NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,
2017
,
2016
AND
2015
1. Nature of Business
Comstock Mining Inc. is a Nevada-based gold and silver exploration, development and production-focused mining company with extensive, contiguous property in the historic Comstock and Silver City mining districts (collectively, the “Comstock District”). The Comstock District is located within the western portion of the Basin and Range Province of Nevada, between Reno and Carson City, Nevada. Our Lucerne resource area is located in Storey County, Nevada, approximately three miles south of Virginia City, Nevada and 30 miles southeast of Reno, Nevada. Our Dayton resource area is located in Lyon County, Nevada, approximately six miles south of Virginia City, Nevada. The Company also owns extensive real estate holdings, including but not limited to the Gold Hill Hotel located in Gold Hill, Nevada, just south of Virginia City, the Daney Ranch, located just south of Silver City, and
98
acres of land and
257
acre-feet of senior-priority water rights in Silver Springs, Nevada. As used in the notes to the consolidated financial statements, we refer to Comstock Mining Inc., and its wholly owned subsidiaries as “we,” “us,” “our,” “our Company,” or “the Company.”
We continue expanding our property footprint and creating opportunities for exploration, development and mining. The Company now owns or controls approximately
9,272
acres of mining claims and parcels in the Comstock and Silver City Districts. The acreage is comprised of approximately
2,347
acres of patented claims (private lands) and surface parcels (private lands) and approximately
6,925
acres of unpatented mining claims, which the Bureau of Land Management, (“BLM”) administers.
2. Summary of Significant Accounting Policies
Principles of Consolidation -
The consolidated financial statements include the accounts of Comstock Mining Inc., and its wholly owned subsidiaries: Comstock Mining LLC, Comstock Real Estate Inc. and Comstock Industrial LLC. Inter-company transactions and balances have been eliminated.
Basis of Presentation -
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which contemplates continuation of the Company as a going concern.
The Company commenced production with the Lucerne Mine in 2012, and ramped up to approximately
20,000
gold-equivalent-ounces of annual production. The Company completed leaching from its existing leach pads in December 2016 and is currently planning the exploration and development of its next two mines, first with its second surface mine in the Dayton resource area and then further developing, in collaboration through an agreement with a potential joint venture partner, the second phase of development and production from the Lucerne Mine.
The Company has recurring net losses from operations and an accumulated deficit of
$222.6 million
as of
December 31, 2017
. For the year ended
December 31, 2017
, the Company incurred a net loss of
$10.6 million
and used
$6.5 million
of cash in operations. As of
December 31, 2017
, the Company had cash and cash equivalents of
$2.1 million
, current assets of
$7.7 million
and current liabilities of
$1.1 million
, resulting in net working capital of
$6.6 million
.
The Company’s current capital resources include cash and cash equivalents and other net working capital resources, along with a loan commitment agreement with
$7.0 million
in unused capacity, after consideration of fees due at the time of borrowing. The Company also has an at-the-market ("ATM") equity offering program with International Assets Advisory LLC ("IAA"), and an equity purchase agreement (the "Purchase Agreement") with Leviston Resources, LLC ("Leviston"), with aggregate unused capacity of
$4.4 million
. These capital resources are in addition to certain planned non-mining asset sales.
While the Company has been successful in the past in obtaining the necessary capital to support its operations, including registered equity financings from its existing shelf registration statement, 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 sources of funding detailed above.
Future operating expenditures above management’s expectations, including exploration and mine development expenditures in excess of amounts to be raised from the issuance of equity under the ATM Agreement and Purchase 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.
Fair Value Measurements -
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.
Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Long-Lived Assets -
We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.
Mineral Rights and Properties -
We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration expenditures are expensed as incurred. We expense care and maintenance costs as incurred.
We review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties and possibly require future asset impairment write-downs.
Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and properties.
Properties, Plant and Equipment -
We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:
|
|
|
Building
|
7 to 15 years
|
Vehicles and equipment
|
3 to 7 years
|
Processing and laboratory
|
5 to 15 years
|
Furniture and fixtures
|
2 to 3 years
|
Reclamation Liabilities and Asset Retirement Obligations -
Minimum standards for site reclamation and closure have been established for us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site.
