seller hereby (a) acknowledges and agrees that prior to the consummation of the transactions contemplated by this Agreement that it has had access to trade secrets and other information which is confidential with respect to the Acquired Assets and valuable to the operation of the Business (the “Confidential Information”), and (b) understands the necessity of keeping the Confidential Information confidential and secret. The Seller will hold the Confidential Information in confidence, unless required to disclose such Confidential Information by judicial or administrative process or by other legal requirement, including, without limitation, any disclosures required by the rules of the U.S. Securities and Exchange Commission or any United States stock exchange. 6.5 Remedies. Without limiting the right of the Buyer to pursue all other legal or equitable remedies available for any violation of Section 6.3 or Section 6.4 and to recover its legal fees and expenses, the Parties agree that monetary damages are inadequate for such violation given the unique nature of the Business, and that the Buyer shall be entitled to injunctive relief to prevent violation or continuing violation thereof and that no bond or other security shall be required in connection therewith. It is the intent and understanding of each Party hereto that if, in any action before any court or agency legally empowered to enforce Section 6.3 or Section 6.4 any term, restriction, covenant or promise is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the minimum extent necessary to make it enforceable by such court or agency. Nothing herein shall be construed as prohibiting the Buyer from pursuing any other remedies at Law or in equity which it may have. The Seller acknowledges and agrees that the existence of any claim or cause of action by any of them against the Buyer shall not relieve any of the Seller Parties of their obligations under this Agreement and otherwise shall not operate as a defense to the enforcement of this Agreement. 6.6 Books and Records. Following the Closing, each Party will afford the other Party, and the other Party’s counsel and accountants, during normal business hours, reasonable access to and assistance from each Party’s accountants, accounting firm, or other financial advisors, and to the books, records and other data in each Party’s possession or control (including without limitation accounting, Tax and financial records) relating to the Business with respect to periods prior to the Closing and the right to make copies and extracts therefrom, to the extent that such access may be reasonably desired by a Party in connection with: (a) the preparation of Tax Returns; (b) the determination or enforcement of rights and obligations under this Agreement, including by any Buyer Indemnified Person or Seller Indemnified Person; (c) compliance with the requirements of any Governmental Authority; or (d) in connection with any actual or threatened Action.
72520263v19 16 6.7 Information Technology and Digital Records. Following the Closing, the Seller will afford the Buyer and its counsel, during normal business hours, reasonable access at the Seller’s expense to Seller’s digital books, records and other data in the Seller’s possession or control relating to electronically stored data, information and systems (including without limitation records of the Seller’s data collection and security policies) of the Business with respect to periods prior to the Closing and the right to make copies and extracts therefrom. The Seller shall, or at the Seller’s expense engage a third party technology consultant, to transfer all of Seller’s digital books, records, and other data to the Buyer (the “IT Transition”). In connection with the IT Transition, the Seller shall provide the Buyer with access to the Seller’s website (to have website traffic directed to the Buyer’s website and to the extent the Seller’s website is viewed by the public containing a disclosure that Buyer purchased the assets of Seller) for a period of one (1) year and the use of Seller’s email accounts for a period of six (6) months following the Closing. Notwithstanding the foregoing, (i) the Seller shall not be obligated to pay for the IT Transition for a period longer than six (6)months after the Closing and (ii) Buyer may not utilize the ‘Comstock’ name after Closing for any public, marketing, or advertising purposes excepting disclosures that Buyer purchased the assets of Seller. For a period of two (2) years following the Closing, Seller shall forward all e-mails sent on Seller’s e-mail accounts to Buyer. 6.8 Cease Using Name. After the Closing, the Seller shall not operate any business under the name “Comstock Environmental Services”. 6.9 Cooperation. If any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Article 7 below). After the Closing, in the event and for so long as any Party actively is contesting or defending against any third-party action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (a) any transaction contemplated under this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that existed on or prior to the Closing Date involving the Seller, the other Party(ies) will reasonably cooperate with such Party and such Party’s counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as is reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Article 7). This provision will be inapplicable to any direct claims between Seller and the Buyer. 6.10 Operation of Business After the Closing. The Parties hereto acknowledge that certain Permits required or desirable for the operation of the Business after the Closing may not be transferable by the Seller to the Buyer at the Closing, or may not be obtainable by the Buyer until after the Closing, and that transfer of or application for any such Permits may require the Seller to sign certain documents, affidavits and certifications. As and when requested from time to time by the Buyer until any such Permits are transferred to or obtained by the Buyer, the Seller shall, in accordance with applicable Laws, use commercially reasonable efforts (a) to provide all necessary and lawful cooperation for the voluntary transfer or surrender of any such Permits, assets or contracts or the use of any such Permits for the operation of the Business by the Buyer after the Closing; and (b) to facilitate the Buyer’s successful application for any such Permit. In the event Seller seeks to recover amounts due under Contracts consistent with the terms of this Agreement and through the course of Seller’s final audits, Buyer shall provide reasonable cooperation efforts to Seller in coordination with such activities including, but not limited to, access to and coordination efforts with employees listed in Schedule 3.2(m) of this Agreement.
72520263v19 17 ARTICLE 7 INDEMNIFICATION AND REMEDIES 7.1 Indemnification and Reimbursement by Seller. Subject to the limitations and other provisions of this Agreement, the Seller Parties jointly and severally shall indemnify, defend and hold harmless the Buyer, and its officers, directors, managers, employees, equity holders, representatives, agents, subsidiaries and Affiliates (collectively, the “Buyer Indemnified Persons”), and will reimburse the Buyer Indemnified Persons for any loss, liability, claim, damage, expense whatsoever (including reasonable costs of investigation and defense and reasonable professional and attorney fees and expenses) and whether direct, between, or among the Parties or with respect to any third party (collectively, “Damages”), arising from, related to or in connection with: (a) any inaccuracy or breach of any representation or warranty made by any of the Seller Parties in this Agreement; (b) any breach of any covenant or obligation of the Seller in this Agreement; (c) the Seller’s ownership or operation of the Acquired Assets and the Business prior to the Closing; (d) the Excluded Assets; (e) the Excluded Liabilities; (f) any failure of the Seller to comply with, or any other liability arising under or in connection with, the Worker Adjustment Retraining and Notification Act, or any similar Laws; and (g) any and all Actions, claims, demands, assessments, judgments, costs and expenses (including interest, penalties, reasonable legal fees and accounting fees) related to the foregoing clauses (a) through (f), inclusive, and the enforcement of the provisions of this Section 7.1. 7.2 Indemnification and Reimbursement by Buyer. Subject to the limitations and other provisions of this Agreement, the Buyer will indemnify, defend and hold harmless the Seller and its officers, directors, managers, employees, equity holders, representatives, agents, subsidiaries and Affiliates (collectively, the “Seller Indemnified Persons”), and will reimburse the Seller Indemnified Persons for any Damages arising from, related to or in connection with: (a) any inaccuracy or breach of any representation or warranty made by the Buyer in this Agreement; (b) any breach of any covenant or obligation of the Buyer in this Agreement; (c) the Assumed Liabilities; and (d) any and all Actions, claims, demands, assessments, judgments, costs and expenses (including interest, penalties, reasonable legal fees and accounting fees) related to the foregoing clauses (a) through (c), inclusive, and the enforcement of the provisions of this Section 7.2. 7.3 Limitations. All representations and warranties made by any Party in this Agreement shall survive the Closing for eighteen (18) months, at which time they shall expire and be of no further force and effect, other than the representations and warranties set forth in Sections 4.1, 4.2, 4.3, 4.4, the first sentence of 4.6, 4.8, 4.14, 4.18, 4.20, 5.1, 5.2, 5.3, 5.4, and 5.5, which shall survive the Closing until the date that is sixty (60) days after the expiration of the applicable statute of limitations, at which time they shall expire and be of no further force and effect (representations and warranties listed in the immediately forgoing exceptions clause, each a “Fundamental Representation and Warranty”). Notwithstanding the foregoing sentence, if a written notice regarding the inaccuracy or breach of any representation or warranty shall have been timely delivered as required by this Article 7 on or prior to the applicable expiration date, such representation and warranty shall survive with respect to such claim until the related claim for indemnification has been satisfied or otherwise resolved as provided in this Article 7. The covenants contained in this Agreement shall survive until fully performed. In no event shall the Buyer Indemnified Persons be entitled to indemnification under Section 7.1(a) (other than with respect to claims for the inaccuracy or breach of a Fundamental Representation and Warranty to which the following limitation shall not apply) until the aggregate amount of all Damages in respect of the matters described in Section 7.1(a) exceeds $35,000.00 (the “Basket”). Once the Basket is exceeded, then the Buyer Indemnified Persons shall be entitled to pursue recovery of all such Damages in excess of the Basket; provided that, in no event shall the Buyer Indemnified Persons be entitled to indemnification under Section 7.1(a) for the inaccuracy or breach of a representation or warranty (other than with respect to claims for the inaccuracy or breach of a Fundamental Representation and Warranty to which the following limitation shall not apply) if the
