NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020 (UNAUDITED)
1. Interim Financial Statements
Basis of Presentation and Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Comstock Mining Inc., and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States ("GAAP"): Comstock Processing LLC, Comstock Northern Exploration LLC, Comstock Exploration & Development LLC, Comstock Real Estate Inc., Comstock Industrial LLC, Downtown Silver Springs LLC ("DTSS"), and prior to its sale in the quarter ended September 30, 2020, Comstock Mining LLC (collectively "Comstock", the "Company", "we", "our" or "us"). Inter-company transactions and balances have been eliminated.
The Company completed a sale of 100% of the membership interests in Comstock Mining LLC (“CML”) to Tonogold Resources Inc. (“Tonogold”) on September 8, 2020. The condensed consolidated financial statements do not include CML subsequent to that date (Note 20).
Variable interest entities (VIEs) are consolidated when the Company is the primary beneficiary. The Company is the primary beneficiary when it has power over the activities that impact the VIE’s economic performance and at the same time has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The Company has an investment in Sierra Springs Opportunity Fund Inc. (“SSOF”), of which the Company's CEO is an executive (Note 23). Management concluded that SSOF is a VIE of the Company because the Company has both operational and equity risk related to SSOF, and SSOF currently has insufficient equity at risk. Management also concluded that the Company is not the primary beneficiary because no one individual or entity has unilateral control over significant decisions of SSOF and decisions require consent from all investors. As the Company is not the primary beneficiary, SSOF is not consolidated. The Company’s investment in SSOF is presented in the condensed consolidated balance sheets at September 30, 2020 and December 31, 2019 as a non-current investment.
Operating results for the three and nine months ended September 30, 2020, may not be indicative of the results expected for the full year ending December 31, 2020. For further information, refer to the financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the Company's financial position as of September 30, 2020, and its results of operations, cash flows, and changes in stockholders’ equity for the three and nine months ended September 30, 2020 and 2019. The financial statements do not include all of the information and notes required by GAAP for complete financial statements.
Liquidity, Capital Resources and Management Plans
The condensed consolidated financial statements are prepared on the going concern basis of accounting which assumes the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company’s current capital resources include cash and cash equivalents and other net working capital resources, planned sales of Tonogold Resources Inc ("Tonogold") common shares, and proceeds from the planned sale of the Silver Springs properties to Sierra Springs Enterprises Inc. ("SSE").
The Company has recurring net losses from operations and an accumulated deficit of $217.5 million as of September 30, 2020. For the nine months ended September 30, 2020, the Company generated net income of $18.3 million and used $2.4 million of cash in operating activities. As of September 30, 2020, the Company had cash and cash equivalents of $1.7 million. Through September 30, 2020, the Company had converted $3.9 million of the $6.1 million in Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock ("CPS”) in exchange for 21,777,778 common shares of Tonogold and realized approximately $1.4 million in gross cash proceeds from the sale of 3,557,209 common shares at an average price of approximately $0.40 per share. At September 30, 2020, the Company continues to hold 18,220,569 common shares with an estimated value of $7.1 million, in addition to a $4.5 million 12% Tonogold senior secured note receivable ("Note"), with payment due to the Company on September 20, 2021.
At September 30, 2020, the Company had debt obligations of approximately $4.7 million that mature on or before September 30, 2021. On October 2, 2020, Tonogold redeemed the remaining $2.2 million of CPS for cash proceeds to the Company of $2.6 million, representing 120% of the CPS face value. With the cash proceeds, the Company made payments on its unsecured promissory notes, reducing the principal balance from $4.5 million on September 30, 2020, to $1.9 million on October 9, 2020.
The Company intends to finance its operations over the next twelve months through its existing cash, receipts on notes receivable, proceeds from the planned sale of Tonogold common shares and proceeds from the planned sale of its Silver Springs properties, together significantly in excess of current debt obligations due. While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration statement, borrowings, and other means, there is no assurance the Company will be able to obtain additional equity capital or other financing, if needed. However, management believes it will have sufficient funds to sustain its operations during the 12 months following the date the financial statements were issued as a result of the funding sources described above.
On April 30, 2020, the Company received a Paycheck Protection Program (“PPP”) grant of $0.3 million, as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and the rules promulgated thereunder. The amounts received were all used to fund payroll costs and the Company expects all proceeds received to be forgiven.
On February 18, 2019, the Company filed a new shelf registration statement on Form S-3 (the “S-3 Shelf”), for the sale of up to $50 million of the Company’s securities, from time to time, and used $8.2 million of that capacity through September 30, 2020, leaving an aggregate unused capacity of $41.8 million. So long as the aggregate market value of the Company’s voting and non-voting common equity held by non-affiliates is less than $75 million, the aggregate market value of securities sold by or on behalf of the Company pursuant to the S-3 Shelf during the period of 12 calendar months immediately prior to such sales, is limited to being no more than one-third of the aggregate market value of the Company’s non-affiliated voting and non-voting common equity. On September 30, 2020, these limitations resulted in approximately $10.5 million of unrestricted, available S-3 Shelf capacity. There can be no assurance the Company can sell common shares up to the capacity.
In February 2019, the Company also entered into an equity purchase agreement (the "2019 Equity Agreement") with the Murray Family Office ("Murray FO") for the sale of up to $5 million in shares of the Company's common stock from time to time, at the Company’s option, subject to certain restrictions and at a 10% discount to a volume weighted average price. As of September 30, 2020, the 2019 Equity Agreement has no remaining unused capacity.
In July 2020, the Company entered into a common stock purchase agreement (the "2020 Triton Equity Agreement") with Triton Funds L.P., (“Triton”) and filed a prospectus supplement to offer and sell shares of common stock at an aggregate offering price of up to $1.25 million, from time to time, to Triton. On July 22, 2020, the Company issued 2,040,483 common shares to Triton
for net proceeds of $1.25 million, at a price of $0.61 per common share. As of September 30, 2020, the 2020 Triton Equity Agreement has no remaining unused capacity.
In July 2020, the Company also entered into a new equity purchase agreement (the “2020 Leviston Equity Agreement”) with Leviston Resources LLC (“Leviston”) and filed a prospectus supplement to offer and sell shares of common stock at an aggregate offering price of up to $2.5 million, from time to time, to Leviston, and paid a 5% fee by issuing 173,611 restricted common shares, with a fair value of $125,000. From July 13, 2020 through September 23, 2020, the Company raised $2.5 million by issuing to Leviston 2,793,586 common shares at a price of $0.89 per common share. As of September 30, 2020, the 2020 Leviston Equity Agreement has no remaining unused capacity.
Future operating expenditures above management’s expectations, including exploration and pre-development expenditures in excess of planned proceeds from notes receivable, planned proceeds from the sale of Tonogold securities and the Silver Springs properties and amounts to be raised from the issuance of equity under the S-3 Shelf, declines in the market value of properties held for sale, or declines in the share price of the Company's common stock would adversely affect the Company’s results of operations, financial condition and cash flows. If the Company was unable to obtain necessary additional funds, this could have an immediate material adverse effect on liquidity and raise substantial doubt about the Company’s ability to continue as a going concern. In such case, the Company could be required to limit or discontinue certain business plans, activities or operations, reduce or delay certain capital expenditures or sell certain assets or businesses. There can be no assurance the Company would be able to take any such actions on favorable terms, in a timely manner or at all.
Use of Estimates
In preparing financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and related estimated receipts and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to estimated useful lives and valuation of properties, plant, and equipment, assets held for sale, mineral rights, deferred tax assets, derivative assets and liabilities, valuation of the Tonogold CPS and Note, reclamation liabilities, stock-based compensation, and contingent assets and liabilities.
Reclassifications
Certain prior period amounts have been reclassified to conform to the 2020 financial statement presentation. Reclassifications had no effect on net income (loss), stockholders' equity, or cash flows as previously reported.
Investments
Investments in Securities:
From time to time, the Company holds investments in the form of both debt and equity securities.
Debt securities are classified as either trading, available for sale, or held to maturity. Convertible debt securities are typically classified as available for sale unless the Company elects to account for a specific instrument at fair value. When a debt security is classified as available for sale, it is measured at fair value at the end of each reporting period. Unrealized holding gains and losses for available for sale securities are excluded from current earnings and are reported in other comprehensive income until realized. Upon sale of a debt security, the realized gain or loss is recognized in earnings. At September 30, 2020, the Company is the holder of two debt securities, the Tonogold CPS and Tonogold Note (Note 3), for both of which the Company has elected the fair value option with unrealized holding gains and losses recognized in current earnings.
Equity securities are generally measured at fair value. Unrealized gains and losses for equity securities are included in earnings. If an equity security does not have a readily determinable fair value, the Company may elect to measure the security at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company reassesses, at each reporting period, whether the equity security without a readily determinable fair value qualifies to be measured at cost minus impairment. Upon sale of an equity security, the realized gain or loss is recognized in earnings. At the end of each reporting period, the Company considers whether impairment indicators exist to evaluate whether the investment is impaired and, if so, records an impairment loss. At September 30, 2020, the Company has one equity security, Tonogold common shares (Note 3), that has a readily determinable fair value for which unrealized gains or losses are recognized in earnings. At September 30, 2020, the Company has one equity security,
Investment in Sierra Springs Opportunity Fund Inc (Note 23), that does not have a readily determinable fair value and thus is accounted for at its cost minus impairment.
Investments - Equity Method and Joint Ventures:
Investments in companies and joint ventures in which we have the ability to exercise significant influence, but do not control, would be accounted for under the equity method of accounting and included on the condensed consolidated balance sheets. In determining whether significant influence exists, the Company considers its participation in policy-making decisions and its representation on the companies or venture’s management committee. Under the equity method of accounting, our share of the net earnings or losses of the investee would be included in net income (loss) on the condensed consolidated statements of operations, since the activities of the investee would be closely aligned with the operations of the business segment holding the investment. We would evaluate equity method investments whenever events or changes in circumstance indicate the carrying amounts of such investments may be impaired. If a decline in the value of an equity method investment is determined to be other than temporary, a loss is recorded in earnings in the current period. At September 30, 2020, the Company's 25% investment in Pelen LLC (Note 21) is accounted for using the equity method.
For investments in companies and joint ventures in which the Company does not have joint control or significant influence, the investment is accounted for similar to investments in equity securities. For companies and joint ventures where the Company holds more than 50% of the voting interests, but less than 100%, and has significant influence, the company or joint venture is consolidated, and other investor interests are presented as noncontrolling. The Company’s investment in Comstock Mining LLC was consolidated with presentation of noncontrolling interest through September 8, 2020 when the Company’s remaining membership interest was sold (Note 20).
Convertible Instruments
In June 2019, the Company issued 1,274 shares of convertible preferred stock which, prior to September 30, 2019, were converted into 2,240,441 shares of the Company’s common stock (as adjusted for the November 2019 1-for-5 reverse stock split). The convertible preferred stock contained no embedded conversion features that were required to be separated from the host contract under prior accounting standards.
As of September 30, 2020 and December 31, 2019, the Company had no convertible instruments outstanding.