Revenue Recognition -
Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are credited to costs applicable to mining revenue. Real estate revenue is recognized as services are provided to customers.
Substantially all mining revenues recorded relate to a single customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product.
Stock Issued For Goods and Services -
Common shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.
Stock-Based Compensation -
For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.
Loss per Common Share -
Basic net loss per common share is computed by dividing net loss, less the preferred stock dividends, 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 and warrants, and convertible instruments, if the impact is not antidilutive. Since the Company incurred net losses for the periods presented, all equity-linked instruments are considered anti-dilutive.
Comprehensive Loss -
There were no components of comprehensive loss other than net loss for the years ended
December 31, 2017
,
2016
and
2015
.
Income Taxes -
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and 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 for which the Company does not consider realization of such deferred tax assets to be more likely than not.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Other than the impacts of the new federal tax reform legislation disclosed in Note 15, management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.
Use of Estimates -
In preparing financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, reclamation liabilities, and contingent liabilities.
Reverse Stock Split -
Effective November 9, 2017, the Company completed a 1-for-5 reverse stock split of its authorized and outstanding common stock, as approved by its Board of Directors. All common shares and per share amounts set forth herein give effect to this reverse stock split.
Recently Issued Accounting Pronouncements –
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01 - Business Combinations (Topic 805), which clarifies the definition of a business. For accounting and financial reporting purposes, businesses are generally comprised of three elements; inputs, processes, and outputs. Integrated sets of assets and activities capable of providing these three elements may not always be considered a business, and the lack of one of the three elements does not always disqualify the set from being a business. The
issuance of ASU No. 2017-01 provides a clarifying screen to determine when a set of assets and activities is not a business. Primarily, the screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The amendments contained in ASU No. 2017-01 are effective for annual periods beginning after December 15, 2017 and may be early adopted for certain transactions that have occurred before the effective date, but only when the underlying transaction has not been reported in the financial statements that have been issued or made available for issuance. The Company does not believe the implementation of ASU 2017-01 will have a material effect on its financial position, operational results, or cash flows.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which amends ASC 230, Statement of Cash Flows, and the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exceptions. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted for all entities. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements, which will require right of use assets and lease liabilities be recorded in the consolidated balance sheet for operating leases.
In May 2014, the FASB issued ASU 2014-09 (Topic 606) that introduces a new five-step revenue recognition model that an entity should use to recognize revenue when depicting the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. On July 9, 2015, the FASB deferred the effective date to fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.
We will use the modified retrospective method to adopt the provisions of this standard effective January 1, 2018, which requires us to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018 through a cumulative adjustment to retained earnings. In accordance with this approach, our consolidated revenues for the periods prior to January 1, 2018 will not be revised. The Company will not record a cumulative effect adjustment to its beginning retained earnings as a result of adoption of Topic 606 as there are no revenue contracts within the scope of Topic 606 as of January 1, 2018.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land and property deposits
|
$
|
—
|
|
|
$
|
1,208,785
|
|
Lease obligation deposit
|
—
|
|
|
355,920
|
|
Other
|
301,387
|
|
|
321,087
|
|
Total prepaid expenses and other current assets
|
$
|
301,387
|
|
|
$
|
1,885,792
|
|
4. Mineral Rights and Properties, Net
Mineral rights and properties at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Dayton resource area
|
$
|
2,932,226
|
|
|
$
|
2,932,226
|
|
Lucerne resource area
|
1,998,896
|
|
|
1,998,896
|
|
Occidental area
|
1,002,172
|
|
|
1,002,172
|
|
Spring Valley area
|
810,000
|
|
|
810,000
|
|
Oest area
|
260,707
|
|
|
260,707
|
|
Northern extension
|
157,205
|
|
|
157,205
|
|
Northern targets
|
121,170
|
|
|
121,170
|
|
Other mineral properties
|
317,404
|
|
|
317,404
|
|
Water rights
|
90,000
|
|
|
90,000
|
|
Accumulated depletion
|
(484,699
|
)
|
|
(484,699
|
)
|
Total mineral rights and properties
|
$
|
7,205,081
|
|
|
$
|
7,205,081
|
|
Mineral rights and properties balances as of
December 31, 2017
, and
2016
, are presented based on the Company’s identified mineral resource areas and exploration targets. During the year ended
December 31, 2017
, the Company did not recognize any depletion expense. During years ended December 31,
2016
and
2015
, the Company recognized depletion expense of approximately
$0.0
million and
$0.1
million, respectively.
