NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
2018
,
2017
AND
2016
1. Nature of Business
Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and production-focused mining company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City, Nevada. Our Dayton resource area and the Spring Valley exploration targets are located in Lyon County, Nevada, approximately six miles south of Virginia City, Nevada. Our Lucerne resource area is located in Storey County, Nevada, approximately three miles south of Virginia City, Nevada and 30 miles southeast of Reno, Nevada. The Company also owns extensive real estate holdings, including but not limited to the Gold Hill Hotel located in Gold Hill, Nevada, just south of Virginia City, the Daney Ranch, located just south of Silver City, and the Comstock Industrial parcel, representing
98
acres of land and
203
acre-feet of senior-priority water rights in Silver Springs, Nevada. As used in the notes to the consolidated financial statements, we refer to Comstock Mining Inc., and its wholly owned subsidiaries as “we,” “us,” “our,” “our Company,” or “the Company.”
We continue expanding our property footprint and creating opportunities for exploration, development and mining. The Company now owns or controls approximately
9,358
acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately
2,396
acres of patented claims (private lands) and surface parcels (private lands) and approximately
6,962
acres of unpatented mining claims, which the Bureau of Land Management, (“BLM”) administers.
2. Summary of Significant Accounting Policies
Principles of Consolidation -
The consolidated financial statements include the accounts of Comstock Mining Inc., and its wholly owned subsidiaries: Comstock Mining LLC, Comstock Real Estate Inc., Comstock Industrial LLC, and Downtown Silver Springs LLC. Inter-company transactions and balances have been eliminated.
Basis of Presentation -
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America on a basis that contemplates the continuation of the Company as a going concern.
The Company commenced production with the Lucerne Mine in 2012, and ramped up to approximately
20,000
gold-equivalent-ounces of annual production. The Company completed leaching from its existing leach pads in December 2016 and is currently planning the exploration and development of its next two mines, first with its second mine plan for the Dayton resource area and then further developing, through an agreement and collaboration with a potential joint venture partner, the second phase of development and production from the Lucerne Mine.
The Company has recurring net losses from operations and an accumulated deficit of
$232.1 million
as of
December 31, 2018
. For the year ended
December 31, 2018
, the Company incurred a net loss of
$9.5 million
and used
$4.0 million
of cash in operations. As of
December 31, 2018
, the Company had cash and cash equivalents of
$0.5 million
, current assets of
$8.6 million
and current liabilities of
$2.4 million
, resulting in net working capital of
$6.2 million
.
The Company’s current capital resources include cash and cash equivalents and other net working capital resources, along with a loan commitment agreement with
$10.0 million
in unused capacity, (
$9.5 million
after consideration of fees due at the time of borrowing). The Company has an existing equity purchase agreement (the "2019 Equity Agreement') with Murray FO LLC ("Murray") with unused capacity of
$5.0 million
(
$4.9 million
after consideration of certain transaction fees), pursuant to the Company’s new shelf registration statement on Form S-3, expected to be filed February 26, 2019. These capital resources are in addition to certain planned asset sales.
While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration statement, private placements, borrowings, and/or other means, there is no assurance that the Company will be able to obtain additional equity capital or other financing, if needed. However, the Company believes it will have sufficient funds to sustain its operations during the next 12 months from the date the financial statements were issued as a result of its existing resources and the sources of funding detailed above.
Future operating expenditures above management’s expectations, including exploration and mine development expenditures in excess of amounts to be raised from the issuance of equity under the 2019 Equity Agreement (pursuant to the Company’s new shelf registration statement on Form S-3, expected to be filed February 26, 2019), declines in the market value of properties held for sale, or declines in the share price of the Company's common stock, would adversely affect the Company’s results of operations, financial condition and cash flows. If the Company was unable to obtain any necessary additional funds, this could have an immediate material adverse effect on liquidity and could raise substantial doubt about the Company’s ability to continue as a going concern. In such case, the Company could be required to limit or discontinue certain business plans, activities or operations, reduce or delay certain capital expenditures or sell certain assets or businesses. There can be no assurance that the Company would be able to take any such actions on favorable terms, in a timely manner or at all.
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.
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, exploration expenditures are expensed as incurred. We expense repair and maintenance costs as incurred.
We review the carrying value of our properties for impairment, including mineral rights, whenever there are negative indicators of impairment. Our estimate of the gold price, 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. 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:
|
|
|
Building
|
7 to 15 years
|
Vehicles and equipment
|
3 to 7 years
|
Processing and laboratory
|
5 to 15 years
|
Furniture and fixtures
|
2 to 3 years
|
Reclamation Liabilities and Asset Retirement Obligations -
Minimum standards for site reclamation and closure have been established for us by various government agencies. 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.
Revenue Recognition -
The Company adopted ASC 606, Revenue from Contracts with Customers (Topic 606), on January 1, 2018 using a modified retrospective method. Currently, 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 within the scope of ASC 606, it will account for revenue from contracts with customers by evaluating the five steps of Topic 606, which are as follows: (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.
Stock Issued for Goods and Services -
Common shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.
Stock-Based Compensation -
For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.
Loss per Common Share -
Basic net loss per common share is computed by dividing net loss, by the weighted average number of common shares outstanding. Dilutive 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. Since the Company incurred net losses for all the periods presented, all equity-linked instruments are considered anti-dilutive.
Comprehensive Loss -
There were no components of comprehensive loss other than net loss for all the periods presented.