Derivative Instruments
Derivative instruments are recognized as either assets or liabilities in the condensed consolidated balance sheets at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use and resulting hedge designations. Changes in the fair value of derivative instruments not designated as hedges are recorded in the consolidated statements of operations, as a component of other income (expense).
Reverse Stock Split
Effective November 28, 2019, the Company completed a 1-for-5 (reverse) stock split of its authorized and outstanding common stock, as approved by its Board of Directors. All common shares and per share balances herein give effect to this reverse split.
Income Taxes
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining consolidated income tax expense.
Income taxes are provided for using the asset and liability method under which deferred income taxes arise from the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws in effect when such differences are expected to reverse. The Company is required to establish a valuation allowance against the deferred tax assets if, based on the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including the
reversal of temporary differences, projected future taxable income, tax planning strategies and recent financial operations. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses. Our income tax expense, and deferred tax assets and liabilities reflect management's best estimate of current and future taxes to be paid.
As of September 30, 2020, the Company has determined that a full valuation allowance is necessary against its net deferred tax assets based on the weight of all available evidence, and the Company currently estimates its annual effective income tax rate to be 0%. The effective tax rate for the Company differs from the federal rate of 21% primarily due to recording a full valuation allowance.
Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Dilutive income (loss) per share includes any additional dilution from common stock equivalents, such as stock options, warrants, and convertible instruments, if the impact is not antidilutive.
Related Parties and Transactions
The Company identifies related parties, and accounts for and discloses related party transactions. Parties, which can be a corporation or individual, are considered to be related if either party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence. See notes 5, 8, 11, 13, 22, and 23 to the condensed consolidated financial statements for the three and nine months ended September 30, 2020.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06 Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The update is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles for certain financial instruments with characteristics of liabilities and equity. The update is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years and with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Clarifying the Interactions Between Topic 321, Topic 323 and Topic 815. ASU 2020-01 which makes improvements related to accounting for certain equity securities when the equity method of accounting is applied or discontinued, and scope considerations related to forward contracts and purchased options on certain securities. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”), which expands the application of a specific private company alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. ASU 2018-17 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted in any interim period. ASU 2018-17 is required to be applied retrospectively from the date the guidance is first applied. The Company's adoption of this standard has not had a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company modified its disclosures beginning in the first quarter of 2020 to conform to this guidance. The Company's adoption of this standard and the associated changes to the disclosures have not had a material impact on its consolidated financial statements.
COVID-19
The outbreak of the coronavirus (aka “COVID-19”) has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, including the implementation of social distancing measures, quarantine periods and travel bans, have caused material disruptions to many businesses and negatively impacted economic activities. Global equity markets have experienced significant volatility. Governments and their central banks have reacted with significant fiscal and monetary interventions designed to mitigate the impacts and stabilize economic conditions. The impact and ultimate duration of the COVID-19 outbreak is currently unknown, as is the efficacy of these governmental interventions.
Nevada Governor Steve Sisolak signed Emergency Directive 033 that became effective on October 1, 2020, to facilitate larger gatherings and events while still diminishing personal contact and increasing the level of disinfection in high use areas. The controlling guidance below accompanies the requirements set forth in Directive 033. In order to minimize the risk of contracting and spreading the virus, minimum strict adherence to safety and infection prevention measures must be followed. All event venues, gathering organizers, hosts and individuals throughout the State must be fully compliant to ensure a successful next step in our reopening. The controlling guidance below is for planning, coordinating, or hosting in-person gatherings (e.g., events, conventions, corporate meetings, services, ceremonies and celebrations). These gatherings may take place in outdoor or indoor venues, including but not limited to, community centers, fellowship halls and gatherings spaces in faith-based buildings, halls, rental space in event centers, or outdoor event spaces. The guidance includes, but is not limited to, implementing 6-foot physical distancing practices, wearing face coverings at all times, conducting health screenings for all events, employees, and visitors by measuring temperature, and assessing detectible symptoms, among other required practices.
The Company is operating in alignment with these guidelines for protecting the health of our employees, partners, and suppliers, and limiting the spread of COVID-19, that have already resulted in delays of Mercury Clean Up LLC’s plans for commencing mercury recovery testing on the Comstock and in the Philippines (Note 22). It is not currently possible to reliably estimate the length and severity of these delays and the impact on the Company's financial condition, and that of its subsidiaries and partners, in future periods.
2. Assets and Liabilities Held for Sale
As of September 30, 2020 and December 31, 2019, the Company had assets with a net book value of $6.3 million and $10.5 million, respectively, which met the criteria to be classified as assets held for sale. Those criteria specify that the asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets), the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale generally within one year.
Assets held for sale include:
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September 30, 2020
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December 31, 2019
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Silver Springs properties:
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DTSS (Land)
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$
|
3,589,876
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|
|
$
|
3,589,876
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Industrial Park (Land and water rights)
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2,738,462
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|
|
2,738,462
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Daney Ranch (Land and buildings)
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—
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|
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2,146,575
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Lucerne Mine (Mineral rights and properties) (Note 20)
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—
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|
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1,558,787
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Gold Hill Hotel (Land and buildings)
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—
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|
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478,366
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Total assets held for sale
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$
|
6,328,338
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|
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$
|
10,512,066
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Liabilities held for sale include:
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|
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|
|
September 30, 2020
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December 31, 2019
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Lucerne Properties (Reclamation liabilities)
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$
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—
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|
|
$
|
1,019,705
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Total liabilities held for sale
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$
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—
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|
|
$
|
1,019,705
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Assets Held for Sale - Silver Springs, Nevada
On September 26, 2019, as amended on November 30, 2019, December 26, 2019, March 31, 2020, June 30, 2020, and October 1, 2020, the Company entered into agreements with Sierra Springs Enterprises Inc ("SSE"), a subsidiary of SSOF (Note 23), to sell two properties in Silver Springs, Nevada (the "Silver Springs properties"). The agreements include the sale of 98 acres of
industrial land and senior water rights for $6.5 million, and 160 acres of commercial land along with its rights in the membership interests in Downtown Silver Springs LLC (“DTSS”) for $3.6 million. The carrying value of the 160 acres of commercial land and DTSS membership rights were adjusted to the contract value of $3.6 million less estimated costs to sell, resulting in an impairment of $0.5 million, charged to other expense in the consolidated statements of operations as of December 31, 2019. As of September 30, 2020, the Company received $0.4 million in escrowed deposits from SSE for the sale of these assets and expects the sales to close during the fourth quarter of 2020. Proceeds from the sale of the Silver Springs properties must satisfy certain obligations due under the terms of the Promissory Notes described in Note 11.
Properties No Longer Classified Held for Sale
The Company had classified the Daney Ranch as an asset held for sale at December 31, 2019. On September 1, 2020, the Company, as lessor, entered into an agreement to lease the Daney Ranch for $9,000 per month, with lease payments applicable to the purchase price through an option to purchase the property for $2.7 million, if closed by September 1, 2022. The lease is extendable for a third year, with lease payments increasing to $10,000 per month, with just the last twelve months of lease payments applicable to the purchase price, if closed by September 1, 2023. As a result of this agreement, the property is included in properties, plant and equipment on the condensed consolidated balance sheets at September 30, 2020. Upon the change in status, the Company recorded depreciation expense of $0.5 million included in real estate operating costs on the condensed consolidated statements of operations, to recognize the depreciation that would have been recognized had the property not been held for sale.
On September 8, 2020, the membership interest purchase agreement with Tonogold closed (Note 20), and the Company transferred 100% of the membership interests in Comstock Mining LLC, the entity that owns the Lucerne Mine mineral rights and properties, to Tonogold. The associated assets and liabilities held for sale were removed from the condensed consolidated balance sheets.
The Company had classified the Gold Hill Hotel as an asset held for sale at December 31, 2019. On September 28, 2020, management decided to retain the Gold Hill Hotel as an income-producing property, and canceled its listing for sale. As a result, the property is included in properties, plant and equipment on the condensed consolidated balance sheets at September 30, 2020. Upon the change in status, the Company recorded depreciation expense of $0.2 million included in real estate operating costs on the condensed consolidated statements of operations, to recognize the depreciation that would have been recognized had the property not been held for sale.
3. Tonogold Resources Inc. ("Tonogold") Securities
Investments in Tonogold Convertible Preferred and Common Shares
The consideration received for Tonogold's acquisition of Comstock Mining LLC under the membership interest purchase agreement (the "Purchase Agreement") (Note 20) included shares of Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock ("CPS").
During 2019, the Company received $6.1 million in Tonogold CPS. The CPS became convertible into common shares on May 22, 2020. The conversion price for the CPS is the lower of (1) 85% of the 20-day volume weighted closing price or (2) $0.18 cents per share. Tonogold can redeem the CPS prior to conversion, at a redemption price 120% of the face value of the CPS. The CPS was recorded at a fair value of $7.6 million when received.
On May 22, 2020, and September 29, 2020, the Company elected to convert $1.1 million and $2.8 million of CPS, respectively, at $0.18 per common share, for a total of 21,777,778 Tonogold common shares. On October 2, 2020, Tonogold redeemed the remaining $2.2 million of CPS for $2.6 million in cash, representing 120% of face value.
During the three and nine months ended September 30, 2020, the Company sold 3,450,138 Tonogold common shares at an average price of $0.40 per share for gross proceeds of $1.4 million and 3,557,209 common shares also at an average price of $0.40 per share for gross proceeds of $1.4 million, respectively.
At September 30, 2020, the Company has total investments in Tonogold valued at $9.7 million, including $2.2 million in CPS valued at $2.6 million, and 18,220,569 common shares valued at $7.1 million. The fair value of the common shares is based on the $0.39 closing share price (OTC: TNGL) on September 30, 2020 (Note 17).
Tonogold Note Receivable
The consideration received for Tonogold's acquisition of Comstock Mining LLC (Note 20) included a senior secured convertible note (the "Note"). The Note had an initial principal balance of $5,475,000 when the Note was issued on March 20, 2020. The outstanding principal balance was $4,475,000 when the Purchase Agreement closed on September 8, 2020. The Note has an interest rate of 12%, with interest payable monthly. The principal is due on September 20, 2021, unless extended by the Company.
The Note includes the following features: 1) conversion feature allowing the Company, at the Company's sole option, to elect payment in Tonogold common shares upon certain events; 2) change of control redemption right allowing the Company to redeem the Note in cash at a 125% premium; 3) event of default redemption right allowing the Company the right to redeem the Note in cash at a 118% premium; and 4) an option for the Company to extend the maturity date. On September 8, 2020, the fair value of the Note was $6.1 million, based on a Monte Carlo model with various inputs, including the Tonogold common share price of $0.35, volatility of 96%, risk-free rate of 0.15%, cost of debt of 11.12%, required conversion premium of 30%, probability of prepayment of 5%, probability of change of control of 5% and probability of default of 27%. On September 30, 2020, the fair value was updated with a Tonogold common share price of $0.39, resulting in a fair value of $6.4 million, and a gain in change in fair value of $0.3 million recorded in other income in the condensed consolidated statements of operations.
The Note was previously accounted for as a contingent forward (Note 20). Upon closing of the Purchase Agreement, the contingencies were eliminated, and the Note was recorded as a current asset in the condensed consolidated balance sheets.
