NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2019 (UNAUDITED)
1. Interim Financial Statements
Basis of Presentation
The interim condensed consolidated financial statements of Comstock Mining Inc. and subsidiaries (“Comstock”, the “Company”, “we”, “our” or “us”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation are included. Operating results for the three and nine month periods ended September 30, 2019, may not be indicative of the results expected for the year ended December 31, 2019. For further information, refer to the financial statements and footnotes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Liquidity and Management Plans
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and contemplates the Company's continuation as a going concern.
The Company has recurring net losses from operations and an accumulated deficit of $235.6 million at September 30, 2019. For the nine month period ended September 30, 2019, the Company incurred a net loss of $3.5 million and used $2.3 million of cash in operations. As of September 30, 2019, the Company had cash and cash equivalents of $0.3 million, current assets of $12.4 million and current liabilities of $12.3 million, resulting in current working capital of approximately $0.1 million.
The Company’s current capital resources include cash and cash equivalents and other net working capital resources, an equity purchase agreement capacity and a loan commitment agreement with $9.5 million in unused capacity after consideration of fees due at the time of borrowing. These capital resources are in addition to the planned asset sales.
On October 1, 2019, and as amended and restated on October 9, 2019, the Company entered into a new equity purchase agreement (the “Leviston Equity Agreement”) with Leviston Resources LLC (“Leviston”) and filed a prospectus supplement
to offer and sell shares of common stock at an aggregate offering price of up to $1.25 million, from time to time, to Leviston. On February 18, 2019, the Company filed a new shelf registration statement on Form S-3 (the “S-3 Shelf”), for the purchase of up to $50.0 million of the Company’s securities, from time to time. In February 2019, the Company also entered into an equity purchase agreement (the "2019 Equity Agreement") with the Murray Family Office ("Murray FO") for the sale of up to $5.0 million in shares of the Company's common stock from time to time, at the Company’s option, subject to certain restrictions and at a 10% discount to a volume weighted average price. On September 20, 2019, the Company filed a prospectus that terminated any remaining sales pursuant to the 2019 Equity Agreement.
On September 26, 2019, the Company entered into new agreements, with Sierra Springs Enterprises Inc., a qualified opportunity zone business, to sell the industrial land and senior water rights in Silver Springs, NV, (the “98 acres”) for $6.5 million and to sell its rights in the membership interests in Downtown Silver Springs, LLC (“DTSS”) for $3.6 million. The agreements require the transactions to close before December 15, 2019. On September 15, 2019, and effective September 25, 2019, the Company terminated previous agreements with a different third party to sell the 98 acres and to sell DTSS.
On September 20, 2019, the Company and Tonogold Resources Inc. ("Tonogold") agreed to extend the closing date on the sale of the membership interests in Comstock Mining LLC through the Membership Purchase Agreement (the "Tonogold Agreement") to October 15, 2019. Through September 30, 2019 the Company received $3.925 million in non-refundable deposits relating to the Tonogold Agreement and used approximately $2.8 million of these proceeds to reduce its 11% Senior Secured Debenture (the "Debenture") down to approximately $6.4 million. Between May 2019 and August 2019, the Company has also received $4.75 million in in non-refundable Tonogold Convertible Preferred Stock (“CPS”), and recorded the investment at its indicated fair market value of $5.65 million. The CPS is convertible in May 2020, at the lowest of Tonogold’s (1) 20-day volume-weighted closing price prior to conversion, (2) most recent private placement or (3) public offering price. Tonogold must pay $3.625 million in cash in October 2019, and $3.95 million in cash between January and June, 2020, for the purchase of the entity that owns the Lucerne mine properties.
On October 14, 2019, the Company and Tonogold amended the Tonogold Agreement and Tonogold elected to extend the closing date to October 31, 2019, upon payment of an additional non-refundable cash deposit of $0.3 million, and an extension fee of $0.25 million in CPS, which have been received. Tonogold may elect to further extend the closing date to November 10, 2019, by paying an additional non-refundable cash deposit of $1.0 million on or before October 31, 2019, and an extension fee of $0.5 million in CPS.
During 2017 and 2018, the Company received $2.2 million in total cash payments relating to an option agreement (the “Option Agreement”) with Tonogold. This agreement, signed in October 2017, was terminated effective September 18, 2019, and the associated option payments of $2.2 million were recorded as income in the three month period ended September 30, 2019.
