UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2019
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 001-35200
LODE20150930LOGOA07.JPG
COMSTOCK MINING INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
 
1040
(Primary Standard Industrial
Classification Code Number)
 
65-0955118
(I.R.S. Employer
Identification No.)
117 American Flat Road
Virginia City, NV 89440
(Address of principal executive offices)
(775) 847-5272
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerated filer
 
¨
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
x
 
 
 
 
 
 
 
 
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
If an emerging growth company, indicate by check mark of the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨  No x
The registrant's number of outstanding Common Stock, $0.000666 par value, at October 25, 2019, was 126,970,215.
 




TABLE OF CONTENTS

 
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2



Cautionary Notice Regarding Forward-Looking Statements


Certain statements contained in this report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions identify forward-looking statements, but are not the exclusive means of doing so. Forward-looking statements include statements about matters such as: future industry market conditions; future explorations or acquisitions; future changes in our exploration activities; future prices and sales of, and demand for, our products; land entitlements and uses; permits; production capacity and operations; operating and overhead costs; future capital expenditures and their impact on us; operational and management changes (including changes in the board of directors); changes in business strategies, planning and tactics; future employment and contributions of personnel, including consultants; future land sales; investments, acquisitions, joint ventures, strategic alliances, business combinations, operational, tax, financial and restructuring initiatives; including the nature and timing and accounting for restructuring charges, derivative liabilities and the impact thereof; contingencies; environmental compliance and changes in the regulatory environment; offerings, limitations on sales or offering of equity or debt securities; including asset sales and the redemption of the debenture and associated costs; future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties, many of which are unforeseeable and beyond our control and could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements.  Some of those risks and uncertainties include the risk factors set forth in this report and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and the following: adverse effects of climate changes or natural disasters; global economic and capital market uncertainties; the speculative nature of gold or mineral exploration, including risks of diminishing quantities or grades of qualified resources; operational or technical difficulties in connection with exploration or mining activities; contests over our title to properties; potential dilution to our stockholders from our stock issuances, recapitalization and balance sheet restructuring activities; potential inability to comply with applicable government regulations or law; adoption of or changes in legislation or regulations adversely affecting our businesses; permitting constraints or delays; business opportunities that may be presented to, or pursued by, us; acquisitions, joint ventures, strategic alliances, business combinations, asset sales, and investments that we may be party to in the future; changes in the United States or other monetary or fiscal policies or regulations; interruptions in our production capabilities due to capital constraints; equipment failures; fluctuation of prices for gold or certain other commodities (such as silver, zinc, cyanide, water, diesel fuel and electricity); changes in generally accepted accounting principles; adverse effects of terrorism and geopolitical events; potential inability to implement our business strategies; potential inability to grow revenues; potential inability to attract and retain key personnel; interruptions in delivery of critical supplies, equipment and raw materials due to credit or other limitations imposed by vendors; assertion of claims, lawsuits and proceedings against us; potential inability to satisfy debt and lease obligations; potential inability to maintain an effective system of internal controls over financial reporting; potential inability or failure to timely file periodic reports with the SEC; potential inability to list our securities on any securities exchange or market; inability to maintain the listing of our securities; and work stoppages or other labor difficulties. Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Except as may be required by securities or other law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.



3



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COMSTOCK MINING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
276,649

 
$
488,657

Assets held for sale, Net (Note 2)
6,902,600

 
5,363,403

Prepaid expenses and other current assets (Note 3)
5,232,119

 
2,712,202

Total current assets
12,411,368

 
8,564,262

 
 
 
 
MINERAL RIGHTS AND PROPERTIES, Net
5,690,885

 
7,205,081

PROPERTIES, PLANT AND EQUIPMENT, Net (Note 4)
8,197,249

 
9,742,120

RECLAMATION BOND DEPOSIT
2,680,347

 
2,622,544

RETIREMENT OBLIGATION ASSET (Note 5)
152,456

 
203,274

INVESTMENT IN PREFERRED SHARES (Note 16)
5,650,000

 

OTHER ASSETS
625,149

 
274,444

 
 
 
 
TOTAL ASSETS
$
35,407,454

 
$
28,611,725

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
806,215

 
$
405,146

Accrued expenses and other liabilities (Note 6)
1,274,839

 
1,674,733

Deferred liabilities (Note 16)
9,915,596

 

Long-term debt– current portion (Note 7)
323,415

 
309,843

Total current liabilities
12,320,065

 
2,389,722

 
 
 
 
LONG-TERM LIABILITIES:
 
 
 
Long-term debt (Note 7)
6,618,823

 
8,857,870

Long-term reclamation liability (Note 8)
7,048,203

 
7,441,091

Other liabilities
531,416

 
538,140

Total long-term liabilities
14,198,442

 
16,837,101

 
 
 
 
Total liabilities
26,518,507

 
19,226,823

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 10)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
Preferred Stock, $.000666 par value, 50,000,000 shares authorized; no shares issued and/or outstanding at September 30, 2019, and December 31, 2018

 

Common stock, $.000666 par value, 790,000,000 shares authorized, 116,230,203 and 75,338,273 shares issued and outstanding at September 30, 2019, and December 31, 2018, respectively
77,409

 
50,175

Additional paid-in capital
244,422,620

 
241,419,897

Accumulated deficit
(235,611,082
)
 
(232,085,170
)
 
 
 
 
Total stockholders’ equity
8,888,947

 
9,384,902

 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
35,407,454

 
$
28,611,725


See accompanying notes to condensed consolidated financial statements.