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
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September 30, 2020
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December 31, 2019
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Land and property deposits
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$
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10,100
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$
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10,100
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Purchase Option for Pelen LLC (Note 21)
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100,000
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—
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Advance to Sierra Springs Opportunity Fund (Note 23)
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1,315,000
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—
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Surety bond and insurance
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84,593
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110,558
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Investor relations subscription
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28,356
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|
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—
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Other
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315,783
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|
|
199,919
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Total prepaid expenses and other current assets
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$
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1,853,832
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$
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320,577
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5. Mineral Rights and Properties, Net
Mineral rights and properties consisted of the following:
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September 30, 2020
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December 31, 2019
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Dayton resource area
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$
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2,971,838
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$
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2,971,838
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Spring Valley area
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1,530,332
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1,530,332
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Oest area
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307,522
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307,522
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Occidental area
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1,002,172
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1,002,172
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Northern extension
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157,205
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157,205
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Northern targets
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121,170
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121,170
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Other mineral properties
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317,405
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317,405
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Water rights
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90,000
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90,000
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Total mineral rights and properties
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$
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6,497,644
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$
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6,497,644
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|
These mineral rights and properties are segmented based on the Company’s identified resource areas and exploration targets.
On February 25, 2020, the Company sold two patented mining claims and five unpatented mining claims (the "Wild Horse" properties) to Hercules Gold USA LLC ("Hercules") for a total purchase price of $100,000 plus a 2% net smelter returns royalty on future mineral production from these properties. Hercules has the option to purchase the royalty for $75,000 for each one
percent (1%) per each patented or unpatented claim. There was no book value for the Wild Horse properties, so the entire purchase price represented a gain recorded in other income.
On May 5, 2020, the Company renewed the lease with Fred Garrett et al for one patented mining claim located in Storey County, Nevada. The new lease terms provide for a five-year Exploration Term followed by a fifteen-year Development Term. The lease remains in effect as long as exploration, development, mining, or processing operations are being conducted on a continuous basis, without a lapse of activity for more than 180 days. The lease fee is $250 per month, increasing to $1,000 per month when all permits for placing the property into production have been obtained.
On May 21, 2020, the Company exercised its option with New Daney Company Inc. ("New Daney") to purchase seven unpatented lode mining claims located in Spring Valley, south of the Company's Dayton resource area. These claims have been leased from New Daney since 2010. The claims are being purchased for a total of $100,000, inclusive of a 3% net smelter returns royalty. The Company paid $10,000 upon signing, and $1,000 on June 4, 2020. Additional payments of $1,000 per month will be made, with a final $85,000 payment at closing, on or before November 26, 2020. Until closing, these payments are shown on the condensed consolidated balance sheets in prepaid expenses and other current assets. On October 8, 2020, the Company closed the transaction with a payment in full for the $85,000 balance.
On July 9, 2020, the Company amended the lease with Renegade Mineral Holdings for 26 unpatented mining claims in the area of our Occidental exploration target. Under the terms of the amendment, the Additional Term was lengthened to ten years, and an optional ten-year Second Additional Term was added, which would extend the lease through September 30, 2039. The lease payment remains $2,250 per quarter, and will increase to $3,000 per quarter in the Second Additional Term. The work commitment was increased to $250,000 by September 30, 2021, and a cumulative $500,000 by September 30, 2023.
On September 1, 2020, the Company entered into a new mineral exploration and mining lease with the Sutro Tunnel Company ("Sutro") (a related party through the Company's 25% interest in Pelen LLC, owner of the Sutro Tunnel Company). The lease covers patented mining claims, exploration rights, and access over and through town lots in Gold Hill and Virginia City. The lease also provides the right to explore the Sutro Tunnel. The previous lease with Sutro expired December 31, 2017, and had been extended on a month-to-month basis since.
The new Sutro lease provides the right to explore, develop, and mine all minerals on or in the property, including surface dumps. The lease is for a term of five years, with automatic renewals for an addition ten years, and then continues thereafter for so long as operations continue on the property, or on a month-to-month basis so long as the Company continues to make the monthly rental payments, unless explicitly terminated. The rental payment is $5,000 per month for the first five years, increasing to $10,000 per month and then $15,000 per month in the second and third five-year periods, respectively. During the extended period after the first fifteen years, the rental payment increases to $20,000 per month. Total mineral lease payments to Sutro were $5,000 and $11,000 for the three and nine months ended September 30, 2020, and $2,250 and $6,750 for the three and nine months ended September 30, 2019, respectively.
All the Company's mineral exploration and mining lease payments are classified as costs applicable to mining in the condensed consolidated statements of operations.
6. Properties, Plant and Equipment
Properties, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Land and buildings leased to others
|
|
|
|
Daney Ranch
|
$
|
2,261,263
|
|
|
$
|
—
|
|
Gold Hill Hotel
|
753,272
|
|
|
—
|
|
Other real estate
|
283,776
|
|
|
283,776
|
|
Less accumulated depreciation
|
(1,365,751)
|
|
|
(275,106)
|
|
Total, net
|
1,932,560
|
|
|
8,670
|
|
|
|
|
|
Property, plant, and equipment for mineral processing
|
|
|
|
American Flat land and buildings
|
6,500,816
|
|
|
6,500,817
|
|
Crushing, processing, and refining plant and equipment
|
21,113,177
|
|
|
21,113,177
|
|
Retirement obligation asset
|
72,454
|
|
|
115,926
|
|
Less accumulated depreciation
|
(24,365,260)
|
|
|
(24,074,287)
|
|
Total, net
|
3,321,187
|
|
|
3,655,633
|
|
|
|
|
|
Other property and equipment
|
|
|
|
Comstock corporate campus
|
1,549,453
|
|
|
1,549,453
|
|
Vehicle and equipment
|
2,267,916
|
|
|
2,267,916
|
|
Furniture and fixtures
|
549,860
|
|
|
549,860
|
|
Less accumulated depreciation
|
(839,568)
|
|
|
(787,344)
|
|
Total, net
|
3,527,661
|
|
|
3,579,885
|
|
|
|
|
|
Total properties, plant and equipment, net
|
$
|
8,781,408
|
|
|
$
|
7,244,188
|
|
During the three and nine months ended September 30, 2020, the Company recognized depreciation expense of $0.8 million and $1.1 million, respectively. This included $0.7 million of depreciation, included in real estate operating costs for the three months ended September 30, 2020, for the Gold Hill Hotel and Daney Ranch properties, to recognize the depreciation that would have been recognized had the properties not been held for sale. During the three and nine months ended September 30, 2019, the Company recognized depreciation expense of $0.4 million and 1.1 million, respectively.
8. Deposits for Investments
Deposits for investment in Mercury Clean Up LLC
On June 21, 2019, as amended July 3, 2019, the Company entered into a Mercury Remediation Pilot, Investment and Joint Venture Agreement (the “MCU Agreement”) with Mercury Clean Up LLC (“MCU”) (Note 22). Pursuant to the MCU Agreement, the Company committed $2.0 million of capital contributions that was payable in cash of $1.15 million and shares of the Company's common stock of $0.85 million, in exchange for 15% of the fully-diluted equity ownership of MCU and the first right to participate in 50% of the equity of any future joint ventures formed with MCU (the “Joint Ventures”).
The MCU Agreement offers the Company the opportunity to acquire an additional 10% of the fully-diluted equity ownership by investing, or arranging for the investment of an additional $3.0 million in the Joint Ventures. Until this additional investment is recovered, 75% of any profits from the Joint Ventures will be distributed to the Company, and thereafter there will be a 50/50 distribution of profits.
On July 18, 2019, the Company issued 900,000 shares of restricted common stock with a fair value of $751,050 to MCU to fund the MCU capital contribution. The shares were subsequently liquidated by MCU for gross proceeds of approximately $0.5 million. On May 15, 2020, the Company issued MCU an additional 625,000 shares of restricted common stock with a fair value of $314,687 to fund the difference between proceeds received by MCU and the required 0.85 million capital contribution.
The Company paid MCU $0.4 million in cash during the nine months ended September 30, 2020, bringing the total to $1.15 million in cash as of September 30, 2020, satisfying the required cash contribution. Since the transaction has not closed, these
amounts are recorded as prepaid expenses and other current assets in the condensed consolidated balance sheets. The Company expects to close the MCU Agreement in the fourth quarter of 2020.
Deposits for investment in MCU Philippines Inc. ("MCU-P")
The Company entered into a second amendment of the MCU Agreement, on April 10, 2020, wherein MCU and the Company have identified an opportunity to remediate mercury in the Philippines, particularly in the province of Davao d' Oro (the “Philippine Opportunity”). MCU and the Company formed a new entity called MCU Philippines Inc. ("MCU-P") to engage in the Philippine Opportunity. During the three months ended September 30, 2020, the Company made cash deposits totaling $1 million for MCU-P, committed another $1 million equity investment in MCU and a joint venture with MCU, and committed up to $1 million in secured loans. These Company investments, when completed, will meet the requirements of the additional investments in the MCU Agreement, and result in the full 25% interest in MCU and direct 50% joint venture participation in both the Philippine and Comstock Lode systems. The Company expects to close the MCU-P transaction in the first quarter of 2021. The Company’s chief executive officer is a director of MCU-P.
9. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Accrued make-whole for Mercury Clean Up LLC (Note 22)
|
$
|
—
|
|
|
$
|
452,740
|
|
Accrued interest expense
|
—
|
|
|
264,268
|
|
|
|
|
|
|
|
|
|
Accrued Northern Comstock LLC payments (Note 20)
|
67,708
|
|
|
180,833
|
|
Accrued payroll costs
|
121,476
|
|
|
165,543
|
|
Accrued make-whole for Pelen LLC (Note 21)
|
—
|
|
|
222,602
|
|
|
|
|
|
Accrued Board of Directors fees
|
75,000
|
|
|
120,000
|
|
Accrued vendor liabilities
|
126,041
|
|
|
309,515
|
|
Other accrued expenses
|
59,646
|
|
|
139,930
|
|
Total accrued expenses and other liabilities
|
$
|
449,871
|
|
|
$
|
1,855,431
|
|
The accrued expense for Northern Comstock LLC represents the difference in timing of expense recognition and required and actual monthly payments.