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. Other than the impacts of the new federal tax reform legislation disclosed in Note 16, management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
Use of Estimates -
In preparing financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, reclamation liabilities, and contingent liabilities.
Reverse Stock Split -
Effective November 9, 2017, the Company completed a 1-for-5 reverse stock split of its authorized and outstanding common stock, as approved by its Board of Directors. All common shares and per share amounts set forth herein give effect to this reverse stock split.
Recently Issued Accounting Pronouncements –
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01 - Business Combinations (Topic 805), which clarifies the definition of a business. For accounting and financial reporting purposes, businesses are generally comprised of three elements; inputs,
processes, and outputs. Integrated sets of assets and activities capable of providing these three elements may not always be considered a business, and the lack of one of the three elements does not always disqualify the set from being a business. The issuance of ASU No. 2017-01 provides a clarifying screen to determine when a set of assets and activities is not a business. Primarily, the screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The amendments contained in ASU No. 2017-01 are effective for annual periods beginning after December 15, 2017 and may be early adopted for certain transactions that have occurred before the effective date, but only when the underlying transaction has not been reported in the financial statements that have been issued or made available for issuance. The Company adopted this guidance on January 1, 2018, with no material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which amends ASC 230, Statement of Cash Flows, and the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted this guidance on January 1, 2018, with no material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exceptions. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted for all entities. The Company has evaluated the impact of adopting this standard on its consolidated financial statements. The majority of the Company’s leases pertain to mineral leases, which are not in the scope of Topic 842, and accordingly, have no material impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 (Topic 606) that introduces a new five-step revenue recognition model that an entity should use to recognize revenue when depicting the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. We used the modified retrospective method to adopt the provisions of this standard effective January 1, 2018, requiring us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) assess all existing revenue contracts as of January 1, 2018, to determine if a cumulative adjustment to accumulated deficit was required. The Company does not have any revenue contracts within the scope of Topic 606 as of January 1, 2018, and accordingly, was not required to record any adjustments.
3. Assets Held For Sale
The Company committed to a plan to sell certain land, buildings, and water rights. As of
December 31, 2018
and
2017
, the Company has assets with a net book value of
$5.4 million
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. Proceeds from the sale of these assets are required to be used to satisfy obligations due under the terms of the debenture with GF Comstock 2 LP as described in Note 10.
Assets held for sale at
December 31, 2018
and
2017
include:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Industrial Park (Land and water rights)
|
$
|
2,738,462
|
|
|
$
|
2,738,462
|
|
Daney Ranch (Land and buildings)
|
2,146,575
|
|
|
2,146,575
|
|
Gold Hill Hotel (Land and buildings)
|
478,366
|
|
|
478,366
|
|
Total assets held for sale
|
$
|
5,363,403
|
|
|
$
|
5,363,403
|
|
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land and property deposits
|
$
|
1,800,000
|
|
|
$
|
—
|
|
Surety bond and insurance
|
475,861
|
|
|
188,485
|
|
Reimbursements from Tonogold
|
82,951
|
|
|
—
|
|
Other
|
353,390
|
|
|
112,902
|
|
Total prepaid expenses and other current assets
|
$
|
2,712,202
|
|
|
$
|
301,387
|
|
5. Mineral Rights and Properties, Net
Mineral rights and properties at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Dayton resource area
|
$
|
2,932,226
|
|
|
$
|
2,932,226
|
|
Lucerne resource area
|
1,998,896
|
|
|
1,998,896
|
|
Occidental area
|
1,002,172
|
|
|
1,002,172
|
|
Spring Valley area
|
810,000
|
|
|
810,000
|
|
Oest area
|
260,707
|
|
|
260,707
|
|
Northern extension
|
157,205
|
|
|
157,205
|
|
Northern targets
|
121,170
|
|
|
121,170
|
|
Other mineral properties
|
317,404
|
|
|
317,404
|
|
Water rights
|
90,000
|
|
|
90,000
|
|
Accumulated depletion - Lucerne Resource area
|
(484,699
|
)
|
|
(484,699
|
)
|
Total mineral rights and properties
|
$
|
7,205,081
|
|
|
$
|
7,205,081
|
|
These mineral rights and properties are segmented and presented based on the Company’s identified mineral resource areas and exploration targets. During the years ended
December 31, 2018
and 2017, the Company did
no
t recognize any depletion expense. During the year ended December 31,
2016
, the Company recognized depletion expense of approximately
$0.1
million.
6. Properties, Plant and Equipment, Net
Properties, plant and equipment at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land and building
|
$
|
9,169,605
|
|
|
$
|
9,169,605
|
|
Vehicle and equipment
|
2,319,290
|
|
|
2,414,216
|
|
Processing and laboratory
|
21,129,248
|
|
|
21,166,497
|
|
Furniture and fixtures
|
648,309
|
|
|
755,665
|
|
Construction in progress
|
35,190
|
|
|
—
|
|
|
33,301,642
|
|
|
33,505,983
|
|
Less accumulated depreciation
|
(23,559,522
|
)
|
|
(20,724,250
|
)
|
Total properties, plant and equipment
|
$
|
9,742,120
|
|
|
$
|
12,781,733
|
|
For the years ended
December 31, 2018
,
2017
and
2016
, the Company recognized depreciation expense of
$3.1
million,
$4.2
million, and
$5.9
million, respectively.
For the years ended December 31,
2017
and
2016
, the Company sold land and equipment with total proceeds of
$1.1 million
, and
$3.3 million
, respectively and recorded a gain on the sale of that land and equipment totaling
$0.3 million
, and
$0.4 million
, respectively.
