NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2020 (UNAUDITED)
1. Interim Financial Statements
Basis of Presentation and Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of Comstock Mining Inc., and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States ("GAAP"): Comstock Processing LLC, Comstock Northern Exploration LLC, Comstock Exploration & Development LLC, Comstock Real Estate Inc., Comstock Industrial LLC, and Downtown Silver Springs LLC ("DTSS"), and its fifty percent membership interest in Comstock Mining LLC (collectively "Comstock", the "Company", "we", "our" or "us"). Inter-company transactions and balances have been eliminated.
Operating results for the three-month period ended March 31, 2020, may not be indicative of the results expected for the full year ending December 31, 2020. For further information, refer to the financial statements and footnotes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Liquidity and Going Concern
The condensed consolidated financial statements are prepared on the going concern basis of accounting which assumes the realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company’s current capital resources include cash and cash equivalents and other net working capital resources, planned sales of Tonogold securities, and proceeds from the planned sale of Lucerne mineral properties and non-mining assets.
The Company has recurring net losses from operations and an accumulated deficit of $237.2 million as of March 31, 2020. For the three months ended March 31, 2020, the Company incurred a net loss of $1.3 million and used $0.2 million of cash in operations. As of March 31, 2020, the Company had cash and cash equivalents of $1.0 million. The Company also has a debt obligation of $4.9 million that matures in January 2021, for which it does not currently have the ability to repay. Such condition raises substantial doubt regarding the Company’s ability to continue as a going concern.
The Company intends to finance its operations over the next twelve months through its existing cash, proceeds from the planned sale of its Lucerne mineral properties and non-mining assets and Tonogold securities, and the sale of common stock through its existing equity agreements to issue securities. These plans are outside of the control of management, and therefore, substantial doubt exists about the Company’s ability to continue as a going concern through 12 months from the issuance date of the financial statements.
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 with aggregate unused capacity of $0.20 million as of March 31, 2020.
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, valuation of Tonogold CPS, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.
Income Taxes
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and the assumptions are consistent with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets that the Company does not consider more likely (than not) to be realized. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
Variable-Interest Entity
During 2018 and 2019, Comstock’s board approved the Company to enter into an investment in certain opportunity zone funds in northern Nevada. During 2019, Comstock invested $0.3 million into a qualified opportunity zone fund named Sierra Springs Opportunity Fund Inc. (“SSOF”) and a qualified opportunity zone business named Sierra Springs Enterprises Inc. (“SSE” solely owned by SSOF.) It is anticipated that the Company could own approximately 9% of SSOF upon issuance of all 75 million authorized shares to investors.
On September 26, 2019, as amended on November 30, 2019, December 26, 2019, and March 31, 2020, the Company entered into agreements with SSE to sell two properties in Silver Springs, NV. The agreements include the sale of 98 acres of industrial land and senior water rights for $6.5 million and 160 acres of commercial land along with its rights in the membership interests in Downtown Silver Springs, LLC for $3.6 million.
The Company’s chief executive officer is 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 chief executive officer 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 $0.3 million investment in SSOF is recorded in the consolidated balance sheets at March 31, 2020, and December 31, 2019, in Investments. Comstock’s maximum exposure to loss as a result of its involvement with SSE at March 31, 2020, is limited to its current investment. The investment is held at cost and fair value was not estimated as there were no identified events or changes in circumstances that might have had a significant adverse effect on the fair value of the investment. Management concluded it was impractical to estimate fair value due to the fund being in the early stages.
Comprehensive Loss
The only component of comprehensive loss for the three-month periods ended March 31, 2020, and 2019 was our net loss.
Reverse Stock Split
Effective November 28, 2019, the Company completed a 5-for-1 reverse stock split of its authorized and outstanding common stock, as approved by its Board of Directors. All common shares and per share amounts set forth herein give effect to this reverse stock split.
Loss per Common Share
Basic net loss per common share is computed by dividing net loss, by the weighted average number of common shares outstanding. Dilutive loss per share includes any additional dilution from common stock equivalents, such as stock options, warrants, and convertible instruments, if the impact is not antidilutive. Since the Company incurred net losses for all the periods presented, all equity-linked instruments are considered anti-dilutive.
Derivative Instruments
The Financial Accounting Standards Board (“FASB”) provides guidance that requires derivative instruments to be recognized as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on their intended use and resulting hedge designations. For derivative instruments designated as hedges, the changes in fair value are recorded in the balance sheets as a component of accumulated other comprehensive income (loss). Changes in the fair value of derivative instruments not designated as hedges are recorded in the consolidated statements of operations, generally as a component of other income (expense).