10. Deposits
Deposits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Deposits toward sale of Silver Springs properties (Note 23)
|
$
|
410,100
|
|
|
$
|
310,100
|
|
Prepaid Tonogold expense reimbursements
|
78,855
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Tonogold mineral exploration lease
|
9,167
|
|
|
8,284
|
|
Total deposits
|
$
|
498,122
|
|
|
$
|
318,384
|
|
11. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Note Description
|
September 30, 2020
|
|
December 31, 2019
|
Senior Secured Debenture (GF Comstock 2) - 11% interest, due Dec 2020
|
$
|
—
|
|
|
$
|
4,929,277
|
|
Concorde Trust Unsecured Promissory Note - 12% interest, due 2021
|
3,679,680
|
|
|
—
|
|
Bean Trust Unsecured Promissory Note - 12% interest, due 2021
|
636,256
|
|
|
—
|
|
Scott H. Jolcover Unsecured Promissory Note - 12% interest, due 2021
|
159,064
|
|
|
—
|
|
Caterpillar Financial Services Unsecured Note Payable - 5.75% interest, due 2021
|
511,047
|
|
|
645,891
|
|
Total debt
|
4,986,047
|
|
|
5,575,168
|
|
Less: debt discounts and issuance costs
|
(220,793)
|
|
|
(163,094)
|
|
Total debt, net of discounts and issuance costs
|
4,765,254
|
|
|
5,412,074
|
|
Less: current maturities
|
(4,690,155)
|
|
|
(328,068)
|
|
Long-term debt, net of discounts and issuance costs
|
$
|
75,099
|
|
|
$
|
5,084,006
|
|
Debt Obligations
Concorde Trust, Bean Trust, & Scott H. Jolcover Unsecured Promissory Notes
On August 6, 2020, the Company entered into three unsecured promissory notes (the "Promissory Notes") in order to refinance existing indebtedness on more favorable terms. The Promissory Notes, with the Concorde Trust, Bean Trust, and Mr. Scott H. Jolcover (a member of the Company's management), have an aggregate principal amount of $4,475,000, were issued at an original issue discount of $255,000, bear interest at a rate of 12% per annum payable monthly, and mature on September 20, 2021. The Promissory Notes are unsecured, but contain covenants that prohibit the Company from incurring debt that matures prior to the maturity date of the Promissory Notes or that is senior in right of payment, and require the Company to prepay the Promissory Notes with at least 80% of the net cash proceeds received by the Company with respect to the sale of the Company's properties in Silver Springs, Nevada. The Company is permitted to defer payment of up to 34% of the principal payment (or approximately $1.5 million) due on the maturity date of the Promissory Notes for an additional two years (i.e., until September 20, 2023), in exchange for two year warrants to purchase the Company’s common stock based on a 10% discount to the 20-day volume weighted average price of the Company’s common stock on the maturity date of the Promissory Notes. Based on a separate valuation analysis, the Company determined fair value of the Promissory Notes approximated their face value, as embedded derivatives that required bifurcation had de minimis estimated fair values on the date of issue and at September 30, 2020. As of September 30, 2020, Scott Jolcover, a member of the Company’s management, held $159,064 face value of the Promissory Notes, and had received $2,876 in payments of interest for the three months ended September 30, 2020.
GF Comstock 2 LP
On January 13, 2017, the Company issued an 11% Senior Secured Debenture (the "Debenture") to GF Comstock 2 LP due January 13, 2021, in an aggregate principal amount of $10.7 million. Interest was payable semi-annually. The Debenture was collateralized by (1) substantially all of the assets of the Company, and (2) a pledge of 100% of the equity of its subsidiaries. Hard Rock Nevada Inc., controlled by Scott Jolcover, a member of the Company's management, and another related party who is a significant shareholder of the Company, participated in this financing. In addition, J. Clark Gillam, a former director of the Company is a manager and member of the general partner of GF Capital 2 LP. Mr. Gillam resigned from the Company's board of directors on September 20, 2020.
The Debenture was issued at a discount of approximately $0.6 million and with additional issuance costs of approximately $0.5 million. The Debenture also required an additional "Make Whole" obligation totaling approximately $0.7 million. The Company recorded the Debenture at face value, net of the discount, issuance costs and Make Whole obligation, which approximated its estimated fair value. The discount, issuance costs and Make Whole obligation were amortized to interest expense during the term of the Debenture.
On August 11, 2020, the Company retired the Debenture by paying the remaining principal balance of approximately $4.0 million, plus the remaining Make Whole obligation of $0.2 million. Upon retirement, all securing collateral was released. The Company recognized a loss on early retirement of debt of $51,000. Interest expense on the Debenture was $82,646 and $423,318 for the three and nine months ended September 30, 2020, and $330,080 and $1,065,947 for the three and nine months ended September 30, 2019, respectively. Tonogold reimbursed $41,071 and $260,795 of the Debenture interest for the three and nine months ended September 30, 2020, respectively, and reimbursed $161,160 and $278,623 of the Debenture interest for the three and nine months ended September 30, 2019, respectively.
Caterpillar Equipment Facility
On June 27, 2016, the Company completed an agreement with Caterpillar Financial Services Corporation (“CAT”) relating to certain finance and lease agreements (the “CAT Agreement”). Under the terms of the CAT Agreement, the obligations to CAT bear interest at 5.7% and mature on November 1, 2021, with scheduled payments of $29,570 per month. The obligations were recorded at face value, which approximated fair value.
On June 29, 2020, Comstock and CAT modified the CAT Agreement allowing for four months of deferred payments, with no extension of terms, beginning with the May 1, 2020, payment and extending through August 1, 2020. Interest payable for the four deferred payments was added to principal, after which monthly payment amounts were increased to $37,817 per month, beginning on September 1, 2020.
12. Long-Term Reclamation Liability
Following is a reconciliation of the Company's aggregate reclamation liability, including asset retirement obligations, associated with our reclamation plan for our mining projects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Twelve Months
Ended
|
|
September 30, 2020
|
|
December 31, 2019
|
Long-term reclamation liability — beginning of period
|
$
|
6,034,208
|
|
|
$
|
7,441,091
|
|
Reduction of obligation
|
—
|
|
|
(410,018)
|
|
Amount reclassified to liabilities held for sale
|
—
|
|
|
(1,019,705)
|
|
Accretion of reclamation liability
|
15,533
|
|
|
22,840
|
|
Long-term reclamation liability — end of period
|
$
|
6,049,741
|
|
|
$
|
6,034,208
|
|
Reclamation Liability Reduction by NDEP
On April 30, 2019, the Company was notified by the Nevada Division of Environmental Protection ("NDEP") that the Company's successful reclamation of parts of the Lucerne mine area had reduced the Lucerne project reclamation cost estimate with an updated reclamation bond requirement of $6.8 million. Our total reclamation liability also includes cost estimates for our Dayton project and enhanced reclamation obligations in Storey County, Nevada.
13. Leases
Lease expense
The Company has an operating lease, as lessee, and the Sutro Tunnel Company (a related party through the Company's 25% interest in Pelen, owner of the Sutro Tunnel Company) as lessor, for a property located adjacent to the Gold Hill Hotel, which is primarily used as a room rental. The lease runs from 2018 until 2028. The monthly rent is $750 with automatic annual increases of $25 per month every November, beginning in 2020. The operating lease is sub-leased to Crown Point Management LLC, the operators of the Gold Hill Hotel, and not separately valued within the Gold Hill Hotel lease.
For the three and nine months ended September 30, 2020, the fixed operating lease expense was $2,250 and $6,750, respectively, with 8.1 years remaining on the lease. For the three and nine months ended September 30, 2019, the fixed operating lease expense was $2,250 and $6,750, respectively, with 9.1 years remaining on the lease.
Supplemental information related to the Company's operating lease follows for the nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
6,750
|
|
|
$
|
6,750
|
|
|
|
|
|
The Company has the following lease balances recorded in the condensed consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Assets and Liabilities
|
Classification
|
September 30, 2020
|
|
December 31, 2019
|
Operating lease right-of-use asset
|
Other assets
|
$
|
52,334
|
|
|
$
|
45,485
|
|
|
|
|
|
|
Operating lease liability - current
|
Accrued expenses and other liabilities
|
$
|
3,477
|
|
|
$
|
9,000
|
|
Operating lease liability - long-term
|
Other liabilities
|
50,779
|
|
|
36,668
|
|
Total operating lease liabilities
|
|
$
|
54,256
|
|
|
$
|
45,668
|
|
Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows:
|
|
|
|
|
|
|
|
|
Remainder of 2020
|
|
$
|
2,300
|
|
2021
|
|
9,350
|
|
2022
|
|
9,650
|
|
2023
|
|
9,950
|
|
2024
|
|
10,250
|
|
Thereafter
|
|
42,050
|
|
Total operating lease payments
|
|
83,550
|
|
Less: Imputed interest
|
|
29,294
|
|
Present value of lease liabilities
|
|
$
|
54,256
|
|
Lease Income
Real estate revenue from operating leases on our land and buildings leased to others (Note 6) for the three and nine months ended September 30, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Daney Ranch
|
$
|
16,000
|
|
|
$
|
3,300
|
|
|
$
|
21,000
|
|
|
$
|
6,600
|
|
Gold Hill Hotel
|
13,500
|
|
|
24,000
|
|
|
61,500
|
|
|
72,000
|
|
Lab and office space
|
5,000
|
|
|
7,500
|
|
|
20,000
|
|
|
15,000
|
|
Land
|
4,500
|
|
|
4,500
|
|
|
13,500
|
|
|
13,500
|
|
All other residential
|
10,425
|
|
|
9,050
|
|
|
30,225
|
|
|
23,032
|
|
Total real estate revenue from operating leases
|
$
|
49,425
|
|
|
$
|
48,350
|
|
|
$
|
146,225
|
|
|
$
|
130,132
|
|
On September 1, 2020, the Company entered into an agreement to lease the Daney Ranch for $9,000 per month, with lease payments applicable to the purchase price through an option to purchase the property for $2.7 million, if closed by September 1, 2022 (Note 2).
14. Commitments and Contingencies
Royalty Agreements
The Company has minimum royalty obligations with certain of its mineral properties and leases. For most of the mineral properties and leases, the Company is subject to a range of royalty obligations once production commences. These royalties range from 0.5% to 5% of net smelter returns ("NSR") from minerals produced on the properties, with the majority being under 3%. Some of the factors that will influence the amount of the royalties include ounces extracted and the price of gold.
Regulatory Compliance
The Company’s mining and exploration activities are subject to various laws and regulations governing environmental protection. These laws and regulations are frequently changing and generally becoming more restrictive. The Company believes its operations are in compliance with applicable laws and regulations, in all material respects. The Company continuously makes expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
Comstock Residents Association
On January 31, 2014, the Comstock Residents Association (the “CRA”) and two of its members filed a civil action in the Third Judicial District Court in Lyon County, Nevada (the “District Court”) against the Lyon County Board of Commissioners (the “Commissioners”) and the Company, asking the District Court to reverse the Commissioners’ decision to grant a master plan amendment and zone changes that were approved by the Commissioners in 2014 (the “Application”).
Prior to the approval of the Application, the master plan designation and zoning precluded mining on certain property of the Company in the area of Silver City, Nevada. In April 2015, the District Court ruled in favor of the Company and the Commissioners. The written Order Denying Petition for Judicial Review was filed and mailed to all parties on June 15, 2015. On July 14, 2015, the CRA and one individual (together “Appellants”) filed a Notice of Appeal of the Court Order, appealing the decision to the Nevada Supreme Court. On December 9, 2015, Appellants filed their Opening Brief in the Nevada Supreme Court, generally repeating the arguments that were made at the District Court. On January 15, 2016, the Company and the Commissioners jointly filed an Answering Brief. Briefing in the Nevada Supreme Court was completed with the Appellants’ filing of a Reply Brief on March 3, 2016. Oral arguments before a three-judge panel took place on September 14, 2016.