7. 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
$7.1 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, 2018
. In addition, the Company has a
$0.5 million
surety bond with Storey County related to mine reclamation as of
December 31, 2018
. 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
$2.5 million
at
December 31, 2018
, and
2017
. The total cash collateral is a component of the reclamation bond deposit in the consolidated balance sheets.
The reclamation bond deposit at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Lexon surety bond cash collateral
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Other cash reclamation bond deposits
|
122,544
|
|
|
122,544
|
|
Total reclamation bond deposit
|
$
|
2,622,544
|
|
|
$
|
2,622,544
|
|
8. 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 site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies.
We have accrued a long-term liability of
$7.4 million
as of
December 31, 2018
, and
2017
, for our obligation to reclaim our mine facility based on our most recent reclamation plan, as revised, submitted and approved by the Nevada State Environmental Commission and Division of Environmental Protection. In conjunction with recording the reclamation liability, we recorded a retirement obligation asset that is being amortized over the period of the anticipated land disturbance. Such costs are based on management’s current estimate of then expected amounts for the 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 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 and the amortization of the retirement obligation asset for the years ended
December 31, 2018
,
2017
, and
2016
, totaled
$0.1 million
,
$0.4 million
,
$0.8 million
, respectively, and were a component of environmental and reclamation expenses in the consolidated statements of operations.
Following is a reconciliation of the aggregate retirement liability associated with our reclamation plan for the mining projects for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Long-term reclamation liability — beginning of period
|
$
|
7,417,680
|
|
|
$
|
7,353,346
|
|
|
$
|
6,827,568
|
|
Additional obligations incurred
|
—
|
|
|
—
|
|
|
340,000
|
|
Accretion of reclamation liability
|
23,411
|
|
|
64,334
|
|
|
185,778
|
|
Long-term reclamation liability — end of period
|
$
|
7,441,091
|
|
|
$
|
7,417,680
|
|
|
$
|
7,353,346
|
|
Following is a reconciliation of the aggregate retirement obligation asset associated with our mining projects for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Retirement obligation asset — beginning of period
|
$
|
282,745
|
|
|
$
|
617,126
|
|
|
$
|
1,107,120
|
|
Additional obligations incurred
|
—
|
|
|
—
|
|
|
340,000
|
|
Amortization of retirement obligation asset
|
(79,471
|
)
|
|
(334,381
|
)
|
|
(829,994
|
)
|
Retirement obligation asset — end of period
|
$
|
203,274
|
|
|
$
|
282,745
|
|
|
$
|
617,126
|
|
The increases in the reclamation liability and retirement obligation asset in 2016 is related to the net inflated and discounted increase of the asset and liability as a result of the increase in time before the Company expects to reclaim.
9. Accrued Expenses
Accrued expenses at
December 31, 2018
, and
2017
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Accrued interest expense
|
$
|
481,946
|
|
|
$
|
—
|
|
Accrued insurance liabilities
|
341,680
|
|
|
—
|
|
Accrued liability for purchase of DTSS (Note 18)
|
185,000
|
|
|
—
|
|
Accrued Northern Comstock Joint Venture
|
180,833
|
|
|
180,833
|
|
Accrued payroll costs
|
140,915
|
|
|
57,402
|
|
Accrued make-whole for Pelen LLC (Note 18)
|
135,162
|
|
|
—
|
|
Accrued personal property tax
|
74,434
|
|
|
84,264
|
|
Accrued Board of Directors fees
|
20,000
|
|
|
84,000
|
|
Accrued vendor liabilities
|
—
|
|
|
75,415
|
|
Other accrued expenses
|
114,763
|
|
|
14,737
|
|
Total accrued expenses
|
$
|
1,674,733
|
|
|
$
|
496,651
|
|
10. Long-Term Debt
Long-term debt at
December 31, 2018
, and
2017
, consisted of the following:
|
|
|
|
|
|
|
|
|
Note Description
|
2018
|
|
2017
|
Senior Secured Debenture (GF Comstock 2) - 11% interest, due 2021.
|
$
|
8,872,663
|
|
|
$
|
10,218,352
|
|
Note Payable (Caterpillar Financial Services) - 5.7% interest.
|
955,845
|
|
|
1,242,960
|
|
Total debt
|
9,828,508
|
|
|
11,461,312
|
|
Less: long-term debt discounts and issuance costs
|
(660,795
|
)
|
|
(1,198,359
|
)
|
Total debt, net of discounts and issuance costs
|
9,167,713
|
|
|
10,262,953
|
|
Less: current portion of long-term debt
|
(309,843
|
)
|
|
(291,532
|
)
|
Long-term debt, net of discounts and issuance costs
|
$
|
8,857,870
|
|
|
$
|
9,971,421
|
|
Debt Obligations
GF Comstock 2 LP
On January 13, 2017, the Company issued an
11%
Senior Secured Debenture (the “Debenture”) to GF Comstock 2 LP in an aggregate principal amount of
$10,723,000
. The Debenture is collateralized by (1) substantially all of the assets of the Company, and (2) a pledge to
100%
of the equity of the subsidiaries of Comstock Mining Inc. The use of proceeds included refinancing substantially all of the Company’s current debt obligations except the amounts due to Caterpillar Finance. The Debenture was issued at a discount of approximately
$568,000
and the Company incurred issuance costs of approximately
$528,000
. The Debenture required an additional Make-Whole payment of approximately
$688,000
if paid any time prior to or at maturity. At December 31, 2018, the remaining balance on the Make-Whole obligation was
$508,599
. Total principal is due at maturity on January 13, 2021. The Debenture requires acceleration of the payment of accrued interest, principal and the Make-Whole amount from all net proceeds received upon sale of any assets of the Company.