On June 21, 2019, as amended July 3, 2019, the Company entered into a Mercury Remediation Pilot, Investment and Joint Venture Agreement (the “MCU Agreement”) with Mercury Clean Up LLC (“MCU”). Pursuant to the MCU Agreement, the Company committed $2.0 million of capital contributions to MCU. The Company's investment, payable in cash and stock, entitles it to an initial 15% of the fully-diluted equity ownership of MCU and 50% of the equity of a future joint venture formed with MCU (the “Joint Venture”). The Company has paid a total of 4,500,000 in restricted common shares and $500,000 in cash to MCU as of October 1, 2019. The contract requires additional payments of $300,000 by October 31, 2019 and $350,000 payable no later than November 30, 2019. The 4.5 million shares of restricted common shares were valued at $751,050 on July 18, 2019, and the Company recorded a make-whole liability of $370,750 at September 30, 2019, for the difference in fair value and the $850,000 committed to MCU for the value of this investment. Pursuant to the MCU Agreement, the Company has the rights to coordinate an additional $3.0 million in financing for the Joint Venture and MCU would contribute certain other assets, entitling the Company to acquire an additional 10% of the fully-diluted equity ownership of MCU.
On June 28, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Temple Tower Group LLC (“Temple") providing for the issuance and sale to Temple of shares of the Preferred Shares for gross proceeds to the Company of $1.1 million, that was received on July 1, 2019. The Preferred Shares are convertible into the Company's common stock from time to time, at Temple’s option, subject to certain restrictions and at a 10% discount to the lowest volume weighted average price over the prior seven days. For the three-month period ended September 30, 2019, Temple converted all of the Preferred Shares for 11,202,206 common shares at average share price of $0.114 cents.
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, 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.
While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration statement, borrowings, 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 the funding sources detailed above.
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 estimated useful lives and valuation of properties, plant, and equipment, assets held for sale, mineral rights, deferred tax assets, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.
Comprehensive Loss
The only component of comprehensive income or loss for the three and nine month periods ended September 30, 2019, and 2018 was our net income or net loss.
Income Taxes
We recognize deferred tax assets and liabilities based on differences between the consolidated financial statement carrying amounts and tax basis of certain recorded assets and liabilities and for tax loss carryforwards. Realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable earnings. Where it is more likely than not that the deferred tax asset will not be realized, we have provided a full valuation allowance. The Company has provided full valuation allowances at September 30, 2019, and December 31, 2018, for its net deferred tax assets because we cannot conclude it is more likely than not that they will be realized.
Variable Interest Entity
During 2018, Comstock’s board approved the Company to enter into an investment in certain opportunity zone funds in northern Nevada. During 2019, Comstock invested $0.25 million into a qualified opportunity zone fund named Sierra Springs Opportunity Fund Inc. (“SSOF”) and a qualified opportunity zone business named Sierra Springs Enterprises Inc. (“SSE” solely owned by SSOF). It is anticipated that the Company could own approximately 9.5% of SSOF upon issuance of all 75 million authorized shares to investors. SSOF currently has $1.25 million in deposits from investors, including Comstock.
On September 26, 2019 the Company entered into agreements with SSE to sell industrial land and senior water rights in Silver Springs, NV, (the “98 acres”) for $6.5 million and to sell its rights in the membership interests in Downtown Silver Springs, LLC (“DTSS”) for $3.6 million. The Company’s chief executive officer is expected to be the president and a director of SSOF and an executive of SSE.
In conjunction with its investment in SSOF, the Company evaluated whether consolidation is required according to ASC 810, Consolidation. As SSOF is a legal entity, does not meet any scope exceptions, the Company has both operational and equity risk related to SSOF, and SSOF currently has insufficient equity at risk, the Company concluded SSOF is a variable interest entity (“VIE”). However, the Company has concluded it does not meet the power threshold even though the Company’s CEO is an executive of SSOF as no one individual has unilateral control over significant decisions of SSOF and consent is required from other current investors.
Comstock’s $0.25 million investment in SSOF is recorded in the condensed consolidated balance sheets at September 30, 2019 in Other assets. Comstock’s maximum exposure to loss as a result of its involvement with SSE at September 30, 2019 is limited to its current investment.
Recently Issued Accounting Pronouncements
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. The Company adopted this guidance on January 1, 2019, with no material impact on the Company’s condensed consolidated financial statements.
2. Assets Held For Sale
The Company has committed to a plan to sell certain land, buildings, and water rights ("the Non-mining assets"). In January 2019, the Company also committed to a plan to sell certain mining properties. As of September 30, 2019, and December 31, 2018, the Company has assets with a net book value of $6.9 million and $5.4 million, respectively, which met the criteria to be classified as assets held for sale. Those criteria specify that the asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets), the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale generally within one year. Proceeds from the sale of these assets are required to be used to satisfy obligations due under the terms of the debenture described in Note 7.
