NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
1. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
Comstock Mining Inc. is a Nevada-based, precious and strategic metal-based exploration, economic resource development, mineral production and metal processing business with a strategic focus on high-value, cash-generating, environmentally friendly, and economically enhancing mining and processing technologies and businesses. The Company has extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”), is an emerging leader in sustainable, responsible mining and processing, and is currently commercializing environment-enhancing, metal-based technologies, products, and processes for precious and strategic metals recovery. As used in the notes to the consolidated financial statements, we refer to Comstock Mining Inc., and its wholly-owned subsidiaries as "Comstock", the "Company", "we", “us”, or "our."
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Comstock Mining Inc. and its wholly-owned subsidiaries, Comstock Processing LLC, Comstock Northern Exploration LLC, Comstock Exploration and Development LLC, Comstock Real Estate Inc., Comstock Industrial LLC, Downtown Silver Springs LLC ("DTSS") and, prior to its sale in September 2020, Comstock Mining LLC. Intercompany transactions and balances have been eliminated.
On September 8, 2020, the Company completed the sale to Tonogold Resources, Inc. ("Tonogold") of its remaining 50% membership interests in Comstock Mining LLC (“Comstock LLC”). The consolidated financial statements do not include Comstock LLC subsequent to that date (Note 2).
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 2). 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 of SSOF because no one individual or entity has unilateral control over significant decisions and decisions require the consent of all investors. As the Company is not the primary beneficiary, SSOF is not consolidated. At December 31, 2020 and 2019, the Company’s investment in SSOF is presented on the consolidated balance sheets as a non-current investment. At December 31, 2020, the Company’s maximum exposure to loss as a result of its involvement with SSOF is limited to its investment of $0.4 million and the advances of $1.65 million.
Reclassifications
Certain prior year 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.
Liquidity and Capital Resources
The 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 has recurring net losses from operations and an accumulated deficit of $221.0 million as of December 31, 2020. As of December 31, 2020, the Company has cash and cash equivalents of $2.4 million and $13.6 million of other net working capital. During 2021, management expects proceeds from planned sales of Tonogold common shares, collection of a note receivable due on September 20, 2021 from Tonogold, and the planned sale of the Company’s Silver Springs properties (the "Silver Springs Properties") to Sierra Springs Enterprises, Inc. ("SSE"). Management believes the Company will be able to pay its obligations that are due over the next twelve months from the issuance date of the financial statements.
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 at the date of the financial statements, and related income, costs, expenses, receipts
and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to the useful lives and valuation of properties, plant and equipment, carrying value of assets held for sale and, mineral rights, deferred tax assets, derivative assets and liabilities, the Tonogold Series D Convertible Junior Participating Non-Cumulative Perpetual Preferred Stock ("CPS"), note receivable accounted for at fair value, discount rates on non-interest bearing notes, reclamation liabilities, stock-based compensation, and contingent liabilities.
Fair Value Measurements
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Derivative Instruments
Derivative instruments are recognized as either assets or liabilities on the 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).
The Company evaluates and accounts for embedded derivatives in its financial instruments based on three criteria that, if met, require bifurcation of embedded derivatives from their host instruments and accounting for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not required to be re-measured at fair value and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument, and is shown at its fair value at each balance sheet date and recorded as an asset or liability with the change in fair value recorded in the consolidated statements of operations as other income (expense).
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and highly liquid investments purchased with maturities of three months or less. Cash deposits with banks may exceed FDIC insured limits.
Investments
Investments in Securities:
From time to time, the Company holds investments in the form of both debt and equity securities.
Debt and convertible debt securities are classified as trading, available for sale or held to maturity, in certain cases electing the fair value option. Upon sale of a debt security, the realized gain or loss is recognized in earnings. At December 31, 2020, the Company is the holder of two investments in debt securities, a convertible note receivable from Tonogold and a note receivable from MCU Philippines, Inc ("MCU-P"). The Company has elected the fair value option for the Tonogold note receivable with unrealized gains and losses recognized in current earnings. The MCU-P note receivable is classified as held to maturity and accounted for at amortized cost (Note 2). Unrealized gains and losses from available for sale debt securities are excluded from current earnings and reported in other comprehensive income until realized.
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 an identical or similar investment in the same issuer. At the end of each reporting period, the Company reassesses whether an equity security without a readily determinable fair value qualifies to be measured at cost minus impairment, considers whether impairment indicators exist to evaluate whether the investment is impaired and, if so, records an impairment loss. Upon sale of an equity security, the realized gain or loss is recognized in earnings. At December 31, 2020, the Company holds two investments in equity securities, Tonogold common shares and Eclipse Gold Mining Corporation common shares, that have readily determinable fair values for which unrealized gains or losses are recognized in earnings. At December 31, 2020, the Company has an investment in one equity security, Investment in SSOF, that does not have a readily determinable fair value and, accordingly, is accounted for at its cost minus impairment (Note 2).
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, are accounted for under the equity method of accounting. In determining whether significant influence exists, the Company considers its participation in policy-making decisions and representation on governing bodies. Under the equity method of accounting, our share of the net earnings or losses of the investee are included in net income (loss) in the consolidated statements of operations. We 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 December 31, 2020, the Company's 25% membership interests in Pelen Limited Liability Company (“Pelen”), 15% membership interests in Mercury Clean Up, LLC ("MCU") and 50% common stock holdings of MCU-P are accounted for using the equity method (Note 2).
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 LLC was consolidated with presentation of noncontrolling interest through September 8, 2020 when the Company’s remaining membership interests were sold (Note 2).
Long-Lived Assets
We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future undiscounted cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.
Mineral Rights and Properties
We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by Securities and Exchange Commission ("SEC") Industry Guide 7 or by regulation S-K 1300, exploration expenditures are expensed as incurred. We expense mineral lease costs and repair and maintenance costs as incurred.
We review the carrying value of our properties for impairment, including mineral rights upon the occurrence of events or changes in circumstances that indicate the related carrying amounts may not be recoverable. Our estimate of precious metal prices, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in all of these properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our properties and mineral claims, and possibly require future asset impairment write-downs.
Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and mining properties.
Properties, Plant and Equipment
We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. When an asset is sold, we recognize a gain (loss) in the consolidated statements of operations based upon the proceeds received on the sale less the net carrying value of
the asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:
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Building
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7 to 15 years
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Vehicles and equipment
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3 to 7 years
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Processing and laboratory
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5 to 15 years
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Furniture and fixtures
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2 to 3 years
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Reclamation Liabilities and Asset Retirement Obligations
Minimum standards for site reclamation and closure have been established for us by various government agencies and contractual obligations with lessors. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site. Separately, we accrue costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable.
Revenue Recognition
The Company has no contracts with customers as it does not have active mining operations. When the Company resumes active mining operations and has revenue, it will account for revenue from contracts with customers by evaluating the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied.
Real estate revenue is recognized when rental income is earned under the related leasing agreements.
Stock-Based Compensation
All transactions in which goods or services are received for the issuance of shares of the Company’s common stock or options to purchase shares of common stock are accounted for based on the fair value of the equity interest issued. The fair value of shares of common stock is determined based upon the closing price per share of the Company’s common stock on the date of the award. The Company estimates the fair value of stock-based compensation (e.g., option) using the Black-Scholes model, which requires the input of various subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected life”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”), the risk-free interest rate and the dividend yield. Changes in the subjective assumptions can materially affect the estimate of the fair value of stock-based compensation.
Reverse Stock Split
Effective November 28, 2019, the Company completed a 1-for-5 (reverse) stock split of its authorized and outstanding shares of common stock, as approved by its Board of Directors. All common shares and per share amounts 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 the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and the assumptions are consistent with the plans and estimates that the Company is using to manage the
underlying businesses. The Company provides a valuation allowance for deferred tax assets that the Company does not consider more likely (than not) to be realized.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company evaluates its tax positions taken or expected to be taken in the course of preparing its tax returns to determine whether the tax positions will more likely than not be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are not recorded as a tax benefit or expense in the current year. No reserve for uncertain tax positions has been recorded.
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 entities or individuals, are considered to be related if either party has the ability, directly or indirectly, to control or exercise significant influence over the other party in making financial and operational decisions. Entities and individuals are also considered to be related if they are subject to the common control or significant influence of another party (Notes 3 and 21).
Leases
The Company determines if a contract is or contains a lease at its inception and evaluates if a contract gives the right to obtain substantially all of the economic benefits from use of an identified asset and the right to direct the use of the asset, in order to determine if a contract contained a lease. The Company has one existing lease contract classified as an operating lease contract. For this lease, the Company recognized a right-of-use asset and a corresponding operating lease liability on its consolidated balance sheets. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent obligations by the Company to make lease payments which arise from a lease. Lease right-of-use assets and liabilities are recognized at the inception date based on the present value of lease payments over the lease term. As the Company’s lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the inception date in order to determine the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term, in real estate operating costs.
Recently Issued Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“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 on January 1, 2020 did not have 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 the disclosures beginning in the first quarter of 2020 to conform to this guidance. The Company's adoption of this standard on January 1 2020 did not have 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.
The Company is operating in alignment with these state and federal 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 MCU’s plans for commencing mercury recovery testing on the Comstock and in the Philippines (Note 2). 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. Significant Transactions
Tonogold Resources Inc. Securities, 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 the 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 LLC, a wholly-owned subsidiary with sole net assets of the Lucerne properties and related permits, to Tonogold (the "Purchase Agreement”), with the initial closing on November 18, 2019. On September 8, 2020, 100% of Comstock LLC membership interests were transferred to Tonogold.
On November 18, 2019, Tonogold received 50% of the membership interests of Comstock LLC, in exchange for the consideration paid to date of $5.9 million in cash and CPS with fair value when received of $7.6 million. The Company retained all management control and authority over Comstock LLC until Tonogold's membership interests totaled 100%. Accordingly, Tonogold’s membership interests in Comstock LLC were accounted for as a noncontrolling interest in the 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 in 2019. Consideration received in 2020 prior to the close on September 8, 2020 totaled $1,140,000 ($100,000 of which was additional contribution, $140,000 additional compensation at closing, and $900,000 payments on the note receivable). The additional contribution was allocated between additional paid in capital and the non-controlling interest based upon the percentage ownership at the time the consideration was received.
On September 8, 2020, the Purchase Agreement was finalized, and 100% of the membership interests in Comstock LLC were acquired by Tonogold. The fair value of the consideration delivered by Tonogold in 2019 and 2020 for the membership interests in Comstock LLC was $18.8 million, and included cash, CPS, and the note receivable. The Company's gain on the sale was $18.3 million, recorded during the year ended December 31, 2020 in the consolidated statements of operations.