5. Properties, Plant and Equipment, Net
Properties, plant and equipment at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land and building
|
$
|
9,169,605
|
|
|
$
|
7,827,490
|
|
Vehicle and equipment
|
2,414,216
|
|
|
3,299,143
|
|
Processing and laboratory
|
21,166,497
|
|
|
21,049,497
|
|
Furniture and fixtures
|
755,665
|
|
|
755,665
|
|
|
33,505,983
|
|
|
32,931,795
|
|
Less accumulated depreciation
|
(20,724,250
|
)
|
|
(17,783,228
|
)
|
Total properties, plant and equipment
|
$
|
12,781,733
|
|
|
$
|
15,148,567
|
|
For the years ended
December 31, 2017
,
2016
and
2015
, the Company recognized depreciation expense of
$3.9
million,
$5.1
million, and
$6.4
million, respectively.
For the years ended
December 31, 2017
, 2016 and 2015, the Company sold land and equipment with total proceeds of
$1.1 million
,
$3.3 million
, and
$0.8 million
, respectively and recorded a gain on the sale of that land and equipment totaling
$0.3 million
,
$0.4 million
, and
$0.2 million
, respectively.
Assets Held For Sale
The Company committed to a plan to sell certain land and buildings. As of
December 31, 2017
, the Company had assets with a net book value of
$5.4 million
that met the criteria to be classified as assets held for sale. Those criteria specify that the asset must be available for immediate sale in its present condition (subject only to terms that are usual and customary for sales of such assets), the sale of the asset must be probable, and its transfer expected to qualify for recognition as a completed sale generally within one year. Proceeds from the sale of these assets are required to be used to satisfy obligations due under the terms of the debenture with GF Comstock 2 LP as described in Note 9.
6. Reclamation Bond Deposit
The Nevada Revised Statutes and Regulations require a surety bond to be posted for mining projects so that after the completion of such mining projects the sites are left safe, stable and capable of productive post-mining uses. The bond is intended to cover the estimated costs required to safely reclaim the natural environment to the regulatory standards established by the State of Nevada’s Division of Environmental Protection. Accordingly, the Company has a
$7.1 million
reclamation
surety bond through the Lexon Surety Group (“Lexon”) with the State of Nevada’s Bureau of Mining Regulation and Reclamation as of
December 31, 2017
. In addition, the Company has a
$0.5 million
surety bond with Storey County related to mine reclamation as of
December 31, 2017
. As part of the surety agreement, the Company agreed to pay a
2.0%
annual bonding fee. The total cash collateral, per the surety agreement, was
$2.5 million
at
December 31, 2017
, and
2016
. The total cash collateral is a component of the reclamation bond deposit in the consolidated balance sheets.
The reclamation bond deposit at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Lexon surety bond cash collateral
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Other cash reclamation bond deposits
|
122,544
|
|
|
122,544
|
|
Total reclamation bond deposit
|
$
|
2,622,544
|
|
|
$
|
2,622,544
|
|
7. Long-term Reclamation Liability and Retirement Obligation Asset
The Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of our site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies.
We have accrued a long-term liability of
$7.4 million
and
$7.4 million
as of
December 31, 2017
, and
2016
, respectively, for our obligation to reclaim our mine facility based on our most recent reclamation plan, as revised, submitted and approved by the Nevada State Environmental Commission and Division of Environmental Protection. In conjunction with recording the reclamation liability, we recorded a retirement obligation asset that is being amortized over the period of the anticipated land disturbance. Such costs are based on management’s current estimate of then expected amounts for the remediation work, assuming the work is performed in accordance with current laws and regulations. It is reasonably possible that, due to uncertainties associated with the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate cost of reclamation and remediation could change in the future. We periodically review the accrued reclamation liability for information indicating that our assumptions should change. The accretion of the reclamation liability and the amortization of the retirement obligation asset for the years ended
December 31, 2017
,
2016
, and
2015
, totaled
$0.4 million
,
$1.0 million
,
$1.4 million
, respectively, and were a component of environmental and reclamation expenses in the consolidated statements of operations.