Assets held for sale include:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Industrial Park (Land and water rights)
|
$
|
2,738,462
|
|
|
$
|
2,738,462
|
|
Daney Ranch (Land and buildings)
|
2,146,575
|
|
|
2,146,575
|
|
Lucerne Mine (Mineral rights and properties) (Note 16)
|
1,539,197
|
|
|
—
|
|
Gold Hill Hotel (Land and buildings)
|
478,366
|
|
|
478,366
|
|
Total assets held for sale
|
$
|
6,902,600
|
|
|
$
|
5,363,403
|
|
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Land and property deposits (Note 15)
|
$
|
3,250,000
|
|
|
$
|
1,800,000
|
|
Mercury Clean Up Investment
|
1,101,050
|
|
|
—
|
|
Reimbursements due from Tonogold
|
451,566
|
|
|
82,951
|
|
Surety bond and insurance
|
180,766
|
|
|
475,861
|
|
Other
|
248,737
|
|
|
353,390
|
|
Total prepaid expenses and other current assets
|
$
|
5,232,119
|
|
|
$
|
2,712,202
|
|
4. Properties, Plant and Equipment
Properties, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Land and building
|
$
|
9,140,805
|
|
|
$
|
9,169,605
|
|
Vehicle and equipment
|
2,308,773
|
|
|
2,319,290
|
|
Processing and laboratory
|
21,113,178
|
|
|
21,129,248
|
|
Furniture and fixtures
|
549,860
|
|
|
648,309
|
|
Construction in progress
|
35,190
|
|
|
35,190
|
|
|
33,147,806
|
|
|
33,301,642
|
|
Less accumulated depreciation
|
(24,950,557
|
)
|
|
(23,559,522
|
)
|
Total properties, plant and equipment
|
$
|
8,197,249
|
|
|
$
|
9,742,120
|
|
During the three and nine month periods ended September 30, 2019, the Company recognized depreciation expense of $0.4 million and $1.1 million, respectively. During the three and nine month periods ended September 30, 2018, the Company recognized depreciation expense of $0.7 million and $2.3 million, respectively.
5. Retirement Obligation Asset
Following is a reconciliation of the aggregate retirement obligation asset associated with our mining reclamation plans:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Twelve Months
Ended
|
|
September 30, 2019
|
|
December 31, 2018
|
Retirement obligation asset — beginning of period
|
$
|
203,274
|
|
|
$
|
282,745
|
|
Additional obligations incurred
|
—
|
|
|
—
|
|
Amortization of retirement obligation asset
|
(50,818
|
)
|
|
(79,471
|
)
|
Retirement obligation asset — end of period
|
$
|
152,456
|
|
|
$
|
203,274
|
|
6. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Accrued make-whole for Mercury Clean Up LLC (Note 15)
|
$
|
370,750
|
|
|
$
|
—
|
|
Accrued make-whole for Pelen LLC (Note 15)
|
181,754
|
|
|
135,162
|
|
Accrued liability for purchase of DTSS (Note 15)
|
—
|
|
|
185,000
|
|
Accrued payroll costs
|
173,191
|
|
|
140,915
|
|
Accrued interest expense
|
171,444
|
|
|
481,946
|
|
Accrued Board of Directors fees
|
79,000
|
|
|
20,000
|
|
Accrued Northern Comstock Joint Venture
|
67,708
|
|
|
180,833
|
|
Accrued insurance liabilities
|
34,168
|
|
|
341,680
|
|
Accrued personal property tax
|
—
|
|
|
74,434
|
|
Other accrued expenses
|
196,824
|
|
|
114,763
|
|
Total accrued expenses and other liabilities
|
$
|
1,274,839
|
|
|
$
|
1,674,733
|
|
The accrued expense for the Northern Comstock Joint Venture represents the difference in timing of expense recognition and required monthly and annual payments to Northern Comstock LLC.
7. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
Note Description
|
September 30, 2019
|
|
December 31, 2018
|
Senior Secured Debenture (GF Comstock 2) - 11% interest, due 2021.
|
$
|
6,419,112
|
|
|
$
|
8,872,663
|
|
Note Payable (Caterpillar Financial Services) - 5.75% interest.
|
725,021
|
|
|
955,845
|
|
Total debt
|
7,144,133
|
|
|
9,828,508
|
|
Less: long-term debt discounts and issuance costs
|
(201,895
|
)
|
|
(660,795
|
)
|
Total debt, net of discounts and issuance costs
|
6,942,238
|
|
|
9,167,713
|
|
Less: current maturities
|
(323,415
|
)
|
|
(309,843
|
)
|
Long-term debt, net of discounts and issuance costs
|
$
|
6,618,823
|
|
|
$
|
8,857,870
|
|
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 due 2021 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 of 100% of the equity of the subsidiaries of Comstock Mining Inc. The use of proceeds included refinancing substantially all of the Company’s current obligations, except the amount 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" obligation totaling approximately $688,000 if paid any time prior to or at maturity. At September 30, 2019, the remaining balance on the Make Whole obligation was $332,301. Total principal on the Debenture is due on January 13, 2021. The Debenture requires acceleration of payment of accrued interest, principal, and the related Make Whole obligation from all net proceeds received upon the sale of any of the assets of the Company.
Interest is payable semi-annually. For the first two years, interest was 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 is payable only in cash. In 2018, the Company elected to make the semi-annual 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. A director of the Company is a manager and member of the general partner of GF Capital 2 LP.
Loan Commitment
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. 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.