4



COMSTOCK MINING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2019
 
2018
 
2019
 
2018
REVENUES
 
 
 
 
 
 
 
Revenue - mining
$

 
$

 
$

 
$

Revenue - real estate
48,350

 
32,281

 
130,132

 
83,946

Total revenues
48,350

 
32,281

 
130,132

 
83,946

 
 
 
 
 
 
 
 
COSTS AND EXPENSES
 
 
 
 
 
 
 
Costs applicable to mining revenue
318,537

 
717,155

 
1,329,322

 
2,174,618

Real estate operating costs
8,651

 
12,887

 
31,362

 
29,858

Exploration and mine development
109,189

 
241,902

 
576,594

 
700,088

Mine claims and costs
(324,027
)
 
(291,602
)
 
(36,172
)
 
(20,346
)
Environmental and reclamation
30,590

 
88,612

 
(278,784
)
 
208,866

General and administrative
697,793

 
801,157

 
2,322,428

 
2,355,320

Total costs and expenses
840,733

 
1,570,111

 
3,944,750

 
5,448,404

 
 
 
 
 
 
 
 
LOSS FROM OPERATIONS
(792,383
)
 
(1,537,830
)
 
(3,814,618
)
 
(5,364,458
)
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest expense
(179,588
)
 
(340,548
)
 
(822,632
)
 
(1,054,775
)
Other income (expense)
1,358,868

 
(166,732
)
 
1,111,338

 
(526,113
)
Total other income (expense), net
1,179,280

 
(507,280
)
 
288,706

 
(1,580,888
)
 
 
 
 
 
 
 
 
INCOME (LOSS) BEFORE INCOME TAXES
386,897

 
(2,045,110
)
 
(3,525,912
)
 
(6,945,346
)
 
 
 
 
 
 
 
 
INCOME TAXES

 

 

 

 
 
 
 
 
 
 
 
NET INCOME (LOSS)
$
386,897

 
$
(2,045,110
)
 
$
(3,525,912
)
 
$
(6,945,346
)
 
 
 
 
 
 
 
 
Net income (loss) per common share – basic and diluted
$
0.00

 
$
(0.03
)
 
$
(0.04
)
 
$
(0.13
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding — basic and diluted
100,062,905

 
58,531,058

 
87,482,183

 
54,755,753


See accompanying notes to condensed consolidated financial statements.

5



COMSTOCK MINING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Amount
 
Total
BALANCE - January 1, 2019

 
$

 
75,338,273

 
$
50,175

 
$
241,419,897

 
$
(232,085,170
)
 
$
9,384,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
5,452,000

 
3,631

 
809,930

 

 
813,561

Common stock issuance costs

 

 

 

 
(85,093
)
 

 
(85,093
)
Net Loss









 
(1,835,065
)
 
(1,835,065
)
BALANCE - March 31, 2019

 

 
80,790,273

 
53,806

 
242,144,734

 
(233,920,235
)
 
8,278,305

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
3,643,949

 
2,427

 
673,041

 

 
675,468

Common stock issuance costs

 

 
1,065,778

 
710

 
(126,305
)
 

 
(125,595
)
Issuance of convertible preferred stock
1,274

 
1

 

 

 
1,514,999

 

 
1,515,000

Net Loss









 
(2,077,744
)
 
(2,077,744
)
BALANCE - June 30, 2019
1,274



1



85,500,000



56,943



244,206,469


(235,997,979
)

8,265,434

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
22,498,856

 
14,984

 
2,763,854

 

 
2,778,838

Common stock issuance costs

 

 

 

 
(60,772
)
 

 
(60,772
)
Preferred stock converted to common
(1,274
)
 
(1
)
 

 

 
(1,514,999
)
 

 
(1,515,000
)
Payment for mineral rights

 

 
3,731,347

 
2,485

 
480,015

 

 
482,500

Investment in Mercury Clean Up LLC

 

 
4,500,000

 
2,997

 
748,053

 

 
751,050

Termination of share option with Tonogold

 

 

 

 
(2,200,000
)
 

 
(2,200,000
)
Net lncome

 

 

 

 

 
386,897

 
386,897

BALANCE - September 30, 2019

 
$

 
116,230,203

 
$
77,409

 
$
244,422,620

 
$
(235,611,082
)
 
$
8,888,947



6



 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated
Deficit
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Amount
 