Interest is payable semi-annually. For the first
two years
, interest will be payable, at the option of the Company, either in cash or in the form of additional Debentures (or a combination thereof). For the third and fourth years, interest will be payable only in cash. In 2017, the Company elected to make the interest payments in cash. In 2018, the Company elected to make the interest payments in the form of additional Debentures (Payment-in-Kind).
Hard Rock Nevada Inc., an employee owned entity, and another related party who is a significant shareholder of the Company participated in this financing.
Caterpillar Equipment Facility
On June 27, 2016, the Company completed an agreement with Caterpillar Financial Services Corporation 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
per month until the amounts have been paid in full. The note bears an interest rate of
5.7%
Loan Commitment Agreement
In 2017 (and amended in February 2019), the Company entered into a loan commitment agreement that provides up to
$10 million
in borrowing capacity and expires in 2021 with an
11%
interest rate. Principal amounts borrowed under this agreement are not due until 2021. Until January 1, 2019, interest on any borrowings will be payable in cash and/or in the form of additional indebtedness under the agreement, at the Company’s option.
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.
Future maturities of long-term debt are as follows:
|
|
|
|
|
Years Ending December 31:
|
|
2019
|
$
|
309,843
|
|
2020
|
328,077
|
|
2021
|
9,190,588
|
|
Total debt (excludes discounts and debt issuance costs)
|
$
|
9,828,508
|
|
There are no other maturities due after November 1, 2021.
11. Stockholders’ Equity
Common Stock
Equity Offering Program
In February 2019, the Company entered into an equity purchase agreement (the "2019 Equity Agreement") with Murray FO ("Murray") for the sale of up to
$5.0 million
in shares of the Company's common stock from time to time, at the Company’s option, subject to certain volume and pricing restrictions. Shares purchased under the 2019 Equity Agreement will be purchased at a
10%
discount to the volume weighted average sales price of such shares prior to the Company initiating sales. The shares will be sold pursuant to the Company’s new shelf registration statement on Form S-3, expected to be filed February 26, 2019 for the purchase of up to
$50 million
in shares of the Company’s securities.
Effective August 2018, the Company entered into the 2018 Sales Agreement with Leviston Resources for the sale of up to
$2.25 million
of shares of the Company's common stock from time to time, at the Company's option. The Company is not obligated to make any sales of shares under the 2018 Sales Agreement and if it elects to make share sales, can set a minimum sales price for the shares. As of December 31, 2018, the Company has issued shares with an aggregate sales price of
$0.9 million
under the Sales Agreement.
Effective April 2017, the Company also entered into the 2017 Sales Agreement with Leviston for the purchase of up to
$7.25 million
of shares of the Company's common stock from time to time, at the Company's option. Effective August 2018, the Company and Leviston terminated the 2017 Sales Agreement and no further sales pursuant to that program were made. At the time of the termination, the Company had issued shares with an aggregate purchase price of
$5.3 million
.
Effective June, 2016, the Company entered into a sales agreement with respect to an at-the-market offering program (“ATM Agreement”) wherein the Company could offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to
$5.0 million
. Final proceeds from the ATM Agreement were received in January 2018 and the ATM Agreement was terminated. The Company paid the sales agent a commission of
2.5%
of the gross proceeds.
During the year ended December 31, 2018, the Company issued Leviston
877,233
common shares valued at
$0.2 million
for issuance fees under the 2017 Sales Agreement and the 2018 Sales Agreement. In the year ended December 31, 2017, the Company issued Leviston
777,936
common shares valued at
$0.2 million
for issuance fees due under the 2017 Sales Agreement.
Following is a reconciliation of the transactions under the ATM Agreement, 2017 Sales Agreement and the 2018 Sales Agreement as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Number of shares sold
|
|
15,762,310
|
|
|
8,686,828
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
3,578,441
|
|
|
$
|
7,346,707
|
|
Fees
|
|
264,275
|
|
|
278,919
|
|
Net proceeds
|
|
$
|
3,314,166
|
|
|
$
|
7,067,788
|
|
|
|
|
|
|
Average price per share
|
|
$
|
0.23
|
|
|
$
|
0.85
|
|
Stock-based Incentive Plans
During the years ended
December 31, 2018
, and 2017,
no
shares were issued under the 2011 Equity Incentive Plan.
Other Stock-based Transactions
Following is a reconciliation of the stock based transactions as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Shares Outstanding as of beginning of year
|
|
47,236,103
|
|
|
37,072,735
|
|
Shares issued for:
|
|
|
|
|
Equity issue agreements
|
|
15,762,310
|
|
|
8,686,828
|
|
Private placement agreements
|
|
5,454,546
|
|
|
—
|
|
Purchase of mineral rights
|
|
2,774,490
|
|
|
502,604
|
|
Purchase of Pelen, LLC membership interest (Note 18)
|
|
3,233,591
|
|
|
—
|
|
Purchase of properties, plant and equipment
|
|
—
|
|
|
196,000
|
|
Payment for equity issue costs
|
|
877,233
|
|
|
777,936
|
|
Shares outstanding as of end of year
|
|
75,338,273
|
|
|
47,236,103
|
|
The following are other stock-based transactions for the years ended December 31, 2018 and 2017:
|
|
a.
|
During the years ended
December 31, 2018
and 2017, the Company issued
2,774,490
and
502,604
common shares valued at approximately
$0.5 million
each per year, respectively in satisfaction of an annual capital contribution pursuant to the Northern Comstock agreement, a related party. The 2018 transaction had stock issuance fees of
$55,000
.
|
|
|
b.
|
During 2017, the Company purchased land and property by issuing
196,000
common shares valued at
$0.3 million
.
|
|
|
c.
|
During 2018, the Company issued
5,454,546
common shares valued at
$0.9 million
, These common shares were exempt from the Securities Act pursuant to Section 4(a)(2) of the Securities Act and had a transaction fee of
$10,000
.
|
12. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
During the years ended
December 31, 2018
and
2017
, there were no transfers of assets and liabilities between Level 1, Level 2, or Level 3.