Total consideration received from Tonogold in 2019 and 2020:
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Fair Value
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Cash
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$
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7,065,000
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Non-cash items - fair value on date received
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Tonogold CPS
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7,607,263
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Tonogold note receivable
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6,141,497
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Contingent forward asset - fair value on settlement date
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(1,998,832)
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Total Consideration
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18,814,928
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Net carrying value Comstock Mining LLC
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(539,082)
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Net gain on sale
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$
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18,275,846
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The gain was recognized in the consolidated statements of operations for the year ended December 31, 2020. As a result of the sale of 100% membership interest in Comstock LLC, the Company deconsolidated Comstock LLC which resulted in a decrease in additional paid in capital of $20.5 million and elimination of the non-controlling interest of $0.3 million.
Other features of the Purchase Agreement include Tonogold guaranteeing the Company’s future payments of capital contributions required under the operating agreement of Northern Comstock LLC, which owns and leases certain mineral properties in the Lucerne area, the assumption of certain reclamation liabilities, and the reimbursement of certain operating costs. The Company also retains a 1.5% net smelter return ("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. The Company received cash payments of $1.1 million and $5.9 million for the years ended December 31, 2020 and 2019, respectively.
Tonogold CPS and Common Shares - The consideration received under the Purchase Agreement included the CPS.
During 2019, the Company received $6.1 million face value in Tonogold CPS. The CPS was recorded by the Company at a fair value of $7.6 million when received. The CPS became convertible into common shares on May 22, 2020. The conversion price for the CPS was the lower of (1) $0.18 cents per share, or (2) 85% of the 20-day volume weighted average closing price of Tonogold common shares. Tonogold could redeem the CPS prior to conversion, at a redemption price 120% of the face value of the CPS.
On May 22, 2020 and September 29, 2020, the Company elected to convert CPS with a face value of $1.1 million and $2.8 million, respectively, at $0.18 per common share, for a total of 21.8 million Tonogold common shares. On October 2, 2020, Tonogold redeemed the remaining $2.2 million face value of CPS for $2.6 million in cash, representing 120% of face value. During the years ended December 31, 2020 and 2019, the Company recognized gains (losses) on the change in fair value of the CPS of $(2.5) million and $1.5 million, respectively.
During the year ended December 31, 2020, the Company sold 8.7 million Tonogold common shares at an average price of $0.37 per share for gross proceeds of $2.9 million (plus a $0.2 million related receivable).and realized a gain of $1.5 million.
At December 31, 2020, the Company held 13.1 million Tonogold common shares with a fair value of $3.9 million. The fair value of the common shares is based on the $0.30 closing share price (OTC: TNGL) on December 31, 2020 (Note 15). During the year ended December 31, 2020, the Company recognized a gain on the change in fair value of the common shares of $1.6 million.
Tonogold Note Receivable - The consideration received for Tonogold's acquisition of Comstock LLC included a note receivable (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% per annum, with interest payable monthly. The outstanding principal balance is due on September 20, 2021, unless extended by the Company (Note 15). The fair value of the Note on September 8, 2020 and December 31, 2020 was $6.1 million and $5.5 million, respectively. During the year ended December 31, 2020, the Company recognized a loss on the change in fair value of the Note of $0.6 million.
Contingent Forward - Upon its issuance on March 20, 2020 and prior to the close of the sale of Comstock LLC, the Note contained a contingent forward. In evaluating the accounting for the Note, the Company determined upon issuance the Note represented a legal form debt, but should be evaluated and accounted for based on the substance of the arrangement rather than its legal form. The Company concluded the Note contained a contingent forward for the Company’s right to sell its membership interests in Comstock LLC to Tonogold at a future date in exchange for cash consideration or common stock of Tonogold if certain options were 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. On March 20, 2020, the Company recorded the $1.2 million initial fair value of the Contingent Forward asset in additional paid in capital on the consolidated balance sheets as Tonogold, a related party at the time, owned 50% of the membership interests of Comstock LLC. The fair value of the Contingent Forward asset on September 8, 2020 was $2.0 million, and was an offset against the consideration received for the sale of Comstock LLC recorded on that date. Upon closing of the Purchase Agreement, the contingencies were eliminated, and the Note was recorded as a current asset on the consolidated balance sheets. During the year ended December 31, 2020, the Company recognized a gain for the change in fair value of the Contingent Forward of $765,880 (Note 15).
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 10-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 to the Company 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, but not limited to, lease payments for underlying, third-party leases. The Exploration Lease also provides for royalty payments when 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.
Lease Option Agreement for the American Flat Processing Facility
On November 18, 2019, the Company, as lessor, entered into an agreement 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 the option is exercised, Tonogold will then pay the Company a rental fee of $1.0 million per year plus $1 per processed ton up to and until the first $15.0 million in rental fees are paid to the Company, and then stepping down to $1.0 million per year plus $0.50 per processed ton for the next $10.0 million paid to the Company. The Lease Option Agreement remains in effect, but has not yet been exercised. The Lease Option Agreement expires in November 2025.
Reimbursements
Total reimbursements under the three Tonogold agreements, including but not limited to all costs associated with owning the properties, lease and option payments and lease income for the years ended December 31, 2020 and 2019 were $2.9 million and $2.2 million, respectively.
Mercury Clean Up LLC Pilot and Joint Venture Agreements
The MCU Agreement
On June 21, 2019, as amended July 3, 2019, April 10, 2020 and December 4, 2020, 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 membership interest of MCU and the first right to participate in 50% of the equity of any future joint ventures formed with MCU (the “Joint Ventures”).
Upon successful proof of technical and commercial viability, the Company has the rights to coordinate an additional $3.0 million in financing for the Joint Ventures, 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. Completing $2.0 million of such financing entitles the Company to an additional 10% of the fully-diluted membership interests of MCU.
MCU Investment
Cash - The Company made cash payments to MCU of $750,000 during 2019, and $400,000 during 2020, bringing the total to $1.15 million in cash and satisfying the required cash contribution.
Shares of Common Stock - The MCU Agreement contains a provision whereby the Company is required to issue additional shares of its common stock for the make whole difference between the value 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 April and May 2020, MCU sold the 900,000 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.
On December 4, 2020, the remaining common shares became transferable, and the parties agreed that the make-whole obligation had been satisfied. On that date, MCU and the Company agreed that MCU received consideration in excess of the required $2.0 million, and the Company became the fully vested owner of 15% of the fully-diluted membership interest of MCU and became entitled to 50% participation in the Joint Ventures. As of December 31, 2020, the total purchase price of $2.0 million, paid in cash and stock, is accounted for as Investment in Mercury Clean Up, LLC, a non-current asset on the consolidated balance sheets. The investment is accounted for under the equity method. The Company’s chief executive officer is a member of the board of MCU.
The December 4, 2020 third amendment to the MCU Agreement clarified the provision that when MCU sells its remaining 625,000 shares of the Company’s common stock, the Company is entitled to the portion of the proceeds that is in excess of its original required contribution. See MCU Derivative Asset below.
MCU Philippines Inc. Investment
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, specifically in the province of Davao d' Oro (the “Philippine Opportunity”). In July 2020, MCU formed MCU-P to engage in the Philippine Opportunity. The Company’s chief executive officer is a director of MCU-P.
On December 4, 2020, the Company became fully entitled to 50% participation in the Joint Ventures and was issued 50% of the common stock of MCU-P.
During 2020, the Company made cash loans of $1.2 million, in the form of senior secured interest free loans, and committed up to another $1.8 million in secured loans. When the Company's loans to MCU-P reach $2.0 million, the Company will receive an additional 10% membership interest in MCU. The loans are secured by all equipment owned by MCU-P.
Prior to December 4, 2020, the Company considered these advances to be a receivable. Based on the third amendment to the MCU agreement on December 4, 2020, the Company was granted 50% participation in the Joint Ventures, including 50% of the common stock of MCU-P. On that date, the advances were recognized as a non-interest bearing note receivable due December 31, 2024. At December 4, ,2020, the fair value of the note receivable from MCU-P, based on the discounted present value of future payments, was $755,866, which was comprised of the $1,080,000 face amount less implied interest of $324,134, and was recognized as consideration for the Company's December 4, 2020 investment in MCU-P. The discounted present value is based on the alternative borrowing cost of MCU-P, considering market data for companies with comparable credit ratings. As of December 31, 2020, the net balance of the note receivable was $860,940.
As of December 31, 2020, the MCU-P investment of $323,770 is accounted for as investment in MCU Philippines, Inc, a non-current asset on the consolidated balance sheets. The investment is accounted for under the equity method.
MCU Derivative Asset
As part of the 15% membership interests purchase price, in May 2020, the Company issued 625,000 shares of its common stock to MCU. As of December 31, 2020, the fair value of these shares in excess of the $2.0 million purchase price (less $1,150,000 of cash payments to and $465,127 of proceeds from sales of common shares previously issued to MCU by the Company) is expected to be paid by MCU to MCU-P on behalf of the Company as an additional senior secured interest free loan due December 31, 2024. The Company has recognized this right as a derivative asset that had a fair value of $271,377 on December 4, 2020. As a derivative asset, its carrying value is adjusted to fair value each reporting period end with the resulting gain (loss)
recognized in the consolidated statements of operations. The fair value of the derivative asset at December 31, 2020 is $265,127 and is a current asset on the consolidated balance sheets. A loss on the change in fair value of $6,250 was recognized during the year ended December 31, 2020 (Note 15).
Pelen Limited Liability Company Membership Interest
Investment in Pelen Limited Liability Company Membership Interest
Pelen owns 100% of the historic Sutro Tunnel Company ("Sutro") which, in turn, 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 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. If all of the shares of restricted common stock had been sold by the seller of the membership interests and the aggregate proceeds received were less than $0.6 million, then the Company was required to pay the make whole liability shortfall in either additional shares of the Company’s common stock or cash, at the Company’s election.
In August, September and October 2018, the original 295,082 shares of restricted common stock were sold for total proceeds of $236,476. In November 2018, the Company issued 351,637 shares of restricted common stock based on the make whole liability shortfall resulting from the aggregate sales proceeds for the initial shares. In December 2019, the agreement was amended to revise the cut-off date for closing the transaction to March 31, 2020.
On April 24, 2020, the Company completed the acquisition of 25% of the total membership interests of Pelen. The total purchase price paid since 2018 of $602,500 (including shares with fair value of $585,000 on date of issuance and $17,500 paid in cash), has been recorded as investment in Pelen Limited Liability Company, a non-current asset on the consolidated balance sheets. The investment is accounted for under the equity method. In addition, in connection with the investment, $197,943 of cash payments were made against the make whole liability and $31,190 of cash payments were made in connection with interest expense during 2019 and 2020.