On December 2, 2016, the Nevada Supreme Court entered an order affirming all three of the District Court’s decisions associated with 1) the Commissioners’ discretion and authority for changing master plans and zoning, 2) their compliance with Nevada’s Open Meeting Law, and 3) their compliance with Nevada statutory provisions. Specifically, the Supreme Court affirmed the District Court’s conclusions that Lyon County did not abuse its discretion and that it acted with substantial evidence in support of their decision, that the County did not violate Nevada’s Open Meeting Law or any other statutes.
The Supreme Court reversed the District Court’s dismissal of CRA’s claim of a due process violation, concluding that this claim should not have been dismissed and that further proceedings are necessary in the District Court on this single claim. The District Court concluded that the Supreme Court's reversal of CRA's due process claim required that CRA be afforded the opportunity to conduct discovery and allowed CRA the time to conduct discovery on its due process claim. The Company responded to the CRA discovery request on February 20, 2018, and the District Court held a hearing on April 23, 2018. Additional discovery was also allowed by the District Court. On May 14, 2019, the Court held a hearing on CRA’s due process claim and issued its ruling from the bench. The Court concluded that CRA, having been afforded the opportunity to conduct discovery, was unable to meet its burden to establish by a preponderance of the evidence that Lyon County had denied CRA of its due process rights. The Court, therefore, denied CRA's due process claim. On July 11, 2019, the Court issued and filed a formal judgment in favor of Lyon County and Comstock Mining. The Company and Lyon County have filed a motion to recover attorney's fees and costs from the CRA.
On August 14, 2019, the CRA filed a Notice of Appeal, appealing the judgment to the Nevada Supreme Court. CRA filed their Opening Brief on January 24, 2020. The Company’s Answering Brief was filed on March 25, 2020. The appellate briefing was completed with the filing of CRA’s Reply Brief on May 8, 2020. The Nevada Supreme Court has not yet acted on this matter.
OSHA Complaint
On or about February 27, 2020, the Company received notice that three former employees had filed a complaint with the U.S. Department of Labor - Occupational Safety and Health Administration (“OSHA”) regarding alleged wrongful termination of employment in 2019, seeking backpay, frontpay and other compensatory damages, as well as interest and legal fees and costs. On April 10, 2020, the Company filed its reply to the complaint, and believes that those terminations were appropriate and lawful and is vigorously defending the complaint.
From time to time, we are involved in claims, investigations and proceedings that arise in the ordinary course of business. There are no other matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
15. Equity
Convertible Preferred Stock
In June 2019, the Company entered into the Securities Purchase Agreement with Temple Tower Group LLC ("Temple") providing for the issuance and sale to Temple of 1,274 preferred shares with a stated value of $1,000 per share, for net proceeds to the Company of $1.1 million with 191 of the preferred shares representing due diligence fees. The Company recorded the difference between the proceeds of $1.1 million and the fair value of $1.5 million as a cost of issuing the preferred shares. The preferred shares were issued pursuant to the Company’s registration statement on Form S-3 and were convertible into the Company’s common stock. For the three months ended September 30, 2019, Temple converted all the preferred shares for 2,240,441 common shares at an average share price of $0.57 cents.
Equity Offering Programs
In July 2020, the Company entered into an equity purchase agreement (the “2020 Leviston Equity Agreement”) with Leviston Resources LLC (“Leviston”) and filed a prospectus supplement to offer and sell shares of common stock at an aggregate offering price of up to $2.5 million, from time to time, to Leviston. From July 13, 2020 through September 23, 2020, the Company raised $2.5 million by issuing 2,793,586 common shares at a price of $0.89 per common share. The Company issued 173,611 restricted common shares, with a fair value of $125,000, in commitment fees. As of September 30, 2020, the 2020 Leviston Equity Agreement has no remaining unused capacity.
In July 2020, the Company entered into a common stock purchase agreement (the "2020 Triton Equity Agreement") with Triton Funds L.P., (“Triton”) and filed a prospectus supplement to offer and sell shares of common stock at an aggregate offering price of up to $1.25 million, from time to time, to Triton. On July 22, 2020, the Company issued 2,040,483 common shares to Triton for net proceeds of $1.25 million, at a price of $0.61 per common share. As of September 30, 2020, the 2020 Triton Equity Agreement has no remaining unused capacity.
In October 2019, the Company entered into a new equity purchase agreement, (the “2019 Sales Agreement”), with Leviston to sell up to $1.25 million in shares of the Company’s common stock from time to time at the Company’s option. Pursuant to the 2019 Sales Agreement, the Company agreed to deliver additional shares of common stock with a value of 5% of the aggregate offering price to Leviston as a commitment fee. As of September 30, 2020, the Company had issued shares with an aggregate sales price of $1.25 million under the 2019 Sales Agreement. The Company issued 284,852 shares in commitment fees to Leviston in 2019. The 2019 Sales Agreement has no remaining unused capacity.
In February 2019, the Company filed a new shelf registration statement on Form S-3 (the “S-3 Shelf”), for the purchase of up to $50 million of the Company’s securities, from time to time. In February 2019, the Company also entered into an equity purchase agreement (the "2019 Equity Agreement") with the Murray Family Office ("Murray FO") for the sale of up to $5 million in shares of the Company's common stock from time to time, at the Company’s option, subject to certain restrictions and at a 10% discount to a volume weighted average price. The 2019 Equity Agreement has no remaining unused capacity.
Effective August 2018, the Company entered into an equity sales agreement with Leviston (the "2018 Sales Agreement") for the sale of up to $2.25 million of the Company's common stock. Through September 30, 2019, the Company had issued 2,327,400 common shares at an average price of $0.74 per share, totaling $1.7 million under the 2018 Sales Agreement. The Company issued 261,628 shares in due diligence fees to Leviston in 2018. Final proceeds from the 2018 Sales Agreement were received in February 2019, and the 2018 Sales Agreement was terminated.
Following is a reconciliation of the common stock transactions under the Company's Equity Offering Programs for the nine months ended September 30, 2020, and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30, 2020
|
|
September 30, 2019
|
Number of shares sold
|
5,921,219
|
|
|
4,291,675
|
|
|
|
|
|
Gross cash proceeds
|
$
|
4,322,622
|
|
|
$
|
3,002,157
|
|
Fees
|
(255,070)
|
|
|
(520,750)
|
|
Net proceeds
|
$
|
4,067,552
|
|
|
$
|
2,481,407
|
|
|
|
|
|
Average price per share
|
$
|
0.73
|
|
|
$
|
0.70
|
|
Share-Based Compensation
On May 28, 2020, Comstock’s Board of Directors resolved to grant certain share-based compensation payable to the board members, in lieu of cash, in consideration of certain past and current service to the Company and also resolved to grant certain share-based compensation to members of management, including the chief executive officer and other key employees of the company, in consideration of service to the Company. These share-based payments are granted under the previously approved 2011 Equity Compensation Plan. The grant date for both the shares and the options is May 28, 2020.
Board members were granted a total of 135,000 common shares for past services and 180,000 common shares for current services for a total of 315,000 common shares. The fair value of the common shares issued was $0.56 per share, based on the
Company's closing price on May 28, 2020. Compensation cost totaling $176,400 was recorded as a general and administrative expense in the condensed consolidated statements of operations for the nine months ended September 30, 2020.
Employees were granted 138,800 fully vested options to acquire common shares with an exercise price equal to the closing sales price on the date of the grant, or $0.56 per share, and expiring on the second anniversary of the grant. Fair value of stock options was calculated using a Black-Scholes model with the following inputs: stock price on the grant date and exercise price - $0.56 per share; expected term - 1 year; annualized risk-free rate - 0.17%; and, annualized volatility - 92.91%. Based on these inputs, the fair-value option price is $0.20 per share. Compensation cost for the options issued totaled $27,849 and was recorded in the statements of operations for the nine months ended September 30, 2020. There were no options issued or outstanding in the nine months ended September 30, 2019. No options were exercised from the date of issuance through September 30, 2020. The intrinsic value of these options was $71,760 at September 30, 2020.
16. Net Income (Loss) Per Common Share
Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if stock options were exercised. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) attributable to Comstock Mining Inc.
|
$
|
17,330,062
|
|
|
$
|
386,897
|
|
|
$
|
18,342,836
|
|
|
$
|
(3,525,912)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
32,082,972
|
|
|
20,012,581
|
|
|
29,210,777
|
|
|
17,496,437
|
|
Incremental shares
|
58,007
|
|
|
—
|
|
|
26,463
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
32,140,979
|
|
|
20,012,581
|
|
|
29,237,240
|
|
|
17,496,437
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
0.54
|
|
|
$
|
0.02
|
|
|
$
|
0.63
|
|
|
$
|
(0.20)
|
|
Diluted EPS
|
$
|
0.54
|
|
|
$
|
0.02
|
|
|
$
|
0.63
|
|
|
$
|
(0.20)
|
|
17. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets at September 30, 2020 measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
September 30, 2020
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Convertible preferred shares of Tonogold (Note 3)
|
$
|
2,616,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,616,000
|
|
Common shares of Tonogold (Note 3)
|
7,106,022
|
|
|
7,106,022
|
|
|
—
|
|
|
—
|
|
Tonogold note receivable (Note 3)
|
6,397,497
|
|
|
—
|
|
|
—
|
|
|
6,397,497
|
|
Total Assets
|
$
|
16,119,519
|
|
|
$
|
7,106,022
|
|
|
$
|
—
|
|
|
$
|
9,013,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our assets and liabilities at December 31, 2019 measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
December 31, 2019
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Convertible preferred shares of Tonogold (Note 3)
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
Total Assets
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued make-whole for Pelen LLC (Note 21)
|
$
|
222,602
|
|
|
$
|
—
|
|
|
$
|
222,602
|
|
|
$
|
—
|
|
Accrued make-whole for Mercury Clean Up LLC (Note 22)
|
452,740
|
|
|
—
|
|
|
452,740
|
|
|
—
|
|
Total Liabilities
|
$
|
675,342
|
|
|
$
|
—
|
|
|
$
|
675,342
|
|
|
$
|
—
|
|
The following tables provide reconciliation between the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
10,581,334
|
|
|
$
|
4,995,000
|
|
|
$
|
9,080,000
|
|
|
$
|
—
|
|
Total gains or losses recognized in earnings
|
(2,890,502)
|
|
|
(332,263)
|
|
|
(1,522,120)
|
|
|
(332,263)
|
|
Additions
|
|
|
|
|
|
|
—
|
|
Convertible preferred shares of Tonogold
|
—
|
|
|
987,263
|
|
|
—
|
|
|
5,982,263
|
|
Contingent forward asset
|
—
|
|
|
—
|
|
|
1,232,952
|
|
|
|
Tonogold note receivable
|
6,141,497
|
|
|
—
|
|
|
6,141,497
|
|
|
—
|
|
Transfers
|
|
|
|
|
|
|
|
Tonogold preferred shares converted to Tonogold common shares
|
(2,820,000)
|
|
|
—
|
|
|
(3,920,000)
|
|
|
—
|
|
Contingent forward asset
|
(1,998,832)
|
|
|
—
|
|
|
(1,998,832)
|
|
|
—
|
|
Ending balance
|
$
|
9,013,497
|
|
|
$
|
5,650,000
|
|
|
$
|
9,013,497
|
|
|
$
|
5,650,000
|
|
Following is a description of the valuation methodologies used for the Company's financial instruments measured at fair value on a recurring basis as well as the general classification of such instruments pursuant to the valuation hierarchy.