The following table presents our liabilities at
December 31, 2018
, which are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2018
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued make-whole for Pelen LLC (Note 18)
|
$
|
135,162
|
|
|
$
|
—
|
|
|
$
|
135,162
|
|
|
$
|
—
|
|
Total Liabilities
|
$
|
135,162
|
|
|
$
|
—
|
|
|
$
|
135,162
|
|
|
$
|
—
|
|
There were no assets or liabilities at December 31, 2017, that were measured at fair value on a recurring basis.
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.
Accrued make-whole for Pelen LLC -
The accrued make-whole is valued based on the difference between the valuation of the outstanding shares held by the seller of the membership interests at the Company's closing stock price of $0.13 on December 31, 2018 as compared to the remaining aggregate proceeds due. Because the inputs are all observable market-based inputs, this instrument is classified within Level 2 of the valuation hierarchy.
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, 2018, and December 31, 2017, the fair value of long-term debt approximated
$8.9
million and
$10.0 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 whose carrying value approximates fair value is determined using Level 2 inputs, with the exception of cash and cash equivalents (Level 1).
13. 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 and the Gold Hill Hotel. We evaluate the performance of our operating segments based on operating income (loss). All intercompany transactions have been eliminated, and intersegment revenues are not significant. Financial information relating to our reportable operating segments and consolidated totals are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,944,627
|
|
Real estate
|
150,289
|
|
|
104,329
|
|
|
125,590
|
|
Total revenues
|
150,289
|
|
|
104,329
|
|
|
5,070,217
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
|
|
|
|
|
Mining
|
$
|
(7,509,786
|
)
|
|
$
|
(8,908,556
|
)
|
|
$
|
(15,101,138
|
)
|
Real estate
|
(40,935
|
)
|
|
(73,739
|
)
|
|
(182,423
|
)
|
Total cost and expenses
|
(7,550,721
|
)
|
|
(8,982,295
|
)
|
|
(15,283,561
|
)
|
|
|
|
|
|
|
Operating Loss
|
|
|
|
|
|
|
|
|
Mining
|
$
|
(7,509,786
|
)
|
|
$
|
(8,908,556
|
)
|
|
$
|
(10,156,511
|
)
|
Real estate
|
109,354
|
|
|
30,590
|
|
|
(56,833
|
)
|
Total loss from operations
|
(7,400,432
|
)
|
|
(8,877,966
|
)
|
|
(10,213,344
|
)
|
Other income (expense), net
|
(2,080,321
|
)
|
|
(1,698,212
|
)
|
|
(2,751,360
|
)
|
Net loss
|
$
|
(9,480,753
|
)
|
|
$
|
(10,576,178
|
)
|
|
$
|
(12,964,704
|
)
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Mining
|
$
|
5,630
|
|
|
$
|
1,810,845
|
|
|
$
|
340,491
|
|
Real estate
|
1,650,190
|
|
|
—
|
|
|
3,200,000
|
|
Total capital expenditures
|
$
|
1,655,820
|
|
|
$
|
1,810,845
|
|
|
$
|
3,540,491
|
|
|
|
|
|
|
|
Depreciation, Amortization and Depletion
|
|
|
|
|
|
|
|
|
Mining
|
$
|
3,138,032
|
|
|
$
|
4,176,115
|
|
|
$
|
5,763,293
|
|
Real estate
|
9,860
|
|
|
11,568
|
|
|
130,490
|
|
Total depreciation, amortization and depletion
|
$
|
3,147,892
|
|
|
$
|
4,187,683
|
|
|
$
|
5,893,783
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2018
|
|
2017
|
Assets
|
|
|
|
|
|
Mining
|
$
|
21,166,231
|
|
|
$
|
25,530,508
|
|
Real estate
|
7,445,494
|
|
|
5,433,405
|
|
|
$
|
28,611,725
|
|
|
$
|
30,963,913
|
|
For the year ended December 31, 2016, substantially all of the mining revenues were attributable to
one
customer.
14. Net Loss Per Common Share
Basic earnings per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if stock options or warrants 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2018
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(9,480,753
|
)
|
|
$
|
(10,576,178
|
)
|
|
$
|
(12,964,704
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
59,629,805
|
|
|
41,127,245
|
|
|
35,324,947
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.16
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.37
|
)
|
The following table includes the number of common stock equivalent shares that are not included in the computation of diluted loss per share, because the Company has a net loss and the inclusion of such shares would be antidilutive.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
2018
|
|
2017
|
|
2016
|
Stock options
|
—
|
|
|
10,000
|
|
|
10,000
|
|
Restricted stock
|
—
|
|
|
—
|
|
|
28,000
|
|
|
—
|
|
|
10,000
|
|
|
38,000
|
|
15. Stock-Based Compensation
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 may be delivered pursuant to awards granted under the 2011 Plan is
6,000,000
shares of common stock. Availability under the 2011 Plan is
2,129,200
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.