Recently Issued Accounting Pronouncements
In October 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities (“ASU 2018-17”), which expands the application of a specific private company alternative related to VIEs and changes the guidance for determining whether a decision-making fee is a variable interest. Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. ASU 2018-17 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted in any interim period. ASU 2018-17 is required to be applied retrospectively from the date the guidance is first applied. The Company has adopted this standard, which has not had a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds various disclosure requirements related to fair value disclosures. Disclosures related to transfers between fair value hierarchy levels will be removed and further detail around changes in unrealized gains and losses for the period and unobservable inputs used in determining level 3 fair value measurements will be added, among other changes. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company modified its disclosures beginning in the first quarter of 2020 to conform to this guidance. The adoption of this standard and the associated changes to the disclosures, have not had a material impact on its consolidated financial statements.
2. Assets and Liabilities 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 both March 31, 2020, and December 31, 2019, the Company has assets with a net book value of $10.5 million, 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 9.
Assets held for sale include:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
DTSS (Land)
|
$
|
3,589,876
|
|
|
$
|
3,589,876
|
|
|
Industrial Park (Land and water rights)
|
2,738,462
|
|
|
2,738,462
|
|
|
Daney Ranch (Land and buildings)
|
2,146,575
|
|
|
2,146,575
|
|
|
Lucerne Mine (Mineral rights and properties) (Note 18)
|
1,539,197
|
|
|
1,539,197
|
|
|
Lucerne Properties (Reclamation asset, net)
|
19,590
|
|
|
19,590
|
|
|
Gold Hill Hotel (Land and buildings)
|
478,366
|
|
|
478,366
|
|
|
Total assets held for sale
|
$
|
10,512,066
|
|
|
$
|
10,512,066
|
|
Liabilities held for sale include:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Lucerne Properties (Reclamation liabilities)
|
$
|
1,019,705
|
|
|
$
|
1,019,705
|
|
|
Total liabilities held for sale
|
$
|
1,019,705
|
|
|
$
|
1,019,705
|
|
Non-mining Assets Held for Sale - Silver Springs, NV
On September 26, 2019, as amended on November 30, 2019, December 26, 2019, and March 31, 2020, the Company entered into agreements with SSE to sell two properties in Silver Springs, NV. The agreements include the sale of 98 acres of industrial land and senior water rights for $6.5 million and 160 acres of commercial land along with its rights in the membership interests in Downtown Silver Springs, LLC (“DTSS”) for $3.6 million. The carrying value of the 160 acres of commercial land and DTSS membership rights was adjusted to the contract value of $3.6 million less estimated costs to sell, resulting in an impairment of $0.5 million, charged to other expense in the consolidated statements of operations as of December 31, 2019. As of March 31, 2020, the Company received $0.4 million in escrowed deposits for the purchase of these assets and expects the sales to close during the second quarter of 2020.
Non-mining Assets Held for Sale - Dayton and Gold Hill, NV
The Company owns a 225 acre residential property (the “Daney Ranch) along Highway 50 in Dayton, NV, listed for sale, in two components, for a total of $3.7 million and a historic, operating hotel (the “Gold Hill Hotel”) including 19 leasable rooms, 4 cottages, a bar and a restaurant listed for sale for $1.5 million.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Land and property deposits
|
$
|
10,100
|
|
|
$
|
10,100
|
|
|
Deposit for Mercury Clean Up
|
1,651,050
|
|
|
1,501,050
|
|
|
Surety bond and insurance
|
137,262
|
|
|
110,558
|
|
|
Other
|
197,203
|
|
|
199,919
|
|
|
Total prepaid expenses and other current assets
|
$
|
1,995,615
|
|
|
$
|
1,821,627
|
|
4. Mineral Rights and Properties, Net
Mineral rights and properties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Dayton resource area
|
$
|
2,932,226
|
|
|
$
|
2,932,226
|
|
|
Occidental area
|
1,002,172
|
|
|
1,002,172
|
|
|
Spring Valley area
|
810,000
|
|
|
810,000
|
|
|
Oest area
|
260,707
|
|
|
260,707
|
|
|
Northern extension
|
157,205
|
|
|
157,205
|
|
|
Northern targets
|
121,170
|
|
|
121,170
|
|
|
Other mineral properties
|
317,405
|
|
|
317,405
|
|
|
Water rights
|
90,000
|
|
|
90,000
|
|
|
Total mineral rights and properties
|
$
|
5,690,885
|
|
|
$
|
5,690,885
|
|
These mineral rights and properties are segmented based on the Company’s identified mineral resource areas and exploration targets.
On February 25, 2020, the Company sold two patented mining claims and five unpatented mining claims (the "Wild Horse" properties) to Hercules Gold USA LLC ("Hercules") for a total purchase price of $100,000 plus a 2% net smelter returns royalty on future mineral production from these properties. Hercules has the option to purchase the royalty for $75,000 per each one percent (1%) per each patented or unpatented claim. There was no book value for the Wild Horse properties, so the entire purchase price was recorded in Other Income.