72520263v19 18 aggregate amount of all Damages in respect of the matters described in Section 7.1(a) (other than with respect to claims for the inaccuracy or breach of a Fundamental Representation and Warranty) exceeds $300,000.00. The aggregate amount required to be paid by the Seller Indemnified Persons pursuant to Section 7.1(a) as a result of Damages from Seller’s breach of or inaccuracy in Fundamental Representations and Warranties and as a result of Damages arising under Sections 7.1(b) through (f) shall not exceed the Purchase Price. For purposes of determining the amount of Damages and for determining whether a representation or warranty has been breached or is inaccurate, in connection with a claim under Section 7.1(a), for the inaccuracy or breach of a representation or warranty containing any material or materiality or other similar qualification, such material or materiality or similar qualifier shall not be considered. The Parties acknowledge and agree that their sole and exclusive remedy with respect to any and all claims for any breach of any representation, warranty, covenant, agreement or obligation set forth herein, shall be pursuant to the indemnification provisions set forth in this Article 7; provided that, for purposes of clarity, the foregoing shall not apply to any of the Ancillary Documents. Notwithstanding the foregoing sentence, nothing in this Article 7 shall limit any person or entity’s right to seek and obtain any equitable relief to which it shall be entitled. Notwithstanding anything else to the contrary, (a) nothing in this Article 7 shall limit in any way any Party’s ability to make, or recover for, any claim for fraud, willful misconduct or intentional misrepresentation related to this Agreement or the transactions contemplated hereby; and (b) no adjustments, if any, required to be paid by the Seller under Section 2.2 of this Agreement shall be counted against, or taken into account with respect to, the Basket or indemnification caps set forth in this Section 7.3. 7.4 Effect of Investigation. Each Buyer Indemnified Person’s right to indemnification or other remedy based on the representations, warranties, covenants and agreements of the Seller contained in this Agreement will not be affected by any investigation conducted by the Buyer with respect to, or any knowledge acquired by the Buyer at any time, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement. 7.5 Tax Treatment of Indemnification Payments. All indemnification payments made by the Seller Parties under this Agreement shall be treated by the Parties as an adjustment to the Purchase Price for Tax purposes, unless otherwise required by Law. 7.6 Mitigation. Each Indemnified Party shall use commercially reasonable efforts to mitigate any Damages which are the subject of claims under this Agreement upon and after becoming aware of any facts or circumstances that would reasonably be expected to result in any Damages that are indemnifiable hereunder. 7.7 No Double Recovery. Notwithstanding any provision of this Agreement to the contrary, no Indemnified Party shall be entitled to double recovery for any Damages resulting from a state of facts or circumstances constituting the breach of more than one of the representations, warranties, covenants, agreements and obligations of the Indemnifying Party in this Agreement. The Seller shall not have any liability or obligation with respect to any claim for indemnification to the extent that the Damages related to such matter actually served to reduce the amount of Actual Net Working Capital pursuant to Section 2.2 of this Agreement. 7.8 Insurance Proceeds. Payments by an Indemnifying Party pursuant to this Article 7 in respect of any Damages shall be limited to the amount that remains after deducting therefrom any insurance proceeds paid to and actually received by the Indemnified Party (or its Affiliates) and any indemnity, contribution or other similar payment paid to and actually received by the Indemnified Party (or its Affiliates) in respect of any such claim to the extent specifically identifiable to an indemnification obligation of the Indemnifying Party (net of costs of collection resulting from making any claim thereunder and taking into account any deductible or retention amount paid or payable). The Indemnified Party shall
72520263v19 19 not be required to pursue recovery of such amounts prior to seeking indemnification under this Article 7, but shall use its commercially reasonable efforts to recover under insurance policies or indemnity, contribution or other similar agreements for any Damage specifically identifiable to an indemnification obligation of the Indemnifying Party. 7.9 Recourse First against Indemnity Escrow Amount. In the case of any indemnification claim by a Buyer Indemnified Person against the Seller, the Buyer Indemnified Person shall, to the extent there are sufficient amounts in the Escrow Fund, be required to first seek recourse against the Indemnity Escrow Amount, with the balance of any claim for Damages being satisfied directly by the Seller Parties. 7.10 Right to Defend. Promptly after acquiring knowledge of any loss, action, suit, investigation, proceeding, demand, assessment, audit, judgment, or claim brought by a person or entity that is not a party to this Agreement (each a “Third Party Claim”) to which it may be liable, any party entitled to indemnification hereunder (the “Indemnified Party”) shall give to the party obligated to indemnify hereunder (the “Indemnifying Party”) prompt written notice thereof; provided, that the failure to so notify such Indemnifying Party will not relieve such Indemnifying Party of its obligations under this Article 7, except to the extent that the Indemnifying Party demonstrates that the defense of such Third Party Claim is prejudiced by the Indemnified Party’s failure to give such claim notice. Each Indemnifying Party shall, at its own expense, promptly defend, contest or otherwise protect against any Third Party Claim against which it has agreed to indemnify any Indemnified Party, and each Indemnifying Party shall receive from the Indemnified Party all necessary and reasonable cooperation in said defense, including, but not limited to, the services of employees of the Indemnified Party who are familiar with the transactions out of which any such damage, loss, deficiency, liability, claim, encumbrance, penalty, cost, expense, action, suit, investigation, proceeding, demand, assessment, audit, judgment or claim may have arisen. The Indemnifying Party shall have the right to control the defense of any such third party proceeding unless it is relieved of its liability hereunder with respect to such defense by the Indemnified Party, and except for claims involving (i) non-monetary Damages sought against the Indemnified Party; or (ii) criminal allegations. The Indemnifying Party shall have the right, at its option, and, unless so relieved, to compromise or defend, at its own expense by its own counsel, any such matter involving the asserted liability to a third party of the Indemnified Party involving monetary damages but may not compromise or settle any matter involving equitable or injunctive recourse against the Indemnified Party without such party’s written consent. In the event that the Indemnifying Party shall undertake to compromise or defend any such asserted liability, it shall promptly notify the Indemnified Party of its intention to do so. In the event that an Indemnifying Party, after written notice of a Third Party Claim from an Indemnified Party, fails to take timely action to defend the same, the Indemnified Party shall have the right to defend the same by counsel of its own choosing, but at the cost and expense of the Indemnifying Party. In such an event, the Indemnified Party shall not compromise any such asserted liability without the written consent of the Indemnifying Party, such consent not to be unreasonably withheld, conditioned, or delayed. ARTICLE 8 GENERAL PROVISIONS 8.1 Expenses. Except as provided for in Section 6.5 and Article 7, each Party will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement, including all fees and expenses of agents, representatives, counsel and accountants. The Buyer shall timely and fully pay any and all transfer and sales Taxes resulting from the sale of the Acquired Assets from the Seller to the Buyer, or the assumption of the Assumed Liabilities by the Buyer, as contemplated by this Agreement; provided, however, that Seller agrees to promptly reimburse the Buyer for 50% of any such transfer and sales Taxes but only up to a maximum Seller reimbursement amount of $10,000.00.
72520263v19 20 8.2 Public Announcements. Any public announcement or similar publicity with respect to this Agreement will be issued, if at all at such time and in such manner as the Buyer and the Seller mutually determine. Unless consented to by the Parties in writing, the Parties shall keep this Agreement and the transactions consummated hereby strictly confidential and may not make any disclosure of this Agreement to any person or entity; provided, however, that the (x) Parties may disclose the terms of this Agreement to their accountants, attorneys and similar professionals, who have an obligation to maintain the confidentiality of such information, as necessary for tax returns, to enforce their rights under this Agreement or the Ancillary Documents, and for similar purposes, and (y) Seller and its Affiliates may make any disclosures necessary to comply with the SEC disclosure obligations or the rules of any United States stock exchange. The Seller and the Buyer shall consult with each other concerning the means by which the Seller’s employees, customers, and suppliers and others persons or entities having dealings with the Seller will be informed of the transactions contemplated herein. 8.3 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given (a) when delivered personally to the recipient, (b) when sent by electronic mail or facsimile, on the date of transmission to such recipient (with, in the case of electronic mail, the sender not receiving an undeliverable message in connection with sending such electronic mail message or with, in the case of facsimile, receipt by the sender thereof of a confirmation of transmission), (c) one (1) Business Day after being sent to the recipient by reputable overnight courier service (charges prepaid), or (d) four (4) Business Days after being mailed to the recipient by certified mail, return receipt requested and postage prepaid, and addressed to the intended recipient, and in the case of clauses (b) through (d) above when sent or mailed to the recipient pursuant to the contact information for such recipient set forth on the signature pages of this Agreement, which contact information may be modified by a party hereto providing written notice of such modification to all other Parties pursuant to this Section 8.3. “Business Day” means any day except Saturday, Sunday or any other day on which commercial banks located in Conshohocken, Pennsylvania are authorized or required by Law to be closed for business. 8.4 Governing Law. This Agreement shall be governed by and construed under the laws of the Commonwealth of Pennsylvania without regard to conflict of law principles. 8.5 Waiver. The rights and remedies of the Parties are cumulative and not alternative. Neither the failure nor any delay by any Party in exercising any right, power, or privilege under this Agreement or the other documents and instruments referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege. To the maximum extent permitted by applicable Law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other Party; (b) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one Party will be deemed to be a waiver of any obligation of such Party or of the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the other documents and instruments referred to in this Agreement. 8.6 Entire Agreement; Modification. This Agreement (together with the Schedules, Exhibits and the other documents, agreements and instruments referenced herein) supersedes all prior agreements between the Parties with respect to its subject matter (including that certain Term Sheet, dated December 1, 2021, by and between the Seller and Buyer), and constitutes a complete and exclusive statement of the terms of the agreement between the Parties with respect to the subject matter contained herein. This Agreement may not be amended except by a written agreement executed by all Parties that will be burdened by such amendment.