8. Long-Term Reclamation Liability
Following is a reconciliation of the aggregate reclamation liability associated with our reclamation plan for our mining projects:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Twelve Months
Ended
|
|
September 30, 2019
|
|
December 31, 2018
|
Long-term reclamation liability — beginning of period
|
$
|
7,441,091
|
|
|
$
|
7,417,680
|
|
Additional obligations incurred
|
—
|
|
|
—
|
|
Reduction of obligation
|
(410,018
|
)
|
|
—
|
|
Accretion of reclamation liability
|
17,130
|
|
|
23,411
|
|
Long-term reclamation liability — end of period
|
$
|
7,048,203
|
|
|
$
|
7,441,091
|
|
Reclamation Liability Reduction by NDEP
On April 30, 2019, the Company was notified by the Nevada Division of Environmental Protection ("NDEP") that the Company's successful reclamation of parts of the Lucerne mine area had reduced the Lucerne project reclamation cost estimate with an updated reclamation bond requirement of $6.8 million. Our total reclamation liability also includes cost estimates for our Dayton project and enhanced reclamation obligations in Storey County.
9. Leases
The Company has an operating lease for a property located adjacent to the Gold Hill Hotel, which is primarily used as a room rental. The lease runs from 2018 until 2028. The monthly rent is $750 with automatic annual increases of $25 per month every November, beginning in 2020. The operating lease is sub-leased to Crown Point Management LLC, the operators of the Gold Hill Hotel, and not separately valued within the Gold Hill Hotel lease.
For the three and nine month period ended September 30, 2019, the fixed operating lease expense was $2,250 and $6,750, respectively with a remaining term of 9.1 years.
Supplemental cash flow information related to the Company's operating lease for the nine months ended September 30, 2019, are as follows:
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
6,750
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
$
|
2,909
|
|
The Company has the following lease balances recorded in the condensed consolidated balance sheet as follows:
|
|
|
|
|
|
|
Lease Assets and Liabilities
|
Classification
|
|
September 30, 2019
|
Operating lease right-of-use asset
|
Other assets
|
|
$
|
48,536
|
|
|
|
|
|
Operating lease liability - current
|
Accrued expenses and other liabilities
|
|
$
|
9,000
|
|
Operating lease liability - long-term
|
Other liabilities
|
|
39,845
|
|
Total operating lease liabilities
|
|
|
$
|
48,845
|
|
Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows:
|
|
|
|
|
|
Remainder of 2019
|
|
$
|
2,250
|
|
2020
|
|
9,050
|
|
2021
|
|
9,350
|
|
2022
|
|
9,650
|
|
2023
|
|
9,950
|
|
Thereafter
|
|
52,300
|
|
Total operating lease payments
|
|
92,550
|
|
Less: Imputed interest
|
|
43,705
|
|
Present value of lease liabilities
|
|
$
|
48,845
|
|
10. Commitments and Contingencies
The Company has minimum royalty obligations with certain of its mineral properties and leases. For most of the mineral properties and leases, the Company is subject to a range of royalty obligations once production commences. These royalties range from 0.5% to 5% of net smelter 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 the price of gold.
The Company’s mining and exploration activities are subject to various laws and regulations for protecting 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 continue making expenditures to comply with such laws and regulations, but cannot fully predict such future expenditures.
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 the approval of the Application, the master plan designation and zoning precluded mining on certain property of the Company in the area of Silver City, Nevada. In April 2015, the District Court ruled in favor of the Company and the Commissioners. The written Order Denying Petition for Judicial Review was filed and mailed to all parties on June 15, 2015. On July 14, 2015, the CRA and one individual (together “Appellants”) filed a Notice of Appeal of the Court Order, appealing the decision to the Nevada Supreme Court. On December 9, 2015, Appellants filed their Opening Brief in the Nevada Supreme Court, generally repeating the arguments that were made at the District Court. On January 15, 2016, the Company and the
Commissioners jointly filed an Answering Brief. Briefing in the Nevada Supreme Court was completed with the Appellants’ filing of a Reply Brief on March 3, 2016. Oral arguments before a three-judge panel took place on September 14, 2016.
On December 2, 2016, the Nevada Supreme Court entered an order affirming all three of the District Court’s decisions associated with 1) the Commissioners’ discretion and authority for changing master plans and zoning, 2) their compliance with Nevada’s Open Meeting Law and 3) their compliance with Nevada statutory provisions. Specifically, the Supreme Court affirmed the District Court’s conclusions that Lyon County did not abuse its discretion and that it acted with substantial evidence in support of their decision, that the County did not violate Nevada’s Open Meeting Law or any other statutes.