Accrued Make Whole for Pelen Limited Liability Company
The agreement with the member from whom the Company acquired the 25% interest contained a provision whereby the Company was required to issue additional shares of its common stock for the make whole 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 average price per share for five consecutive trading days preceding the date of determination. At December 31, 2019, the make whole liability was $0.2 million based on the Company's closing price per share of common stock of $0.47, as compared to the remaining aggregate proceeds due. In April 2020, the Company completed the purchase of 25% of the membership interests in Pelen, settling all remaining amounts due. No make whole accrual remains on the consolidated balance sheets at December 31, 2020. Tonogold reimbursed $234,934 of costs associated with the Pelen investment. For the years ended December 31, 2020 and 2019, the changes in fair value of the make whole liability of $24,659 and $(87,439), respectively, were recorded in other income (expense) in the consolidated statements of operations.
Purchase Option for Pelen Limited Liability Company
On September 1, 2020, the Company paid $100,000 for a one-year option to purchase the remaining 75% of the membership interests of Pelen (the "Option"), for a purchase price of $3,750,000. The Option can be extended for a second year for an additional option fee of $100,000, with the purchase price increased to $4,400,000; and can be extended for a third year for another additional option fee of $100,000, with the purchase price increased again to $5,000,000. 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 consolidated balance sheets at December 31, 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 Sutro, 100% owned by Pelen. 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.
Sierra Springs Opportunity Fund Inc. 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 $335,000 into a qualified opportunity zone fund Sierra Springs Opportunity Fund, Inc. ("SSOF") and a qualified opportunity zone business Sierra Springs Enterprises, Inc. ("SSE"), which is wholly owned by SSOF. The Company expects to own approximately 9% of SSOF upon issuance by SSOF of 75.0 million authorized shares to investors. The Company owns 12.1% of SSOF as of December 31, 2020. As of December 31, 2020, SSOF has received $11.6 million in equity from investors, including $0.3 million from the Company and $0.5 million (16.5% ownership) from officers and directors of the Company, including the Company's chief executive officer, who owns 16.2% of SSOF. The Company’s chief executive officer is the president and a director of SSOF and an executive and a director of SSE.
Comstock’s $335,000 investment in SSOF is recorded on the consolidated balance sheets at December 31, 2020 and 2019, as Investment in Sierra Springs Opportunity Fund, Inc., a non-current asset. 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, October 1, 2020, and December 30, 2020, the Company entered into agreements with SSE to sell the Company's two 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 DTSS for $3.6 million. Accordingly, the properties are classified as assets held for sale on the consolidated balance sheets at December 31, 2020 and 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 consisting of $3.1 million cash payments toward the purchase price of the land parcel, $0.5 million in interest and closing costs and, $0.5 million cash payments to the former membership interest holders of DTSS. 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 operations for the year ended December 31, 2019.
As of December 31, 2020, the Company has received deposits in cash and escrow from SSE totaling $0.4 million and $0.3 million towards the purchase of the Silver Springs Properties, recorded in deposits under current liabilities on the consolidated balance sheets. The transactions are expected to close during 2021.
Advance to Sierra Springs Opportunity Fund Inc.
As of December 31, 2020, the Company had advanced SSOF $1.65 million to be used by SSOF for deposits and payments on land and other facilities related to investments in qualified businesses in the opportunity zone. The advances are non-interest-bearing and are expected to be repaid during 2021, upon the sale of the Company’s Silver Springs Properties to SSE. The Company made no such advances in 2019.
As of December 31, 2020, the advances totaling $1.65 million are included on the consolidated balance sheets in Notes receivable and advances, net.
3. Notes Receivable and Advances, Net
Notes receivable and advances, net at December 31, 2020 and 2019 include:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Tonogold note receivable, face value
|
$
|
4,475,000
|
|
|
$
|
—
|
|
Estimated fair value adjustments
|
1,023,500
|
|
|
—
|
|
Tonogold note receivable, fair value (Notes 2 and 15)
|
5,498,500
|
|
|
—
|
|
SSOF advances receivable (Note 2)
|
1,650,000
|
|
|
—
|
|
Total notes receivable and advances, net - current portion
|
$
|
7,148,500
|
|
|
$
|
—
|
|
MCU-P note receivable, face value
|
1,180,000
|
|
|
—
|
|
Unamortized discount for implied interest
|
(319,060)
|
|
|
—
|
|
MCU-P note receivable, fair value (Notes 2 and 15) - non-current
|
860,940
|
|
|
—
|
|
Total notes receivable and advances, net
|
$
|
8,009,440
|
|
|
$
|
—
|
|
4. Assets and Liabilities Held for Sale
The Company previously committed to a plan to sell certain land, buildings, and water rights. As of December 31, 2020, and 2019, the Company had assets with a net book value of $6.3 million and $10.5 million, respectively, that 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 at December 31, 2020 and 2019 include:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Silver Springs Properties
|
|
|
|
DTSS (Land)
|
$
|
3,589,876
|
|
|
$
|
3,589,876
|
|
Industrial Park (Land and water rights)
|
2,738,462
|
|
|
2,738,462
|
|
Daney Ranch (Land and buildings) (Note 10)
|
—
|
|
|
2,146,575
|
|
Lucerne Mine (Mineral rights and properties) (Note 2)
|
—
|
|
|
1,558,787
|
|
Gold Hill Hotel (Land and buildings)
|
—
|
|
|
478,366
|
|
Total assets held for sale
|
$
|
6,328,338
|
|
|
$
|
10,512,066
|
|
Liabilities held for sale at December 31, 2020, and 2019 include:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Lucerne Properties (reclamation liabilities) (Note 12)
|
$
|
—
|
|
|
$
|
1,019,705
|
|
Total liabilities held for sale
|
$
|
—
|
|
|
$
|
1,019,705
|
|
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, October 1, 2020, and December 30, 2020, the Company entered into agreements with SSE, a subsidiary of SSOF (Note 2), to sell the two 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 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 for the year ended December 31, 2019. During 2020 and 2019, the Company received $0.1 and $0.3 million, respectively, in escrowed deposits from SSE for the sale of these assets and expects the sales to close in 2021. Total deposits of $0.4 million and $0.3 million are included in deposits on the consolidated balance sheets as of December 31, 2020, and 2019, respectively. Proceeds from the sale of the Silver Springs Properties must satisfy certain obligations due under the terms of the Promissory Notes (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 only 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 was reclassified to an asset held for use and is included in properties, plant and equipment on the consolidated balance sheets at December 31, 2020. Upon the change in classification, the Company recorded depreciation expense of $0.5 million included in real estate operating costs in the 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 Purchase Agreement with Tonogold closed (Note 2), and the Company transferred to Tonogold 100% of the membership interests in Comstock LLC, the entity that owns the Lucerne Mine, resource area and related permits. At that time, the associated assets and liabilities held for sale were removed from the 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 was reclassified to an asset held for use and is included in properties, plant and equipment on the consolidated balance sheets at December 31, 2020. Upon the change in classification, the Company recorded depreciation expense of $0.2 million included in real estate operating costs in the consolidated statements of operations, to recognize the depreciation that would have been recognized had the property not been held for sale.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at December 31, 2020, and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land and property deposits
|
$
|
12,600
|
|
|
$
|
10,100
|
|
Insurance
|
139,527
|
|
|
110,558
|
|
Receivable on sale of investment in equity securities
|
200,000
|
|
|
—
|
|
Purchase option for 75% membership interest in Pelen LLC (Note 2)
|
100,000
|
|
|
—
|
|
Deposit for Mercury Clean Up LLC (Note 2)
|
—
|
|
|
1,501,050
|
|
Other
|
228,951
|
|
|
199,919
|
|
Total prepaid expenses and other current assets
|
$
|
681,078
|
|
|
$
|
1,821,627
|
|
On December 16, 2020, the Company entered into a securities purchase agreement with Wingfield Tono, LP (“Wingfield”), and agreed to sell 15,666,667 Tonogold common shares at $0.33 per share in three closings. On December 23, 2020, the Company transferred 3,333,333 Tonogold common shares to Wingfield for total proceeds of $1.1 million. As of December 31, 2020, the Company had received $0.9 million and recorded a receivable of $0.2 million on the consolidated balance sheets in connection with the first closing under the securities purchase agreement.
6. Mineral Rights and Properties, Net
Mineral rights and properties at December 31, 2020, and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Dayton resource area
|
$
|
2,932,226
|
|
|
$
|
2,932,226
|
|
Spring Valley area
|
910,000
|
|
|
810,000
|
|
Oest area
|
260,707
|
|
|
260,707
|
|
Occidental area
|
1,002,172
|
|
|
1,002,172
|
|
Northern extension
|
157,205
|
|
|
157,205
|
|
Northern targets
|
121,170
|
|
|
121,170
|
|
Other mineral properties
|
317,405
|
|
|
317,405
|
|
Water rights
|
90,000
|
|
|
90,000
|
|
Total mineral rights and properties
|
$
|
5,790,885
|
|
|
$
|
5,690,885
|
|
These mineral rights and properties are segmented based on the Company’s identified mineral resource areas and exploration targets. During the years ended December 31, 2020 and 2019, the Company did not recognize any depletion expense as none of the properties are in operation.
On February 25, 2020 and September 17, 2020, the Company sold two patented mining claims and five unpatented mining claims (the "Wild Horse" properties) and eight unpatented mining claims (the "Como Comet" properties), respectively, to Hercules Gold USA LLC ("Hercules") for a total purchase price of $100,000 and 100,000 shares of common stock of Eclipse Gold Mining Corporation (the parent company of Hercules), with a fair value of $52,000, plus a 2% NSR 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. Since the Wild Horse and Como Comet properties had no recorded carrying value, the entire purchase price represented a total gain of $152,000 recorded in other income in the consolidated statements of operations for the year ended December 31, 2020.
On May 5, 2020, the Company, as lessee, renewed a 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 15-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, Nevada, south of the Company's Dayton resource area. These claims have been leased from New Daney since 2010. The claims were purchased for a total of $100,000, inclusive of a 3% NSR royalty. The Company paid $10,000 upon signing, five payments of $1,000 and a final payment of $85,000 on October 8, 2020. The total purchase price is recorded in mineral rights and properties, net on the consolidated balance sheets as of December 31, 2020.
On July 9, 2020, the Company, as lessee, amended a lease with Renegade Mineral Holdings, LLC 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 10-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 (a related party through the Company's 25% interest in Pelen, owner of Sutro). 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.
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 additional 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 $26,000 and $12,000 for the years ended December 31, 2020 and 2019, respectively.
All the Company's mineral exploration and mining lease payments are classified as costs applicable to mining in the consolidated statements of operations.