72520263v19 21 8.7 Assignments, Successors, and No Third Party Rights. No Party may assign any of its rights under this Agreement without the prior written consent of the other Party, except that the Buyer may so long as it remains liable for its obligations under this Agreement (a) collaterally assign this Agreement to any of its lenders; (b) assign its rights and obligations under this Agreement to a wholly-owned subsidiary; and (c) assign its rights and obligations under this Agreement to any successor-in-interest, whether by merger, sale of assets or otherwise. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the permitted successors and assigns of the Parties. Other than with respect to the Buyer Indemnified Persons and Seller Indemnified Persons as contemplated by Article 7, who are expressly intended to be, and hereby are made, third party beneficiaries of the provisions of Article 7, nothing expressed or referred to in this Agreement will be construed to give any person or entity other than the Parties any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement. 8.8 Severability. The provisions of this Agreement are severable and shall be separately construed. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.9 Section Headings; Construction. The headings of the Articles and Sections in this Agreement are provided for convenience only and will not affect the construction or interpretation of this Agreement. All references to “Section” or “Sections” refer to the corresponding Section or Sections of this Agreement. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms. If any payment is required to be made, or other action (including the giving of notice) is required to be taken, pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be considered to have been made or taken in compliance with this Agreement if made or taken on the next succeeding Business Day. In this Agreement, a period of days shall be deemed to begin on the first day after the event that began the period and to end at 5:00 p.m. (local time, Indianapolis, Indiana) on the last day of the period. If any period of time is to expire hereunder on any day that is not a Business Day, the period shall be deemed to expire at 5:00 p.m. (local time, Conshohocken, Pennsylvania) on the next succeeding Business Day. Each Party represents and agrees that: it has had the opportunity to be represented by independent counsel of its own choosing, it or its authorized officers or directors (as applicable) have carefully read and fully understand this Agreement in its entirety, it is fully aware of the contents of this Agreement and its meaning, intent and legal effect. This Agreement is the product of negotiations between the Parties and any rules of construction relating to interpretation against the drafter of an agreement shall not apply to this Agreement and are expressly waived by each Party. The terms “Knowledge of the Seller”, “Knowledge of the Seller Parties”, or words of similar import mean the actual knowledge of David White, Chris Guthrie, Jon Buzan, John Krinis, and Robert Scott after reasonable due inquiry. 8.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. Facsimile or electronic transmission of a counterpart hereto shall be deemed an original hereof. [Signature Page Follows]
Exhibit A Escrow Agreement See attached.
ESCROW AGREEMENT THIS ESCROW AGREEMENT (the “Agreement”) dated effective as of March 31, 2022 (the “Effective Date”), is by and among August Mack Environmental, Inc., an Indiana corporation (“Purchaser”), Comstock Environmental Services, LLC, a Virginia limited liability company (“Seller”), and U.S. Bank National Association, a national banking association, as escrow agent hereunder (“Escrow Agent”). BACKGROUND A. Purchaser and Seller have entered into that certain Asset Purchase Agreement dated as of March 30, 2022 (the “Purchase Agreement”), pursuant to which Purchaser is purchasing substantially all of the assets and certain liabilities of Seller used in the operation of Seller’s environmental engineering, environmental consulting, and tank construction business. The Purchase Agreement provides that Purchaser shall deposit on behalf of Seller the Escrow Fund (defined below) in a segregated escrow account to be held by Escrow Agent for the purpose of post-closing working capital adjustments and indemnifications that may become due to Purchaser pursuant to the Purchase Agreement. B. Escrow Agent has agreed to accept, hold, and disburse the funds deposited with it and any earnings thereon in accordance with the terms of this Agreement. C. Purchaser and Seller have appointed the Representatives (as defined below) to represent them for all purposes in connection with the funds to be deposited with Escrow Agent and this Agreement. D. Purchaser and Seller acknowledge that (i) Escrow Agent is not a party to and has no duties or obligations under the Purchase Agreement, (ii) all references in this Agreement to the Purchase Agreement are solely for the convenience of Purchaser and Seller, and (iii) Escrow Agent shall have no implied duties beyond the express duties set forth in this Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows: 1. Definitions. The following terms shall have the following meanings when used herein: “Adjustment Escrow Amount” means Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00). “Business Day” means any day, other than a Saturday, Sunday or legal holiday, on which Escrow Agent at its location identified in Section 15 is open to the public for general banking purposes. “Claim Notice” has the meaning set forth in Section 6(a). 1 7 2602403v32602403v7
“Escrow Fund” means the Adjustment Escrow Amount and the Indemnity Escrow Amount, together with any interest and other income thereon. “Escrow Period” means the period commencing on the date hereof and ending at the close of Escrow Agent’s Business Day on the second (2nd) anniversary of the Effective Date unless earlier terminated pursuant to this Agreement. “Final Order” means a final and nonappealable order of a court of competent jurisdiction (an “Order”), which Order is delivered to Escrow Agent accompanied by a written instruction from Purchaser or Seller given to effectuate such Order and confirming that such Order is final, nonappealable and issued by a court of competent jurisdiction, and Escrow Agent shall be entitled to conclusively rely upon any such confirmation and instruction and shall have no responsibility to review the Order to which such confirmation and instruction refers. “Indemnified Party” has the meaning set forth in Section 11. “Indemnity Claim” has the meaning set forth in Section 6(a). “Indemnity Escrow Amount” means One Hundred Fifty Thousand and No/100 Dollars ($150,000.00). “Joint Written Direction” means a written direction executed by a Purchaser Representative and a Seller Representative, delivered to Escrow Agent in accordance with Section 15 and directing Escrow Agent to disburse all or a portion of the Escrow Fund or to take or refrain from taking any other action pursuant to this Agreement. “Purchaser Representative” means the person(s) so designated on Schedule B hereto or any other person designated in a writing signed by Purchaser and delivered to Escrow Agent and a Seller Representative in accordance with the notice provisions of this Agreement, to act as its representative under this Agreement. “Representatives” means a Purchaser Representative and a Seller Representative. “Seller Representative” means the person(s) so designated on Schedule B hereto or any other person designated in a writing signed by Seller and delivered to Escrow Agent and a Purchaser Representative in accordance with the notice provisions of this Agreement, to act as its representative under this Agreement. 2. Appointment of and Acceptance by Escrow Agent. Purchaser and Seller hereby appoint Escrow Agent to serve as escrow agent hereunder. Escrow Agent hereby accepts such appointment and, upon receipt by wire transfer of the Escrow Fund in accordance with Section 3, shall hold, invest and disburse the Escrow Fund in accordance with this Agreement. 3. Deposit of Escrow Fund. Simultaneously with the execution and delivery of this Agreement, Purchaser will transfer the Escrow Fund, by wire transfer of immediately available 2 7 2602403v32602403v7
funds, to an account designated by Escrow Agent (the “Escrow Account”). Escrow Fund will remain uninvested. 4. Disbursements of Escrow Fund. (a) Escrow Agent shall disburse Escrow Fund, or a portion thereof, at any time and from time to time, upon receipt of, and in accordance with, a Joint Written Direction substantially in the form of Attachment 1 hereto and received by Escrow Agent as set forth in Section 15. Such Joint Written Direction must contain the amount of the Escrow Fund to be so released and complete payment instructions, including funds transfer instructions or an address to which a check should be sent. (b) Purchaser and Seller, as between themselves, hereby agree that if Purchaser makes a claim for any uncollected accounts receivable pursuant to Section 2.2(d)(ii) of the Purchase Agreement, Purchaser and Seller shall execute and deliver to Escrow Agent a Joint Written Direction, authorizing Escrow Agent to disburse the Indemnity Escrow Amount to Purchaser in the amount of such uncollected accounts receivable. (c) Purchaser and Seller, as between themselves, hereby agree that Purchaser and Seller shall execute and deliver to Escrow Agent a Joint Written Direction, authorizing Escrow Agent to disburse the Adjustment Escrow Amount to Seller or Purchaser, as applicable, pursuant to the terms of Section 2.2(b) of the Purchase Agreement. (d) Upon the expiration of the Escrow Period, Escrow Agent shall distribute to Seller pursuant to the funds transfer instruction set forth in this Section 4(c), as promptly as practicable, any remaining Indemnity Escrow Amount not subject to a Claim Notice as provided in Section 6. Purchaser and Seller each acknowledges that the Escrow Agent is authorized to use the following funds transfer instructions to disburse any funds due to Seller: Bank Name: Eagle Bank Bank Address: 7815 Woodmont Avenue Bethesda, MD 20814 ABA No.: 055003298 Account Name: Comstock Real Estate Services, L. C. Account No.: 020-017-7905 (e) Prior to any disbursement, Escrow Agent must receive reasonable identifying information regarding the recipient so that Escrow Agent is able to comply with its regulatory obligations and reasonable business practices, including without limitation a completed United States Internal Revenue Service (“IRS”) Form W-9 or Form W-8, as applicable. All disbursements of Escrow Fund will be subject to the fees and claims of Escrow Agent and the Indemnified Parties pursuant to Section 11 and Section 12. (f) Purchaser and Seller may each deliver written notice to Escrow Agent in accordance with Section 15 changing their respective funds transfer instructions, which notice will 3 7 2602403v32602403v7