Following is a reconciliation of the aggregate retirement liability associated with our reclamation plan for the mining projects for the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Long-term reclamation liability — beginning of period
|
$
|
7,353,346
|
|
|
$
|
6,827,568
|
|
|
$
|
5,908,700
|
|
Additional obligations incurred
|
—
|
|
|
340,000
|
|
|
659,295
|
|
Accretion of reclamation liability
|
64,334
|
|
|
185,778
|
|
|
259,573
|
|
Long-term reclamation liability — end of period
|
$
|
7,417,680
|
|
|
$
|
7,353,346
|
|
|
$
|
6,827,568
|
|
Following is a reconciliation of the aggregate retirement obligation asset associated with our mining projects for the years ended
December 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Retirement obligation asset — beginning of period
|
$
|
617,126
|
|
|
$
|
1,107,120
|
|
|
$
|
1,619,101
|
|
Additional obligations incurred
|
—
|
|
|
340,000
|
|
|
659,295
|
|
Amortization of retirement obligation asset
|
(334,381
|
)
|
|
(829,994
|
)
|
|
(1,171,276
|
)
|
Retirement obligation asset — end of period
|
$
|
282,745
|
|
|
$
|
617,126
|
|
|
$
|
1,107,120
|
|
The increases in the reclamation liability and retirement obligation asset in 2016 is related to the net inflated and discounted increase of the asset and liability as a result of the increase in time before the Company expects to reclaim. In 2015, the increase related to additional County bonding.
8. Accrued Expenses
Accrued expenses at
December 31, 2017
, and
2016
, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued Northern Comstock Joint Venture Contribution Obligations
|
$
|
180,833
|
|
|
$
|
480,833
|
|
Accrued Board of Directors fees
|
84,000
|
|
|
290,600
|
|
Accrued vendor liabilities
|
75,415
|
|
|
121,081
|
|
Accrued payroll
|
57,402
|
|
|
60,735
|
|
Accrued personal property tax
|
84,264
|
|
|
56,895
|
|
Accrued production royalties
|
—
|
|
|
7,940
|
|
Other accrued expenses
|
14,737
|
|
|
117,850
|
|
Total accrued expenses
|
$
|
496,651
|
|
|
$
|
1,135,934
|
|
9. Long-Term Debt
Long-term debt at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
Note Description
|
2017
|
|
2016
|
$10,723,000 Note Payable (GF Comstock 2) - Payable in semi-annual installments of interest only at 11% with principal and $688,059 make whole payment due January 2021.
|
$
|
10,218,352
|
|
|
$
|
—
|
|
$3,677,254 Caterpillar Equipment Consolidated - Principal and interest at 5.7% payable in monthly installments of $29,570 due on or before November 1, 2021.
|
1,242,960
|
|
|
1,540,629
|
|
$3,250,000 Note Payable (Silver Springs property) - Interest was paid monthly and accrued at a rate of 9% per annum for the first year post closing, 12.5% per annum for the six months that follow the first anniversary and 14% per annum thereafter.
|
—
|
|
|
3,310,851
|
|
$5,000,000 Varilease Finance Obligation - Principal, 9% interest and taxes were payable in monthly installments of $247,830 due on or before April 1, 2017. Secured by certain equipment.
|
—
|
|
|
1,964,882
|
|
$1,800,000 Note Payable (Daney) - The Company was permitted to settle the note payable in shares of common stock issued in January 2016. Shares issued were to be sold by the noteholder in satisfaction of the outstanding principal amount.
|
—
|
|
|
868,398
|
|
$725,000 Note Payable (Donovan Property) - Principal and interest at 6% were payable in monthly installments of $10,075 with final payment due on or before July 31, 2019. Secured by deeds of trust on land and unpatented claims.
|
—
|
|
|
300,733
|
|
$1,000,000 Note Payable (V&T) - Principal was payable in monthly installments of $50,409 with a final payment due on April 1, 2017.
|
—
|
|
|
298,955
|
|
$300,000 Note Payable (White House) - Principal and interest at 4.5% were payable in monthly installments of $1,520 with the final payment due on or before April 1, 2017. Secured by first deed of trust on the land.