Total
BALANCE - January 1, 2018

 

 
47,236,103

 
$
31,459

 
$
234,438,057

 
$
(222,604,417
)
 
$
11,865,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
4,064,310

 
2,707

 
1,182,745

 

 
1,185,452

Common stock issuance costs

 

 
615,605

 
410

 
(52,978
)
 

 
(52,568
)
Purchase of membership interests

 

 
1,475,410

 
983

 
(983
)
 

 

Net Loss









 
(2,484,903
)
 
(2,484,903
)
BALANCE - March 31, 2018

 

 
53,391,428

 
35,559

 
235,566,841

 
(225,089,320
)
 
10,513,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
2,365,000

 
1,575

 
608,833

 

 
610,408

Common stock issuance costs

 

 

 

 
(275
)
 

 
(275
)
Issuance of share options with Tonogold at fair value

 

 

 

 
2,000,000

 

 
2,000,000

Net Loss





 

 

 
(2,415,332
)
 
(2,415,332
)
BALANCE - June 30, 2018

 

 
55,756,428

 
37,134

 
238,175,399

 
(227,504,652
)
 
10,707,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock

 

 
12,060,273

 
8,032

 
1,979,548

 

 
1,987,580

Common stock issuance costs

 

 
261,628

 
174

 
(31,606
)
 

 
(31,432
)
Payment for mineral rights

 

 
2,774,490

 
1,848

 
480,653

 

 
482,501

Net Loss









 
(2,045,110
)
 
(2,045,110
)
BALANCE - September 30, 2018

 
$

 
70,852,819

 
$
47,188

 
$
240,603,994

 
$
(229,549,762
)
 
$
11,101,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements.

7



COMSTOCK MINING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Nine Months Ended 
 September 30,
 
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(3,525,912
)
 
$
(6,945,346
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation, amortization, and depletion
1,573,236

 
2,468,817

(Reduction) accretion of reclamation liability
(392,888
)
 
17,233

Gain on sale of properties, plant, and equipment
(3,125
)
 
(26,000
)
Amortization of debt discounts and issuance costs
174,254

 
282,708

Net loss on early retirement of long-term debt
284,647

 
164,751

Payment-in-kind interest expense
470,246

 
437,852

Cancellation of Tonogold share option
(2,200,000
)
 

Change in make-whole liability with Pelen, LLC
46,591

 
369,000

Change on make-whole liability - MCU
370,750

 

Mark to market Tonogold preferred shares
332,263

 

Preferred shares issuance expense
432,000

 

Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other assets
(72,515
)
 
(775,311
)
Accounts payable
401,069

 
24,633

Accrued expenses and other liabilities
(173,127
)
 
484,443

NET CASH USED IN OPERATING ACTIVITIES
(2,282,511
)
 
(3,497,220
)
INVESTING ACTIVITIES:
 
 
 
Proceeds from principal payment on note receivable
396

 
376

Proceeds from sale of mineral rights and properties, plant, and equipment
3,125

 
26,000

Proceeds from deposits on Membership Interest Purchase Agreement
3,925,000

 

Purchase of mineral rights and properties, plant and equipment
(1,635,000
)
 
(1,055,631
)
Investment in Sierra Springs Opportunity Fund
(225,000
)
 

Investment in Mercury Clean Up LLC
(350,000
)
 

Change in reclamation bond deposit
(57,803
)
 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
1,660,718

 
(1,029,255
)
FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term debt
(3,154,622
)
 
(2,000,631
)
Proceeds from the issuance of share option with Tonogold

 
2,000,000

Proceeds from the issuance of common stock
3,835,867

 
3,783,442

Common stock issuance costs
(271,460
)
 
(84,276
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
409,785

 
3,698,535

DECREASE IN CASH AND CASH EQUIVALENTS
(212,008
)
 
(827,940
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
488,657

 
2,066,718

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
276,649

 
$
1,238,778

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
Cash paid for interest
$
66,854

 
$
99,092

 
 
 
(Continued)


8











COMSTOCK MINING INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
Nine Months Ended 
 September 30,
 
2019
 
2018
Supplemental disclosure of non-cash operating, investing and financing activities:
 
 
 
Receipt of preferred shares of Tonogold
$
5,650,000

 
$

Advance payment received on Membership Interest Purchase Agreement (Note 16)
$
5,982,263

 
$

Issuance of common stock for mineral lease
$
482,500

 
$

Issuance of common stock to pay for common stock issuance costs
$

 
$
245,000

Issuance of common stock (in advance) to purchase Pelen membership interest
$

 
$
585,000

Issuance of common stock (in advance) to purchase MCU membership interest
$
751,050

 
 

See notes to condensed consolidated financial statements.


                            

9



COMSTOCK MINING INC. AND SUBSIDIARIES
 
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.


10



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

11




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.


12



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.


13



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



14



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.


15



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

16



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

17



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.


18



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

 
$


19




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).