5. Properties, Plant and Equipment
Properties, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Land and building
|
$
|
9,140,805
|
|
|
$
|
9,140,805
|
|
|
Vehicle and equipment
|
2,267,916
|
|
|
2,267,916
|
|
|
Processing and laboratory
|
21,113,177
|
|
|
21,113,177
|
|
|
Furniture and fixtures
|
549,860
|
|
|
549,860
|
|
|
|
33,071,758
|
|
|
33,071,758
|
|
|
Less accumulated depreciation
|
(25,319,524
|
)
|
|
(25,136,737
|
)
|
|
Total properties, plant and equipment
|
$
|
7,752,234
|
|
|
$
|
7,935,021
|
|
During the three-month periods ended March 31, 2020 and March 31, 2019, the Company recognized depreciation expense of $0.2 million and $0.5 million, respectively.
6. Retirement Obligation Asset
Following is a reconciliation of the aggregate retirement obligation asset associated with our mining reclamation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months
Ended
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Retirement obligation asset — beginning of period
|
$
|
115,926
|
|
|
$
|
203,274
|
|
|
Additional obligations incurred
|
—
|
|
|
—
|
|
|
Amounts reclassified to assets held for sale
|
—
|
|
|
(19,590
|
)
|
|
Amortization of retirement obligation asset
|
(14,491
|
)
|
|
(67,758
|
)
|
|
Retirement obligation asset — end of period
|
$
|
101,435
|
|
|
$
|
115,926
|
|
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Accrued make-whole for Mercury Clean Up LLC (Note 17)
|
$
|
485,410
|
|
|
$
|
452,740
|
|
|
Accrued interest expense
|
128,801
|
|
|
264,268
|
|
|
Accrued insurance liabilities
|
25,730
|
|
|
—
|
|
|
Accrued Northern Comstock Joint Venture
|
293,958
|
|
|
180,833
|
|
|
Accrued payroll costs
|
212,913
|
|
|
165,543
|
|
|
Accrued make-whole for Pelen LLC (Note 17)
|
75,708
|
|
|
222,602
|
|
|
Accrued Board of Directors fees
|
90,000
|
|
|
120,000
|
|
|
Accrued vendor liabilities
|
40,572
|
|
|
309,515
|
|
|
Other accrued expenses
|
59,314
|
|
|
139,930
|
|
|
Total accrued expenses and other liabilities
|
$
|
1,412,406
|
|
|
$
|
1,855,431
|
|
The accrued expense for the Northern Comstock Joint Venture represents the difference in timing of expense recognition and required and actual monthly payments to Northern Comstock LLC.
8. Deposits
Deposits consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
Deposits toward sale of non-mining assets
|
$
|
410,100
|
|
|
$
|
310,100
|
|
|
Prepaid expense reimbursement for American Flat lease option agreement
|
1,055,130
|
|
|
—
|
|
|
Lease income
|
8,283
|
|
|
8,284
|
|
|
Total deposits
|
$
|
1,473,513
|
|
|
$
|
318,384
|
|
9. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Note Description
|
March 31, 2020
|
|
December 31, 2019
|
|
Senior Secured Debenture (GF Comstock 2) - 11% interest, due 2021.
|
$
|
4,854,785
|
|
|
$
|
4,929,277
|
|
|
Note Payable (Caterpillar Financial Services) - 5.75% interest.
|
565,623
|
|
|
645,891
|
|
|
Total debt
|
5,420,408
|
|
|
5,575,168
|
|
|
Less: long-term debt discounts and issuance costs
|
(121,638
|
)
|
|
(163,094
|
)
|
|
Total debt, net of discounts and issuance costs
|
5,298,770
|
|
|
5,412,074
|
|
|
Less: current maturities
|
(5,065,934
|
)
|
|
(328,068
|
)
|
|
Long-term debt, net of discounts and issuance costs
|
$
|
232,836
|
|
|
$
|
5,084,006
|
|
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 January 13, 2021, in an aggregate principal amount of $10,723,000. Interest is payable semi-annually. The Debenture is collateralized by (1) substantially all of the assets of the Company, and (2) a pledge of 100% of the equity of its subsidiaries. The use of proceeds included refinancing substantially all of the Company’s 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 March 31, 2020, the remaining balance on the Make Whole obligation was $237,974. 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.
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.
Caterpillar Equipment Facility
On June 27, 2016, the Company completed an agreement with Caterpillar Financial Services Corporation (“CAT”) relating to certain finance and lease agreements (the “CAT Agreement”). Under the terms of the CAT Agreement, the obligations to CAT bear interest at 5.7% and will be paid off on a monthly payment schedule of $29,570 per month.
10. Long-Term Reclamation Liability
Following is a reconciliation of the aggregate reclamation liability associated with our reclamation plan for our mining projects:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Twelve Months
Ended
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Long-term reclamation liability — beginning of period
|
$
|
6,034,208
|
|
|
$
|
7,441,091
|
|
|
Reduction of obligation
|
—
|
|
|
(410,018
|
)
|
|
Amount reclassified to liabilities held for sale
|
—
|
|
|
(1,019,705
|
)
|
|
Accretion of reclamation liability
|
5,178
|
|
|
22,840
|
|
|
Long-term reclamation liability — end of period
|
$
|
6,039,386
|
|
|
$
|
6,034,208
|
|
Reclamation Liability Reduction by NDEP
On April 30, 2019, the Company was notified by the Nevada Division of Environmental Protection ("NDEP") that the Company's successful reclamation of parts of the Lucerne mine area had reduced the Lucerne project reclamation cost estimate with an updated reclamation bond requirement of $6.8 million. Our total reclamation liability also includes cost estimates for our Dayton project and enhanced reclamation obligations in Storey County.