7. Properties, Plant and Equipment, Net
Properties, plant and equipment at December 31, 2020 and 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land and building
|
$
|
12,186,090
|
|
|
$
|
9,140,805
|
|
Vehicle and equipment
|
2,267,916
|
|
|
2,267,916
|
|
Processing and laboratory
|
21,113,177
|
|
|
21,113,177
|
|
Furniture and fixtures
|
549,860
|
|
|
549,860
|
|
|
36,117,043
|
|
|
33,071,758
|
|
Less accumulated depreciation
|
(26,685,584)
|
|
|
(25,136,737)
|
|
Total properties, plant and equipment
|
$
|
9,431,459
|
|
|
$
|
7,935,021
|
|
For each of the years ended December 31, 2020 and 2019, the Company recognized depreciation expense of $1.2 million and $1.8 million, respectively. This included $0.7 million of depreciation, included in real estate operating costs for the year ended December 31, 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 (Note 4).
As of December 31, 2020 and 2019, land and building leased to others was $2,101,887 and $208,162, respectively, which was net of accumulated depreciation of $1,196,425 and $75,615, respectively.
8. Reclamation Bond Deposit
The Nevada Revised Statutes and Regulations require a surety bond to be posted for mining projects so that after the completion of such mining projects the sites are left safe, stable and capable of productive post-mining uses. The bond is intended to cover the estimated costs required to safely reclaim the natural environment to the regulatory standards established by the State of Nevada’s Division of Environmental Protection. Accordingly, the Company has a $6.8 million reclamation surety bond through the Lexon Surety Group (“Lexon”) with the State of Nevada’s Bureau of Mining Regulation and Reclamation as of December 31, 2020. In addition, the Company has a $0.5 million surety bond with Storey County related to mine reclamation as of December 31, 2020. As part of the surety agreement, the Company agreed to pay a 2.0% annual bonding fee. The total cash collateral, per the surety agreement, was $2.6 million at December 31, 2020, and 2019. The total cash collateral is a component of the reclamation bond deposit on the consolidated balance sheets.
The reclamation bond deposit at December 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Lexon surety bond cash collateral
|
$
|
2,588,768
|
|
|
$
|
2,582,026
|
|
Other cash reclamation bond deposits
|
106,936
|
|
|
106,936
|
|
Total reclamation bond deposit
|
$
|
2,695,704
|
|
|
$
|
2,688,962
|
|
The Lexon collateral at December 31, 2020 and 2019 includes earned income of $88,768 and $82,026, respectively, which has been left on deposit at BNY Mellon.
9. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at December 31, 2020, and 2019, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Accrued make whole for MCU (Note 2)
|
$
|
—
|
|
|
$
|
452,740
|
|
Accrued interest expense
|
—
|
|
|
264,268
|
|
Accrued Northern Comstock LLC
|
180,833
|
|
|
180,833
|
|
Accrued payroll costs
|
153,615
|
|
|
165,543
|
|
Accrued make whole for Pelen LLC
|
—
|
|
|
222,602
|
|
Accrued board of directors' fees
|
60,000
|
|
|
120,000
|
|
Accrued vendor liabilities
|
136,499
|
|
|
309,515
|
|
Other accrued expenses
|
4,000
|
|
|
139,930
|
|
Total accrued expenses
|
$
|
534,947
|
|
|
$
|
1,855,431
|
|
The Northern Comstock LLC operating agreement between the Company and other members of Northern Comstock LLC, a related party (Note 21), requires the Company to make monthly cash payments of $30,000 and an annual capital contribution in the amount of $482,500 in stock or cash. In addition to the balance accrued for Northern Comstock LLC in the table above, the Company has a long-term liability to Northern Comstock LLC in the amount of $413,956 and $476,048 recorded in other liabilities on the consolidated balance sheets as of December 31, 2020 and 2019, respectively. The long-term liability is being amortized over the term of the agreement, which expires September 1, 2027.
10. Leases
Lease Expense
The Company has an operating lease, as lessee, with Sutro 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 years ended December 31, 2020 and 2019, the fixed operating lease expense was $10,099 and $9,000, respectively with a remaining term of 7.8 years.
The Company has the following lease balances recorded on the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Lease Assets and Liabilities
|
Classification
|
December 31, 2020
|
December 31, 2019
|
Operating lease right-of-use asset
|
Other assets
|
$
|
51,294
|
|
$
|
45,485
|
|
|
|
|
|
Operating lease liability - current
|
Accrued expenses and other liabilities
|
3,650
|
|
9,000
|
|
Operating lease liability - long-term
|
Other liabilities
|
49,791
|
|
36,668
|
|
Total operating lease liabilities
|
|
$
|
53,441
|
|
$
|
45,668
|
|
Maturities of lease liabilities by fiscal year for the Company's operating lease are as follows:
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
9,350
|
|
2022
|
|
9,650
|
|
2023
|
|
9,950
|
|
2024
|
|
10,250
|
|
2025
|
|
10,550
|
|
Thereafter
|
|
31,500
|
|
Total operating lease payments
|
|
81,250
|
|
Less: Imputed interest at 11%
|
|
(27,809)
|
|
Present value of lease liabilities
|
|
$
|
53,441
|
|
Lease Income
Maturities of lease payments by fiscal year for the Company's operating leases on our land and buildings leased to others are as follows:
|
|
|
|
|
|
2021
|
$
|
111,600
|
|
2022
|
112,000
|
|
2023
|
80,000
|
|
Thereafter
|
—
|
|
Total Minimum Lease Income
|
$
|
303,600
|
|
The Daney Ranch lease expires August 31, 2023 and provides the lessee an option to purchase the property for $2.7 million. All lease payments received from the lessee and credits for drilling services performed by the lessee during the lease term will reduce the purchase price. The Gold Hill Hotel lease expired March 31, 2020 and was extended on a month-to month-basis in April 2020. The land lease expired July 31, 2020 and was extended on a month-to-month basis in August 2020. All other leases are either on a month-to-month basis or will be month-to-month in 2021, with no extension options.
11. Long-Term Debt
Long-term debt at December 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Senior Secured Debenture (GF Comstock 2) - 11% interest, paid in 2020
|
$
|
—
|
|
|
$
|
4,929,277
|
|
Georges Trust Unsecured Promissory Notes - 12% interest, due September 2021
|
1,389,014
|
|
|
|
Concorde Trust Unsecured Promissory Notes - 12% interest, due September 2021
|
683,263
|
|
|
—
|
|
Bean Trust Unsecured Promissory Note - 12% interest, due September 2021
|
290,386
|
|
|
—
|
|
GHF Inc Unsecured Promissory Note - 12% interest, due September 2021
|
916,712
|
|
|
—
|
|
Note Payable (Caterpillar Financial Services) - 5.7% interest.
|
404,373
|
|
|
645,891
|
|
Total debt
|
3,683,748
|
|
|
5,575,168
|
|
Less: long-term debt discounts and deferred issuance costs
|
(126,043)
|
|
|
(163,094)
|
|
Total debt, net of discounts and deferred issuance costs
|
3,557,705
|
|
|
5,412,074
|
|
Less: current portion of long-term debt
|
(3,557,705)
|
|
|
(328,068)
|
|
Long-term debt, net of discounts and deferred issuance costs
|
$
|
—
|
|
|
$
|
5,084,006
|
|
Debt Obligations
Concorde Trust, Bean Trust, Georges Trust, GHF, Inc. & Scott H. Jolcover Unsecured Promissory Notes
On August 6, 2020, the Company entered into three unsecured promissory notes (together with the additional promissory notes with the Concorde Trust and GHF Inc. described below, 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 former employee of the Company), had an original aggregate principal amount of $4,475,000, were issued at an original issue discount ("OID") of $225,000, bear interest at a rate of 12% per annum payable monthly, and mature on September 20, 2021.
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 to Concorde Trust for $0.64 million, representing entities under common control with one another but not with the Company.
On October 1, 2020, the Company paid the former employee's promissory note in full, with a principal payment of $150,000 plus OID of $1,216. As of December 31, 2020, the former employee had no outstanding Promissory Notes, and had received $2,876 in payments of interest and $151,216 in payments of principal during the year ended December 31, 2020.
On October 5, 2020, the Company paid $1.7 million in principal for the 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 for the remaining Promissory Notes, plus earned OID of $4,716. These early payments reduced the principal balance on the notes to approximately $1.9 million.
On December 4, 2020, the Company entered into two additional Promissory Notes with the Concorde Trust and GHF Inc., which had an original aggregate principal amount of $1,309,589, were issued at an original issue discount of $59,589, bear interest at a rate of 12% per annum payable monthly, and mature on September 20, 2021.
Interest expense on the Promissory Notes was $223,543 for the year ended December 31, 2020, which includes OID amortization of $66,868. Accrued interest of $31,700 was included in accounts payable on the consolidated balance sheets as of December 31, 2020.
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 Silver Springs Properties. The Company is permitted to defer payment for an additional two years of up to 34% of the original principal balances (or approximately $1.9 million) due on the maturity date of the Promissory Notes (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 its 20-day volume weighted average price on the original maturity date of the Promissory Notes. Based on a separate valuation analysis, the Company has concluded that the cash proceeds received approximate the fair value of the Promissory Notes. In assessing the values of the term extension and contingent warrants derivatives, the valuation model considers the probability of the derivatives being value-accretive and, on an average basis, the related costs exceed the benefits. As a result, the Company has concluded that the cash proceeds received approximate the fair value of the Promissory Notes. Accordingly, the value ascribed to the derivatives by the Company is $0 on issuance date and at December 31, 2020.
GF Comstock 2 LP
On January 13, 2017, the Company issued 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 the former employee, 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 on the consolidated balance sheets, 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 $0.4 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively. Tonogold reimbursed $0.3 million and $0.4 million of the Debenture interest for the years ended December 31, 2020 and 2019, respectively, which was netted against interest expense in the consolidated statements of operations.
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”). The Company entered into the CAT Agreement that required the Company to complete the sale of certain financed and leased equipment and modified the payment schedule under the related finance and lease arrangements. Under the terms of the CAT Agreement, the Company paid down its obligations with the net proceeds from the financed and leased equipment sold during the second and third quarters of 2016, with the remaining balance to be paid off from a monthly payment schedule of primarily $29,570 monthly payments until the amounts have been paid in full. The note bears an interest rate of 5.7% per annum. The obligations were recorded at face value on the consolidated balance sheets, 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 payment amounts were increased to $37,817 per month, beginning on September 1, 2020.
Loan Commitment Agreement
In 2017 (and amended in February 2019), the Company entered into a loan commitment agreement with Legend Merchant Group that provides up to $10.0 million in borrowing capacity and expires in 2021 with an 11% interest rate. Principal amounts borrowed under this agreement are not due until 2021. No amounts have been borrowed under this agreement and the Company has $9.5 million (after consideration of fees due at the time of borrowing) of available borrowing capacity.
There are no maturities due after November 1, 2021.
12. Long-term Reclamation Liability and Retirement Obligation Asset
The Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of our sites after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by appropriate regulatory agencies.