The Supreme Court reversed the District Court’s dismissal of CRA’s claim of a due process violation, concluding that this claim should not have been dismissed and that further proceedings are necessary in the District Court on this single claim. The District Court concluded that the Supreme Court's reversal of CRA's due process claim required that CRA be afforded the opportunity to conduct discovery and allowed the CRA the time to conduct discovery on its due process claim. The Company responded to the CRA discovery request on February 20, 2018 and the District Court held a hearing on April 23, 2018. Additional discovery was also allowed by the District Court. On May 14, 2019, the Court held a hearing on CRA's due process claim and issued its ruling from the bench. The Court concluded that CRA, having been afforded the opportunity to conduct discovery, was unable to meet its burden to establish by a preponderance of the evidence that Lyon County had denied CRA of its due process rights. The Court, therefore, denied CRA's due process claim. On July 11, 2019, the Court issued and filed a formal judgment in favor of Lyon County and Comstock Mining. The Company and Lyon County have filed a motion to recover attorney's fees and costs from the CRA. On August 14, 2019, the CRA filed a Notice of Appeal.
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 net smelter return royalty in accordance with a settlement agreement dated September 24, 2012, and seeking $510,000 in damages. 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 Royalty and filed a counter-claim that, among other things, requests reimbursement of legal fees and related interest. On July 26, 2019, Precious filed an answer to the counter-claim. Discovery has commenced and a four-day trial has been set for July 20, 2020. The Company believes that the claims made in this complaint are without merit and the Company intends to vigorously defend this litigation.
From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no other matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
11. Stockholders’ Equity
Convertible Preferred Stock
On June 28, 2019, the Company entered into the Securities Purchase Agreement with Temple Tower Group LLC ("Temple") providing for the issuance and sale to Temple of 1,274 Preferred Shares with a stated value of $1,000 per share, for net proceeds to the Company of $1.1 million with 191 of the Preferred Shares representing due diligence fees. The net proceeds of $1.1 million in cash were received on July 1, 2019. The total of 1,274 Preferred Shares issued on June 28, 2019 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 proceeds of $1.1 million and the fair value of $1.5 million as a cost of issuing the Preferred Shares.
The Preferred Shares were issued pursuant to the Company’s registration statement on Form S-3, and the Preferred Shares were convertible into the Company’s common stock. The number of shares issuable 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 for the Company’s common stock as reported at the close of trading on the NYSE American LLC during the seven trading days ending on, and including, the date of the notice. For the three-month period ended September 30, 2019, Temple converted all of the Preferred Shares for 11,202,206 common shares at an average share price of $0.114 cents.
Equity Offering Program
Effective August 2018, the Company entered into an equity sales agreement (the "2018 Sales Agreement") for the sale of up to $2.25 million in shares of the Company's common stock. As of March 31, 2019, the Company had issued 5,452,000 common
shares at an average price of $0.14 cents per share shares totaling $1.7 million under the 2018 Sales Agreement. Final proceeds from the 2018 Sales Agreement were received in February 2019, and the 2018 Sales Agreement was terminated.
On February 18, 2019, the Company filed a new shelf registration statement on Form S-3 (the “S-3 Shelf”), for the purchase of up to $50.0 million of the Company’s securities, from time to time. In February 2019, the Company also entered into an equity purchase agreement (the "2019 Equity Agreement") with the Murray Family Office ("Murray FO") for the sale of up to $5.0 million in shares of the Company's common stock from time to time, at the Company’s option, subject to certain restrictions and at a 10% discount to a volume weighted average price. The Company issued 657,778 shares in commitment fees and 408,000 shares for due diligence fees to Murray FO. For the nine-month period ended September 30, 2019, the Company issued 14,940,599 common shares at an average price per share of $0.13 cents per share. On September 20, 2019, the Company filed a prospectus that terminated any remaining sales pursuant to the Murray FO agreement.
Following is a reconciliation of the equity transactions for nine months ended September 30, 2019, and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
September 30, 2019
|
|
September 30, 2018
|
Number of shares sold
|
31,594,805
|
|
|
18,489,583
|
|
|
|
|
|
Gross cash proceeds
|
$
|
3,835,867
|
|
|
$
|
3,783,442
|
|
Fees
|
271,460
|
|
|
84,276
|
|
Net proceeds
|
$
|
3,564,407
|
|
|
$
|
3,699,166
|
|
|
|
|
|
Average price per share
|
$
|
0.12
|
|
|
$
|
0.20
|
|
In January 2018, the Company issued 1,475,410 shares of restricted stock as initial payment to acquire 25% of the total membership interests of Pelen, LLC (Note 15).
Subsequent to quarter-end and through October 25, 2019, the Company issued 10,740,012 common shares through the Leviston Equity Agreement including 1,424,262 shares in payment for equity issue costs. Gross proceeds were approximately $0.8 million at an average share price of $0.09.
12. Net Income (Loss) Per Common Share
Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if stock options were exercised.
The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 30,
|
|
June 30,
|
|
September 30,
|
|
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(1,835,065
|
)
|
|
$
|
(2,484,903
|
)
|
|
$
|
(2,077,744
|
)
|
|
$
|
(2,415,332
|
)
|
|
$
|
386,897
|
|
|
$
|
(2,045,110
|
)
|
|
$
|
(3,525,912
|
)
|
|
$
|
(6,945,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
79,080,429
|
|
|
49,863,424
|
|
|
83,072,638
|
|
|
53,834,285
|
|
|
100,062,905
|
|
|
58,531,058
|
|
|
87,482,183
|
|
|
54,755,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.00
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
13. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
During the nine months ended September 30, 2019 and the year ended December 31, 2018, there were no transfers of assets and liabilities between Level 1, Level 2, or Level 3.