|
—
|
|
|
275,433
|
|
$340,000 Note Payable (Gold Hill Hotel) - Principal and interest at 4.5% were payable in monthly installments of $2,601 with the final payment due on or before April 30, 2026. Secured by first deed of trust on rental property.
|
—
|
|
|
239,216
|
|
$2,500,000 Note Payable (Dayton Property "Golden Goose") - The Company was permitted to settle the remaining note payable in shares of common stock. Shares were to be sold by the noteholder in satisfaction of the outstanding principal. The remaining principal was due on or before January 31, 2017. Secured by first deed of trust on the land.
|
—
|
|
|
207,562
|
|
Notes Payable – Other - Various other notes payable with interest rates between 1.9% and 6.27% were payable in monthly installments due on or before October 19, 2019. Secured by first deed of trust on various property owned by the Company.
|
—
|
|
|
277,636
|
|
$186,000 Note Payable (Lynch House) - Payable in monthly installments of interest at 11% with final payment due in December 2017. Secured by first deed of trust on property.
|
—
|
|
|
186,000
|
|
Total debt
|
11,461,312
|
|
|
9,470,295
|
|
Less: long-term debt discounts and issuance costs
|
(1,198,359
|
)
|
|
—
|
|
Total debt, net of discounts and issuance costs
|
10,262,953
|
|
|
9,470,295
|
|
Less: current maturities
|
(291,532
|
)
|
|
(483,669
|
)
|
Long-term debt, net of discounts and issuance costs
|
$
|
9,971,421
|
|
|
$
|
8,986,626
|
|
Debt Obligations
GF Comstock 2 LP
On January 13, 2017, the Company issued an
11%
Senior Secured Debenture (the “Debenture”) to GF Comstock 2 LP in an aggregate principal amount of
$10,723,000
. The use of proceeds included refinancing substantially all of the Company’s current debt obligations except the amounts due to Caterpillar Finance and the Lynch House note. The Debenture was issued at a discount of approximately
$568,000
and the Company incurred issuance costs of approximately
$528,000
. The Debenture requires a Make-Whole payment of approximately
$688,000
due at maturity.
The total principal amount and Make-Whole payment are due at maturity on January 13, 2021. The Debenture requires acceleration of the payment of accrued interest, principal, and the Make-Whole amount from all net proceeds received upon sale of any assets of the Company.
Interest is payable semi-annually. For the first
two years
, interest will be payable, at the option of the Company, either in cash or in the form of additional Debentures (or a combination thereof). For the third and fourth years, interest will be payable only in cash. The Company elected to pay the first two semi-annual interest payments in cash in June and December of 2017.
The Debenture is collateralized by (1) substantially all of the assets of the Company, and (2) a pledge to
100%
of the equity of the subsidiaries of Comstock Mining Inc.
Hard Rock Nevada Inc., an employee owned entity, and another related party who is a significant shareholder of the Company participated in this financing.
Caterpillar Equipment Facility
On June 27, 2016, the Company completed an agreement with Caterpillar Financial Services Corporation relating to certain finance and lease agreements (the “CAT Agreement”). The Company entered into the CAT Agreement that required the Company to complete the sale of certain financed and leased equipment and modified the payment schedule under the related finance and lease arrangements. Under the terms of the CAT Agreement, the Company paid down its obligations with the net proceeds from the financed and leased equipment sold during the second and third quarters of 2016, with the remaining balance to be paid off from a monthly payment schedule of primarily
$29,570
per month until the amounts have been paid in full. The note bears an interest rate of
5.7%
Loan Commitment Agreement
In March 2017 (and amended in June and September 2017), the Company entered into a loan commitment agreement that provides up to
$7.5 million
in borrowing capacity and expires in 2021 with an
11%
interest rate. Principal amounts borrowed under this agreement are not due until 2021. Until January 1, 2019, interest on any borrowings will be payable in cash and/or in the form of additional indebtedness under the agreement, at the Company’s option.
No
amounts have been borrowed under this agreement and the Company has
$7 million
(after consideration of fees due at the time of borrowing) of available borrowing capacity as of December 31, 2017.