Performance-based Restricted Stock
On February 23, 2015, the Board of Directors granted
12,000
shares of restricted stock (performance awards) to an employee under the 2011 Equity Incentive Plan. These awards and prior awards expired unvested in May 2017.
At
December 31, 2018
, there was
no
unrecognized compensation expense related to non-vested restricted stock award shares.
Options
Prior to the 2011 Plan, the Company had previously issued options under prior programs. During
2018
, there were
no
options granted, exercised, or forfeited.
There was
no
compensation expense recognized during the years ended December 31,
2018
and 2017. During
2016
, the Company recognized
$0.02 million
in compensation expense.
At December 31, 2018, there was
no
unrecognized compensation expense related to non-vested options.
16. Income Taxes
The provision (benefit) for income taxes from continuing operations for the years ended
December 31, 2018
,
2017
and
2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Income taxes provision
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Federal statutory rate
|
(21.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
Change in valuation allowance
|
20.5
|
%
|
|
(224.0
|
)%
|
|
34.0
|
%
|
Change in rate
|
—
|
%
|
|
258.0
|
%
|
|
—
|
%
|
Other
|
0.5
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Deferred income taxes at
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Asset retirement obligation
|
$
|
1,519,942
|
|
|
$
|
1,498,336
|
|
Mineral rights and properties, plant, and equipment
|
1,120,591
|
|
|
891,413
|
|
Mining exploration, development, claims, and permit costs
|
5,709,281
|
|
|
6,247,638
|
|
Net operating loss carryforward
|
37,401,823
|
|
|
35,205,356
|
|
Other
|
234,214
|
|
|
196,041
|
|
Valuation allowance
|
(45,985,851
|
)
|
|
(44,038,784
|
)
|
Total net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2018
, the Company had federal net operating losses of approximately
$178.1 million
that will begin to expire in
2023
and could be subject to certain limitations under section 382 of the Internal Revenue Code.
The Company has provided a valuation allowance at
December 31, 2018
, and
2017
, of
$46.0 million
and
$44.0 million
, respectively, for its net deferred tax assets as it cannot conclude it is more likely than not that they will be realized. The valuation allowance changed by
$1.9 million
,
$(23.7) million
, and
$4.4 million
in
2018
,
2017
, and
2016
, respectively.
On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), following its passage by the United States Congress. The TCJA makes significant changes to the U.S. federal income tax laws including among other changes a federal corporate tax rate reduction from 35% to 21% for tax years beginning after December 31, 2017, repeal of the corporate AMT tax system, immediate expensing of certain types of business assets and changing rules related to uses and limitations of NOL carryforwards created in tax years beginning after December 31, 2017. Due to the impact of the Company’s full valuation allowance on net deferred tax assets, the TCJA had no impact on the Company's provision for income taxes. The Company calculated the impact of the TCJA and recorded
$27.3 million
as additional income tax expense in the fourth quarter of 2017, which was offset with the corresponding impact for the change in valuation allowance. The
$27.3 million
was related to the remeasurement of certain deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future.
As of
December 31, 2018
and
2017
, 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
2015
and forward.
17. Related Party Transactions
Northern Comstock LLC
The Company has an operating agreement with Northern Comstock LLC, 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 this agreement were amended on August 27, 2015, and September 28, 2015 (the “Amendments”), with the other members of its Northern Comstock LLC joint venture. The Amendments resulted in reduced capital contribution obligations of the Company from
$31.05 million
down to
$9.75 million
. The terms of the Amendments provide that the Company will 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
$10,500,000
on the date of such payments, wherein the Company would then be required to pay in cash or in certain circumstances, 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 the net smelter returns generated by the properties subject to the Northern Comstock LLC joint venture. The Operating 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, secured by a mortgage on the properties subject to the Northern Comstock LLC joint venture. The operating agreement requires that these capital contributions commenced in October 2015, and will end in September 2027, unless prepaid by the Company.
The Company made payments in stock in the amounts of
$482,500
,
$482,500
and
$482,525
with the number of shares being
2,774,490
,
502,604
and
243,025
under the Northern Comstock Joint Venture agreement during the years ended
December 31, 2018
, 2017 and 2016, respectively. During the years ended December 31,
2018
,
2017
and
2016
, the Company recognized expense of
$0.8 million
,
$0.8
million and
$0.8
million, respectively. In 2018, the Company recognized
$0.8 million
reimbursements from Tonogold for the Northern Comstock Joint Venture agreement.
18. Acquisition Agreements
Pelen, LLC
In January 2018, the Company issued
1,475,410
shares of restricted common stock as initial payment to acquire
25%
of the total membership interests of Pelen, LLC. The purchase of the membership interests will close once the seller of the membership interests has received total cash proceeds of at least
$0.6
million either through sale of the restricted common stock received or through additional cash payments made by the Company. If all of the shares of restricted common stock have been sold by the seller of the membership interests and the aggregate proceeds received are less than
$0.6
million, then the Company is required to pay the shortfall in either additional shares of the Company’s common stock or cash, at the Company’s election. In November 2018, the Company issued
1,758,181
shares of restricted common stock as additional shares based on the shortfall on the aggregate proceeds for the initial shares. In December 2018, the agreement was amended to have a "Cut-Off" date of December 31, 2019 at which time the transaction will close and any unsold shares will be returned to the Company, with the Company required to make up any shortfall in cash. As of December 31, 2018, the purchase has not closed and the Company has not received legal ownership of the membership interests. The Company has recorded a make-whole liability of
$0.1
million at December 31, 2018 representing the value of the shortfall based on the actual sales of shares and the share price as of December 31, 2018. This amount is recorded within accrued expenses in the consolidated balance sheet as of December 31, 2018.