Convertible Preferred Shares of Tonogold
The consideration received for Tonogold's acquisition of Comstock Mining LLC (Note 20) included shares of Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock ("CPS"). The CPS was convertible into Tonogold common stock on May 22, 2020, at the lowest of (1) $0.18 per share, or (2) 85% of Tonogold’s 20-day volume-weighted closing price prior to conversion. Since the CPS shares are not listed securities, and have no readily available market, the Company elected the fair value option for this financial instrument. It was recorded at fair value when received, and is adjusted to fair value at the end of each reporting period, with changes in fair value reported in net earnings. The Company received CPS as follows: May 31, 2019 ($3.92 million), August 30, 2019 ($0.83 million), October 14, 2019 ($0.75 million), December 19, 2019 ($0.50 million), and December 30, 2019 ($0.10 million). The Company recorded the receipt of the CPS at a fair value of $7.6 million when received and recorded $2.5 million in other expense and $2.5 million in other expense for the changes in fair value for the three and nine months ended September 30, 2020, respectively. The Company recorded $0.3 million in other expense and $0.3 million in other expense for the changes in fair value for the three and nine months ended September 30, 2019, respectively.
In previous quarters, the fair value of the Tonogold convertible preferred shares was based on a Monte Carlo model with various inputs including the Tonogold common share price, private placement conversion price ceiling of $0.18 per share and estimates of volatility, risk-free rate, cost of debt, redemption probability, and illiquidity discount. On September 14, 2020, it was announced that Tonogold's acquisition of Comstock Mining LLC, owner of the Lucerne properties, was complete (Note 20). Tonogold also completed an equity capital raise and experienced an increase in common share trading volume making it more likely that the redemption provision would be applied. Based on these considerations, the fair value of convertible preferred shares of Tonogold was estimated at 120% of par value at September 30, 2020. The convertible preferred shares are classified within Level 3 of the valuation hierarchy.
Common Shares of Tonogold
On May 22, 2020, the Company converted $1.1 million of CPS (that is, 1,100 Tonogold preferred shares) into 6,111,111 Tonogold common shares. On September 29, 2020, the Company converted $2.82 million of CPS (that is, 2,820 Tonogold preferred shares) into 15,666,667 Tonogold common shares. The Company sold 3,557,209 of the shares, and held 18,220,569 Tonogold common shares with a fair value based on the $0.39 closing share price (OTC:TNGL) on September 30, 2020.
Tonogold Note Receivable
In connection with Tonogold's acquisition of Comstock Mining LLC (Note 20), on September 8, 2020, the Company recorded a senior secured convertible note (the "Note") due from Tonogold with a principal amount of $4,475,000 and a 12% annual interest rate. Interest is due and payable monthly with the principal due and payable on September 20, 2021 (the “Maturity Date”). The Note may be converted into Tonogold common shares, at the sole discretion of the Company, at the Maturity Date, upon an event of default or upon a partial or whole prepayment by Tonogold. The Maturity Date may be extended at the Company’s option if an event of default has occurred or is expected to occur or a fundamental transaction (as defined by the Note) has been announced but not yet closed. Because of the embedded features, the Company made the irrevocable election to report the Note on a fair value basis. Fair value of the Tonogold Note is based on a Monte Carlo model with the following inputs: Tonogold common share price - $0.39; volatility – 96%; risk free rate – 0.15%; cost of debt – 11.12%; conversion premium – 30%; probability of prepayment – 5% at both March and June 2021; probability of change in control – 5% at June 2021; probability of default – 27% at September 2021. The Company recorded the Tonogold Note at a fair value of $6.1 million as of September 8, 2020 and recorded an additional $0.3 million for the change in fair value as other income for the three and nine months ended September 30, 2020.
Contingent Forward
On March 20, 2020, Tonogold issued a senior secured convertible note with a principal amount of $5,475,000 to the Company, reflecting Tonogold’s intent to purchase additional membership interests in Comstock Mining LLC (Note 20) in the future at a specified price (the “Contingent Forward”). The Contingent Forward included the following features: 1) conversion feature allowing Comstock, at the Company’s sole option, to elect payment in Tonogold common shares upon certain events; 2) change of control redemption right allowing Comstock, to redeem the note in cash at a 125% premium; 3) event of default redemption right allowing Comstock the right to redeem the note in cash at a 118% premium; and 4) a payment modification included in the Contingent Forward. The fair value of the Contingent Forward is based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price of $0.35 on September 8, 2020, volatility of 96.0%, risk-free rate of 0.15%, cost of debt of 11.12%, required conversion premium of 30.0%, probability of prepayment of 5%, probability of change in control of 5% and probability of default of 27%. The Company recorded $0.6 million in other expense and $0.8 million in other income for the three and nine months ended September 30, 2020, respectively. The contingent forward asset was netted against the gain on sale of Comstock Mining LLC recorded for the three months ended September 30, 2020.
Accrued Make-Whole for Pelen LLC
The Pelen make-whole was valued based on the difference between the valuation of the outstanding Comstock common shares held by the seller of the Pelen membership interests (Note 21) at the volume-weighted price per share for five consecutive trading days preceding the date of determination of $0.47 at December 31, 2019, as compared to the remaining aggregate proceeds due. Because the inputs are observable market-based inputs, this instrument is classified within Level 2 of the valuation hierarchy. In April 2020, the Company purchased the 25% membership interest in Pelen LLC, settling all amounts due. No make-whole accrual remains in the condensed consolidated balance sheets at September 30, 2020.
Accrued Make-Whole for Mercury Clean Up LLC
The MCU make-whole was valued based on the difference between the valuation of the Company's common shares received by MCU and the required stock-based investment of $850,000 (Note 22). For the three months ended June 30, 2020, MCU sold 900,000 Comstock common shares for net proceeds of $465,127, reducing the remaining make-whole liability to $384,873. On May 15, 2020, the Company issued an additional 625,000 shares of its common stock to MCU. The accrued make-whole is zero at September 30, 2020, because the value of the Company's common shares held by MCU at the Company's closing share price of $1.08 on that date exceeded the remaining liability. The inputs are observable and market-based, so the instrument is classified within Level 2 of the valuation hierarchy.
Other Financial Instruments
The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these financial instruments. At September 30, 2020 and December 31, 2019, the fair value of the Company's debt obligations approximated $4.8 million and $5.4 million, respectively, as determined by borrowing rates estimated to be available to the Company for debt with similar terms and conditions.
18. Segment Reporting
Our management organizes the Company into two operating segments: mining and real estate. Our mining segment consists of all activities and expenditures associated with exploration, mineral development and mining. Our real estate segment consists of land, real estate rental properties, the Gold Hill Hotel, and the Daney Ranch. We evaluate the performance of our operating segments based on operating income (loss). All intercompany transactions have been eliminated. Financial information relating to our reportable operating segments and reconciliation to the consolidated totals follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenue
|
|
|
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate (Note 13)
|
49,425
|
|
|
48,350
|
|
|
146,225
|
|
|
130,132
|
|
Total revenue
|
49,425
|
|
|
48,350
|
|
|
146,225
|
|
|
130,132
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
Mining
|
(832,040)
|
|
|
(832,082)
|
|
|
(3,332,742)
|
|
|
(3,913,388)
|
|
Real estate
|
(698,957)
|
|
|
(8,651)
|
|
|
(727,873)
|
|
|
(31,362)
|
|
Total costs and expenses
|
(1,530,997)
|
|
|
(840,733)
|
|
|
(4,060,615)
|
|
|
(3,944,750)
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
Mining
|
(832,040)
|
|
|
(832,082)
|
|
|
(3,332,742)
|
|
|
(3,913,388)
|
|
Real estate
|
(649,532)
|
|
|
39,699
|
|
|
(581,648)
|
|
|
98,770
|
|
Total loss from operations
|
(1,481,572)
|
|
|
(792,383)
|
|
|
(3,914,390)
|
|
|
(3,814,618)
|
|
|
|
|
|
|
|
|
|
Gain on sale of membership interests in Comstock Mining LLC (Note 20)
|
18,275,846
|
|
|
—
|
|
|
18,275,846
|
|
|
—
|
|
Change in estimated fair value of contingent forward asset
|
(647,502)
|
|
|
—
|
|
|
765,880
|
|
|
—
|
|
Interest expense
|
(164,448)
|
|
|
(179,588)
|
|
|
(306,692)
|
|
|
(822,632)
|
|
Other income (expense) (Note 19)
|
1,347,738
|
|
|
1,358,868
|
|
|
3,522,192
|
|
|
1,111,338
|
|
Net income (loss)
|
$
|
17,330,062
|
|
|
$
|
386,897
|
|
|
$
|
18,342,836
|
|
|
$
|
(3,525,912)
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
Mining
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
15,000
|
|
|
$
|
—
|
|
Real estate
|
—
|
|
|
550,000
|
|
|
—
|
|
|
1,635,000
|
|
Total capital expenditures
|
$
|
4,000
|
|
|
$
|
550,000
|
|
|
$
|
15,000
|
|
|
$
|
1,635,000
|
|
|
|
|
|
|
|
|
|
Depreciation, Amortization, and Depletion
|
|
|
|
|
|
|
|
Mining
|
$
|
86,082
|
|
|
$
|
396,910
|
|
|
$
|
386,671
|
|
|
$
|
1,565,841
|
|
Real estate
|
690,151
|
|
|
2,465
|
|
|
705,233
|
|
|
7,395
|
|
Total depreciation, amortization, and depletion
|
$
|
776,233
|
|
|
$
|
399,375
|
|
|
$
|
1,091,904
|
|
|
$
|
1,573,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
|
2020
|
|
2019
|
Assets
|
|
|
|
Mining
|
$
|
39,355,282
|
|
|
$
|
30,106,865
|
|
Real estate
|
8,814,813
|
|
|
9,463,027
|
|
Total assets
|
$
|
48,170,095
|
|
|
$
|
39,569,892
|
|
19. Other Income and Expense
Other income (expense) net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Gain on sale of membership interests in Comstock Mining LLC
|
$
|
18,275,846
|
|
|
$
|
—
|
|
|
$
|
18,275,846
|
|
|
$
|
—
|
|
Change in estimated fair value of contingent forward asset
|
(647,502)
|
|
|
—
|
|
|
765,880
|
|
|
—
|
|
Interest expense
|
(164,448)
|
|
|
(179,588)
|
|
|
(306,692)
|
|
|
(822,632)
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
Interest income
|
142,365
|
|
|
11,136
|
|
|
328,391
|
|
|
73,411
|
|
Mining lease income
|
10,167
|
|
|
1,667
|
|
|
30,167
|
|
|
1,667
|
|
Realized gain on sale of shares of Tonogold common stock
|
743,535
|
|
|
—
|
|
|
767,275
|
|
|
—
|
|
Change in estimated fair value of Tonogold CPS and common shares
|
(53,610)
|
|
|
(332,263)
|
|
|
1,282,319
|
|
|
(332,263)
|
|
Change in estimated value of Tonogold note receivable
|
256,000
|
|
|
—
|
|
|
256,000
|
|
|
—
|
|
Loss on early retirement of GF Comstock debenture
|
(51,433)
|
|
|
—
|
|
|
(51,433)
|
|
|
—
|
|
Preferred shares issuance cost
|
—
|
|
|
—
|
|
|
—
|
|
|
(432,000)
|
|
Make whole obligations
|
—
|
|
|
(517,558)
|
|
|
162,711
|
|
|
(417,341)
|
|
Recognition of PPP proceeds
|
67,624
|
|
|
—
|
|
|
261,170
|
|
|
—
|
|
Gain on sale of mineral rights and property, plant, and equipment
|
—
|
|
|
(6,250)
|
|
|
100,000
|
|
|
|
Reimbursements from Tonogold
|
84,944
|
|
|
—
|
|
|
234,944
|
|
|
—
|
|
Termination of Tonogold option agreement
|
—
|
|
|
2,200,000
|
|
|
—
|
|
|
2,200,000
|
|
Final settlement of outstanding amounts due
|
144,473
|
|
|
—
|
|
|
144,473
|
|
|
—
|
|
All other
|
3,673
|
|
|
2,136
|
|
|
6,175
|
|
|
17,864
|
|
Total other income (expense)
|
1,347,738
|
|
|
1,358,868
|
|
|
3,522,192
|
|
|
1,111,338
|
|
Total other income (expense), net
|
$
|
18,811,634
|
|
|
$
|
1,179,280
|
|
|
$
|
22,257,226
|
|
|
$
|
288,706
|
|
Final settlement of outstanding accounts payable relates to invoices received from American Mining and Tunneling ("AMT") after a settlement in 2017 of all amounts due. AMT recently confirmed the invoiced amounts are not owed.