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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



21



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-

22



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:
 
September 30, 2019
 
December 31, 2018
Cash payments (non-refundable)
$
3,925,000

 
$0
Convertible Preferred Stock payments at fair value (non-refundable)
5,650,000

 

Mark to market adjustment for Convertible Preferred Stock
332,263

 

Mineral Lease payment (in advance)
8,333

 

Total Deferred Liabilities
$
9,915,596

 
$0

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.


23



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.




24



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion provides information that we believe is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company as of and for the nine month period ended September 30, 2019. It should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in this Form 10-Q and our Annual Report on Form 10-K as of, and for the fiscal year ended December 31, 2018.

Overview

The Company is a Nevada-based, gold and silver mining company with extensive, contiguous property in the Comstock District and is an emerging leader in sustainable, responsible mining and is currently commercializing environment-enhancing, precious-metal-based technologies, products, and processes for precious metal recovery.

The Company began acquiring properties in the Comstock District in 2003. Since then, the Company has consolidated a significant portion of the Comstock District, amassed the single largest known repository of historical and current geological data on the Comstock region, secured permits, built an infrastructure and completed two phases of test production. The Company continues evaluating and acquiring properties inside and outside the district, expanding its footprint and evaluating all of our existing and prospective opportunities for further exploration, development and mining. The Company’s goal is to grow per-share value by commercializing environment-enhancing, precious-metal-based products and processes that generate predictable cash flow (throughput) and increase the long-term enterprise value of our northern Nevada based platform.

The Company and its subsidiaries now own or control approximately 9,358 acres of mining claims and parcels in the broader Comstock District and surrounding area. The acreage includes approximately 2,396 acres of patented claims and surface parcels (private lands) and approximately 6,962 acres of unpatented mining claims (public lands), which the Bureau of Land Management (“BLM”) administers. The Company's headquarters is on American Flat road, immediately north of the Lucerne resource area and just south of Virginia City, Nevada.

Because of the Comstock District’s historical significance, the geology is well known and has been extensively studied by the Company, our advisors and many independent researchers. We have expanded our understanding of the geology through vigorous surface mapping and drill hole logging. The volume of geologic data is immense, particularly in the Lucerne and Dayton resource areas. We have amassed a large library of historical data and detailed surface mapping of Comstock District properties and continue to obtain historical information from private and public sources. We integrate this data with information obtained from our recent mining operations, to target geological prospective exploration areas and plan exploratory drilling programs, including expanded surface and underground drilling.


25



A10Q20190930FIGURE2.JPG
Figure 1 - Comstock Mining's Land Position in the Comstock District


26



During 2019, the Company’s Board of Directors approved a transformational strategy focused on high-value, cash-generating, precious metal-based activities, (the “Strategic Focus”) including, but not limited to, metals exploration, engineering, resource development, economic feasibility assessments, mineral production, metal processing and related ventures of environmentally friendly, and economically enhancing mining technologies.

The Company advanced the Strategic Focus by facilitating the formation of a qualified opportunity zone fund named Sierra Springs Opportunity Fund Inc. and a qualified opportunity zone business named Sierra Springs Enterprises Inc. Sierra Springs Enterprises, Inc. has formally agreed to acquire Comstock’s non-mining assets and has also secured over a dozen independent projects, including the development of the Silver Springs Airport, a centrally located regional airport, the acquisition of certain exceptionally well located and adjacent lands and water rights, and the rights to a number of conservation-based, non-mining businesses. These businesses include a Tahoe-based, high pH spring water, an agricultural-ready manufacturing and processing facility and a business to manufacture and sell a totally compostable green bottle and cap, designed to displace single-use petroleum-based plastics.

Comstock Mining's Corporate Realignment

A2019Q3REALIGNMENTV6.JPG Figure 2 - Comstock's Corporate Realignment
    

27



Current Projects

The Company completed the realignment during 2019, such that the new corporate structure is now well aligned with the Strategic Focus. Comstock Mining Inc. remains as the parent company that wholly owns the realigned subsidiaries. Comstock Mining LLC owns or controls the Lucerne properties, including those contained in the Northern Comstock Joint Venture. Comstock Processing LLC owns the American Flat processing facility and additional land for potential expansion. Comstock Northern Exploration LLC owns or controls the remaining Storey County mining claims and exploration targets, primarily located north of the Lucerne properties, including the Gold Hill targets and the Occidental Lode. Comstock Exploration & Development LLC owns or controls the Lyon County mining claims and exploration targets, including the Dayton Resource Area and the Spring Valley target. Comstock Industrial LLC owns the Silver Springs properties and water rights. Comstock Real Estate Inc. owns the Daney Ranch and the Gold Hill Hotel assets.