The following table presents our assets and liabilities at September 30, 2019 which are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
September 30, 2019
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Convertible preferred shares of Tonogold (Note 16)
|
$
|
5,650,000
|
|
|
—
|
|
|
—
|
|
|
$
|
5,650,000
|
|
Total Assets
|
$
|
5,650,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,650,000
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accrued make-whole for Pelen LLC (Note 15)
|
$
|
181,754
|
|
|
$
|
—
|
|
|
$
|
181,754
|
|
|
$
|
—
|
|
Accrued make-whole for Mercury Clean Up LLC (Note 15)
|
370,750
|
|
|
—
|
|
|
370,750
|
|
|
—
|
|
Total Liabilities
|
$
|
552,504
|
|
|
$
|
—
|
|
|
$
|
552,504
|
|
|
$
|
—
|
|
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 15)
|
$
|
135,162
|
|
|
$
|
—
|
|
|
$
|
135,162
|
|
|
$
|
—
|
|
Total Liabilities
|
$
|
135,162
|
|
|
$
|
—
|
|
|
$
|
135,162
|
|
|
$
|
—
|
|
Following is a description of the valuation methodologies used for the Company's financial instruments measured at fair value on a recurring basis as well as the general classification of such instruments pursuant to the valuation hierarchy.
Convertible preferred shares of Tonogold - The value of the convertible preferred shares of Tonogold is based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price, volatility, risk-free rate, private placement conversion observations, listing probability, and illiquidity discount. The convertible preferred shares are classified within Level 3 of 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 $0.11 on September 30, 2019, and $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.
Accrued make-whole for Mercury Clean Up LLC - The accrued make-whole is valued based on the difference between the value of the outstanding shares delivered to MCU at the Company’s closing stock price of $0.11 on September 30, 2019 and the required investment value of $850,000. Because the inputs are all observable market-based inputs, the 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 September 30, 2019, and December 31, 2018, the fair value of long-term debt approximated $6.6 million and $8.9 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).
14. 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. 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 inter-segment revenues are not significant. Financial information relating to our reportable operating segments and reconciliation to the consolidated totals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenue
|
|
|
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Real estate
|
48,350
|
|
|
32,281
|
|
|
130,132
|
|
|
83,946
|
|
Total revenue
|
48,350
|
|
|
32,281
|
|
|
130,132
|
|
|
83,946
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
Mining
|
(832,082
|
)
|
|
(1,557,224
|
)
|
|
(3,913,388
|
)
|
|
(5,418,546
|
)
|
Real estate
|
(8,651
|
)
|
|
(12,887
|
)
|
|
(31,362
|
)
|
|
(29,858
|
)
|
Total costs and expenses
|
(840,733
|
)
|
|
(1,570,111
|
)
|
|
(3,944,750
|
)
|
|
(5,448,404
|
)
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
|
|
|
Mining
|
(832,082
|
)
|
|
(1,557,224
|
)
|
|
(3,913,388
|
)
|
|
(5,418,546
|
)
|
Real estate
|
39,699
|
|
|
19,394
|
|
|
98,770
|
|
|
54,088
|
|
Total loss from operations
|
(792,383
|
)
|
|
(1,537,830
|
)
|
|
(3,814,618
|
)
|
|
(5,364,458
|
)
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
1,179,280
|
|
|
(507,280
|
)
|
|
288,706
|
|
|
(1,580,888
|
)
|
Net income (loss)
|
$
|
386,897
|
|
|
$
|
(2,045,110
|
)
|
|
$
|
(3,525,912
|
)
|
|
$
|
(6,945,346
|
)
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
800,000
|
|
|
$
|
—
|
|
|
$
|
1,305,631
|
|
Real estate
|
550,000
|
|
|
—
|
|
|
1,635,000
|
|
|
—
|
|
Total capital expenditures
|
$
|
550,000
|
|
|
$
|
800,000
|
|
|
$
|
1,635,000
|
|
|
$
|
1,305,631
|
|
|
|
|
|
|
|
|
|
Depreciation, Amortization, and Depletion
|
|
|
|
|
|
|
|
Mining
|
$
|
396,910
|
|
|
$
|
1,631,007
|
|
|
$
|
1,565,841
|
|
|
$
|
2,461,422
|
|
Real estate
|
2,465
|
|
|
4,930
|
|
|
7,395
|
|
|
7,395
|
|
Total depreciation, amortization, and depletion
|
$
|
399,375
|
|
|
$
|
1,635,937
|
|
|
$
|
1,573,236
|
|
|
$
|
2,468,817
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
As of December 31,
|
|
2019
|
|
2018
|
Assets
|
|
|
|
Mining
|
$
|
27,598,489
|
|
|
$
|
21,166,231
|
|
Real estate
|
7,808,965
|
|
|
7,445,494
|
|
Total assets
|
$
|
35,407,454
|
|
|
$
|
28,611,725
|
|
15. Acquisition Agreements
Mercury Clean Up LLC
On June 21, 2019, as amended July 3, 2019, the Company entered into a Mercury Remediation Pilot, Investment and Joint Venture Agreement (the “MCU Agreement”) with Mercury Clean Up LLC (“MCU”). Pursuant to the MCU Agreement, the Company committed $2.0 million of capital contributions payable in cash and stock, in exchange for 15% of the fully-diluted equity ownership of MCU and 50% of the equity of any future joint ventures formed with MCU (the “Joint Ventures”).