11. Leases
The Company has an operating lease for a property located adjacent to the Gold Hill Hotel, which is primarily used as a room rental. The lease runs from 2018 until 2028. The monthly rent is $750 with automatic annual increases of $25 per month every November, beginning in 2020. The operating lease is sub-leased to Crown Point Management LLC, the operators of the Gold Hill Hotel, and not separately valued within the Gold Hill Hotel lease.
For the three-month period ended March 31, 2020, the fixed operating lease expense was $2,250 with 8.6 years remaining.
Supplemental information related to the Company's operating lease, for the three months ended March 31, 2020, follows:
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
$
|
2,250
|
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
$
|
979
|
|
The Company has the following lease balances recorded in the condensed consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
|
|
Lease Assets and Liabilities
|
Classification
|
|
March 31, 2020
|
|
Operating lease right-of-use asset
|
Other assets
|
|
$
|
54,352
|
|
|
|
|
|
|
|
Operating lease liability - current
|
Accrued expenses and other liabilities
|
|
$
|
3,147
|
|
|
Operating lease liability - long-term
|
Other liabilities
|
|
52,578
|
|
|
Total operating lease liabilities
|
|
|
$
|
55,725
|
|
Maturities of lease liabilities by fiscal year for the Company's operating leases are as follows:
|
|
|
|
|
|
|
|
|
Remainder of 2020
|
|
$
|
6,800
|
|
|
2021
|
|
9,350
|
|
|
2022
|
|
9,650
|
|
|
2023
|
|
9,950
|
|
|
2024
|
|
10,250
|
|
|
Thereafter
|
|
42,050
|
|
|
Total operating lease payments
|
|
88,050
|
|
|
Less: Imputed interest
|
|
32,325
|
|
|
Present value of lease liabilities
|
|
$
|
55,725
|
|
12. Commitments and Contingencies
Royalty Agreements
The Company has minimum royalty obligations with certain of its mineral properties and leases. For most of the mineral properties and leases, the Company is subject to a range of royalty obligations once production commences. These royalties range from 0.5% to 5% of net smelter 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.
Regulatory Compliance
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.
Comstock Residents Association
On January 31, 2014, the Comstock Residents Association (the “CRA”) and two of its members filed a civil action in the Third Judicial District Court in Lyon County, Nevada (the “District Court”) against the Lyon County Board of Commissioners (the “Commissioners”) and the Company, asking the District Court to reverse the Commissioners’ decision to grant an application for master plan amendment and zone change submitted and approved by the Commissioners in 2014 (the “Application”).
Prior to the approval of the Application, the master plan designation and zoning precluded mining on certain property of the Company in the area of Silver City, Nevada. In April 2015, the District Court ruled in favor of the Company and the Commissioners. The written Order Denying Petition for Judicial Review was filed and mailed to all parties on June 15, 2015. On July 14, 2015, the CRA and one individual (together “Appellants”) filed a Notice of Appeal of the Court Order, appealing the decision to the Nevada Supreme Court. On December 9, 2015, Appellants filed their Opening Brief in the Nevada Supreme Court, generally repeating the arguments that were made at the District Court. On January 15, 2016, the Company and the Commissioners jointly filed an Answering Brief. Briefing in the Nevada Supreme Court was completed with the Appellants’ filing of a Reply Brief on March 3, 2016. Oral arguments before a three-judge panel took place on September 14, 2016.
On December 2, 2016, the Nevada Supreme Court entered an order affirming all three of the District Court’s decisions associated with 1) the Commissioners’ discretion and authority for changing master plans and zoning, 2) their compliance with
Nevada’s Open Meeting Law and 3) their compliance with Nevada statutory provisions. Specifically, the Supreme Court affirmed the District Court’s conclusions that Lyon County did not abuse its discretion and that it acted with substantial evidence in support of their decision, that the County did not violate Nevada’s Open Meeting Law or any other statutes.
The Supreme Court reversed the District Court’s dismissal of CRA’s claim of a due process violation, concluding that this claim should not have been dismissed and that further proceedings are necessary in the District Court on this single claim. The District Court concluded that the Supreme Court's reversal of CRA's due process claim required that CRA be afforded the opportunity to conduct discovery and allowed CRA the time to conduct discovery on its due process claim. The Company responded to the CRA discovery request on February 20, 2018, and the District Court held a hearing on April 23, 2018. Additional discovery was also allowed by the District Court. On May 14, 2019, the Court held a hearing on CRA’s due process claim and issued its ruling from the bench. The Court concluded that CRA, having been afforded the opportunity to conduct discovery, was unable to meet its burden to establish by a preponderance of the evidence that Lyon County had denied CRA of its due process rights. The Court, therefore, denied CRA's due process claim. On July 11, 2019, the Court issued and filed a formal judgment in favor of Lyon County and Comstock Mining. The Company and Lyon County have filed a motion to recover attorney's fees and costs from the CRA.