As of December 31, 2020 and 2019, we have accrued a long-term liability of $6.1 million, and $6.0 million. respectively, for our obligation to reclaim our mine facilities based on our most recent reclamation plan, as revised, submitted and approved by the Nevada State Environmental Commission and Division of Environmental Protection. Our total reclamation liability includes cost estimates for our American Flat processing facility, Dayton project and enhanced reclamation obligations in Storey County. As of December 31, 2019, $1.0 million of the accrued long-term liability associated with the Lucerne mineral property was reclassified to liabilities held for sale. We do not currently have a schedule for final reclamation of the American Flat processing facility. Under the Lease Option Agreement with Tonogold, we must preserve the property and equipment in its current state for possible resumption of processing by Tonogold. Tonogold has not yet announced specific plans or a definitive schedule for future processing.
In conjunction with recording the reclamation liability, we recorded a retirement obligation asset on the consolidated balance sheets that is being amortized over the period of the anticipated land disturbance and operations. Such costs are based on management’s original estimate of then expected amounts for remediation work, assuming the work is performed in accordance with current laws and regulations. It is reasonably possible that, due to uncertainties associated with the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate cost and timing of reclamation and remediation could change in the future. We periodically review the accrued reclamation liability for information indicating that our assumptions should change. The accretion of the reclamation liability for the years ended December 31, 2020 and 2019 totaled $20,711 and $22,840, respectively, and was a component of environmental and reclamation expenses in the consolidated statements of operations. The amortization of the retirement obligation asset for the years ended December 31, 2020 and 2019 totaled $57,963 and $67,758, respectively, and was a component of environmental and reclamation expenses in the consolidated statements of operations.
On April 30, 2019, the Company was notified by the Nevada Division of Environmental Protection 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, resulting in a $0.4 million reduction in the obligation, which was a component of environmental and reclamation expenses in the consolidated statements of operations in 2019.
Following is a reconciliation of the mining retirement liability associated with our reclamation plan for the mining projects for the years ended December 31, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Long-term reclamation liability — beginning of year
|
$
|
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
|
20,711
|
|
|
22,840
|
|
Long-term reclamation liability — end of year
|
$
|
6,054,919
|
|
|
$
|
6,034,208
|
|
Following is a reconciliation of the mining retirement obligation asset for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Retirement obligation asset — beginning of year
|
$
|
115,926
|
|
|
$
|
203,274
|
|
Amount reclassified to assets held for sale
|
—
|
|
|
(19,590)
|
|
Amortization of retirement obligation asset
|
(57,963)
|
|
|
(67,758)
|
|
Retirement obligation asset — end of year
|
$
|
57,963
|
|
|
$
|
115,926
|
|
13. Commitments and Contingencies
The Company leases certain mineral rights and properties under operating leases expiring at various dates through 2040. Future minimum annual lease payments, including royalty and rental payments, under these existing lease agreements are as follows as of December 31, 2020:
|
|
|
|
|
|
Year Ended December 31,
|
Leases
|
2021
|
$
|
114,000
|
|
2022
|
114,000
|
|
2023
|
114,000
|
|
2024
|
108,000
|
|
2025
|
110,000
|
|
Thereafter
|
1,686,250
|
|
|
$
|
2,246,250
|
|
Expense under leases for each of the years ended December 31, 2020 and 2019 was $0.1 million.
Royalty Agreements
The Company has minimum royalty obligations with certain of its mineral properties and leases. Minimum royalty payments were $66,400 for the year ended December 31, 2020. 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 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 prices of gold. Royalty expense, including both NSR and minimum royalty obligations, was $0.1 million for each of the years ended 2020 and 2019.
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, 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 an application for master plan amendment and zone change submitted and approved by the Commissioners in 2014 (the “Application”).
Prior to 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 its 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. 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.
On January 11, 2021, the Nevada Supreme Court issued a final order affirming the District Court's judgment in favor of Lyon County and Comstock. On January 29, 2021, the CRA filed a Petition for Rehearing to the Nevada Supreme Court. On February 25, 2021, the Nevada Supreme Court issued an order denying a rehearing. As such, no amounts have been accrued as it relates to this complaint.
Precious Royalties LLC
On July 12, 2018, Precious Royalties LLC (“Precious”) filed a complaint against the Company in the First Judicial District Court of the State of Nevada, in Storey County, alleging that the Company failed to properly pay Precious a NSR royalty in accordance with a settlement agreement dated September 24, 2012, and seeking $510,000 in damages, plus interest at 18% per annum. On November 16, 2018, the Company filed a Motion for a More Definite Statement on the basis that the complaint is too vague to allow a responsive pleading. On May 16, 2019, the Court granted the Company’s Motion, which required Precious to revise and re-file its complaint in order to proceed with the action. Precious re-filed the complaint on June 5, 2019. On July 3, 2019, the Company answered the amended claim by Precious and filed a counterclaim that, among other things, requests reimbursement of legal fees and related interest. On July 26, 2019, Precious filed an answer to the counterclaim and a four-day trial was set for July 20, 2020.
On January 13, 2020, the Company and Precious negotiated a definitive and final settlement of all claims and counterclaims between the parties, and made a one-time payment to Precious of $60,000.
OSHA Complaint
On or about February 27, 2020, the Company received notice that three former employees had filed a complaint with OSHA regarding alleged wrongful termination of employment in 2019, seeking backpay, frontpay and other compensatory damages (for mental anguish and reputational harm) as well as interest and legal fees and costs. We believe that those terminations were lawful and intend to vigorously defend the complaint. As of December 31, 2020, the Company has accrued severance of $84,166 in connection with this complaint, which is recorded in accrued expenses and other liabilities on the consolidated balance sheets.
From time to time, we are involved in claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
14. Equity
Equity Issuance Agreements
In July 2020, the Company entered into an equity purchase agreement (the "2020 Triton Equity Agreement") with Triton Funds L.P. ("Triton") to offer and sell registered shares of common stock at an aggregate offering price of up to $1.25 million, from time to time, at the Company's option. In July 2020, the Company issued to Triton 2,040,483 common shares with an aggregate sales price of $1.25 million, at an average price per share of $0.61, and paid related cash fees of $15,000. As of December 31, 2020, the 2020 Triton Equity Agreement has no remaining capacity
Also in July 2020, the Company entered into an equity purchase agreement (the "2020 Leviston Sales Agreement") with Leviston Resources LLC ("Leviston") to offer and sell registered shares of common stock at an aggregate offering price of up to
$2.5 million, from time to time, at the Company's option, and paid a commitment fee of $125,000 in shares of common stock and $52,500 of cash fees. From July through September 2020, the Company issued to Leviston 2,793,586 common shares with an aggregate sales price of $2.5 million at an average price per share of $0.89, and an additional 173,611 common shares in commitment fees. As of December 31, 2020, the 2020 Leviston Sales Agreement has no remaining capacity.
In October 2019, the Company entered into an equity purchase agreement (the "2019 Leviston Sales Agreement") with Leviston up to offer and sell registered shares of common stock at an aggregate offering price of up to $1.25 million, from time to time, at the Company’s option, subject to certain restrictions and a $125,000 fee payable to Leviston in shares of common stock. In October 2019, the Company issued to Leviston 1,863,150 common shares with an aggregate sales price of $0.8 million, at an average price per share of $0.43, and an additional 284,852 common shares in commitment fees. From March through July 2020, the Company issued to Leviston an additional 913,539 common shares with an aggregate sales price of $0.4 million, at an average price per share of $0.49. As of December 31, 2020, the 2019 Leviston Sales Agreement has no remaining capacity.
In February 2019, the Company entered into an equity purchase agreement (the “2019 Murray Equity Agreement”) with the Murray Family Office (“Murray”) to offer and sell shares of common stock at an aggregate offering price of up to $5.0 million, from time to time, at the Company’s option, subject to certain restrictions, at a 10% discount to a volume weighted average sales price per common share, and paid a fee of $250,000 in shares of common stock and cash fees of $50,715. From May through September 2019, the Company issued to Murray 2,988,120 common shares with an aggregate sales price of $1.9 million, at an average price per share of $0.65, and an additional 131,556 common shares in fees. As of December 31, 2020, the 2019 Murray Equity Agreement has no remaining capacity.
In August 2018, the Company entered into an equity purchase agreement (the “2018 Leviston Sales Agreement”) with Leviston to offer and sell registered shares of common stock at an aggregate offering price of up to $2.25 million, from time to time, at the Company’s option, subject to certain restrictions. In January and February 2019, the Company issued to Leviston 1,090,400 common shares for net proceeds of $0.8 million, at an average price per share of $0.75. As of December 31, 2020, the 2018 Leviston Sales Agreement has no remaining capacity.
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 1,274shares of convertible preferred stock 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 total of 1,274 preferred shares had a stated value of $1.3 million and a fair value of $1.5 million based on a third-party valuation study. The Company recorded the difference between the net 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 convertible into shares of the Company’s common stock. The number of common shares issuable upon conversion was determined by dividing the stated value of the Preferred Shares by the conversion price. The conversion price was calculated as 90% of the lowest reported volume-weighted average price per share of for the Company’s common stock as reported at the close of trading on the NYSE American stock exchange during the seven trading days ending on, and including, the date of the notice of conversion. From July through September 2019, Temple converted all of the preferred shares for 2,240,441 common shares at an average conversion price per share of $0.57.
Common Stock
Reverse Stock Split
In November 2019, the Board of Directors of the Company approved a one-for-five (1:5) reverse stock split (the “Reverse Split”) for all issued and outstanding shares of the Company’s common stock, par value $0.000666, and a contemporaneous one-for-five (1:5) reduction in the number of shares of the Company’s authorized common stock from 790,000,000 to 158,000,000 shares. The Reverse Split resulted in each outstanding five pre-split shares of common stock automatically combining into one new share of common stock without any action on the part of the stockholders. No fractional shares were issued as a result of the Reverse Split. Fractional shares were rounded up to the nearest whole share requiring the issuance of 9,114 additional shares of common stock, included in issuance of common stock in the consolidated statements of changes in equity. The Reverse Split was effective for trading purposes on November 29, 2019. The total number of outstanding common shares was reduced from 126,970,215 to 25,394,043 on the effective date. All common shares and per share amounts set forth herein give effect to this Reverse Split. The Reverse Split also applies to awards available for issuance under the 2011 Equity Incentive Plan.