Exploration and Development

The Company has identified many exploration targets on its land holdings in the Comstock District, but has focused, to date, on the Dayton resource area and, through our collaboration with Tonogold Resources Inc. (“Tonogold”) the Lucerne resource area (including surface and underground exploration). We have also leased the remaining Storey County mineral claims, including the Occidental group and the Gold Hill group of exploration targets, to Tonogold, who has plans for near-term exploration and ultimately development towards economic feasibility on those assets. We are developing exploration plans for the remaining areas, primarily the Spring Valley group that we view as an extension of the Dayton resource area.

The Company's district-wide plans contemplate the exploration and development of specific, identified geological target areas across the District, that the Company has organized into Comstock Exploration and Development LLC, the Company’s wholly owned subsidiary representing the Dayton and Spring Valley areas, Comstock Northern Exploration LLC representing the Occidental and Gold Hill groups of exploration targets now leased to Tonogold, and Comstock Mining LLC representing the Lucerne resource area that Tonogold has agreed to acquire. These exploration targets represent over 7 miles of mineralized strike length, with current and historical grades of gold and silver.

The Company retained royalties ranging from 1.5% to 3.0% on the Lucerne and Northern Exploration properties.


28



A2019Q3COMSTOCKTARGETS.JPG
Figure 3 - General Overview of Priority Exploration Targets

29



Comstock Processing LLC (100% owner of the American Flat Processing Facility)

A2019Q3PROCESSFACILITYINWINT.JPG
Figure 4: American Flat Processing Facility

The processing facility is in the American Flat area of Gold Hill, NV, less than a mile west of Lucerne, and operated 24 hours per day, seven days per week, for substantially all of 2013 through 2016. During 2019, Comstock formed Comstock Processing LLC ("CPL"), a newly realigned, wholly-owned subsidiary that owns all of the property, plant, equipment and permits for the crushing, agglomerating, leaching, Merrill Crowe processing, mercury retort, refining, and metallurgical operations located at 1200 American Flat, Virginia City, NV. The facilities represent a fully permitted platform, best positioned for implementing our Strategic Focus on high-value, cash-generating, precious metal-based activities, including, but not limited to, metals exploration, engineering, resource development, economic feasibility assessments, mineral production, metal processing and related ventures of environmentally friendly, and economically enhancing mining technologies. To date, Comstock Processing has entered into two agreements that leverage its platform for nearer-term cash generation; the definitive agreement with Mercury Clean Up LLC (“MCU”) and the option to lease the facilities to Tonogold.

CPL’s Venture with Mercury Clean Up LLC

The first agreement is with MCU, to pilot test new, cleaner technologies, in collaboration with Oro Industries Inc. (“Oro”), for the manufacture and global deployment of mercury remediation systems with proprietary mechanical, hydro, electro-chemical and oxidation processes to reclaim and remediate mercury from soils, waste and tailings. MCU has the exclusive, world-wide rights to four patentable technologies and equipment that we believe will demonstrate feasible, economic mercury remediation. Comstock provides the platform for testing the mercury remediation system and MCU will conduct the trials that prove scalable feasibility. MCU plans to deploy the solution globally and is working on at least one major, international remediation project. Comstock’s award-winning mercury reclamation experience coupled with MCU’s technology and processing know-how positions a new growth opportunity consistent with the Company’s Strategic Focus.


30



Worldwide unregulated activity has released thousands of tons of mercury into the environment. The continued worldwide use of mercury in unregulated activities, primarily outside of the United States, is polluting air, soils, and waters and poisoning marine life and endangering lives. Ongoing, unregulated artisanal mining outside of the U.S. represents more than 40% of the ongoing mercury contamination and represents a tremendous opportunity for cleaning up the environment in a sustainable, profitable manner. Mercury will not go away by itself and must be removed to stop the pollution. Mercury can’t be broken down or destroyed, and MCU, in collaboration with Oro and the Company, is pioneering an effective solution.

Through September 30, 2019, the Company has invested $1.2 million out of a total $2 million committed into MCU to demonstrate the feasibility of the Mercury Remediation System on CPL’s permitted platform. Upon successful feasibility, the Company and MCU would create a new, 50-50 venture called Comstock Mercury Remediation LLC for pursuing global business opportunities. The Company has the rights to invest in up to 25% of MCU and separately, 50% of the joint venture.

Over the past seven years, Comstock has implemented several approved plans, by the Nevada Division of Environmental Protection (“NDEP”), intended to address NDEP’s and the U.S. Environmental Protection Agency (“EPA”) protocols, guidance and goals for sampling, characterizing, transporting and managing mercury within the Carson River Mercury Superfund Site. These plans and CPL’s existing, permitted infrastructure provide an ideal platform for evaluating the efficacy of the MCU process. MCU and the Company will work closely with NDEP for any additional approvals or permits.

CPL’s Lease Option with Tonogold

The second agreement, commencing upon the closing of the sale of CML, represents an option to lease (the “Lease-Option”) the permitted American Flat mining property, plant and equipment to Tonogold for crushing, leaching and processing material from the Lucerne mine. Under the Lease-Option, Tonogold has already commenced reimbursing the Company $1.1 million per year to specifically reimburse the costs of maintaining the facility. If the option is exercised, Tonogold would 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. After the first $15 million in rental fees are paid, the rental fee would step down to $1 million per year and $0.50 per processed ton for the next $10 million paid to the Company.