be effective only upon receipt by Escrow Agent and after Escrow Agent has had reasonable time to act upon such notice. 5. Suspension of Performance; Disbursement into Court. If, at any time, (a) a dispute exists with respect to any obligation of Escrow Agent under this Agreement, (b) Escrow Agent is unable to determine, to Escrow Agent’s sole satisfaction, Escrow Agent’s proper actions with respect to its obligations hereunder, or (c) the Representatives have not, within 10 days of receipt of a notice of resignation, appointed a successor escrow agent to act under this Agreement, then Escrow Agent may, in its sole discretion, take either or both of the following actions: (i) suspend the performance of any of its obligations (including without limitation any disbursement obligations) under this Agreement until such dispute or uncertainty is resolved to the sole satisfaction of Escrow Agent or until a successor escrow agent is appointed. (ii) petition (by means of an interpleader action or any other appropriate method) any court of competent jurisdiction, in any venue convenient to Escrow Agent, for instructions with respect to such dispute or uncertainty and, to the extent required or permitted by law, pay into such court, for holding and disposition by such court, the Escrow Fund, after deduction and payment to Escrow Agent of all fees and expenses (including court costs and attorneys’ fees) payable to, incurred by, or expected to be incurred by Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. Escrow Agent will have no liability to Purchaser or Seller for any such suspension of performance or disbursement into court, specifically including any liability or claimed liability that may arise due to any delay in any other action required or requested of Escrow Agent. 6. Resolutions & Disbursement of Claims. If during the Escrow Period Purchaser elects to make a claim for indemnity against Seller pursuant to Article 7 of the Purchase Agreement, then the procedure for administering and resolving such claims is as follows: (a) If Purchaser elects to assert a claim for indemnity as contemplated by the Purchase Agreement (an “Indemnity Claim”), it must give written notice of such claim (a “Claim Notice”) to Escrow Agent and Seller prior to the expiration of the Escrow Period. Such Claim Notice must include a description of the claim and the basis therefor and the amount, if known, asserted by Purchaser for such claim (including, if appropriate, an estimate of all costs and expenses reasonably expected to be incurred by Purchaser by reason of such claim). (b) Escrow Agent shall pay an Indemnity Claim to Purchaser from the Indemnity Escrow Amount only pursuant to (i) Seller’s written direction, (ii) a Joint Written Direction, or (iii) a Final Order. 7. Investment of Funds. Based upon Purchaser’s and Seller’s prior review of investment alternatives, Escrow Agent is directed to leave the Escrow Fund uninvested. To the 4 7 2602403v32602403v7
extent applicable regulations grant rights to receive brokerage confirmations for certain security transactions, Purchaser and Seller waive receipt of such confirmations. 8. Tax Reporting. (a) Escrow Agent has no responsibility for the tax consequences of this Agreement and Purchaser and Seller shall consult with independent counsel concerning any and all tax matters. Purchaser and Seller jointly and severally agree to (i) assume all obligations imposed now or hereafter by any applicable tax law or regulation with respect to payments or performance under this Agreement and (ii) request and direct the Escrow Agent in writing with respect to withholding and other taxes, assessments or other governmental charges, and advise the Escrow Agent in writing with respect to any certifications and governmental reporting that may be required under any applicable laws or regulations. Except as otherwise agreed by Escrow Agent in writing, Escrow Agent has no tax reporting or withholding obligation except to the Internal Revenue Service with respect to Form 1099-B reporting on payments of gross proceeds under Internal Revenue Code Section 6045 and Form 1099 and Form 1042-S reporting with respect to investment income earned on the Escrow Fund, if any. Escrow Agent shall have no responsibility for Form 1099-MISC reporting with respect to disbursements that Escrow Agent makes in an administrative or ministerial function to vendors or other service providers and shall have no tax reporting or withholding duties with respect to the Foreign Investment in Real Property Tax Act (FIRPTA). (b) To the extent that U.S. federal imputed interest regulations apply, Purchaser and Seller shall so inform the Escrow Agent, provide the Escrow Agent with all imputed interest calculations and direct the Escrow Agent to disburse imputed interest amounts as Purchaser and Seller deem appropriate. The Escrow Agent will rely solely on such provided calculations and information and will have no responsibility for the accuracy or completeness of any such calculations or information. Purchaser and Seller shall provide Escrow Agent a properly completed IRS Form W-9 or Form W-8, as applicable, for each payee. If requested tax documentation is not so provided, Escrow Agent is authorized to withhold taxes as required by the United States Internal Revenue Code and related regulations. (c) Except as otherwise directed by Purchaser and Seller in writing, Escrow Agent will report, on an accrual basis, all interest or income on the Escrow Fund as being owned by Seller for federal income tax purposes. If any accrued interest income attributed to Seller is subsequently disbursed by Escrow Agent to Purchaser, Purchaser and Seller shall jointly direct Escrow Agent in writing with respect to the appropriate tax treatment and reporting of such disbursements. 9. Resignation or Removal of Escrow Agent. Escrow Agent may resign and be discharged from the performance of its duties hereunder at any time by giving ten (10) days’ prior written notice to Purchaser and Seller specifying a date when such resignation will take effect and, after the date of such resignation notice, notwithstanding any other provision of this Agreement, Escrow Agent’s sole obligation will be to hold the Escrow Fund pending appointment of a successor Escrow Agent. Similarly, Escrow Agent may be removed at any time by Purchaser and Seller giving at least thirty (30) days’ prior written notice to Escrow Agent specifying the date when such removal will take effect. If Purchaser and Seller fail to jointly appoint a successor 5 7 2602403v32602403v7
Escrow Agent prior to the effective date of such resignation or removal, Escrow Agent may petition a court of competent jurisdiction to appoint a successor escrow agent, and all costs and expenses related to such petition shall be paid jointly and severally by Purchaser and Seller. The retiring Escrow Agent shall transmit all records pertaining to the Escrow Fund and shall pay all Escrow Fund to the successor Escrow Agent, after making copies of such records as the retiring Escrow Agent deems advisable and after deduction and payment to the retiring Escrow Agent of all fees and expenses (including court costs and attorneys’ fees) payable to, incurred by, or expected to be incurred by the retiring Escrow Agent in connection with the performance of its duties and the exercise of its rights hereunder. After any retiring Escrow Agent’s resignation or removal, the provisions of this Agreement will inure to its benefit as to any actions taken or omitted to be taken by it while it was Escrow Agent under this Agreement. 10. Duties and Liability of Escrow Agent. (a) Escrow Agent undertakes to perform only such duties as are expressly set forth herein and no duties will be implied. Escrow Agent has no fiduciary or discretionary duties of any kind. Escrow Agent’s permissive rights will not be construed as duties. Escrow Agent has no liability under and no duty to inquire as to the provisions of any document other than this Agreement, including without limitation any other agreement between any or all of the parties hereto or any other persons even though reference thereto may be made herein and whether or not a copy of such document has been provided to Escrow Agent. Escrow Agent’s sole responsibility is to hold the Escrow Fund in accordance with Escrow Agent’s customary practices and disbursement thereof in accordance with the terms of this Agreement. Escrow Agent shall not be responsible for or have any duty to make any calculations under this Agreement, or to determine when any calculation required under the provisions of this Agreement should be made, how it should be made or what it should be, or to confirm or verify any such calculation. Escrow Agent will not be charged with knowledge or notice of any fact or circumstance not specifically set forth herein. This Agreement will terminate upon the distribution of all the Escrow Fund pursuant to any applicable provision of this Agreement, and Escrow Agent will thereafter have no further obligation or liability whatsoever with respect to this Agreement or the Escrow Fund. (b) Escrow Agent will not be liable for any action taken or omitted by it in good faith except to the extent that a court of competent jurisdiction determines, which determination is not subject to appeal, that Escrow Agent’s gross negligence or willful misconduct in connection with its material breach of this Agreement was the sole cause of any loss to Purchaser or Seller. Escrow Agent may retain and act hereunder through agents, and will not be responsible for or have any liability with respect to the acts of any such agent retained by Escrow Agent in good faith. (c) Escrow Agent may conclusively rely upon any notice, instruction, request or other instrument, not only as to its due execution, validity and effectiveness, but also as to the truth and accuracy of any information contained therein, which Escrow Agent believes to be genuine and to have been signed or presented by the person purporting to sign it and shall have no responsibility or duty to make inquiry as to or to determine the truth, accuracy or validity thereof (or any signature appearing thereon). In no event will Escrow Agent be liable for (i) acting in accordance with or conclusively relying upon any instruction, notice, demand, certificate or document believed by 6 7 2602403v32602403v7