Downtown Silver Springs, LLC
In May 2018, amended in September 2018 and November 2018, the Company entered into an agreement for the purchase of
100%
of the membership interests of Downtown Silver Springs, LLC (“DTSS”). DTSS holds an option for the purchase of approximately
160
acres of centrally located land in Silver Springs, Nevada, and separately, holds an option to purchase
350
units of water rights (equaling
392
acre-feet) and
200
units of sewer rights. DTSS has no other assets, no operations, or employees.
The option to purchase the
160
acres of land allows the holder to purchase the land for approximately
$3.2 million
, less payments made of
$0.1 million
by the sellers of DTSS plus accrued interest of approximately
$0.4 million
and expires on March 31, 2019. The option to purchase the water and sewer rights allows the holder to purchase the water rights for
$5,800
per acre foot and the sewer rights for
$7,000
per sewer unit and expires on March 31, 2019. The water rights and sewer unit usages are not restricted to the
160
-acre parcel.
The DTSS acquisition was accounted for as an asset acquisition as it was determined that the operations of DTSS do not meet the definition of a business. The Company paid total consideration of
$1.8 million
which consists of (1)
$1.3 million
cash deposits that will reduce the final purchase price of the land parcel, and (2)
$0.5 million
cash payments to the former membership interest holders of DTSS (
$0.3 million
of which was paid in cash in 2018). As the options expire on March 31, 2019, the total consideration has been recorded in prepaid expenses.
As of December 31, 2018, the Company has made non-refundable deposits of
$1.3 million
which are recorded in prepaid expenses and other current assets in the consolidated balance sheet.
19. Tonogold Option Agreement
On October 3, 2017, the Company entered into the Option Agreement with Tonogold. Under the terms of the Option Agreement, Tonogold will have the right to participate in certain activities, including but not limited to, engineering, development, drilling and test-work, towards completing a technical and economic feasibility assessment on certain properties within the Company’s Lucerne resource area (the “Lucerne Property”).
Under the terms of the Option Agreement, Tonogold can earn a
51%
interest in the Company’s presently wholly-owned subsidiary, Comstock Mining LLC, which owns the Lucerne Property by meeting certain requirements and financial milestones. These requirements and milestones include: (1) making capital expenditures on the Lucerne Property and related expense reimbursements to the Company of
$20 million
no later than
42
-months following the Commencement Date of April 3, 2018, and (2) making option payments totaling
$2.2 million
to the Company. Tonogold made a
$0.2 million
option payment on October 3, 2017, and a second and final option payment of
$2.0 million
on April 3, 2018. The option payments were both recorded within stockholders' equity as they relate to Tonogold’s right to earn-in to a
51%
interest in Comstock Mining LLC. The Company used
$1.4 million
of the proceeds received from the option payments to reduce its indebtedness under the Debenture. In addition, the Company has recognized approximately
$1.25 million
as an offset to expenses in the consolidated financial statements for the year ended December 31, 2018.
20. Commitments and Contingencies
The Company leases certain properties under operating leases expiring at various dates through 2023. Future minimum annual lease payments under these existing lease agreements are as follows as of
December 31, 2018
:
|
|
|
|
|
Year Ended December 31,
|
Leases
|
2019
|
$
|
91,470
|
|
2020
|
92,370
|
|
2021
|
90,350
|
|
2022
|
90,650
|
|
2023
|
90,950
|
|
Thereafter
|
238,650
|
|
|
$
|
694,440
|
|
Expense under operating leases for the years ended
December 31, 2018
,
2017
and
2016
was
$0.1
million,
$0.1
million and
$0.1
million, respectively.
Royalty Agreements
The Company has minimum royalty obligations with certain of its mineral properties and leases. Minimum royalty payments were
$61,800
in
2018
. For most of the mineral properties and leases, the Company is subject to a range of royalty obligations once production commences. These royalties range from
0.5%
to
5%
of net smelter revenues (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,
$0.1
million, and
$0.1
million for the years ended
2018
,
2017
, and
2016
, respectively.
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.
Precious Royalties LLC
On July 12, 2018, Precious Royalties LLC (“Precious”) filed a complaint in the First Judicial District Court of the State of Nevada, in Storey County, against the Company, alleging that the Company failed to properly pay Precious a net smelter return royalty in accordance with a settlement agreement dated September 24, 2012. Precious is seeking approximately $510,000 in damages, plus interest, at 18% per annum. The Company believes that the claims made in this complaint are without merit and the Company intends to vigorously defend this litigation. The Company has filed a motion for a more definite statement on the basis that the complaint is too vague to allow a responsive pleading. The motion has been fully briefed, and the Company is expecting the decision of the District Court in the first quarter of 2019.
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 of the State of Nevada in and for Lyon County (the “District Court”) against the Lyon County Board of Commissioners (the “Commissioners”) and the Company, asking the District Court to reverse the Commissioners’ approval of an application for a master plan amendment and zone change on January 2, 2014 (the “Application”).
Prior to the approval of the Application, the master plan designation and zoning precluded mining on certain Company property in the area of Silver City, Lyon County. 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”) appealed the decision to the Nevada Supreme Court. Briefing in the Nevada Supreme Court was completed with the Appellants’ filing of a Reply Brief on March 3, 2016. An oral argument before a three-judge panel of the Nevada Supreme Court took place on September 14, 2016.