Future maturities of long-term debt are as follows:
|
|
|
|
|
Years Ending December 31:
|
|
2018
|
$
|
291,532
|
|
2019
|
308,591
|
|
2020
|
326,647
|
|
2021
|
10,534,542
|
|
2022
|
—
|
|
Thereafter
|
—
|
|
Total debt (excludes discounts and debt issuance costs)
|
$
|
11,461,312
|
|
10. Stockholders’ Equity
Common Stock
At-the-Market Offering Program
Effective June 28, 2016, the Company entered into a sales agreement with respect to an at-the-market offering program (“ATM Agreement”) pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to
$5.0 million
. The Company pays the sales agent a commission of
2.5%
of the gross proceeds from the sale of such shares. The Company is not obligated to make any sales of shares under the ATM Agreement, and if it elects to make any sales, the Company can set a minimum sales price for the shares.
Effective April 2017, the Company also entered into a Purchase Agreement with Leviston for the sale of up to
$7.25 million
of shares of the Company's common stock from time to time, at the Company's option. The Company is not obligated to make any sales of shares under either the ATM or Purchase Agreement, and if it elects to make any sales, the Company can set a minimum sales price for the shares.
Following is a reconciliation of the transactions under the ATM Agreement and Purchase Agreement as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Number of shares sold
|
|
9,464,764
|
|
|
367,060
|
|
|
|
|
|
|
Gross proceeds
|
|
$
|
7,346,707
|
|
|
$
|
522,889
|
|
Fees
|
|
278,919
|
|
|
14,090
|
|
Net proceeds
|
|
$
|
7,067,788
|
|
|
$
|
508,799
|
|
|
|
|
|
|
Average price per share
|
|
$
|
0.78
|
|
|
$
|
1.42
|
|
Stock-based Incentive Plans
During the years ended
December 31, 2017
and 2016,
no
shares were issued under the 2011 Equity Incentive Plan. During the year ended December 31, 2015,
12,000
shares of vested restricted stock were issued under the 2011 Equity Incentive Plan.
Stock-based Dividends
During the year ended December 31, 2015 the Company declared and issued
2,368,417
shares of common stock with a fair value of
$3.9 million
as dividends on outstanding shares of convertible preferred stock.
No
shares of common stock were issued as dividends in the years ended
December 31, 2017
and 2016, as a result of the conversion of the Preferred Stock into shares of Common Stock during the year ended December 31, 2015, that eliminated all future stock dividends.
Other Stock-based transactions
During the year ended December 31, 2015, the Company amended an agreement entered into in 2013 with V&T Management LLC, for the purchase of approximately
212
acres of land. The original agreement was valued at
$1.5 million
, including cash and
130,000
shares of Company restricted common stock. The new terms of the amended agreement revoked the portion of the purchase price in shares and required the remaining balance to be paid in cash. As a result of the amendment,
130,000
restricted shares in common stock were returned to the Company and canceled.
In March and April 2016, the Company raised
$4.0 million
in gross proceeds (approximately
$3.5 million
net of issuance cost) through an underwritten public offering of
2.3 million
shares of common stock at a price per share of
$1.75
under the Company’s Registration Statement on Form S-3.
During the year ended December 31, 2016, the Company issued
1,323,579
shares of common stock with a fair value of
$2,473,764
to Varilease Finance Inc. The shares were issued in satisfaction of lease payment obligations.
During the year ended December 31, 2016, the Company issued
600,000
shares of common stock with a fair value of
$1,290,000
to the Daney noteholder as payment on the note.
During the year ended
December 31, 2017
and December 31, 2016, the Company issued
502,604
and
243,025
shares of common stock with a fair value of
$482,500
and
$482,526
, respectively to Northern Comstock LLC (“Northern Comstock”), a related party of the Company. The shares were issued in satisfaction of an annual capital contribution pursuant to the Northern Comstock operating agreement amendment signed in August 2015.
During the year ended December 31, 2016, the Company amended the Golden Goose note to allow for the sale of shares as payment on the remaining note balance and effectively re-issued
200,000
shares of common stock with a fair value of
$360,000
to be sold in partial satisfaction of the outstanding principal balance.
During the year ended December 31, 2016, the Company closed escrow on the purchases of land and property. The purchases included the issuance of
44,729
shares of common stock with a fair value of
$59,390
.