Escrow Agent to have been created by or on behalf of Purchaser or Seller, (ii) incidental, indirect, special, consequential or punitive damages or penalties of any kind (including, but not limited to lost profits), even if Escrow Agent has been advised of the likelihood of such damages or penalty and regardless of the form of action or (iii) any amount greater than the value of the Escrow Fund as valued upon deposit with Escrow Agent. (d) Escrow Agent will not be responsible for delays or failures in performance resulting from acts of God, strikes, lockouts, riots, acts of war or terror, epidemics, governmental regulations, fire, communication line failures, computer viruses, attacks or intrusions, power failures, earthquakes or any other circumstance beyond its control. Escrow Agent will not be obligated to take any legal action in connection with the Escrow Fund, this Agreement or the Purchase Agreement or to appear in, prosecute or defend any such legal action or to take any other action that in Escrow Agent’s sole judgment may expose it to potential expense or liability. Purchaser and Seller are aware that under applicable state law, property which is presumed abandoned may under certain circumstances escheat to the applicable state. Escrow Agent will have no liability to Purchaser or Seller, their respective heirs, legal representatives, successors and assigns, or any other party, should any or all of the Escrow Fund escheat by operation of law. (e) Escrow Agent may consult, at Purchaser’s and Seller’s cost, legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions hereof or of any other agreement or of its duties hereunder, or relating to any dispute involving this Agreement, and will incur no liability and must be fully indemnified from any liability whatsoever in acting in accordance with the advice of such counsel. Purchaser and Seller agree to perform or procure the performance of all further acts and things, and execute and deliver such further documents, as may be required by law or as Escrow Agent may reasonably request in connection with its duties hereunder. When any action is provided for herein to be done on or by a specified date that falls on a day other than a Business Day, such action may be performed on the following Business Day. (f) If any portion of the Escrow Fund is at any time attached, garnished or levied upon, or otherwise subject to any writ, order, decree or process of any court, or in case disbursement of Escrow Fund is stayed or enjoined by any court order, Escrow Agent is authorized, in its sole discretion, to respond as it deems appropriate or to comply with all writs, orders, decrees or process so entered or issued, including but not limited to those which it is advised by legal counsel of its own choosing is binding upon it, whether with or without jurisdiction; and if Escrow Agent relies upon or complies with any such writ, order, decree or process, it will not be liable to any of the parties hereto or to any other person or entity by reason of such compliance even if such order is reversed, modified, annulled, set aside or vacated. (g) Escrow Agent and any stockholder, director, officer or employee of Escrow Agent may buy, sell and deal in any of the securities of any other party hereto and contract and lend money to any other party hereto and otherwise act as fully and freely as though it were not Escrow Agent under this Agreement. Nothing herein will preclude Escrow Agent from acting in any other capacity for any other party hereto or for any other person or entity. 7 7 2602403v32602403v7
(h) In the event instructions, including funds transfer instructions, address change or change in contact information are given to Escrow Agent (other than in writing at the time of execution of this Agreement), whether in writing, by facsimile or otherwise, Escrow Agent is authorized, but not required, to seek confirmation of such instructions by telephone call-back to any person designated by the instructing party on Schedule B hereto, and Escrow Agent may rely upon the confirmation of anyone purporting to be the person so designated. The persons and telephone numbers for call-backs may be changed only in writing actually received and acknowledged by Escrow Agent and will be effective only after Escrow Agent has a reasonable opportunity to act on such changes. If Escrow Agent is unable to contact any of the designated representatives identified in Schedule B, Escrow Agent is hereby authorized but will be under no duty to seek confirmation of such instructions by telephone call-back to any one or more of Purchaser’s or Seller’s executive officers (“Executive Officers”), as the case may be, which will include the titles of Chief Executive Officer, President and Vice President, as Escrow Agent may select. Such Executive Officer must deliver to Escrow Agent a fully executed incumbency certificate, and Escrow Agent may rely upon the confirmation of anyone purporting to be any such officer. Purchaser and Seller agree that Escrow Agent may at its option record any telephone calls made pursuant to this Section. Escrow Agent in any funds transfer may rely solely upon any account numbers or similar identifying numbers provided by Purchaser or Seller to identify (i) the beneficiary, (ii) the beneficiary’s bank, or (iii) an intermediary bank, even when its use may result in a transfer of funds to a person other than the intended beneficiary or to a bank other than the intended beneficiary’s bank or intermediary bank. Purchaser and Seller acknowledge that these optional security procedures are commercially reasonable. 11. Indemnification of Escrow Agent. Purchaser and Seller, jointly and severally, shall indemnify and hold harmless Escrow Agent and each director, officer, employee and affiliate of Escrow Agent (each, an “Indemnified Party”) upon demand against any and all claims, actions and proceedings (whether asserted or commenced by Purchaser, Seller or any other person or entity and whether or not valid), losses, damages, liabilities, penalties, costs and expenses of any kind or nature (including without limitation reasonable attorneys’ fees, costs and expenses) (collectively, “Losses”) arising from this Agreement or Escrow Agent’s actions hereunder, except to the extent such Losses are finally determined by a court of competent jurisdiction, which determination is not subject to appeal, to have been directly caused solely by the gross negligence or willful misconduct of such Indemnified Party in connection with Escrow Agent’s material breach of this Agreement. Purchaser and Seller further agree, jointly and severally, to indemnify each Indemnified Party for all costs, including without limitation reasonable attorneys’ fees, incurred by such Indemnified Party in connection with the enforcement of Purchaser’s and Seller’s obligations to Escrow Agent under this Agreement. Each Indemnified Party shall, in its sole discretion, have the right to select and employ separate counsel with respect to any action or claim brought or asserted against it, and the reasonable fees of such counsel shall be paid upon demand by Purchaser and Seller jointly and severally. The obligations of Purchaser and Seller under this Section shall survive any termination of this Agreement and the resignation or removal of Escrow Agent. 12. Compensation of Escrow Agent. 8 7 2602403v32602403v7
(a) Fees and Expenses. Purchaser and Seller agree, jointly and severally, to compensate Escrow Agent upon demand for its services hereunder in accordance with Schedule A attached hereto. Without limiting the joint and several nature of their obligations to Escrow Agent, Purchaser and Seller agree between themselves that each will be responsible to the other for one-half of Escrow Agent’s compensation. The obligations of Purchaser and Seller under this Section shall survive any termination of this Agreement and the resignation or removal of Escrow Agent. (b) Disbursements from Escrow Fund to Pay Escrow Agent. Escrow Agent is authorized to, and may disburse to itself from the Escrow Fund, from time to time, the amount of any compensation and reimbursement of expenses due and payable hereunder (including any amount to which Escrow Agent or any other Indemnified Party is entitled to seek indemnification hereunder). Escrow Agent shall notify Purchaser and Seller of any such disbursement from the Escrow Fund to itself or any other Indemnified Party and shall furnish Purchaser and Seller copies of related invoices and other statements. (c) Security and Offset. Purchaser and Seller hereby grant to Escrow Agent and the other Indemnified Parties a first priority security interest in, lien upon and right of sale and offset against the Escrow Fund with respect to any compensation or reimbursement due any of them hereunder (including any claim for indemnification hereunder). If for any reason the Escrow Fund are insufficient to cover such compensation and reimbursement, Purchaser and Seller shall promptly pay such amounts upon receipt of an itemized invoice. 13. Representations and Warranties. Purchaser and Seller each respectively make the following representations and warranties to Escrow Agent: (a) it has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and this Agreement has been duly approved by all necessary action and constitutes its valid and binding agreement enforceable in accordance with its terms. (b) each of the applicable persons designated on Schedule B attached hereto has been duly appointed to act as its authorized representative hereunder and individually has full power and authority on its behalf to execute and deliver any instruction or direction, to amend, modify or waive any provision of this Agreement and to take any and all other actions as its authorized representative under this Agreement and no change in designation of such authorized representatives will be effective until written notice of such change is delivered to each other party to this Agreement pursuant to Section 15 and Escrow Agent has had reasonable time to act upon it. (c) the execution, delivery and performance of this Agreement by Escrow Agent does not and will not violate any applicable law or regulation and no printed or other material in any language, including any prospectus, notice, report, and promotional material that mentions “U.S. Bank” or any of its affiliates by name or the rights, powers, or duties of Escrow Agent under this Agreement will be issued by any other parties hereto, or on such party’s behalf, without the prior written consent of Escrow Agent. 9 7 2602403v32602403v7