CPL and Development of Clean Technologies

The ongoing testing of alternative technologies aligns with the Company’s Strategic Focus on responsible development. A breakthrough with cleaner technologies could result in higher, faster recoveries with reduced waste, shorter permitting cycle times and lower reclamation costs.

The Company continues exploring other partners and ventures that can leverage this fully-permitted platform for the development of cash-generating, precious metal-based activities, including, but not limited to, metals exploration, engineering, resource development, economic feasibility assessments, mineral production, metal processing and related ventures of environmentally-friendly, and economically enhancing mining technologies.


31



Comstock Exploration & Development (100% owner of the Dayton Resource and Spring Valley Exploration Areas)

Our Dayton resource area and the adjacent Spring Valley exploration targets are located in Lyon County, Nevada, approximately six miles south of Virginia City. Access to the properties is by State Routes 341 and 342, both paved roads. The Dayton includes the historic Dayton, Kossuth and Alhambra patents, and the old Dayton Consolidated mine workings. The historic Dayton mine was the last meaningful underground mining operation in the Comstock District, before being closed after the War Act in October 1942, which closed down all gold mining operations in the United States and its territories.

The Dayton resource area ranks as the Company’s top exploration and development targets. In January 2014, the Lyon County Board of Commissioners approved strategic master plan and zoning changes on the Dayton, Kossuth and Alhambra mining patents and other properties located in the Dayton resource area, enabling a more practical, comprehensive feasibility study for mining. Geological studies and development planning are currently underway utilizing data from extensive metallurgical testing and assessment during 2017, an additional 30,818 feet of drilling completed in 2015, geophysical analysis and interpretation completed in 2013, and extensive geological data from pre-2013 drill programs.

For the Dayton resource, Comstock previously discovered a newly recognized, mineralized, cross-cutting shear zone. An assay sample of the material identified three feet of 0.246 ounces per ton (OPT) gold and 3.553 OPT silver. Sampling was expanded and exposed another 90.8 feet of mineralized shear zone, beginning just 245 feet inside the Dayton adit. This overall sampling program identified precious metals averaging 0.043 OPT gold and 0.404 OPT silver for the entire zone, including 7.5 feet averaging 0.121 OPT gold and 0.753 OPT silver.

The Company plans to advance the Dayton Project to full feasibility, with a production ready mine plan within two years of commencing that work. This work has not yet commenced. The plan includes expanding the current resource at the Dayton resource area and continuing southerly into Spring Valley with incremental expansion programs that include exploration and definition drilling of targets identified by the prior conventional percussion, RC and diamond core drill programs and magnetic, IP and resistivity geophysical surveys. Ground magnetic geophysical surveys identified a linear anomalous corridor, defined by a series of relative magnetic lows (see Figure 5).

The Spring Valley group of exploration targets lies adjacent to the Dayton resource area, trending south toward the southern-most end of the Comstock District that includes the southern portion of the Kossuth patented claim and the Dondero, Daney and New Daney claims and all of the Company’s placer mining claims in Spring Valley and Gold Canyon. The Spring Valley mineralized structures lie mostly concealed beneath a veneer of sediment gravels and the volcanic host rocks and the structural controls of the mineralization defined for the Dayton resource area are known to continue south into Spring Valley.


32



A1019Q3SVMAGNETICSWINTERP.JPG
Figure 5 - Dayton and Spring Valley Magnetic Geophysics with Interpreted Veins and Structures    
The Spring Valley exploration program is designed to target areas that have similar magnetic signatures of known economic grade mineralization. The magnetic geophysical survey was further studied and a structural interpretation was

33



developed that illustrated multiple cross cutting structures (colored green) that are oblique to the southerly projected north/south vein trend (colored red), refer to Figure 5. Though rare due to alluvial cover, the outcropping quartz veins and outcropping crosscutting structures had definitive diagnostic magnetic signatures. The interpretation of the vein structures were derived by connecting specific magnetic attributes as identified on each 25-meter spaced survey lines. Similar structures have been identified in the Dayton and were important components for the development of economic grades of mineralization. The exploration of Spring Valley will include phased drilling programs that will continue southerly from SR 341 to the historic Daney mine site (Figure 6), with a potential strike length of approximately 9,600 feet.

In-house Dayton engineering and mine planning have resulted in profiling economic shells with multiple cutoff grade scenarios. Multiple layout plans for the mine and corresponding processing facilities have been conceptually developed and located on lands 100% privately held by the Company, thus simplifying and shortening the critical permitting chain.

The Company is proceeding to publish a separate NI 43-101 compliant, updated technical report for the Dayton resource that supports the subsequent scope of publishing a Preliminary Economic Assessment (“PEA”) for the Dayton project. The new technical report will provide not only a new resource estimate, but also a phased drilling plan for further defining and expanding the resource for sustainable, profitable mining.