On August 14, 2019, the CRA filed a Notice of Appeal, appealing the judgment to the Nevada Supreme Court. CRA filed their Opening Brief on January 24, 2020. The Company’s Answering Brief was filed on March 25, 2020.
OSHA Complaint
On or about February 27, 2020, the Company received notice that three former employees had filed a complaint with the U.S. Department of Labor - Occupational Safety and Health Administration (“OSHA”) regarding alleged wrongful termination of employment in 2019, seeking backpay, frontpay and other compensatory damages, including interest and legal costs. On April 10, 2020, the Company filed its reply to the complaint, and believes that those terminations were appropriate and lawful and intends to vigorously defend the complaint.
From time to time, we are involved in claims, investigations and proceedings that arise in the ordinary course of business. There are no other matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
13. Equity
Equity Offering Program
In October 2019, the Company entered into a new equity purchase agreement, (the “2019 Sales Agreement”), with Leviston Resources LLC (“Leviston”), to sell up to $1.25 million in shares of the Company’s common stock from time to time at the Company’s option. Pursuant to the 2019 Sales Agreement, the Company agreed to deliver additional shares of common stock with a value of 5% of the aggregate offering price to Leviston as a commitment fee. As of March 31, 2020, the Company has issued shares with an aggregate sales price of $1.0 million under the 2019 Sales Agreement. The Company issued 284,852 shares in commitment fees to Leviston in 2019.
In February 2019, the Company filed a new shelf registration statement on Form S-3 (the “S-3 Shelf”), for the purchase of up to $50.0 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.
Effective August 2018, the Company entered into an equity sales agreement with Leviston Resources LLC (the "2018 Sales Agreement") for the sale of up to $2.25 million of the Company's common stock. Through March 31, 2019, the Company had issued 2,327,400 common shares at an average price of $0.74 per share, totaling $1.7 million under the 2018 Sales Agreement. Final proceeds from the 2018 Sales Agreement were received in February 2019, and the 2018 Sales Agreement was terminated.
Following is a reconciliation of the common stock transactions under the 2019 Sales Agreement and the 2018 Sales Agreement for three months ended March 31, 2020, and 2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Number of shares sold
|
638,511
|
|
|
1,090,400
|
|
|
|
|
|
|
|
Gross cash proceeds
|
$
|
242,621
|
|
|
$
|
813,561
|
|
|
Fees
|
50,070
|
|
|
85,093
|
|
|
Net proceeds
|
$
|
192,551
|
|
|
$
|
728,468
|
|
|
|
|
|
|
|
Average price per share
|
$
|
0.38
|
|
|
$
|
0.75
|
|
14. Net Loss Per Common Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if stock options 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
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
|
Numerator:
|
|
|
|
|
Net loss attributable to Comstock Mining Inc.
|
$
|
(1,325,503
|
)
|
|
$
|
(1,835,065
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
27,264,555
|
|
|
15,800,481
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
Basic and Diluted
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
15. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
During the three months ended March 31, 2020 and the year ended December 31, 2019, there were no transfers of assets and liabilities within Level 3.
The following table presents our assets and liabilities at March 31, 2020, measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
March 31, 2020
|
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Convertible preferred shares of Tonogold (Note 18)
|
$
|
8,795,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,795,000
|
|
|
Total Assets
|
$
|
8,795,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,795,000
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued make-whole for Pelen LLC (Note 17)
|
$
|
75,708
|
|
|
$
|
—
|
|
|
$
|
75,708
|
|
|
$
|
—
|
|
|
Accrued make-whole for Mercury Clean Up LLC (Note 17)
|
485,410
|
|
|
—
|
|
|
485,410
|
|
|
—
|
|
|
Total Liabilities
|
$
|
561,118
|
|
|
$
|
—
|
|
|
$
|
561,118
|
|
|
$
|
—
|
|
The following table presents our assets and liabilities at December 31, 2019, measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
December 31, 2019
|
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Convertible preferred shares of Tonogold (Note 18)
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
|
Total Assets
|
$
|
9,080,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,080,000
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued make-whole for Pelen LLC (Note 17)
|
$
|
222,602
|
|
|
$
|
—
|
|
|
$
|
222,602
|
|
|
$
|
—
|
|
|
Accrued make-whole for Mercury Clean Up LLC (Note 17)
|
452,740
|
|
|
—
|
|
|
452,740
|
|
|
—
|
|
|
Total Liabilities
|
$
|
675,342
|
|
|
$
|
—
|
|
|
$
|
675,342
|
|
|
$
|
—
|
|
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 (CPS) of Tonogold is based on a Monte Carlo model with various inputs. These inputs include the Tonogold common share price of $0.35, volatility of 101%, risk-free rate of 0.16%, cost of debt of 18.31%, private placement conversion price ceiling of $0.18, redemption probability of 50%, and illiquidity discount of 5% - 15%. The convertible preferred shares are classified within Level 3 of the valuation hierarchy.