On December 2, 2016, the Nevada Supreme Court entered an order affirming all three of the District Court’s decisions associated with 1) the Commissioners’ discretion and authority for changing master plans and zoning, 2) their compliance with Nevada’s Open Meeting Law and 3) their compliance with Nevada statutory provisions. Specifically, the Supreme Court affirmed the District Court’s conclusions that Lyon County did not abuse its discretion and that it acted with substantial evidence in support of their decision, that the County did not violate Nevada’s Open Meeting Law statutory provisions.
The Supreme Court did reverse the District Court’s dismissal of the CRA 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 Company and the Commissioners filed a motion for summary judgment with the District Court based on the evidence in the record and the District Court held a hearing on December 11, 2017. The District Court concluded that the Supreme Court's reversal of the CRA's due process claim required that the CRA be afforded the opportunity to conduct discovery and allowed extensive time for the CRA to conduct discovery, which was completed and the District Court held a hearing on April 23, 2018. Final briefings on the due process claim were completed on October 17, 2018, and the matter has been submitted for a final ruling from the Court.
From time to time, we are involved in lawsuits, 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.
21. Subsequent Events
In January 2019, the Company entered into the following three transactions:
(i) On January 24, 2019, the “Company entered into a Membership Interest Purchase Agreement (the “Tonogold Agreement”) with Tonogold Resources, Inc. (“Tonogold”).
Under the terms of the Tonogold Agreement, the Company will sell Tonogold its interests in Comstock Mining LLC, a wholly-owned subsidiary of Comstock (“CML”) whose sole assets are the Lucerne Mine properties and related permits. Upon closing the sale of CML, the Company and Tonogold will terminate the Lucerne-Comstock Mine Project Option Agreement (the “Existing Option”), dated as of October 3, 2017, between the Company and Tonogold. Pursuant to the Existing Option, Tonogold had the right to earn a
51%
interest in CML, for initial payments of
$2.2 million
in cash and current and future spending commitments totaling
$20 million
for exploration, engineering, permitting, and development.
The purchase price for CML is
$15 million
in cash, plus Tonogold will also guarantee the Company’s financial responsibility for its membership interest in Northern Comstock LLC, who owns and leases certain mineral properties in the Lucerne area, and assume certain reclamation liabilities. The Company also retains a
1.5%
net smelter return royalty on the Lucerne properties.
Tonogold paid the Company a non-refundable cash deposit on the date that the Agreement was executed. The remainder of the purchase price can be paid in one of two ways, at the election of Tonogold. The first alternative is for Tonogold to pay the Company
$10 million
in cash prior to closing, with the remaining
$5 million
payable in cash by the first anniversary of the closing date. This alternative would require that the
$5 million
remainder payment be secured by a deed of trust on the Lucerne properties. The second alternative is for Tonogold to pay the Company
$11.5 million
in cash and
$1.75 million
in stock prior to closing, with another
$1.75 million
payable in cash or stock by the first anniversary of the closing. Ownership of CML will not transfer until the closing. The closing must occur prior to May 30, 2019, or the Company is relieved of any obligations under the Tonogold Agreement.
Upon closing of the sale of CML, the Company has also agreed to enter into a
ten
-year mineral lease for additional mineral properties in Storey County, Nevada, granting Tonogold the right to explore, develop and mine these properties. Tonogold will assume approximately
$100,000
in annual costs for these properties and will assume work commitments totaling over
$200,000
in 2019. The Company will retain a
3%
net smelter return royalty on these additional leased properties, which will be reduced to
1.5%
one year after the commencement of mining operations. The lease is renewable for an additional
ten
-year term.
The Company and Tonogold also agreed that commencing upon the closing of the sale of CML, it will enter into a new Option Agreement to lease its permitted American Flat mining property, plant and equipment to Tonogold for crushing, leaching and processing material from the Lucerne mine. Under this new Option Agreement, Tonogold will be required to reimburse the Company for an additional
$1.1 million
per year to maintain the processing facility lease option. If such option is exercised, Tonogold will then pay the Company a rental fee of
$1 million
per year plus
$1
per processed ton, in addition to all the costs of
operating and maintaining the facility, up to and until the first
$15 million
in rental fees are paid, and then stepping down to
$1 million
per year and
$0.50
per processed ton for the next
$10 million
paid to the Company.
(ii) On February 25, 2019, Downtown Silver Springs LLC, an affiliate of the Company, entered into an agreement to sell certain real property located at intersection of Opal Avenue and Ramsey Weeks Cut-Off, Silver Springs, Nevada, for a cash purchase price of
$2.5 million
. After closing, the Company will retain a right to receive
3%
of the amount of the carried interest that the general partner of the fund that purchased such party is due to receive after all costs, expenses, investor hurdles and returns are deducted from the gross proceeds arising from any gain with respect to such property by the buyer.
(iii) On February 25, 2019, the Company's wholly-owned subsidiary, Comstock Industrial LLC, entered into an agreement to sell certain unimproved real property located at 3405 Citrus Street, Silver Springs, Nevada 89429 and associated water rights and improvements related thereto, for a cash purchase price of
$7.2 million
. After closing, the Company will retain a right to receive
3%
of the amount of the carried interest that the general partner of the fund that purchased such party is due to receive after all costs, expenses, investor hurdles and returns are deducted from the gross proceeds arising from any gain with respect to such property by the buyer.