20. Tonogold Resources Inc. ("Tonogold") Purchase, Lease, and Option Agreements
There are three agreements between the Company and Tonogold: the Membership Interest Purchase Agreement, the Mineral Exploration and Mining Lease, and a Lease Option Agreement for the Company's American Flat processing facility.
Membership Interest Purchase Agreement
On January 24, 2019, the Company entered into an agreement, as amended and restated on September 8, 2020, to sell its interests in Comstock Mining LLC (“CML”), a wholly-owned subsidiary whose sole net assets are the Lucerne properties and related permits, to Tonogold (the "Purchase Agreement”), with the initial closing on November 18, 2019.
On November 18, 2019, Tonogold received 50% of the membership interests of CML, in exchange for the consideration paid to date of $6.0 million in cash and CPS with fair value when received of $7.6 million. The Company retained all management control and authority over CML until Tonogold's membership interests totaled 100%. Accordingly, Tonogold’s membership interests in CML were accounted for as a noncontrolling interest in the condensed consolidated financial statements through September 8, 2020. The Company recorded the fair value received from Tonogold in excess of the noncontrolling interest as additional paid in capital.
On September 8, 2020, the Purchase Agreement was closed, and 100% of the membership interests were acquired by Tonogold. The fair value of the consideration by Tonogold for the membership interests in CML was $18.8 million, including cash, CPS, and a note receivable. The Company's gain on the sale was $18.3 million, recorded during the three months ended September 30, 2020 on the condensed consolidated statements of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Cash
|
$
|
7,065,000
|
|
|
|
Non-cash items - fair value on date received
|
|
|
|
Tonogold CPS (Note 17)
|
7,607,263
|
|
|
|
Tonogold note receivable (Note 17)
|
6,141,497
|
|
|
|
Contingent forward asset - fair value on settlement date (Note 17)
|
(1,998,832)
|
|
|
|
Total Consideration
|
18,814,928
|
|
|
|
|
|
|
|
Net carrying value Comstock Mining LLC
|
(539,082)
|
|
|
|
|
|
|
|
Net gain on sale
|
$
|
18,275,846
|
|
|
|
Other features of the Purchase Agreement include Tonogold guaranteeing the Company’s future payments for its membership interests in Northern Comstock LLC, which owns and leases certain mineral properties in the Lucerne area, and the assumption of certain reclamation liabilities. The Company also retains a 1.5% net smelter returns ("NSR") royalty on the Lucerne properties.
Cash - Through September 8, 2020, the Company received $7.1 million in a series of cash payments from Tonogold, starting with a $1.0 million non-refundable deposit in January 2019, and concluding with $140,000 at closing of the Purchase Agreement.
Tonogold CPS - During 2019, the Company received $6.1 million in Tonogold Convertible Preferred Stock ("CPS"). The CPS became convertible into common shares on May 22, 2020. The conversion price for the CPS is the lower of (1) 85% of the 20-day volume weighted closing price or (2) 0.18 cents per share. Tonogold can redeem the CPS prior to conversion, at a price of 120% of the face value of the CPS. The CPS was recorded at a fair value of $7.6 million when received (Note 17).
Contingent Forward - On March 20, 2020 the Company and Tonogold secured the cash consideration remaining at that time with a 12% senior secured convertible note with an initial principal balance of $5.475 million (the "Note"). The Note is secured by the membership interests held by Tonogold, and was secured by all of CML's assets after the Company's Debenture (Note 11) was been paid in full and the related liens released.
In evaluating the accounting for the Note, the Company determined that although the Note represents legal form debt, it should be evaluated and accounted for based on the substance of the arrangement rather than its legal form. The Company concluded that the Note represented a contingent forward for the Company’s right to sell its membership interests in CML to Tonogold at a future date in exchange for cash consideration or common stock of Tonogold if certain options are elected (the “Contingent Forward”). The Company identified the Contingent Forward as a derivative which was adjusted to fair value at the end of each reporting period. The Company recorded the $1.2 million initial fair value of the Contingent Forward in additional paid in capital since Tonogold, a related party at the time, owned 50% of the membership interests of CML. The fair value of the contingent forward asset on September 8, 2020 was $2.0 million, and was an offset to the consideration received for the sale of Comstock Mining LLC recorded in the three months ended September 30, 2020.
Tonogold Note Receivable - After closing the transaction on September 8, 2020, the Contingent Forward was settled, and the Note was recharacterized as a note receivable from Tonogold. On that date, the remaining principal balance was $4,475,000, bearing a 12% annual interest rate. Interest is due and payable monthly with the principal due and payable on September 20, 2021 (the “Maturity Date”). The Note may be converted into Tonogold common shares, at the sole discretion of the Company, at the Maturity Date, upon an event of default or upon a partial or whole prepayment of the Note by Tonogold. The Maturity Date may be extended at the Company’s option if an event of default has occurred or is expected to occur, or a fundamental transaction (as defined in the Note) has been announced but not yet closed. Fair value of the Note is based on a Monte Carlo model with the following inputs: Tonogold common share price - $0.39; volatility – 96%; risk free rate – 0.15%; cost of debt – 11.12%; conversion premium – 30%; probability of prepayment – 5% at both March and June 2021; probability of change in control – 5% at June 2021; probability of default – 27% at September 2021. The Company recorded the Note at a fair value of $6.1 million at closing on September 8, 2020 and recorded an additional $0.3 million in other income for the change in fair value from September 8, 2020 to September 30, 2020.
Mineral Exploration and Mining Lease for Storey County Properties
On September 16, 2019, as amended and restated on December 23, 2019, the Company, as lessor, entered into a ten-year, renewable mineral exploration and mining lease with Tonogold for certain mineral properties owned or controlled by the Company in Storey County, Nevada (the "Exploration Lease"). The Exploration Lease grants Tonogold the right to use these properties for mineral exploration and development, and ultimately the production, removal and sale of minerals and certain other materials.
Tonogold pays a quarterly lease fee of $10,000. The lease fee will escalate 10% each year on the anniversary date of the Exploration Lease. Tonogold also reimburses the Company for all costs associated with owning the properties, including lease payments for any underlying, third-party leases. The Exploration Lease also provides for royalty payments after mining operations commence. For the first year following the commencement of mining, royalties will be paid to the Company at the rate of 3.0% of NSR for the properties. The rate will be reduced to 1.5% of NSR thereafter.
The Exploration Lease provides that Tonogold’s exploration spending, permitting, and engineering commitments will be a cumulative total of at least $20 million over 20 years, at the rate of $1 million per year. Tonogold also committed to specific milestones for issuing technical reports on their results, culminating in a published Feasibility report by the 20th anniversary of the Exploration Lease.
The initial term of the Exploration Lease (the "Exploration Term") is 5 years, with Tonogold committing to spending at least $5 million for exploration, and to producing an NI 43-101 compliant technical report by the end of the 5th year. The Exploration Lease will automatically renew for a second, 10-year term (the "Development Term") as long as the commitments have been met. During the Development Term, Tonogold is committed to $10 million of additional expenditures for exploration, development, and technical reporting, and to producing an economically viable mine plan and an NI 43-101 compliant Pre-Feasibility report before the agreement's 15th anniversary.
The Exploration Lease will automatically renew for a third, 5-year term (“the Planning Term”) provided that the prior spending and reporting commitments have been met. During the Planning Term, Tonogold is committed to $5 million in additional expenditures for exploration, development, permitting, and technical reporting. By the 20th anniversary of the agreement, Tonogold also commits to producing an economically viable mine plan, and an NI 43-101 compliant Feasibility report, and will produce a mutually agreed-upon schedule for placing the properties into production.
If the spending and other commitments have been met during the Planning Term, the Exploration Lease will automatically continue in effect as long as development and permitting activities continue in compliance with a mutually agreed-upon schedule, or for so long as minerals are produced from the properties or from adjacent properties (the “Extended Term”).
On September 8, 2020, Tonogold announced that it had commenced a $7 million drill program, including both core and RC drilling, focused on the historically significant Comstock Lode.
Lease Option Agreement for the American Flat Processing Facility
On November 18, 2019, the Company, as lessor, entered into a lease-option to lease its permitted American Flat property, plant and equipment to Tonogold for crushing, leaching and processing material from the Lucerne mine (the "Lease Option Agreement"). Under the Lease Option Agreement, Tonogold is required to reimburse the Company approximately $1.1 million in expenses per year to maintain the option. If such option is exercised, Tonogold will then pay the Company a rental fee of $1.0 million per year plus $1 per processed ton, in addition to all the costs of operating and maintaining the facility, up to and
until the first $15 million in rental fees are paid, and then stepping down to $1.0 million per year and $0.50 per processed ton for the next $10 million paid to the Company. The Lease Option Agreement remains in effect, but has not yet been exercised.
Other
For the nine months ended September 30, 2020, the Company received advance expense reimbursements from Tonogold totaling $2.3 million, and invoiced actual expense reimbursements totaling $2.2 million under the Purchase Agreement, the Exploration Lease, and the Lease Option Agreement. The remaining $0.1 million is recorded as a deposit in the current liabilities section of the condensed consolidated balance sheets.
21. Pelen LLC ("Pelen") Membership Interest
Investment in Pelen Membership Interest
Pelen is the 100% owner of the historic Sutro Tunnel Company that owns the Sutro townsite, the historic 6-mile Sutro Tunnel, the federal land grants and mining rights extending 1,000 feet on each side of the 6-mile tunnel, the rights to the tunnel’s water, and the patented mining claims and private lands on Gold Hill.