During the year ended December 31, 2017, the Company closed escrow on the purchases of land and property. The purchases included the issuance of
196,000
shares of common stock with a fair value of
$274,400
.
11. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities at December 31, 2016, which are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016
|
|
Total
|
|
Quoted
Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Deposits on financing agreement (Varilease Finance)
|
$
|
124,920
|
|
|
$
|
124,920
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Assets
|
$
|
124,920
|
|
|
$
|
124,920
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Note payable (Daney Ranch Property)
|
$
|
868,398
|
|
|
$
|
868,398
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note payable (Dayton Property “Golden Goose”)
|
207,562
|
|
|
207,562
|
|
|
—
|
|
|
—
|
|
Total Liabilities
|
$
|
1,075,960
|
|
|
$
|
1,075,960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the years ended
December 31, 2017
and
2016
, there were no transfers of assets and liabilities between Level 1, Level 2, or Level 3.
There were no assets or liabilities at
December 31, 2017
, which were measured at fair value on a recurring basis.
Following is a description of the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis as well as the general classification of such instruments pursuant to the valuation hierarchy.
Deposit on financing agreement (Varilease Finance)
- The deposit is valued as the amount of the proceeds to be received by Varilease Finance from the sale of the remaining
208,200
shares of common stock to be sold by the maturity date. The Company calculated the proceeds received for the shares based on the price the noteholder received for those shares. These inputs included a quoted contractual terms and stock price. Because the inputs are quoted, this instrument is classified within Level 1 of the valuation hierarchy.
Notes payable (Daney Ranch Property) -
The note payable is valued as the difference between the
$0.9 million
face amount as of December 31, 2016, reduced by the proceeds to be received by the noteholder from the sale of the remaining
630,700
shares of common stock to be sold through April 2017 by the noteholder. In January 2017 the note holder sold all their shares and the note was eliminated. The Company calculated the proceeds received for the shares based on the price the noteholder received for those shares. These inputs included a quoted contractual terms and stock price. Because the inputs are quoted, this instrument is classified within Level 1 of the valuation hierarchy.
Note payable (Dayton Property “Golden Goose”) -
The note payable is valued as the difference between the
$0.5 million
face amount, reduced by the proceeds to be received by the noteholder from the sale of the
200,000
shares of common stock to be sold by the maturity date of January 2017, by the noteholder. In January 2017 the note holder sold all their shares and the note was eliminated. The Company calculated the proceeds received for the shares based on the price the noteholder received for those shares. These inputs included a quoted contractual terms and stock price. Because the inputs are quoted, this instrument is classified within Level 1 of the valuation hierarchy.
The carrying amount of cash and cash equivalents and trade payables approximates fair value because of the short-term maturity of these financial instruments. At December 31, 2017, and December 31, 2016, the fair value of long-term debt approximated
$10.5
million and
$7.6 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).
12. Segment Reporting
Our management organizes the Company into
two
operating segments, mining and real estate. Our mining segment consists of all activities and expenditures associated with mining, exploration and mine development. Our real estate segment consists of land, real estate rental properties and the Gold Hill Hotel. We evaluate the performance of our operating segments based on operating income (loss). All intercompany transactions have been eliminated, and intersegment revenues are not significant. Financial information relating to our reportable operating segments and reconciliation to the consolidated totals is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenues
|
|
|
|
|
|
|
|
|
Mining
|
$
|
—
|
|
|
$
|
4,944,627