(d) it will not claim any immunity from jurisdiction of any court, suit or legal process, whether from service of notice, injunction, attachment, execution or enforcement of any judgment or otherwise. (e) there is no security interest in the Escrow Fund or any part thereof and no financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Escrow Fund or any part thereof. 14. Identifying Information. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. For a non-individual person such as a business entity, a charity, a trust or other legal entity, Escrow Agent requires documentation to verify its formation and existence as a legal entity. Escrow Agent may require financial statements, licenses or identification and authorization documents from individuals claiming authority to represent the entity or other relevant documentation. Purchaser and Seller agree to provide all information requested by Escrow Agent in connection with any legislation or regulation to which Escrow Agent is subject, in a timely manner. Escrow Agent’s appointment and acceptance of its duties under this Agreement is contingent upon verification of all regulatory requirements applicable to Purchaser, Seller and any of their permitted assigns, including successful completion of a final background check. These conditions include, without limitation, requirements under the USA PATRIOT Act, the USA FREEDOM Act, the Bank Secrecy Act, and the U.S. Department of the Treasury Office of Foreign Assets Control. If these conditions are not met, Escrow Agent may at its option promptly terminate this Agreement in whole or in part and refuse any otherwise permitted assignment by Purchaser or Seller, without any liability or incurring any additional costs. 15. Notices. All notices, approvals, consents, requests and other communications hereunder (each, a “Notice”) must be in writing, in English, and may only be delivered (a) by personal delivery, or (b) by national overnight courier service, or (c) by certified or registered mail, return receipt requested, or (d) by email. Notice will be effective upon receipt except for notice via email, which will be effective on the date and time it is sent only if a copy is issued on the same day by any other method provided for in this Section. Notices may only be sent to the applicable party or parties at the address specified below: If to Purchaser or Purchaser Representative, at: August Mack Environmental, Inc. 1302 North Meridian Street, Suite 300 Indianapolis, Indiana 46202 Attn: Geoffrey A. Glanders Telephone: (317) 916-8000 E-mail: gglanders@augustmack.com If to Seller or Seller Representative, at: Comstock Environmental Services, LLC 10 7 2602403v32602403v7
Attn: Christopher Clemente Reston Station 1900 Reston Metro Plaza, 10th Floor Reston VA 20190 Telephone: (703)230-1985 E-mail: cclemente@comstockcompanies.com With a copy to: Comstock Companies Attn: Jubal Thompson, General Counsel Reston Station 1900 Reston Metro Plaza, 10th Floor Reston VA 20190 Telephone: (703)230-1985 E-mail: jthompson@comstockcompanies.com If to Escrow Agent, at: U.S. Bank National Association ATTN: Laura Stabley and Brian J. Kabbes One U.S. Bank Plaza, 3rd Floor St. Louis, Missouri 63101 Telephone: 314-418-3935 & 314-418-3943 E-mail: laura.stabley@usbank.com & brian.j.kabbes@usbank.com and to: U.S. Bank National Association ATTN: Russel Otzenberger Trust Finance Management 60 Livingston Avenue, EP-MN-WS3T St. Paul MN 55107 Telephone:651-466-6101 E-mail:russel.otzenberger@usbank.com or to such other address as each party may designate for itself by like notice and unless otherwise provided herein will be deemed to have been given on the date received. Escrow Agent shall not have any duty to confirm that the person sending any Notice by electronic transmission (including by e-mail, web portal or other electronic methods) is, in fact, a person authorized to do so. Electronic signatures believed by Escrow Agent to comply with the ESIGN Act of 2000 or other applicable law (including electronic images of handwritten signatures and digital signatures provided by DocuSign, Orbit, Adobe Sign or any other digital signature provider acceptable to Escrow Agent) shall be deemed original signatures for all purposes. Notwithstanding the foregoing, Escrow Agent may in any instance and in its sole discretion require that an original document bearing a manual signature be delivered to Escrow Agent in lieu of, or in addition to, any such electronic Notice. Purchaser and Seller agree to assume all risks arising out of the use of electronic signatures and electronic methods to submit instructions and directions to Escrow 11 7 2602403v32602403v7
Agent, including without limitation the risk of Escrow Agent acting on unauthorized instructions, and the risk of interception and misuse by third parties. 16. Amendment and Assignment. None of the terms or conditions of this Agreement may be changed, waived, modified, terminated or varied in any manner whatsoever unless in writing duly signed by each party to this Agreement. No course of conduct will constitute a waiver of any of the terms and conditions of this Agreement, unless such waiver is specified in writing, and then only to the extent so specified. No party may assign this Agreement or any of its rights or obligations hereunder without the written consent of the other parties, provided that if Escrow Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the escrow contemplated by this Agreement) to another entity, the successor or transferee entity without any further act will be the successor Escrow Agent. 17. Governing Law, Jurisdiction and Venue. This Agreement must be construed and interpreted in accordance with the internal laws of the Commonwealth of Pennsylvania without giving effect to the conflict of laws principles thereof that would require the application of any other laws. Each of the parties hereto irrevocably (a) consents to the exclusive jurisdiction and venue of the state and federal courts in the Commonwealth of Pennsylvania in connection with any matter arising out of this Agreement, (b) waives any objection to such jurisdiction or venue, (c) agrees not to commence any legal proceedings related hereto except in such courts, (d) consents to and agrees to accept service of process to vest personal jurisdiction over it in any such courts made as set forth in Section 15, and (e) waives any right to trial by jury in any action in connection with this Agreement. 18. Entire Agreement, No Third-Party Beneficiaries. This Agreement constitutes the entire agreement between the signatory parties hereto relating to the holding, investment and disbursement of Escrow Fund and sets forth in their entirety the obligations and duties of Escrow Agent with respect to Escrow Fund. This Agreement and any Joint Written Direction may be executed in two or more counterparts, which when so executed will constitute one and the same agreement or direction. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. The Section headings have been inserted for convenience only and will be given no substantive meaning or significance whatsoever in construing the terms and conditions of this Agreement. Nothing in this Agreement, express or implied, is intended to or will confer upon any person other than the signatory parties hereto and the Indemnified Parties any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. [signature page follows] 12 7 2602403v32602403v7
SCHEDULE A U.S. BANK NATIONAL ASSOCIATION Schedule of Fees for Services as Escrow Agent A. Administration Fee, One-Time: $2,500 The one-time administration fee covers the routine duties of Escrow Agent associated with the administration of the account. Administration fees are payable in advance. In the event that the Agreement is not terminated within three years, then an additional administrative fee of $1,000 shall be due for each year or part thereof. This assumes that Escrow Agent will be directed to leave the funds uninvested. B. Disbursement Processing Fees (if any): $100 per disbursement in excess of ten disbursements per year The first ten disbursements per year are included within the administration fee. Disbursement processing fees after ten disbursements per year (if any) will billed in arrears. This includes payment by check or wire. C. Out-of-Pocket Expenses (if any): At Cost Reimbursement of expenses associated with Escrow Agent’s acceptance, administration of, or performance under the Agreement, including without limitation fees and expenses of legal counsel, accountants and other agents, tax preparation, reporting and filing, publications, and filing and recording fees, will be billed at cost. Extraordinary services are responses to requests, inquiries or developments, or the carrying out of duties or responsibilities of an unusual nature, including termination, which may or may not be provided for in the governing documents, or are not routine or undertaken in the ordinary course of business. Payment of fees for extraordinary services is appropriate where particular requests, inquiries or developments are unexpected, even if the possibility of such things could have been foreseen at the inception of the transaction. A reasonable charge will be assessed and collected based on the nature of the extraordinary service. At our option, these charges will be billed at a flat fee or at Escrow Agent’s hourly rate then in effect. Extraordinary services might include, without limitation, amendments or supplements, specialized reporting, non-routine calculations, foreign wire transfers, processing of IRS Form W-8IMY, use investments not automated with Escrow Agent’s trust accounting system, and actual or threatened litigation or arbitration proceedings. IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify and record information that identifies each person who opens an account. For a non-individual person such as a business entity, a charity, a trust or other legal entity we will ask for documentation to verify its formation and existence as a legal entity. Escrow Agent may also ask to see financial statements, licenses, identification and authorization documents from individuals claiming authority to represent the entity or other relevant documentation. 7 2602403v32602403v7
ATTACHMENT 1 FORM OF JOINT WRITTEN DIRECTION [To be completed on closing] U.S. Bank National Association, as Escrow Agent ATTN: Global Corporate Trust Services Address: _______________ RE: ESCROW AGREEMENT made and entered into as of ___________, 2022 by and among August Mack Environmental, Inc. (“Purchaser”), Comstock Environmental Services, LLC (“Seller”) and U.S. Bank National Association, in its capacity as escrow agent (the “Escrow Agent”). Pursuant to Section 4 of the above-referenced Escrow Agreement, Purchaser and Seller hereby instruct Escrow Agent to disburse the amount of [$_____] from the Escrow Account to [Purchaser][Seller], as provided below: Purchaser Seller Bank Name: Bank Name: Bank Address: Bank Address: ABA No.: ABA No. Account Name: Account Name: Account No.: Account No.: [Purchaser] By: ______________________________ Name: Date: ___________________ [Seller] By: ______________________________ Name: Date: ___________________ 7 2602403v32602403v7
Exhibit B Allocation of the Purchase Price Actual Net Working Capital: $1,128,976.00 Fixed Assets: $106,000.00 Goodwill: $182,341.00 Total Purchase Price $1,417,317.00
Exhibit C Bill of Sale and Assignment See attached.