On July 18, 2019, the Company issued 4.5 million shares of restricted common stock to fund $850,000 of the MCU acquisition. The Company has paid MCU a total of $500,000 in cash as of September 30, 2019. The contract requires additional payments of $300,000 payable by October 31, 2019, and $350,000 payable by November 30, 2019. If there is insufficient working capital from the stock proceeds to fund the plans of MCU, the Company will fund MCU up to $100,000 per month, starting in the seventh month after the MCU Agreement, in lieu of the stock, as required based upon the mutually agreed upon capital plan. This additional funding applies directly, dollar for dollar, towards the Company’s investments commitments. The Company recorded a make-whole liability of $370,750 based on the difference between the value of the outstanding shares delivered to MCU at the Company’s closing stock price of $0.11 on September 30, 2019 and the required investment value of $850,000.
The Company and MCU are evaluating numerous locations containing historical, mercury-contaminated tailings, and developing a detailed schedule for the pilot testing. MCU will receive the mercury remediation and recovery system at the Company’s American Flat facility during the fourth quarter of 2019. The goal of the pilot is to process approximately five to twenty-five tons of ore and sediment per hour, and thoroughly test and confirm the technical and commercial viability of the system and its processes.
Based on successful proof of economic viability, the Company has the rights to coordinate an additional $3 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. Such financing entitles the Company to acquire an additional 10% of the fully-diluted equity interests of MCU.
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, for closing the transaction and any unsold shares will be returned to the Company, with the Company required to make up any shortfall in cash. As of September 30, 2019, 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 $181,754 at September 30, 2019, representing the value of the shortfall based on the actual sales of shares and the share price as of September 30, 2019. These amounts are recorded within accrued expenses in the condensed consolidated balance sheet.
Downtown Silver Springs, LLC
The Company entered into an agreement for the purchase of 100% of the membership interests DTSS on May 30, 2018, as amended. DTSS holds a contract for the purchase of approximately 160 acres of centrally located land in Silver Springs, Nevada. DTSS has no other assets, operations or employees.
The Company’s CEO advanced $25,000 to the equity holders of DTSS in 2017, from his own funds. In the second quarter of 2018, the Company was presented with an opportunity to acquire DTSS, and after disclosure of such advance, the Board of Directors unanimously approved such acquisition. In connection with the closing of the acquisition of DTSS in August 2018, the equity holders of DTSS repaid $25,000 to the Company’s CEO, without interest or profit.
The agreement to purchase the land allows the holder of the option to purchase the land for approximately $3.2 million, plus 4% interest less deposits made through July 29, 2019 totaling $2.4 million. The current amendment requires a series of non-
refundable deposits totaling $0.5 million due monthly and to close the land purchase by December 9, 2019 with the remaining balance due of approximately $0.3 million including interest.
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 $2.75 million, as of September 30, 2019, which consists of (1) $2.25 million in non-refundable cash deposits, which are recorded in prepaid expenses and other current assets in the condensed consolidated balance sheets 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. As the contract for acquiring the property expires in December 2019, the consideration has been recorded in prepaid expenses.
16. Sale, Option and Lease Agreements with Tonogold Resources Inc. ("Tonogold")
There are two current agreements between Comstock and Tonogold: the Membership Interest Purchase Agreement and the Mineral Exploration and Mining Lease. A Lease Option Agreement for the Company's American Flat processing facility becomes effective once the Membership Interest Purchase Agreement is closed. The 2017 Option Agreement was terminated.
Membership Interest Purchase Agreement
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, and October 14, 2019, to sell its interests in Comstock Mining LLC, a wholly-owned subsidiary of Comstock (“CML”), whose sole asset is the Lucerne properties and related permits to Tonogold (the “Tonogold Agreement”), with a closing date no later than November 10, 2019. The latest restated amendment requires a purchase price of $16.5 million, Tonogold will also guarantee the Company’s remaining financial responsibility for its membership interest in Northern Comstock LLC, which owns and leases certain mineral properties in the Lucerne area, and also assume certain reclamation liabilities, both total approximately $7.0 million. The Company also retains a 1.5% net smelter return royalty on the Lucerne properties.