Gross proceeds from and cash fees related to the issuance of shares of the Company's common stock pursuant to registered equity issuance and exempt private placement agreements, and conversion of preferred shares are presented below for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Number of shares sold
|
|
5,747,608
|
|
|
10,015,443
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
4,197,621
|
|
|
$
|
5,186,463
|
|
Cash fees
|
|
130,070
|
|
|
270,751
|
|
Net proceeds
|
|
$
|
4,067,551
|
|
|
$
|
4,915,712
|
|
|
|
|
|
|
Average gross proceeds per share
|
|
$
|
0.73
|
|
|
$
|
0.52
|
|
Stock-based Transactions
Following is a reconciliation of stock-based transactions for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Shares outstanding as of beginning of year
|
|
27,236,489
|
|
|
15,067,655
|
|
Shares issued for:
|
|
|
|
|
Equity issuance agreements
|
|
5,747,608
|
|
|
5,941,670
|
|
Issuance of common stock for convertible preferred
|
|
—
|
|
|
2,240,441
|
|
Private placement agreements
|
|
—
|
|
|
1,833,332
|
|
Reverse split fractional shares
|
|
—
|
|
|
9,114
|
|
Common stock issuance costs
|
|
173,611
|
|
|
498,008
|
|
Share contributions for mineral rights
|
|
343,058
|
|
|
746,269
|
|
Investment in Mercury Clean Up, LLC
|
|
625,000
|
|
|
900,000
|
|
Director compensation
|
|
315,000
|
|
|
—
|
|
Director restricted stock grants
|
|
540,000
|
|
|
—
|
|
Total shares issued
|
|
7,744,277
|
|
|
12,168,834
|
|
Shares outstanding as of end of year
|
|
34,980,766
|
|
|
27,236,489
|
|
The table above includes:
a.During 2020 and 2019, the Company issued 343,058 and 746,269 common shares, respectively, valued at $0.5 million each in satisfaction of annual payments pursuant to the Northern Comstock LLC operating agreement, a related party.
b.During 2020 and 2019, the Company issued 625,000 and 900,000 common shares, valued at $0.4 million and $0.8 million, respectively, in connection with the purchase of membership interests in MCU.
c.In May 2020, the Company issued 315,000 common shares, valued at $0.2 million, to its non-executive directors in compensation for services rendered and, in December 2020, granted 540,000 restricted common shares to its non-executive directors that will vest evenly on January 1, 2022, 2023 and 2024.
Noncontrolling Interest
On January 24, 2019, the Company entered into an agreement, as amended on April 30, 2019, May 22, 2019, June 21, 2019, August 15, 2019, September 20, 2019, October 14, 2019, and November 17, 2019, to sell to Tonogold its interests in Comstock LLC, a wholly-owned subsidiary of the Company, with sole assets of the Lucerne properties and related permits. At the initial closing on November 18, 2019, a 50% membership interest in Comstock LLC was delivered to Tonogold with the Company retaining all management control and authority over Comstock LLC until 100% of consideration for all Comstock LLC
membership interests was delivered. Accordingly, Tonogold’s membership interest in Comstock LLC was accounted for as a noncontrolling interest shown in the consolidated financial statements of the Company. On September 8, 2020, 100% of the membership interests of Comstock LLC were acquired by Tonogold and the noncontrolling interest was eliminated as part of the purchase (Note 2).
15. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities at December 31, 2020, which were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
December 31, 2020
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Common shares of Tonogold (Note 2)
|
$
|
3,939,558
|
|
|
$
|
3,939,558
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Tonogold note receivable (Note 3)
|
5,498,500
|
|
|
—
|
|
|
—
|
|
|
5,498,500
|
|
MCU derivative asset (Note 2)
|
265,127
|
|
|
—
|
|
|
265,127
|
|
|
—
|
|
Commons shares of Eclipse (Note 2)
|
40,165
|
|
|
—
|
|
|
40,165
|
|
|
—
|
|
Total Assets
|
$
|
9,743,350
|
|
|
$
|
3,939,558
|
|
|
$
|
305,292
|
|
|
$
|
5,498,500
|
|
The following table presents our assets and liabilities at December 31, 2019, which are 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:
|
|
|
|
|
|
|
|
Tonogold convertible preferred shares
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
Total Assets
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued make whole for Pelen LLC (Note 2)
|
$
|
222,602
|
|
|
$
|
—
|
|
|
$
|
222,602
|
|
|
$
|
—
|
|
Accrued make whole for MCU (Note 2)
|
452,740
|
|
|
—
|
|
|
452,740
|
|
|
—
|
|
Total Liabilities
|
$
|
675,342
|
|
|
$
|
—
|
|
|
$
|
675,342
|
|
|
$
|
—
|
|
During the year ended December 31, 2020, we converted Tonogold CPS to common shares, resulting in a transfer from Level 3 to Level 1. During the years ended December 31, 2020 and 2019, there were no other transfers of assets and liabilities between Level 1, Level 2 and Level 3.
The following table provides reconciliation between the beginning and ending balance of investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
9,080,000
|
|
|
$
|
—
|
|
Total income (losses) recognized in earnings
|
|
|
|
Tonogold convertible preferred shares
|
(2,544,000)
|
|
|
1,472,737
|
|
Tonogold contingent forward asset
|
765,880
|
|
|
—
|
|
Tonogold note receivable
|
(642,997)
|
|
|
—
|
|
|
(2,421,117)
|
|
|
1,472,737
|
|
Additions
|
|
|
|
Tonogold convertible preferred shares
|
—
|
|
|
7,607,263
|
|
Tonogold contingent forward asset
|
1,232,952
|
|
|
—
|
|
Tonogold note receivable
|
6,141,497
|
|
|
—
|
|
|
7,374,449
|
|
|
7,607,263
|
|
Transfers
|
|
|
|
Conversion of Tonogold convertible preferred shares to Tonogold common
|
(3,920,000)
|
|
|
—
|
|
Deductions:
|
|
|
|
Redemption of Tonogold convertible preferred shares
|
(2,616,000)
|
|
|
—
|
|
Settlement of Tonogold contingent forward asset
|
(1,998,832)
|
|
|
—
|
|
|
(4,614,832)
|
|
|
—
|
|
Ending balance
|
$
|
5,498,500
|
|
|
$
|
9,080,000
|
|
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.
Tonogold Convertible Preferred Shares
The consideration received for Tonogold's acquisition of Comstock LLC included shares of the Tonogold CPS (Note 2). 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. CPS was recorded on the consolidated balance sheets at fair value when received and adjusted to fair value at the end of each reporting period, with changes in fair value reported in net earnings. The Company recorded the receipt of the CPS on the consolidated balance sheets at a fair value of $7.6 million when received at various dates in 2019. The Company recognized changes in fair value of the CPS of $2.5 million in other expense and $1.5 million in other income in the consolidated statements of operations for the years ended December 31, 2020 and 2019, respectively.
At issuance, the fair value of the Tonogold CPS was based on a Monte Carlo model with various inputs including the Tonogold common share price of $0.40, volatility of 82%, risk-free rate of 1.58%, cost of debt of 11.81%, private placement conversion price ceiling of $0.18, redemption probability of 50%, and illiquidity discount of 10% - 15%. On October 2, 2020, Tonogold issued a redemption notice for the remaining $2.2 million (face value) of CPS held by the Company. The redemption price of $2.6 million in cash, representing 120% of face value, was received October 2, 2020. The CPS were classified within Level 3 of the valuation hierarchy.
Tonogold Common Shares
On May 22, 2020, the Company converted $1.1 million face value of CPS (1,100 Tonogold preferred shares) into 6,111,111 Tonogold common shares. On September 29, 2020, the Company converted $2.8 million face value of CPS (2,820 Tonogold
preferred shares) into 15,666,667 Tonogold common shares. During 2020, the Company sold 8,645,918 of these common shares for total proceeds of $2.9 million and held 13,131,860 Tonogold common shares with a fair value of $3.9 million based on the $0.30 closing price per share (OTC:TNGL) on December 31, 2020. The investment in Tonogold common shares is classified within Level 1 of the valuation hierarchy.
Tonogold Note Receivable
In connection with Tonogold's acquisition of Comstock LLC (Note 2), on September 8, 2020, the Company recorded the Note due from Tonogold on the consolidated balance sheets, 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 in the Note) has been announced but not yet closed. Because of the embedded features, the Company made the irrevocable election to report the Tonogold Note Receivable on a fair value basis.
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 elect redemption of 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%.
At December 31, 2020, the fair value of the Tonogold Note was $5.5 million based on a Monte Carlo model with the following inputs: Tonogold common share price - $0.30; volatility – 89%; risk free rate – 0.09%; cost of debt – 7.62%; 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 a loss of $0.6 million for the change in fair value in other expense in the consolidated statements of operations for the year ended December 31, 2020. The Tonogold Note is classified within Level 3 of the valuation hierarchy.
MCU Derivative Asset
On December 4, 2020, the Company recorded a derivative asset on the consolidated balance sheets in connection with its $2.0 million purchase of 15% of MCU membership interests. On that date, the $271,377 fair value of the derivative asset was determined based on the excess of the value of 625,000 shares of the Company’s common stock issued to and held by MCU over $384,873 of the purchase price. The value of the shares was based on the $1.05 closing price per share of the Company’s common stock on that date. At December 31, 2020, the $265,127 fair value of the derivative asset is based on the same number of shares and portion of the purchase price, and the $1.04 closing price per share of the Company’s common stock. The derivative asset is classified within Level 2 of the valuation hierarchy.
Eclipse Common Shares
During 2020, the Company sold certain mining claims in exchange for 100,000 shares of common stock of Eclipse Gold Mining Corporation (“Eclipse”). The fair value of the Company’s investment in common shares of Eclipse is based on the closing price per share of the stock less a discount for a trading restriction on the investment. Upon receipt of the shares, the fair value of the Company’s investment was based on the $0.57 closing price per share of the stock with a discount of $5,200 calculated based on a holding period of 0.34 years, risk-free rate of 0.09% and volatility of 78.0%. December 31, 2020, the fair value of the Company’s investment is based on the $0.43 closing price per share of the stock with a discount of $3,010 calculated based on a holding period of 0.17 years, risk-free rate of 0.08% and volatility of 74.0%. The Eclipse common shares are classified within Level 2 of the valuation hierarchy.
Tonogold 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 LLC (Note 2) 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 at inception on March 20, 2020 was based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price of $0.22, volatility of 96.0%, risk-free rate of 0.26%, cost of debt of 18.23%, required conversion premium of 30.0%, probability of prepayment of 0%, probability of change in control of 5% and probability of default of 32%. As of September 8, 2020, these inputs include the Tonogold common share price of $0.35, 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 a change in fair value of the Contingent Forward of $0.8 million in other income in the consolidated statements of operations for the year ended December 31, 2020. The contingent forward asset was netted against the gain on sale of Comstock LLC recorded for the year ended December 31, 2020.
Accrued Make Whole for Pelen
The accrued make whole was valued based on the difference between the valuation of the outstanding shares held by the seller of the 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. The Pelen Make Whole liability was classified within Level 2 of the valuation hierarchy. In April 2020, the Company purchased the membership interest in Pelen LLC, settling all amounts due.
Accrued Make Whole for MCU
At December 31, 2019, the accrued make-whole was valued based on the difference between the value of the outstanding shares delivered to MCU at the $0.44 closing price per share of the Company's common stock and the required investment value of $850,000. The MCU make whole liability was classified within Level 2 of the valuation hierarchy. On December 4, 2020, the 625,000 remaining common shares held by MCU became transferable and the parties agreed the make whole obligation had been satisfied.