72577742v7 BILL OF SALE THIS BILL OF SALE is entered into as of March 31, 2022, by Comstock Environmental Services, LLC, a Virginia limited liability company (“Seller”), in favor of August Mack Environmental, Inc., an Indiana corporation (“Buyer”), in accordance with that certain Asset Purchase Agreement, made effective as of March 31, 2022 (the “Purchase Agreement”), by and among Seller, Buyer, and Comstock Holding Companies, Inc., a Delaware corporation. Capitalized terms used herein but not otherwise defined shall have the meanings given them in the Purchase Agreement. 1. Seller hereby grants, sells, assigns, transfers, conveys, and delivers unto Buyer, all right, title and interest in and to all of the Acquired Assets, free and clear of all Liens. 2. Seller hereby further covenants that it will, at any time and from time to time at the reasonable request of Buyer, perform, execute, acknowledge and deliver, or cause to be done, executed, acknowledged or delivered, all such further acts and documents as Buyer may reasonably request to vest in Buyer full right, title and interest in and to any of the Acquired Assets. 3. This instrument is subject to all of the terms and conditions of the Purchase Agreement. If any provision of this instrument is construed to conflict with a provision of the Purchase Agreement, then the provision of the Purchase Agreement shall be deemed to be controlling. This instrument shall be binding upon and inure to the benefit of Seller, Buyer, and their respective successors and permitted assigns. This instrument shall be governed by, and construed in accordance with, the internal laws, and not the law of conflicts, of the Commonwealth of Pennsylvania. 4. A signed copy of this instrument delivered by facsimile, e-mail, or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this instrument. [Signature Page Follows]
Exhibit D Assignment and Assumption Agreement See attached.
72577709v7 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (this “Agreement”) is entered into as of March 31, 2022 (the “Effective Date”), by and between Comstock Environmental Services, LLC, a Virginia limited liability company (the “Seller”), and August Mack Environmental, Inc., an Indiana corporation (the “Buyer”), in accordance with that certain Asset Purchase Agreement, made effective as of March 31, 2022 (the “Purchase Agreement”), by and among Seller, Buyer, and Comstock Holding Companies, Inc., a Delaware corporation. Capitalized terms used herein but not otherwise defined shall have the meanings given them in the Purchase Agreement. RECITALS: A. Pursuant to the terms of the Purchase Agreement, Buyer is purchasing the Acquired Assets from Seller. B. In connection with the purchase of the Acquired Assets contemplated by the Purchase Agreement, Seller wishes to transfer and assign to Buyer certain specified liabilities of Seller and all of Seller’s rights and obligations under certain contractual undertakings, and Buyer wishes to accept and assume the same, subject to the terms and conditions of this Agreement and the Purchase Agreement. NOW, THEREFORE, in light of the foregoing, the parties hereby agree as follows: 1. Assignment. Subject in all cases to the terms of the Purchase Agreement, Seller hereby grants, conveys, transfers, and assigns to Buyer and its successors and assigns, all of the right, title and interest of Seller in and to the Assumed Contracts, free and clear of all Liens. 2. Assumption. In consideration of the foregoing and the obligations of Seller under the Purchase Agreement, Buyer hereby assumes and agrees to discharge all of the Assumed Liabilities in accordance with their respective terms. 3. Excluded Liabilities. It is understood and agreed that notwithstanding anything contained herein to the contrary, Buyer is not assuming and shall not assume, or become liable for, at any time, any Excluded Liabilities. 4. Further Assurances. Each of the parties hereto covenants and agrees, at its own expense, to execute and deliver, at the request of the other party hereto, such further instruments of transfer and assignment and to take such other action as such party nay reasonably request to more effectively consummate the assignments and assumptions contemplated by this Agreement. 5. Terms of the Purchase Agreement. In the event of a conflict between the terms and provisions of this Agreement and the Purchase Agreement, the terms and provisions of the Purchase Agreement shall govern and control. 6. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns.
72577709v7 7. Governing Law. This Agreement shall be governed by, and construed in accordance with, the internal laws, and not the law of conflicts, of the Commonwealth of Pennsylvania. 8. Waivers. No waiver of any of the provisions of this Agreement shall be valid and enforceable unless such waiver is in writing and signed by the party to be charged, and, unless otherwise stated therein, no such waiver shall constitute a waiver of any other provisions hereof (whether or not similar) or a continuing waiver. 9. No Third Party Rights. Nothing express or implied in this Agreement is intended or shall be construed to confer on any person other than Seller and Buyer any rights under this Agreement. 10. Severability. In the event that any part of this Agreement is declared by any court or other judicial or administrative body to be null, void or unenforceable, said provision shall survive to the extent it is not so declared, and all of the other provisions hereof shall remain in full force and effect. 11. Counterparts. This Agreement may be executed in multiple counterparts, and each counterpart hereof shall be deemed to be an original agreement, but all such counterparts shall constitute but one agreement. A signed copy of this Agreement delivered by facsimile, e-mail, or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Agreement. [Signature Page Follows] #5180180v5
Exhibit E Restricted Territory Any geographic area located within a radius of two hundred (200) miles from the Real Estate.
Schedule 1.1 Acquired Assets The Acquired Assets shall include the following assets of the Seller used or held for use by the Seller in or for the operation of the Business: (a) the following contracts to which the Seller is a party (collectively, the “Assumed Contracts”); i. all agreements or contracts with clients, whether written or verbal; ii. all agreements set forth on Schedule 4.12(i); (b) all accounts receivable held by the Seller as of the Closing Date, and any security, claim, remedy or other right related to the foregoing; (c) all furniture, fixtures, equipment, machinery, tools, vehicles, office equipment, supplies, computers, telephones and other tangible personal property; (d) to the extent assignable, all Permits; (e) other than the Former Employee Judgment (as defined in Schedule 1.2), all claims, deposits (other than security deposits under the real estate lease, if any), prepayments, refunds (excluding any Tax refunds), causes of action, choses in action, rights of recovery, rights of set off, insurance benefits, and rights of recoupment (excluding any such item relating to the payment of taxes); (f) all files (electronic or otherwise), books, records, ledgers, data, documents, correspondence, project and proposal information, customer lists, creative materials, advertising and promotional materials, studies, reports and other printed or written materials related to the Acquired Assets; (g) other than Excluded Intellectual Property, all Intellectual Property, whether registered or unregistered, including, but not limited to, copyrights, trademarks, trade names, trade secrets and know-how, patents and all applications therefor or relating thereto, the goodwill associated therewith, all licenses and sublicenses granted and obtained with respect thereto, all rights thereunder, all remedies against infringement thereof, and all rights to protection of interests therein under the laws of all jurisdictions; and (h) other than Excluded Intellectual Property, all other intangible property (such as going concern value, goodwill, and telephone numbers and listings).