The CPS is convertible into Tonogold common stock in May 2020, at the lowest of (1) $0.18 per share, or (2) 85% of Tonogold’s 20-day volume-weighted closing price prior to conversion. Under U.S. GAAP, the Company has the irrevocable option to elect 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 $6.10 million of CPS received on May 31, 2019 ($3.92 million), August 30, 2019 ($0.83 million), October 14, 2019 ($0.75 million), December 19, 2019 ($0.50 million), and December 30, 2019 ($0.10 million). The Company recorded the receipt of the CPS at a fair value of $7.6 million when received and recorded an additional $0.3 million in other expense and $1.5 million in other income, for the changes in fair market value, for the three months ended March 31, 2020, and the twelve months ended December 31, 2019, respectively.
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 volume-weighted price per share for five consecutive trading days preceding the date of determination of $0.43 at March 31, 2020, and $0.47 at December 31, 2019, as compared to the remaining aggregate proceeds due. The Company agreed to add $17,500 to the purchase price which is included in 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 $0.41 on March 31, 2020, 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 March 31, 2020, and December 31, 2019, the fair value of long-term debt approximated $5.3 million and $5.4 million, respectively, as determined by borrowing rates estimated to be available to the Company for debt with similar terms and conditions. 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).
16. Segment Reporting
Our management organizes the Company into two operating segments: mining and real estate. Our mining segment consists of all activities and expenditures associated with exploration, mineral development and mining. Our real estate segment consists of land, real estate rental properties and the Gold Hill Hotel. We evaluate the performance of our operating segments based on operating income (loss). All intercompany transactions have been eliminated. Financial information relating to our reportable operating segments and reconciliation to the consolidated totals follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
Revenue
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
48,425
|
|
|
37,598
|
|
|
Total revenue
|
48,425
|
|
|
37,598
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
Mining
|
(1,256,710
|
)
|
|
(1,596,031
|
)
|
|
Real estate
|
(13,596
|
)
|
|
(10,424
|
)
|
|
Total costs and expenses
|
(1,270,306
|
)
|
|
(1,606,455
|
)
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
|
|
Mining
|
(1,256,710
|
)
|
|
(1,596,031
|
)
|
|
Real estate
|
34,829
|
|
|
27,174
|
|
|
Total loss from operations
|
(1,221,881
|
)
|
|
(1,568,857
|
)
|
|
|
|
|
|
|
Other income (expense), net
|
(103,622
|
)
|
|
(266,208
|
)
|
|
Net income (loss)
|
$
|
(1,325,503
|
)
|
|
$
|
(1,835,065
|
)
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
—
|
|
|
Real estate
|
—
|
|
|
365,000
|
|
|
Total capital expenditures
|
$
|
—
|
|
|
$
|
365,000
|
|
|
|
|
|
|
|
Depreciation, Amortization, and Depletion
|
|
|
|
|
Mining
|
$
|
193,482
|
|
|
$
|
583,507
|
|
|
Real estate
|
5,960
|
|
|
3,414
|
|
|
Total depreciation, amortization, and depletion
|
$
|
199,442
|
|
|
$
|
586,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
Assets
|
|
|
|
|
Mining
|
$
|
29,776,143
|
|
|
$
|
30,106,865
|
|
|
Real estate
|
9,476,862
|
|
|
9,463,027
|
|
|
Total assets
|
$
|
39,253,005
|
|
|
$
|
39,569,892
|
|
17. 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 of $1.15 million and stock of $0.85 million, 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 900,000 shares of restricted common stock to fund $751,050 of the MCU acquisition. The Company has paid MCU a total of $0.90 million in cash as of March 31, 2020. The contract requires additional payments totaling $0.25 million during the second and third quarters of 2020. 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 $485,410 based on the difference between the value of the outstanding shares delivered to MCU at the Company’s closing stock price of $0.41 on March 31, 2020, and the required investment value of $850,000. This amount is recorded within accrued expenses on the consolidated balance sheets. The Company expects to close on the MCU transactions during the second and third quarters of 2020.
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 second quarter of 2020. The goal of the pilot is to process approximately five to twenty-five tons of tailings 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 $3.0 million in financing for the Joint Ventures, and MCU would then contribute the 25-ton-per-hour system, based on an agreed upon capital plan (equipment and working capital uses) and a time-specific project schedule, including the timing of the capital needs. 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 295,082 shares of restricted common stock as initial payment to acquire 25% of the total membership interests of Pelen, LLC ("Pelen"). 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 351,637 shares of restricted common stock as additional shares based on the shortfall on the aggregate proceeds for the initial shares. In December 2018, the agreement was amended to have a "Cut-Off" date of December 31, 2019, for closing the transaction and any unsold shares will be returned to the Company, with the Company required to make up any shortfall in cash.