Other Financial Instruments
The carrying amount of cash and cash equivalents and trade payables approximates fair value because of the short-term maturity of these financial instruments. At December 31, 2020, and December 31, 2019, the fair value of long-term debt approximated $3.6 million and $5.1 million, respectively, as determined by borrowing rates estimated to be available to the Company for debt with similar terms and conditions. The fair value of assets and liabilities with carrying values approximating fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1).
16. Stock-Based Compensation
2020 Equity Incentive Plan
In 2020, the Company adopted the Comstock Mining Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The maximum number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the 2020 Plan is 1,800,000, including the 540,000 shares granted to Non-executive directors and vesting in three equal increments of 180,000 shares each on January 1, 2022, January 1, 2023 and January 1, 2024. The remaining availability under the 2020 Plan is 1,260,000 shares. The plan provides for the grant of various types of awards, including but not limited to restricted stock (including performance awards), restricted stock units, stock options, and other types of stock-based awards.
On December 30,2020, Comstock’s Board of Directors resolved to grant certain share-based compensation payable to the board members, in lieu of cash, in consideration of future board service to the Company. These share-based payments are granted under the approved 2020 Equity Compensation Plan. Non-executive board members were granted a total of 540,000 shares of common stock on December 30, 2020, vesting in three equal increments of 180,000 shares each on January 1, 2022, January 1, 2023 and January 1, 2024. The fair value of the common shares issued was $1.06 per share, based on the Company's closing price on December 30, 2020. Compensation cost totaling $572,400 will be recognized straight line over the three years vesting period. No stock compensation was recognized in connection with these shares for the year ended December 31, 2020. As of December 31, 2020, there are 1,260,000 shares available for issuance under the 2020 plan.
2011 Equity Incentive Plan
In 2011, the Company adopted the Comstock Mining Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The maximum number of shares of the Company’s common stock that could be delivered pursuant to awards granted under the 2011 Plan was 1,200,000. There is no availability of shares under the 2011 Plan. The plan provided for the grant of various types of awards, including, but not limited to, restricted stock (including performance awards), restricted stock units, stock options, and other types of stock-based awards.
On May 28, 2020, Comstock’s Board of Directors resolved to grant certain share-based compensation payable to non-executive 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 were granted under the previously approved 2011 Equity Compensation Plan. The grant date for both the shares and the options is May 28, 2020.
Non-executive 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 closing price of the Company's common shares on May 28, 2020. Compensation cost totaling $176,400 was recorded as a general and administrative expense in the consolidated statements of operations for the year ended December 31, 2020.
Employees were granted 138,800 fully vested options to acquire common shares with an exercise price equal to the closing price of the Company's common shares 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 consolidated statements of operations for the year ended December 31, 2020. There were no options issued or outstanding for the year ended December 31, 2019. No options were exercised from the date of issuance through December 31, 2020. The intrinsic value of these options was $66,624 at December 31, 2020.
As of December 31, 2020, there are no other outstanding grants and no remaining shares available for issuance under the 2011 plan.
The Company recognizes forfeitures under the 2011 and 2020 Plans as they occur.
17. Other Income and Expense
Other income (expense) net consisted of the following for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Change in fair value of contingent forward asset
|
$
|
765,880
|
|
|
$
|
—
|
|
Change in fair value of derivative asset related to Mercury Clean Up LC
|
265,127
|
|
|
—
|
|
Change in fair value of make whole liabilities
|
261,661
|
|
|
—
|
|
Gain on sale of mining claims
|
152,000
|
|
|
—
|
|
Tonogold reimbursement of Pelen LLC acquisition costs
|
234,944
|
|
|
—
|
|
Change in fair value of Tonogold preferred shares
|
(2,544,000)
|
|
|
1,472,737
|
|
Change in value MCU make whole
|
—
|
|
|
(452,740)
|
|
Preferred shares issuance cost
|
—
|
|
|
(432,000)
|
|
Realized gain on sale of Tonogold common shares
|
1,528,069
|
|
|
—
|
|
Change in fair value Tonogold note receivable
|
(642,997)
|
|
|
—
|
|
Unrealized gain on investments in securities
|
1,624,633
|
|
|
—
|
|
Recognition of grant from CARES Act PPP loan
|
261,170
|
|
|
—
|
|
Gain on termination of Tonogold option agreement
|
—
|
|
|
2,200,000
|
|
Other
|
645,785
|
|
|
(369,881)
|
|
Total other income (expense)
|
$
|
2,552,272
|
|
|
$
|
2,418,116
|
|
On April 30, 2020, the Company received a Paycheck Protection Program (“PPP”) grant of $261,170, as part of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and the rules promulgated thereunder. The amounts received were used to fund payroll and other qualifying costs and the Company expects all proceeds received to be forgiven.
18. Income Taxes
Due to ongoing losses and available income tax carryforwards, no tax provision (benefit) has been recognized during the years ended December 31, 2020 and 2019.
The provision (benefit) for income taxes from continuing operations for the years ended December 31, 2020 and 2019 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Federal statutory rate
|
(21.0)
|
%
|
|
(21.0)
|
%
|
Change in valuation allowance
|
21.3
|
%
|
|
20.9
|
%
|
Other
|
(0.3)
|
%
|
|
0.1
|
%
|
Total
|
—
|
%
|
|
—
|
%
|
Deferred income taxes at December 31, 2020 and 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Asset retirement obligation
|
$
|
1,259,361
|
|
|
$
|
1,452,863
|
|
Mineral rights and properties, plant, and equipment
|
1,233,374
|
|
|
1,179,604
|
|
Mining exploration, development, claims, and permit costs
|
174,122
|
|
|
5,179,844
|
|
Deferred gain on membership sales proceeds
|
—
|
|
|
2,525,250
|
|
Net operating loss carryforward
|
40,316,072
|
|
|
36,315,519
|
|
Capital loss carryforward
|
655,780
|
|
|
—
|
|
Other
|
(59,225)
|
|
|
128,381
|
|
Valuation allowance
|
(43,579,484)
|
|
|
(46,781,461)
|
|
Total net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2020, the Company has net operating loss carryforwards of approximately $168.2 million for federal income tax purposes which, if not utilized, will begin to expire in 2024 and could be subject to certain limitations under section 382 of the Internal Revenue Code. Additionally, as of December 31, 2020, the Company has net operating loss carryforwards of approximately $23.8 million for federal income tax purposes with no expiration, but which are subject to 80% limitation upon utilization. At December 31, 2020, the Company had capital loss carryforwards of approximately $3.1 million that will expire after 2025.
The Company records a valuation allowance 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. As of December 31, 2020, and 2019, 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. The resulting valuation allowance recorded against the net deferred tax assets of the Company is $43.6 million and $46.8 million as of December 31, 2020, and 2019, respectively.
The CARES Act was enacted on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side payroll tax, Paycheck Protection Program, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The most significant impact to the Company from the CARES Act relates to the Paycheck Protection Program.
As of December 31, 2020, and 2019, the Company did not have any unrecognized tax benefits. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company currently has no federal or state tax examinations in progress nor has it had any federal or state tax examinations since its inception. The Company is subject to U.S. federal and state income tax examination for tax years 2017 and forward.
19. Net Income (Loss) Per Common Share
Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if outstanding stock options were exercised into common stock. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
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Year Ended
December 31,
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2020
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2019
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Numerator:
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Net income (loss) attributable to Comstock Mining Inc.
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$
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14,931,970
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$
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(3,805,102)
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Denominator:
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Basic weighted average shares outstanding
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30,526,895
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|
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19,455,505
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Incremental shares - stock options
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34,273
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|
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—
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Diluted weighted average shares outstanding
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30,561,168
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19,455,505
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Net income (loss) per common share:
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Basic EPS
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$
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0.49
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$
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(0.20)
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Diluted EPS
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$
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0.49
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$
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(0.20)
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For the year ended December 31, 2020, common stock equivalent shares consisted of stock options and were included in the calculation of dilutive earnings per share. During the year ended December 31, 2019, the Company had no common stock equivalent shares.
20. 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 mining, exploration and mine development. Our real estate segment consists of land, real estate rental properties, including the Gold Hill Hotel and the Daney Ranch. We evaluate the performance of our operating segments based on income (loss) from operations. All intercompany transactions have been eliminated. Financial information relating to our reportable operating segments and consolidated totals follows:
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Years Ended
December 31,
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2020
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2019
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Revenues
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Mining
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$
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—
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$
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—
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Real estate
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201,700
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179,632
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Total revenues
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201,700
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179,632
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Cost and Expenses
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Mining
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$
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(4,873,654)
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$
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(5,486,523)
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Real estate
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(802,307)
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(37,562)
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Total cost and expenses
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(5,675,961)
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(5,524,085)
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Income (Loss) From Operations
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Mining
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$
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(4,873,654)
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$
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(5,486,523)
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Real estate
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(600,607)
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142,070
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Total loss from operations
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(5,474,261)
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(5,344,453)
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Other income (expense), net
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20,406,231
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1,538,586
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Net income (loss)
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$
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14,931,970
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$
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(3,805,867)
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Capital Expenditures
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Mining
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$
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100,000
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$
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—
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Real estate
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30,750
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2,436,354
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Total capital expenditures
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$
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130,750
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$
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2,436,354
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Depreciation, Amortization and Depletion
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Mining
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$
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472,022
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$
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1,804,808
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Real estate (includes depreciation expense recognized upon reclassification of held for sale assets to held for use assets)
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745,195
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12,406
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Total depreciation, amortization and depletion
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$
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1,217,217
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$
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1,817,214
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As of December 31,
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2020
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2019
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Assets
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Mining
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$
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34,338,192
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$
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30,106,865
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Real estate
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8,785,370
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|
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9,463,027
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$
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43,123,562
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$
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39,569,892
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21. Related Party Transactions
The Company identifies related parties, and accounts for and discloses related party transactions. Parties, which can be entities
or individuals, are considered to be related if either party has the ability, directly or indirectly, to control or exercise significant influence over the other party in making financial and operational decisions. Entities and individuals are also considered to be related if they are subject to the common control or significant influence of another party (Note 2). In addition to related party transactions discussed in Note 2 and Note 11, the following related party transactions occurred during the years ended December 31, 2020 and 2019.