Schedule 1.2 Excluded Assets The Excluded Assets shall include the following assets of the Seller: (a) cash and cash equivalents and checks, or other payments received by the Seller prior to the Closing; (b) rights to any Impaired Accounts Receivable; (c) rights to Tax refunds, or credits and current and deferred Tax assets, which relate to time periods prior to the Closing; (d) rights under this Agreement or under any Ancillary Document; (e) corporate records, minute book and seal; (f) any Contracts that are not Assumed Contracts, including, but not limited to: i. the Contract between the Seller and Comstock Herndon Ventures LC related to an environmental services project at 770 Herndon, VA and related accounts receivable (which had a balance of $14,900 as of January 31, 2022); and ii. the Contract between the Seller and Spartan or its affiliate related to a tank construction project at the James E. Van Zandt Medical Hospital Center and related accounts receivable (which had a balance of $98,000 as of January 31, 2022); (g) any property (whether real, personal, tangible, intangible or mixed) not used by Seller in or for the operation of the Business; (h) any rights in connection with and assets of any Benefit Plans; (i) any rights to any security deposit under the real estate lease; (j) any rights to any and all Intellectual Property of the Seller containing the trade name “Comstock” or any derivation thereof, including, without limitation, email addresses, domain names, marketing materials, trademarks or tradenames (collectively, the “Excluded Intellectual Property”); (k) the Seller’s insurance policies and any rights arising thereunder, including the right to any prepaid insurance premiums; and (l) any rights under that certain judgment against React Environmental Services Group, Inc. and Jerry F. Naples, Jr, (the “Former Employee Judgment”).
Schedule 1.4 Excluded Liabilities The Excluded Liabilities shall include without limitation the following obligations and liabilities of the Seller: (a) for any liability or obligation for Taxes of the Seller or any of its Affiliates; (b) for costs, fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby; (c) resulting from, arising out of, relating to, in the nature of, or caused by any (i) breach of contract, (ii) tort, (iii) infringement or violation of Law or of any order or judgment, or (iv) environmental matter; (d) which relate to any Excluded Assets or to the operation of the Business prior to the Closing (unless expressly an Assumed Liability); (e) for unpaid remuneration or compensation due to or in connection with the Seller’s employees through the Closing, including accrued but unpaid salaries, bonuses, commissions, union fees, benefits or dues; (f) under any employment, severance, retention, bonus or termination agreement with any employee or contractor of the Seller; (g) arising out of or relating to any employee grievance, the facts or circumstances of which occurred prior to the Closing, whether or not the affected employees are hired by the Buyer at or after the Closing; (h) arising out of any Actions or dispute or workers’ compensation claim pending or settled as of the Closing; (i) arising out of any Actions, dispute or workers’ compensation claim commenced after the Closing relating to any occurrence or event happening prior to or on the Closing; (j) for any capital leases, borrowed money, credit cards or other indebtedness or incurred in connection with any credit facilities; (k) based on the Seller or its employees’, agents’ and contractors’ acts or omissions occurring after the Closing; (l) under this Agreement or under any Ancillary Document; (m) resulting from, arising out of, or relating to any Benefit Plan; (n) arising out of change of control agreements and employment agreements with change of control provisions between the Seller and the Seller’s employees, including, but not limited to: John Krinis, Brian Donoghue, Jon Buzan, and Robert Scott; and
(o) any obligations and liabilities of the Seller related to claims or disputes by Spartan under the Contract between the Seller and Spartan or its affiliate related to a tank construction project at the James E. Van Zandt Medical Hospital.
Schedule 2.2(c)(x) Current Assets Seller and Buyer agree that subsequent to closing, Buyer will continue to pursue full collection of all outstanding trade and retainage receivables, related to the Additional Receivable Reserve (note (3)) and Retainage Receivable Reserve (note (4)). Seller is entitled to receive the full gross amount of these receivables that are ultimately collected. To the extent that these receivables are not collected, and Buyer elects to assign them pursuant to the Asset Purchase Agreement, Seller retains the right at that time to pursue collection of any uncollected amounts related to those account balances. Prior to closing, Seller has provided goods and services for 2 customers stated below that have not been invoiced. There are no amounts recorded in current assets in the books and records reflected in the table above as Seller is awaiting an executed change order from the customer. Seller and Buyer agree that subsequent to closing the Buyer will seek to obtain the executed change order and that subsequent billings for goods and services provided in periods prior to closing will be remitted to Seller if collected. To the extent that the Buyer does not receive the executed change orders within 120 days following close, these contingent assets will be considered to be Excluded Assets pursuant to the Asset Purchase Agreement. The 2 specific customers and related amounts are – Tracey Mechanical (general contractor related to Temple University project) – estimated change order $40,000 to $45,000 Philadelphia Water Authority – estimated change-order $5,000 to $15,000. Per Quickbooks (2/28/2022) Adjustments Estimate of Acquired Assets For Closing Assets Accounts Receivable 1,839,206$ (98,000)$ (1) 1,741,206$ Retainage Receivables 164,442$ -$ 164,442$ Bad Debt Reserve (2,323)$ -$ (2,323)$ Accrued Revenue 187,226$ -$ 187,226$ Prepaid Expenses 15,904$ (5,904)$ (2) 10,000$ Additional Receivable Reserve -$ (143,363)$ (3) (143,363)$ Retainage Receivable Reserve -$ (42,188)$ (4) (42,188)$ Current Assets Purchased 2,204,455$ (289,454)$ 1,915,000$ Notes (2) Certain prepaid expenses are either not transferring, have been cleaned up, or are WIP. These items are: Assets Amounts Nov - Sales Force subscription 11/1/21 - 10/31/22 1,696$ July - 1410 Doron Dr 1,941$ Aug - 1410 Doron Dr. 2,267$ (3) Five Specific receivables are reserved at closing. They are: Projects Amounts 7001 Horrocks Street, Philadelphia, PA 40,806$ 130 East Lancaster Avenue, Shillington, PA 45,051$ 716 Belvoir Road, Plymouth Meeting, PA 33,750$ Christopher Columbus HOPE, Paterson, NJ 9,380$ Paterson HOPE, Paterson, NJ 14,375$ (4) Retainage receivables incurred prior to August 2021 are reserved at 50%. (1) Remove accounts receivable due from James E Van Zandt Medical Center (Spartan) Which Is An Excluded Asset.
Schedule 2.2(c)(y) Current Liabilities Per Quickbooks (2/28/2022) Adjustments Estimate of Acquired Assets For Closing Liabilities Accounts Payable 5,383,834$ (4,646,356)$ (5) 737,479$ 401k Payable 13,286$ (13,286)$ (6) -$ Accrued Expenses 34,680$ (29,180)$ (7) 5,500$ Customer Overpayment/Deposit Liability 15,242$ 15,242$ Accrued Vacaction/PTO -$ 27,803$ (8) 27,803$ -$ Loan - Bancorp Bank - ST 5,772$ (5,772)$ (9) -$ 5,452,814$ (4,666,791)$ 786,023$ Notes (5) Remove accounts payable due to Parent (Comstock) which is not being assumed by Buyer under Article 1.3(b) of the Asset Purchase Agreement. (6) Remove amounts related to benefit plan which is an Excluded Liability per Schedule 1.4 (item (m)) (7) Eliminate accrued Conshohocken Gross Receipts Tax. Buyer is not assuming Taxes per Schedule 1.4 (item (a)) (9) Eliminate liability for Bancorp loan related to 2018 Dodge Ram truck that will be paid off prior to Closing. (8) Represents accrued vacation balance being assumed by AM as of March 30, 2022. Comstock will pay transitioning employees directly for accrued vacation hours (in excess of 40) not assumed by AM. In addition, Comstock's policy is that upon termination unused sick leave, personal days and volunteer hours are forfeited so this liability is neither assumed by AM or paid to transitioning employees.
Schedule 3.2(l) Cooperation Employees Tyler Auker Brandon Bullett Jon Buzan Bill Chaykin Brian Donoghue Steven Hartman Chelsea Johnston Tim Kincaid John Krinis Brandon Lawyer Navjot Mangat Siena Myrsiades Andrea Radtke Stephanie Scott Robert Scott Brian Sheaffer Dan Sheehan Noah Shreiner Steve Treschow Chris Williams
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher Clemente, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comstock Holding Companies, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 16, 2022 | /s/ CHRISTOPHER CLEMENTE | |||||||
Christopher Clemente Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Christopher Guthrie, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comstock Holding Companies, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 16, 2022 | /s/ CHRISTOPHER GUTHRIE | ||||
Christopher Guthrie Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||||
Exhibit 32.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Comstock Holding Companies, Inc. (the “Company”) for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Christopher Clemente, Chairman and Chief Executive Officer of the Company, and Christopher Guthrie, Chief Financial Officer of the Company, certifies, to his best knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: May 16, 2022 | /s/ CHRISTOPHER CLEMENTE | |||||||
Christopher Clemente Chairman and Chief Executive Officer | ||||||||
| Date: May 16, 2022 | /s/ CHRISTOPHER GUTHRIE | |||||||
Christopher Guthrie Chief Financial Officer | ||||||||
The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.