In December 2019, the agreement was amended to revise the “Cut-Off” date to March 31, 2020, for closing the transaction. The Company paid $11,700 of interest payable as of December 31, 2019, and agreed to prepay $5,850 of interest payable with respect to the period between December 31, 2019 and March 31, 2020.
On March 25, 2020, the Company extended the Cut-Off date to April 30, 2020, and paid $0.15 million toward the closing of the transaction. As of March 31, 2020, 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 $75,708 at March 31, 2020, representing the value of the shortfall based on the actual sales of shares and the share price as of March 31, 2020. These amounts are recorded within accrued expenses in the condensed consolidated balance sheet.
On April 24, 2020, the Company completed the acquisition of 25% of the total membership interests of Pelen. The total purchase price was $0.6 million, paid in stock and cash.
Downtown Silver Springs, LLC
The Company entered into an agreement to purchase 100% of the membership interests of DTSS on May 30, 2018, as amended. DTSS held a contract to purchase approximately 160 acres of centrally located land in Silver Springs, Nevada. DTSS has no other assets, operations or employees.
The agreement enabled the purchase of the land for approximately $3.2 million, less deposits already made, plus 4% interest. The land purchase closed on December 9, 2019.
The DTSS acquisition was accounted for as an asset acquisition as DTSS did not meet the definition of a business. The Company paid total consideration of $4.1 million, consisting of (1) $3.1 million cash payments toward the purchase price of the land parcel, (2) $0.5 million in interest and closing costs and, (3) $0.5 million cash payments to the former holders of DTSS.
On September 26, 2019, DTSS entered into an agreement to sell the land parcel to Sierra Springs Enterprises, Inc. (“SSE”), as amended on November 30, 2019, December 26, 2019, January 29, 2020, and March 31, 2020, for $3.6 million. Accordingly, the land is classified as an asset held for sale on the consolidated balance sheets at March 31, 2020 and December 31, 2019, and the carrying value of the land was adjusted to the contract value of $3.6 million less estimated costs to sell, resulting in an impairment of $0.5 million, charged to other expense in the consolidated statements of operations as of December 31, 2019.
As of March 31, 2020, the Company has received deposits in cash and escrow from SSE totaling $0.4 million towards the purchase of the 160 acres of commercial lands and membership interests in DTSS, along with the 98 acres of industrial land and senior water rights in Silver Springs. The transactions are expected to close during the second quarter of 2020.
18. Sale, Option and Lease Agreements with Tonogold Resources Inc. ("Tonogold")
There are three current agreements between the Company and Tonogold: the Membership Interest Purchase Agreement, the Mineral Exploration and Mining Lease, and a Lease Option Agreement for the Company's American Flat processing facility. Tonogold and the Company previously entered into an Option Agreement in 2017 that was terminated during 2019.
Membership Interest Purchase Agreement
On January 24, 2019, the Company entered into an agreement, as restated and amended, to sell its interests in Comstock Mining LLC (“CML”), a wholly-owned subsidiary of the Company whose sole net assets are the Lucerne properties and related permits, to Tonogold (the “Membership Purchase Agreement”), with a closing date of November 18, 2019. The Membership Purchase Agreement was amended and restated March 20, 2020.
For the three months ended March 31, 2020, the Company received an additional $0.1 million in cash payments, bringing the total cash consideration received to date to $6.025 million and the total stock consideration received to date to $6.1 million, in the form of Tonogold Convertible Preferred Stock ("CPS"). The remaining $5.475 million of required cash consideration is secured by a 12% Note (the "Note"), with interest payable monthly, and various default provisions, including an observable market default provision contingent on Tonogold maintaining its stock listing. The Note is considered a freestanding contingent forward derivative under ASC section 480 - Distinguishing Liabilities from Equity, and does not have an initial value as the derivative was entered into at market. The purpose of the derivative is to facilitate the closing of the Tonogold transaction.
At the initial closing, Tonogold received 50% of the membership interests of CML, in exchange for the cash and CPS consideration paid to date. The Company will retain all management control and authority over CML until Tonogold has made all remaining payments in full. Accordingly, Tonogold’s membership interest in CML is accounted for as a noncontrolling interest in the consolidated balance sheets. The Company has recorded the fair value received from Tonogold in excess of the non-controlling interest as additional paid in capital.
The CPS can be converted into Tonogold common shares, at the Company's option, any time on or after May 22, 2020. The conversion price for the CPS will be the lower of (1) 85% of the 20-day volume weighted closing price or (2) 0.18. Tonogold can redeem the CPS at any time prior to conversion, at a redemption price 120% of the face value of the CPS.
Tonogold will receive the remaining 50% of the membership interests after it has delivered the remaining cash consideration. Membership interest will be delivered proportionately to additional cash payments toward principal that are received.
Tonogold guaranteed 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 assumed certain reclamation liabilities, both totaling approximately $7.0 million The Company also retains a 1.5% Net Smelter Returns ("NSR") royalty on the Lucerne properties.