Northern Comstock LLC
The Company has an operating agreement with Northern Comstock LLC ("Northern Comstock"), an entity controlled by a related party. As part of the operating agreement, the Company obtained the exclusive rights of production and exploration on certain parcels in Storey County, Nevada. The terms of the operating agreement, as amended, provide the Company make monthly cash capital contributions of $30,000 and annual capital contributions in the amount of $482,500 payable in stock or cash, at the Company's option, unless the Company has cash or cash equivalents in excess of $10.5 million on the date of such payments, whereupon the Company would then be required to pay in cash or in certain circumstances, shares of the Company’s common stock. The number of shares to be delivered is calculated by dividing the amount of the capital contribution by the volume-weighted average closing price of the Company’s common stock on its primary trading market for the previous 20 consecutive trading days prior to such capital contribution. The operating agreement also provides for a one-time acceleration of $812,500 of the capital contributions payable when the Company receives net cash proceeds from sources other than operations that exceed $6,250,000. The agreement also includes an ongoing acceleration of the Company’s capital contribution obligations equal to 3% of NSR generated by the properties subject to the agreement. The agreement also provides that if the Company defaults in its obligation to make the scheduled capital contributions, then the remaining capital contribution obligations may be converted into the principal amount of a 6% per annum promissory note payable by the Company on the same schedule as the capital contributions, and secured by a mortgage on the properties and rights owned or controlled by Northern Comstock. The operating agreement requires that these capital contributions commence in October 2015, and end in September 2027, unless prepaid by the Company. As of December 31, 2020, the capital contribution obligations of the Company total $5.6 million.
For each the years ended December 31, 2020 and 2019, the Company made payments under the Northern Comstock operating agreement in shares of common stock in the amounts of $482,500 annually, with the number of shares being, 343,058 and 746,269, respectively (as adjusted for the November 2019 1-for-5 stock split). For each year, the Company incurred total expense of $0.8 million related to the Northern Comstock contributions. During the years ended December 31, 2020 and 2019, the Company recognized $0.8 million in reimbursements each year from Tonogold for the Northern Comstock payments as a reduction of mine claims and costs in the consolidated statements of operations.
Mercury Clean Up, LLC and MCU Philippines, Inc.
In connection with the Company’s investments in MCU and MCU-P, the Company has provided certain services relating to feasibility studies and permitting that are separate from those investments and not included as obligations under the MCU Agreement.
22. Subsequent Events
Sierra Springs Opportunity Fund, Inc.
On January 4, 2021, the Company made additional advances to SSOF of $1.5 million, used toward deposits for contracted property purchases. SSOF assigned the Company all rights, title and interest to the extent assignable, in the property purchases, until such time that the advances are repaid.
Performance Share Grants
On January 4, 2021, the Compensation Committee of the Board of Directors of the Company authorized a grant of 1,260,000 performance share units to key employees of the Company. The Executive Chairman and CEO of the Company was among the recipients of such performance share units, with a grant of 500,000 performance share units. Vesting of the awards is conditioned upon the achievement of strategic performance objectives of the Company over three years, as described in the Comstock Mining Inc. 2020 Equity Incentive Plan, for half of the award, and achieving a price per share of the Company's common stock of $12 or greater for the other half of the award.
Comstock Residents Association
On January 11, 2021, the Nevada Supreme Court issued a final order affirming the District Court's judgment in favor of Lyon County and Comstock. On January 29, 2021, the CRA filed a Petition for Rehearing to the Nevada Supreme Court. On February 25, 2021, the Nevada Supreme Court issued an order denying a rehearing. On March 8, 2021, the CRA petitioned the Nevada Supreme Court for reconsideration.
Tonogold Common Shares Purchase
On January 11, 2021, the Company entered into an agreement with Pieter Busscher for the Company to sell 800,000 shares of its investment in Tonogold common stock at a fixed price of $0.31 per share, for proceeds of $248,000.
Mercury Clean Up LLC
In January 2021, MCU sold the 625,000 shares of the Company's common stock for $1.1 million, a $1.84 average price per share, resulting in excess proceeds of $0.8 million, payable to the Company. On February 25, 2021, the Company received the $0.8 million in excess proceeds from MCU and, pursuant to the MCU Agreement, on March 5, 2021 loaned an additional $0.8 million to MCU-P, and became entitled to an additional 10% membership interest in MCU, bringing the Company's total membership interests in MCU to 25% (Note 2).
Leviston Purchase Agreement
On February 8, 2021, the Company entered into an equity purchase agreement (the “2021 Leviston Sales Agreement”) with Leviston to offer and sell registered shares of common stock at an aggregate offering price of up to $5.0 million from time to time, at the Company’s option, on terms deemed favorable to the Company. The term of the agreement is 24 months. The Company agreed to deliver to Leviston additional shares of common stock with a fair value of $250,000, for no additional consideration, on the first settlement date with respect to a put notice delivered by the Company.
Purchase of LINICO Preferred Stock
On February 15, 2021, the Company, Aqua Metals Inc., a Delaware corporation (“AQMS”) and LINICO Corporation, a Nevada corporation (“LiNiCo”) entered into a Series A Preferred Stock Purchase Agreement (the “Stock Purchase Agreement”).
Pursuant to the Stock Purchase Agreement, and subject to the satisfaction or waiver of specified conditions, the Company will make an initial purchase 6,250 shares of LINICO Series A Convertible Preferred Stock (“Series A Preferred”) in exchange for 3,000,000 shares of the Company's restricted common stock (“Stock Consideration”) and $4.5 million in cash payments (“Cash Consideration” and together with the Stock Consideration, the “Consideration”). The Cash Consideration will be paid in a series of payments between February 26, 2021 and September 30, 2021. AQMS will purchase 1,500 shares of Series A Preferred in exchange for 375,000 shares of AQMS. The Company can convert the Series A Preferred shares to LiNiCo common shares at a conversion price of $1.25 per share.
The Stock Purchase Agreement provides that LiNiCo will use the proceeds to fund (i) technology-based lithium-ion battery recycling and cathode production equipment, (ii) an industrial facility lease-purchase, (iii) startup costs and general working capital; (iv) a $1.0 million investment in Green Li-ion Pte. Ltd. and (v) the repurchase of common stock with a value of $500,000.
After the initial purchase of Series A Preferred, the Company and AQMS will own 45.45% and 10.91%, respectively, of LiNiCo on a fully diluted basis.
Warrants
Pursuant to the Stock Purchase Agreement, the Company and AQMS entered into warrant agreements wherein the Company has the right to purchase 2,500 shares of Series A Preferred for a total exercise amount of $2.5 million and AQMS has the right to purchase 500 shares of Series A Preferred for a total exercise amount of $500,000. The consideration for the exercise of the warrants is subject to the following:
•The value of the Consideration between $6.3 million and $8.8 million will be applied to the Company’s exercise amount (such value is to be determined by combining the Cash Consideration with the net proceeds of the Stock Consideration (which cannot be sold until after August 15, 2021)).
•The value of the AQMS shares in excess of $1.5 million will be applied to AQMS’s exercise amount.
The Series A Preferred received by the Company pursuant to the exercise of the warrant may be converted into common stock at conversion price of (i) $1.25, if exercised on or before February 15, 2022 or (ii) $2.00, if exercised after February 15, 2022.
Assuming the exercise of the warrants, the Company and AQMS will own 52.27% and 11.94%, respectively, of LiNiCo on a fully diluted basis.
Obligations
In the event the cash proceeds from the Consideration is less than $6.3 million, the Company is obligated to provide LiNiCo with additional shares or cash to make up the shortfall. However, if cash proceeds from the Consideration exceed $10.8 million, the excess must be returned to the Company (the $4.5 million differential is automatically applied to exercise of the warrant ($2,500,000) and the additional deposit pursuant to the Lease Agreement ($2.0 million)). Similarly, if the cash proceeds from the sale of 75% of the AQMS shares is less than $1.5 million, AQMS is obligated to provide LINICO with additional cash to make up the shortfall. LiNiCo is obligated to hold the remaining 25% of AQMS shares for at least six months after the date of the Stock Purchase Agreement. After such date, the gross proceeds in excess of $2.0 million from the sale of all the AQMS shares must be returned to the AQMS (the $500,000 differential is automatically applied to the exercise of the AQMS warrants).
Additional Lease Deposit
The Lease Agreement requires LiNiCo to make an additional deposit (to be credited towards the purchase price of the facility) by November 1, 2022 in an amount equal to $2.0 million. The Stock Purchase Agreement grants the Company the option to fund such deposit with additional Company shares (in no event will the Company issues shares to LiNiCo pursuant to the Stock Purchase Agreement that exceed 19.9% of the total issued and outstanding common shares of the Company as of February 15, 2021). In the event the option is exercised, the Company and AQMS would own an estimated 64.02% and 10.66% of LiNiCo, respectively, on a fully diluted basis.
LiNiCo Lease Agreement
On February 15, 2021, LiNiCo and Aqua Metal Reno Inc. (the “Landlord”) entered into an Industrial Lease for the land, buildings and related improvements located at 2500 Peru Drive, McCarran, Nevada 89343 (the “Lease Agreement”). The Lease Agreement is for a two-year term and commences on April 1, 2021. The rental costs are $68,000 per month for the first 12 months and escalate to $81,600 for months 13 to 18 and $100,640 for months 19 to 24.
LiNiCo will use a portion of the Consideration to pay the initial $1.3 million nonrefundable deposit (the “Deposit”) that is due on or before October 15, 2021. The Deposit is to be applied to the purchase price if the Purchase Option (as defined below) is exercised.
Pursuant to the Lease Agreement, LiNiCo has the right to purchase the premises for (i) $14.3 million, if purchased on or before October 1, 2022 or (ii) $15.3 million, if the purchase is made after October 1, 2022 (“Purchase Option”). The Lease Agreement also grants the Company the right to consummate the Purchase Option if LiNiCo and the Landlord agree LiNiCo will not exercise the Purchase Option.
On February 22, 2021, the Company issued 3,000,000 shares of restricted common stock to LINICO in exchange for 6,250 shares of Series A Preferred.
Equity Issuance Agreements
On March 2, 2021, the Company entered into equity purchase agreements (the “Equity Purchase Agreements”) with certain investors to issue and sell in a registered direct offering (the “Offering”) 4.0 million shares of common stock at a price of $4.00 per share. The Equity Purchase Agreements contain customary representations, warranties and agreements of the Company, and customary conditions to closing, indemnification rights and obligations of the parties. The Offering of the shares closed on March 4, 2021. The Company paid Noble Capital Markets, Inc., the placement agent for the Offering, an aggregate cash fee equal to 6% of the aggregate gross proceeds raised in the offering, and agreed to pay up to $30,000 for other fees and expenses, resulting in expected net offering proceeds of $15.0 million.
On March 4 2021, the Company repaid $3.2 million, representing all amounts outstanding under the Promissory Notes, including principal, earned original issue discount and accrued interest expense. (Note 11).
On March 4, 2021, the Company made an $812,500 payment to Northern Comstock LLC representing, pursuant to the Northern Comstock operating agreement, a one-time acceleration of required capital contributions when the Company receives net cash proceeds from sources other than operations that exceed $6,250,000 (Note 21).