In January 2018, the Company issued 295,082 shares of restricted common stock as initial payment to acquire 25% of the total membership interests of Pelen. In November 2018, the Company issued 351,637 shares of restricted common stock as additional shares based on the shortfall on the aggregate proceeds for the initial shares. In December 2018, the agreement was amended to have a cut-off date of December 31, 2019, for closing the transaction and any unsold shares returned to the Company, with the Company required to make up any shortfall in cash.
On April 24, 2020, the Company completed the acquisition of 25% of the total membership interests of Pelen. The total purchase price was $0.6 million, paid in stock and cash and accounted for as "Investment in Pelen LLC", a non-current asset on the condensed consolidated balance sheets. The investment is accounted for as an equity method investment.
Accrued Make-whole for Pelen
The agreement with the member from whom the Company was acquiring the 25% interest contained a provision whereby the Company was required to issue additional shares of its common stock (“make whole”) for the difference between the valuation of the Company's common shares received by the member and the required stock-based investment. The accrued make-whole was valued based on the difference between the valuation of the outstanding shares held by the seller of the Pelen membership interests at the volume-weighted price per share for five consecutive trading days preceding the date of determination of $0.47 at December 31, 2019, as compared to the remaining aggregate proceeds due. In April 2020, the Company purchased 25% of the membership interests in Pelen, settling all remaining amounts due with a cash payment of $150,000. No make-whole accrual remains in the condensed consolidated balance sheets at September 30, 2020.
Purchase Option for Pelen
On September 1, 2020, the Company paid $100,000 for a one-year option (the "Option") to purchase the remaining 75% of the membership interests of Pelen, for a purchase price of $3.8 million. The Option can be extended for a second year for an additional option fee of $100,000, with the purchase price increased to $4.4 million; and can be extended for a third year for another additional option fee of $100,000, with the purchase price increased again to $5.0 million. If the Option is exercised, half of all option payments will be credited to the purchase price. The $100,000 option payment is included in prepaid expenses and other current assets on the condensed consolidated balance sheets at September 30, 2020.
Sutro Tunnel Company Mineral Exploration and Mining Lease
On September 1, 2020, the Company entered into a new mineral exploration and mining lease with the Sutro Tunnel Company ("Sutro"), 100% owned by Pelen (Note 5). The lease covers patented mining claims, exploration rights, and access over and through town lots in Gold Hill and Virginia City, Nevada. The lease also provides the right to explore the Sutro Tunnel. The previous lease with Sutro expired December 31, 2017, and had been extended on a month-to-month basis.
22. Mercury Clean Up LLC ("MCU") Pilot and Joint Venture Agreements
The MCU Agreement
On June 21, 2019, as amended July 3, 2019, the Company entered into a Mercury Remediation Pilot, Investment and Joint Venture Agreement (the “MCU Agreement”) with MCU”. Pursuant to the MCU Agreement, the Company committed $2.0 million of capital contributions that was payable in cash of $1.15 million and shares of the Company's common stock of $0.85 million, in exchange for 15% of the fully-diluted equity ownership of MCU and the first right to participate in 50% of the equity of any future joint ventures formed with MCU (the “Joint Ventures”).
Based on successful proof of technical and commercial viability, the Company has the rights to coordinate an additional $3.0 million in financing for the Joint Venture, and MCU would then contribute the 25-ton-per-hour system, based on an agreed upon capital plan (equipment and working capital uses) and a time-specific project schedule, including the timing of the capital needs. Such financing entitles the Company to acquire an additional 10% of the fully-diluted equity interests of MCU.
Deposit for MCU Investment
Cash - The Company paid MCU $750,000 during 2019, and $150,000 and $400,000 in cash during the three and nine months ended September 30, 2020, respectively, bringing the total to $1.15 million in cash as of September 30, 2020, satisfying the required cash contribution.
Shares of Common Stock - The MCU agreement contains a provision whereby the Company is required to issue addition shares of its common stock (“make whole”) for the difference between the valuation of the Company's common shares received by MCU and the required stock-based investment of $850,000. On July 18, 2019, the Company issued 900,000 shares of restricted common stock with a fair value of $751,050 to fund the MCU capital contribution. During the three months ended June 30, 2020, MCU sold the 900,000 Comstock common shares for net proceeds of $465,127, reducing the remaining make-whole liability to $384,873. On May 15, 2020, the Company issued MCU an additional 625,000 shares of restricted common stock with a fair value of $314,687. MCU has not yet sold these shares. The accrued make-whole is zero at September 30, 2020, because the value of the Company's common shares held by MCU at the Company's closing share price of $1.08 on that date exceeded the remaining liability.
The Company’s deposit on investment in MCU is $1.9 million which is comprised of $1.15 million in cash and shares of common stock issued with a fair value of $751,050. Since the transaction has not closed, these amounts are recorded as deposits for investment in Mercury Clean Up LLC in the condensed consolidated balance sheets at September 30, 2020. The Company expects to close the MCU transaction in the fourth quarter of 2020.
Deposit for MCU Philippines Inc.
On April 10, 2020, the Company entered into a second amendment of the MCU Agreement, wherein MCU and the Company have identified an opportunity to remediate mercury in the Philippines, particularly in the province of Davao d' Oro (the “Philippine Opportunity”). Comstock and MCU formed a new entity called MCU Philippines Inc. ("MCU-P") to engage in the Philippine Opportunity. During the three months ended September 30, 2020, the Company made cash investments of $1.0 million and committed another $1.0 million in equity investments, and up to an additional $1.0 million in secured loans. The Company investments, when completed, will result in an additional 10% interest in MCU and additional direct 50% joint venture participation in both the Philippine and Comstock Lode mercury remediation project opportunities. Since the transaction has not closed, these amounts are recorded as "Deposits for investment in MCU Philippines Inc" in the condensed consolidated balance sheets at September 30, 2020. The Company expects to close the MCU-P transaction in the first quarter of 2021. The Company’s chief executive officer is a director of MCU-P.
23. Sierra Springs Opportunity Fund Inc. ("SSOF") Investment
Investment in Sierra Springs Opportunity Fund Inc.
During 2018 and 2019, Comstock’s Board of Directors approved the Company entering into an investment in a certain opportunity zone fund in northern Nevada. During 2019, Comstock invested $0.3 million into a qualified opportunity zone fund named Sierra Springs Opportunity Fund Inc. (“SSOF”) and a qualified opportunity zone business named Sierra Springs Enterprises Inc. (“SSE”), which is solely owned by SSOF. It is anticipated that the Company could own approximately 9% of SSOF upon issuance by SSOF of all 75 million authorized shares to investors. The Company’s chief executive officer is the president and a director of SSOF and an executive of SSE.
Comstock’s $0.3 million investment in SSOF is recorded in the consolidated balance sheets at September 30, 2020, and December 31, 2019, as "Investment in Sierra Springs Opportunity Fund Inc". The investment is accounted for at cost less impairment because there is no ready market for the investment units. Management identified no events or changes in circumstances that might have had a significant adverse effect on the carrying value of the investment. Management concluded it was impractical to estimate fair value due to the early stages of the fund and the absence of a public market for its stock.
Silver Springs Properties
On September 26, 2019, as amended on November 30, 2019, December 26, 2019, March 31, 2020, June 30, 2020, and October 1, 2020, the Company entered into agreements with SSE to sell its two properties in Silver Springs, Nevada (the "Silver Springs properties"). The agreements include the sale of 98 acres of industrial land and senior water rights for $6.5 million and 160 acres of commercial land along with its rights in the membership interests in Downtown Silver Springs LLC for $3.6 million. Accordingly, the properties are classified as assets held for sale on the condensed consolidated balance sheets at September 30, 2020 and December 31, 2019.
On December 9, 2019, the Company purchased 100% of the membership interests in DTSS, including 160 acres of centrally located land in Silver Springs, Nevada, and related approvals for a commercial downtown development. The DTSS acquisition was accounted for as an asset acquisition as DTSS did not meet the definition of a business. The Company paid total consideration of $4.1 million. Based on the agreement with SSE to sell the Silver Springs properties, the carrying value of the land was adjusted to the contract value of $3.6 million less estimated costs to sell, resulting in an impairment of $0.5 million, charged to other expense in the consolidated statements of for the year ended December 31, 2019.
As of September 30, 2020, the Company has received deposits in cash and escrow from SSE totaling $0.4 million towards the purchase of the Silver Springs Properties. The transactions are expected to close during the fourth quarter of 2020.
Advance to Sierra Springs Opportunity Fund Inc.
As of September 30, 2020, the Company advanced SSOF $1.3 million, for deposits and payments on land purchases in Silver Springs, Nevada. The advances are expected to be repaid during the fourth quarter of 2020, upon the sale of the Company’s properties located in Silver Springs to SSE.
The Company’s advances totaling $1.3 million are recorded in the consolidated balance sheets at September 30, 2020, in other current assets. At September 30, 2020, The Company’s maximum exposure to loss as a result of its involvement with SSOF and SSE is limited to the total of its current investment in and advance to SSOF.
24. Subsequent Events
Redemption of Remaining Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock
On October 2, 2020, Tonogold issued a redemption notice for the remaining $2.2 million (face value) of its CPS held by the Company. The redemption price of $2.6 million in cash, representing 120% of face value, was received on October 2, 2020.
Early Extinguishment of Concorde Trust, Bean Trust, & Scott H. Jolcover Unsecured Promissory Notes
On October 1, 2020, the Company revised and divided the Concorde Trust promissory note of $3.68 million into two separate promissory notes totaling the same amount, that is, a new promissory note to Georges Trust for $3.04 million and a revised promissory note for Concorde Trust for $0.64 million, representing entities under common control with each other but not with the Company.
On October 1, 2020, the Company paid the Scott H. Jolcover, a member of the Company's management, promissory note in full, with a principal payment of $150,000 plus earned original issue discount ("OID") of $1,216, and resulted in a gain of $7,848 from the recapture of unearned OID.
On October 5, 2020, the Company paid $1.7 million in principal on the remaining Georges, Concorde, and Bean promissory notes, plus earned OID of $15,143. On October 9, 2020, the Company paid an additional $0.5 million in principal on the remaining promissory notes, plus earned OID of $30,213. These early payments reduced the principal balance on the notes to approximately $1.9 million, and resulted in a gain of $118,548 from the recapture of unearned OID.
New Daney Purchase
On May 21,2020, the Company exercised its option with New Daney Company Inc to purchase seven unpatented lode mining claims located in Spring Valley, south of our Dayton resource area, for a total of $100,000. On October 8, 2020, the Company closed the transaction with a payment in full for the $85,000 remaining balance.
Como Comet Claims Sale
On October 29, 2020, the Company sold eight unpatented mining claims (the "Como Comet" properties) to Hercules Gold USA LLC ("Hercules") for total purchase price of 100,000 shares of the common stock of Eclipse Gold Mining Corporation ("Eclipse") (TSXV: EGLD.V) plus a 2% net smelter returns royalty on future mineral production from these properties. The Eclipse shares had a fair value of $65,000 at the $0.65 per common share price when received. Hercules has the option to purchase the royalty for $75,000 for each one percent (1%) per each unpatented claim.