A2019Q3SVTARGETSA01.JPG
Figure 6 - Dayton and Spring Valley Group Targets


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Comstock Northern Exploration LLC (Occidental Lode and Other Northern Target Mineral Claims)

Tonogold has commenced further, detailed analysis of our northern targets that correlates historical data with modern geological assessments and reveals a potentially much larger exploration opportunity. Accordingly, the Company signed a new mineral exploration lease with Tonogold that commits Tonogold to a minimum of $5.0 million towards the exploration of the Company’s Storey County mineral claims and an additional minimum of $5.0 million for exploration and economic feasibility development. The agreement also retains rights to a 1.5 to 3.0% NSR royalty, a $10 thousand per quarter lease revenue that escalates 10% per annum, and eliminates the Company’s related claim maintenance costs. The Company believes this will accelerate the development of these targets and enhance the value of its mineral property and royalty portfolio.

The mineral lease includes the Occidental group and Gold Hill group of exploration targets, which contains many historic mining operations, including the Overman, Con Imperial, and Yellow Jacket mines.

Comstock Mining LLC (100% owner of the Lucerne Resource Area)

    Our Lucerne resource area is located in Storey County, Nevada, approximately three miles south of Virginia City and 30 miles southeast of Reno, and has been the primary focus of the Company’s exploration and development efforts since 2007. Lucerne includes the previously mined Billie the Kid, Hartford and Lucerne mining patents, and extends east and northeasterly to the area of the historic Woodville (southern-most of the historic Comstock bonanzas), Succor and Lager Beer patents and north to the historic Justice and Keystone mines. The Lucerne resource area is approximately one mile along strike, with explored widths from 600 to 1,800 feet, representing approximately 845 acres of the land holdings controlled by the Company. The Lucerne is the site of our previous mining activities and ongoing exploration and development by Tonogold, the company that has agreed to acquire Comstock Mining LLC, the entity that owns 100% of the Lucerne properties. The Company holds the key mining permits required to resume surface or underground mining of this area and processing.

In December, 2018, the Company received unanimous approval from the Storey County Board of Commissioners to extend its landmark Special Use Permit (“SUP”) for mining and processing for the Lucerne Mine Project for the maximum allowable, 20-year term, extending the original, 10-year permit until September 2, 2034. The permit applies to both surface and underground mining, processing, milling, exploration and development, and other ancillary uses and represents one of the most significant, progressive and collaborative permit approvals in the Company’s history, and its extension strengthens the foundation for the future growth of the Company and its partner in Lucerne’s exploration and development, Tonogold.

Over the past two years, exploration activities have been focused on Tonogold evaluating and remodeling the Lucerne resource, and planning further exploration and development and economic feasibility assessments. The Company’s prior exploration activities in the Lucerne area included open pit gold and silver test mining from 2004, through 2006, and from late 2012 through 2015. As defined by the Securities Exchange Commission (“SEC”) Industry Guide 7 and by the 2018 amendments to Regulation S-K, the Company has not yet established any proven or probable reserves at the Lucerne mine. From 2012 to 2016, the Company processed approximately 2.6 million tons of mineralized material, producing 59,515 ounces of gold and 735,252 ounces of silver.

In January 2019, the Company and Tonogold entered into a sales agreement that immediately values Lucerne at more than $24 million ($11.5 million in cash, $4.75 million in stock and $8 million in assumed liabilities) plus a 1.5% NSR royalty on Lucerne’s future production while already delivering over $2 million in annualized savings. The Company’s recent agreements require additional cash payments at closing, scheduled during November 2019, of $3.625 million, bringing total cash payments to over $7.55 million, providing Tonogold a majority membership interest of 50.3% in Comstock Mining LLC. The remaining $4.0 million in cash owed represents a secured obligation of Tonogold with scheduled monthly payments of at least $650 thousand each starting in January 2020, through June 2020. Upon the satisfaction of such payments, Tonogold will own 100% of Comstock Mining LLC.

Comstock also terminated its previous option agreement with Tonogold, resulting in prior option payments of $2.2 million being recorded as income during the third quarter of 2019.



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Sierra Springs Opportunity Zone Fund Inc. and Sierra Springs Enterprises Inc.

    During 2018, the U.S. Treasury confirmed that all of Storey County, NV, and significant parts of Silver Springs, NV, had been certified as Qualified Opportunity Zones. We are actively engaged in plans to enhance our mining and non-mining assets and core competencies in these locations, to maximize the value of our platform, first by selling our non-mining assets.