On March 20, 2020 the Company and Tonogold restated the Membership Purchase Agreement to secure the remaining cash consideration with a 12% secured convertible note with a principal amount of $5.475 million (the "Note"). The Note is initially secured by the membership interests held by Tonogold, and will be secured by all of CML's assets after the Company's debenture has been paid in full and the related liens released. Interest on the Note is payable on the first business day of each month, with a $1.0 million payment of principal due on or before October 15, 2020, and the remaining principal due at maturity on September 20, 2021. The Note is convertible into common shares of Tonogold, at the Company's sole option, at a conversion price equal to the lower of (1) 85% of the twenty (20) consecutive trading day volume weighted average price of Tonogold common stock or (2) an applicable price stepping from an initial $0.18 to $0.40 at the maturity date.
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.
Tonogold will pay a quarterly lease fee of $10 thousand. 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 Exploration 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 3.0% of 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.
On December 23, 2019, the Company and Tonogold restated the Exploration Lease. The restated Exploration Lease provides that Tonogold’s exploration spending, permitting, and engineering commitments are a minimum of $1 million per year, for a cumulative total of $20 million over 20 years. Tonogold also committed to specific milestones for issuing technical reports on their results, culminating in a published Feasibility report by the 20th anniversary of the Exploration Lease.
The initial term of the Exploration Lease (the "Exploration Term") is 5 years, with Tonogold committing to spending at least $5 million for exploration, at the rate of $1 million per year, and to producing an NI 43-101 compliant technical report by the end of the 5th year. The Exploration Lease will automatically renew for a second, 10-year term (the "Development Term") as long as the commitments have been met. During the Development Term, Tonogold is committed to $10 million of additional expenditures for exploration, development, and technical reporting, at the rate of $1 million per year, and to producing an economically viable mine plan and an NI 43-101 compliant Pre-Feasibility report before the agreement's 15th anniversary.
The Exploration Lease will automatically renew for a third, 5-year term (“the Planning Term”) provided that the prior spending and reporting commitments have been met. During the Planning Term, Tonogold is committed to $5 million in additional expenditures for exploration, development, permitting, and technical reporting, at the rate of $1 million per year. By the 20th anniversary of the agreement, Tonogold also commits to producing an economically viable mine plan, and an NI 43-101 compliant Feasibility report, and will produce a mutually agreed-upon schedule for placing the properties into production.
If the spending and other commitments have been met during the Planning Term, the Exploration Lease will automatically continue in effect as long as development and permitting activities continue in compliance with a mutually agreed-upon schedule, or for so long as minerals are produced from the properties or from adjacent properties (the “Extended Term”).
Lease Option Agreement for the American Flat Processing Facility
On November 18, 2019, the Company entered into a lease-option to lease its permitted American Flat property, plant and equipment to Tonogold for crushing, leaching and processing material from the Lucerne mine (the "Lease Option Agreement"). Under the Lease Option Agreement, Tonogold 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. The Lease Option Agreement remains in effect, but has not yet been exercised.
Option Agreement
During 2017 and 2018, the Company received $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 year ended December 31, 2019.
Other
For the three-month period ended March 31, 2020, the Company received advance expense reimbursements from Tonogold totaling $1.75 million, and invoiced actual expense reimbursements totaling $0.69 million.
19. Subsequent Events
COVID-19
The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19,” has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, including the implementation of travel bans, quarantine periods and social distancing, have caused material disruptions to global business and an economic downturn. Global equity markets have experienced significant volatility and weakness. Governments and their central banks have reacted with significant fiscal and monetary interventions designed to mitigate the impacts and stabilize economic conditions. The impact and ultimate duration of the COVID-19 outbreak is currently unknown, as is the efficacy of these governmental and central bank interventions. On March 12, 2020, Nevada Governor Stephen Sisolak issued a Declaration of Emergency to facilitate the State’s response to the COVID-19 pandemic. The Governor's guidance for the mining industry includes limiting gatherings to no more than 10 people, maintaining social distancing protocols where 10 or less are gathered, limiting travel, and working remotely when possible.
The Company is currently operating in alignment with these guidelines for protecting the health of our employees, partners, and suppliers, and limiting the spread of COVID-19, that could potentially result in delays to the Company's plans for developing our Dayton Resource, MCU’s plans for commencing mercury recovery testing, and Tonogold's plans for exploration drilling during the second quarter of 2020. It is not currently possible to reliably estimate the length and severity of these developments and the impact on the Company's financial condition, and that of its subsidiaries and partners, in future periods.
Pelen LLC
On April 24, 2020, the Company completed its acquisition of 25% of the total membership interests of Pelen. Pelen is the 100% owner of the historic Sutro Tunnel Company that owns the Town of Sutro, the historic 6-mile Sutro Tunnel, the federal land grants and mining rights spanning 1,000 feet on each side of the 6-mile span, the rights to the tunnel’s water and the patented mining claims and private lands on Gold Hill. The total purchase price was $0.6 million, paid in stock and cash.