For the nine months ended September 30, 2019, the Company has received $3.925 million in non-refundable cash deposits relating to the Tonogold Agreement and $4.75 million in CPS payments, recorded on September 30, 2019 at a fair value of $5.65 million, for total payment value, recorded at a fair value, of $9.575 million. The Company also recorded the following Deferred Liabilities associated with these cash and stock payments until the transaction closes. The Company has also recorded a deferred liability for the mineral lease payments received in advance but not yet earned.
Tonogold Deferred Liabilities:
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September 30, 2019
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December 31, 2018
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Cash payments (non-refundable)
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$
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3,925,000
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$0
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Convertible Preferred Stock payments at fair value (non-refundable)
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5,650,000
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—
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Mark to market adjustment for Convertible Preferred Stock
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332,263
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—
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Mineral Lease payment (in advance)
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8,333
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—
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Total Deferred Liabilities
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$
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9,915,596
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$0
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Upon closing, the Company expects to recognize a gain representing the difference between the consideration received and the net book value of CML.
The CPS is all convertible into Tonogold common stock in May 2020, at the lowest of Tonogold’s (1) 20-day volume-weighted closing price prior to conversion, (2) most recent private placement or (3) public offering price. Under U.S. GAAP, the Company has the irrevocable option to report certain financial assets and liabilities at fair value on an instrument by instrument basis, with changes in fair value reported in net earnings. This option was elected for the treatment of the $4.75 million of CPS received on May 31, 2019 ($3.92 million), and August 30, 2019 ($0.83 million). For the three months ended September 30, 2019, the Company recorded a $0.3 million expense in net earnings for the change in fair market value.
Tonogold is required to pay $3.625 million in cash by November 10, 2019, for 50.3% of the membership interest in CML. The remaining $3.95 million of the cash purchase price will be secured by a loan with payments of at least $650 thousand each month from January through June 2020. With each payment, the Company will transfer a proportional share of the membership interests. The final 23.33% of the membership interests, based on the CPS, will be delivered when the loan has been paid in full or when the Company is eligible to sell the CPS for cash without restriction, whichever occurs first.
On October 14, 2019, the Company and Tonogold amended the Tonogold Agreement to extend the closing date to October 31, 2019, upon payment of an additional non-refundable cash deposit of $0.3 million by October 18, 2019, and an extension fee of $0.25 million in CPS, which has been paid. Tonogold may elect to further extend the closing date to November 10, 2019, by paying an additional non-refundable cash deposit of $1.0 million on or before October 31, 2019, and an extension fee of $0.5 million in CPS.
Mineral Exploration and Mining Lease for Storey County Properties
Effective September 16, 2019, the Company entered into a ten-year, renewable mineral 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.
The initial term of the Exploration Lease (the "Exploration Term") is 10 years with a provision for Tonogold to automatically renew for a second 10-year term (the "Development Term" provided that Tonogold spends at least $5 million for exploration and related activities during the Exploration Term. The Exploration Lease allows for automatic renewal for a third term (the "Production Term") that extends through the published production schedule and mine plans, provided that Tonogold spends another $5 million on exploration and engineering and delivers an economic feasibility study during the Development Term. The Production Term continues unless and until a period of 180 days elapses without exploration, development, mining or processing operations.
Tonogold will pay a quarterly lease fee of $10 thousand, in advance. The lease fee will escalate 10% each year on the anniversary date of the Exploration Lease. Tonogold will also reimburse the Company for all costs associated with owning the properties. The lease also provides for royalty payments after mining operations commence. For the first year following the commencement of mining, royalties will be paid at the rate of 3% of net smelter returns ("NSR") for the properties. The rate will be reduced to 1.5% of NSR thereafter. The Company accounts for the Exploration Lease as an operating lease.
Lease Option Agreement for the American Flat Processing Facility
The Company also agreed that commencing upon the closing of the sale of CML, it will enter into a new lease-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 (the "Lease Option Agreement"). Under this Lease Option Agreement, Tonogold will be required to reimburse the Company approximately $1.1 million in expenses per year to maintain the option. If such option is exercised, Tonogold will then pay the Company a rental fee of $1.0 million per year plus $1 per processed ton, in addition to all the costs of operating and maintaining the facility, up to and until the first $15.0 million in rental fees are paid, and then stepping down to $1.0 million per year and $0.50 per processed ton for the next $10.0 million paid to the Company.
Option Agreement
During 2017 and 2018, the Company received a total of $2.2 million in cash payments relating to an option agreement (the “Option Agreement”) with Tonogold. This agreement, signed in October 2017, was terminated effective September 20, 2019, and the associated option payments of $2.2 million were recorded as other income in the three months ended September 30, 2019.
Other
For the three and nine month periods ended September 30, 2019 the Company has received reimbursements from Tonogold totaling $0.9 million and $1.3 million respectively. In October, the Company collected all of the $0.5 million accrued and receivable at September 30, 2019.