    Sierra Springs Opportunity Fund Inc. was formed to capitalize on the extraordinary, explosive growth of high-tech industries in northern Nevada and its qualified zones and has already secured the rights to thousands of developable acres of land and more, including an agreement to purchase Comstock’s Silver Springs properties and water rights, all within the immediate proximity of the Tahoe Reno Industrial (TRI) Center and its over 100 businesses, including high-tech companies such as Google, Panasonic, Switch, Tesla, Walmart, Zulily and Blockchains LLC. Comstock will passively own approximately 9.5% of the Sierra Springs Opportunity Fund Inc. The Company’s CEO and a diverse team of qualified financial, capital markets, real estate and operational professionals will plan on governing, leading and managing the fund, its investments and operations.

Non-mining Real Estate

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 agreements to sell the 98 acres and to sell DTSS to another third party.

The Gold Hill Hotel is listed for sale for $1.0 million. The Gold Hill Hotel has been consistently cash positive over the past two years. The Daney Ranch is listed for sale for $3.9 million.


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Outlook

The Company’s 2020 gross operating expenses are planned at approximately $4.0 million, excluding depreciation and discretionary exploration expenses. As of June 1, 2019, the Company has been and expects to continue receiving monthly reimbursements from Tonogold totaling approximately $2.2 million for the full year 2020, resulting in net operating expenses of approximately $2.8 million. The Company plans on eliminating its debt through announced asset sales, and does not expect any interest expense for the full year 2020.

During 2019, total gross operating expenses are expected at approximately $5.0 million, with Tonogold reimbursements expected at $1.6 million for the full year, plus $0.3 million in interest reimbursements since June 1, 2019.

For the remainder of 2019, the Company’s plans include advancing the commercialization of MCU’s mercury remediation processing technologies. Oro has commenced manufacturing the 2-to-25 ton per hour mercury recovery plant and recently completed the critical “reverse-helix spiral concentrator” component of the system. The entire system will be mounted on three separate trailers and will be set up on the Company’s fully contained, double-lined processing area during the fourth quarter with an expected start date in January 2020. During the fourth quarter, MCU will also identify sample locations within the Carson River Mercury Superfund Site (“CRMSS”) that will be sampled per an EPA-approved and updated Sampling and Analysis Plan (“SAP”). Once suitable sites have been identified, bulk samples will be extracted and transported to the MCU mercury remediation system located at the Company’s American Flat processing facility. MCU has also ordered the 200 gallon-per-minute dissolved air flotation (“DAF”) water treatment plant, also scheduled for delivery in December 2019.

The Company plans on commencing trial operations in January 2020, to validate and fine-tune MCU’s process, which has the potential for reclamation and remediation of its existing properties, enhance the values of, and potential economic feasibilities for, these properties and present new global growth opportunities in mercury remediation by demonstrating MCU’s technological effectiveness and efficiency.

During the fourth quarter of 2019, the Company expects to close on the agreed upon sale of certain non-mining assets located in Silver Springs, NV, to Sierra Springs Enterprises Inc., for total net proceeds of $10.1 million. The agreements were signed in September 2019, with deposits currently in escrow. The Company also expects to close on the sale of 50.3% of the membership interest in Comstock Mining LLC, owner of the Lucerne properties, after receiving an additional $3.625 million in cash from Tonogold in October 2019. The agreement allows them to earn up to 100% of Comstock Mining LLC, after receiving an additional $3.95 million in installment payments in 2020.

    The Dayton resource area is the Company’s top wholly-owned exploration and mine development target. The Company is developing a completely new geological interpretation for a new resource estimate. The new geological interpretation is also being used to design phased drilling programs in higher potential for additional mineral resources. The Company plans to issue a new, stand-alone Dayton resource technical report, followed by a preliminary economic assessment in the fourth quarter 2020.

Equity Raises

For the nine months ended September 30, 2019, the Company issued 31,594,805 common shares through the 2019 Equity Agreement, the 2018 Sales Agreement, and the Securities Purchase Agreement with Temple Tower Group. Gross proceeds were approximately $3.8 million at an average share price of $0.12.
    

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Following is a reconciliation of the common stock-based transactions as of September 30, 2019:
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Shares outstanding as of beginning of period
 
75,338,273

 
47,236,103

Shares issued for:
 
 
 
 
 Equity issue agreements
 
20,392,599

 
18,489,583

 Preferred shares converted to common stock
 
11,202,206

 

 Purchase of Pelen, LLC membership interest
 

 
1,475,410

 Payment for equity issue costs
 
1,065,778

 
877,233

 Payment for mineral rights
 
3,731,347

 
2,774,490

 Investment in Mercury Clean Up LLC
 
4,500,000

 

Shares outstanding as of end of period
 
116,230,203

 
70,852,819

    
On June 28, 2019, the Company issued 1,083 preferred shares with gross proceeds of $1.1 million, which was received on July 1, 2019. The company also issued 191 preferred shares as a due diligence fee. During third quarter 2019, 1,274 preferred shares were converted to 11,202,206 common shares.

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.

Comparative Financial Information
 
The Company had two operating segments as of September 30, 2019: mining and real estate.

The comparative financial information is reflected in the following table:

Three Months Ended:
 
September 30, 2019
 
September 30, 2018
 
Change