|
|
|
$
|
18,245,633
|
|
Real estate
|
104,329
|
|
|
125,590
|
|
|
247,217
|
|
Total revenues
|
104,329
|
|
|
5,070,217
|
|
|
18,492,850
|
|
|
|
|
|
|
|
Cost and Expenses
|
|
|
|
|
|
|
|
|
Mining
|
$
|
(8,908,556
|
)
|
|
$
|
(15,101,138
|
)
|
|
$
|
(30,575,729
|
)
|
Real estate
|
(73,739
|
)
|
|
(182,423
|
)
|
|
(342,634
|
)
|
Total cost and expenses
|
(8,982,295
|
)
|
|
(15,283,561
|
)
|
|
(30,918,363
|
)
|
|
|
|
|
|
|
Operating Loss
|
|
|
|
|
|
|
|
|
Mining
|
$
|
(8,908,556
|
)
|
|
$
|
(10,156,511
|
)
|
|
$
|
(12,330,096
|
)
|
Real estate
|
30,590
|
|
|
(56,833
|
)
|
|
(95,417
|
)
|
Total loss from operations
|
(8,877,966
|
)
|
|
(10,213,344
|
)
|
|
(12,425,513
|
)
|
Other income (expense), net
|
(1,698,212
|
)
|
|
(2,751,360
|
)
|
|
1,971,086
|
|
Net loss
|
$
|
(10,576,178
|
)
|
|
$
|
(12,964,704
|
)
|
|
$
|
(10,454,427
|
)
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Mining
|
$
|
1,810,845
|
|
|
$
|
340,491
|
|
|
$
|
7,478,782
|
|
Real estate
|
—
|
|
|
3,200,000
|
|
|
14,663
|
|
Total capital expenditures
|
$
|
1,810,845
|
|
|
$
|
3,540,491
|
|
|
$
|
7,493,445
|
|
|
|
|
|
|
|
Depreciation, Amortization and Depletion
|
|
|
|
|
|
|
|
|
Mining
|
$
|
4,176,115
|
|
|
$
|
5,763,293
|
|
|
$
|
7,607,677
|
|
Real estate
|
11,568
|
|
|
130,490
|
|
|
119,756
|
|
Total depreciation, amortization and depletion
|
$
|
4,187,683
|
|
|
$
|
5,893,783
|
|
|
$
|
7,727,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2017
|
|
2016
|
|
2015
|
Assets
|
|
|
|
|
|
|
|
|
Mining
|
$
|
25,530,508
|
|
|
$
|
27,829,802
|
|
|
$
|
41,886,124
|
|
Real estate
|
5,433,405
|
|
|
6,013,229
|
|
|
1,326,767
|
|
|
$
|
30,963,913
|
|
|
$
|
33,843,031
|
|
|
$
|
43,212,891
|
|
For the years ended December 31, 2016 and 2015, substantially all of the mining revenues were attributable to
one
customer.
13. Net Loss Per Common Share
Basic earnings per share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if stock options, warrants, and convertible securities to issue common stock were exercised or converted into common stock. The following is a reconciliation of the numerator and denominator used in the basic and diluted computation of net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
$
|
(10,576,178
|
)
|
|
$
|
(12,964,704
|
)
|
|
$
|
(10,454,427
|
)
|
Convertible preferred stock dividends
|
—
|
|
|
—
|
|
|
(5,452,445
|
)
|
Net loss available to common shareholders
|
$
|
(10,576,178
|
)
|
|
$
|
(12,964,704
|
)
|
|
$
|
(15,906,872
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
41,127,245
|
|
|
35,324,947
|
|
|
22,014,497
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
41,127,245
|
|
|
35,324,947
|
|
|
22,014,497
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.26
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.72
|
)
|
Diluted
|
$
|
(0.26
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(0.72
|
)
|
The following table includes the number of common stock equivalent shares that are not included in the computation of diluted loss per share, because the Company has a net loss and the inclusion of such shares would be antidilutive.
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
10,000
|
|
|
10,000
|
|
|
10,000
|
|
Restricted stock
|
—
|
|
|
28,000
|
|
|
332,400
|
|
|
|
|
|
|
|
|
10,000
|
|
|
38,000
|
|
|
342,400
|
|
14. Stock-Based Compensation
2011 Equity Incentive Plan
In 2011, the Company adopted the Comstock Mining Inc. 2011 Equity Incentive Plan (the “2011 Plan”). The maximum number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the 2011 Plan is
1,200,000
shares of common stock. The plan provides for the grant of various types of awards, including but not limited to restricted stock (including performance awards), restricted stock units, stock options, and other types of stock-based awards.
Performance-based Restricted Stock
On February 23, 2015, the Board of Directors granted
12,000
shares of restricted stock (performance awards) to an employee under the 2011 Equity Incentive Plan. These awards and prior awards expired unvested.
The restricted stock fair value was
$3.70
per share, (with a total grant date fair value of
$44,400
). The fair value was determined based on the fair value of the underlying common stock at the grant dates. The unvested restricted stock awards expired in May of 2017.
Information related to non-vested restricted stock issued under the 2011 Plan is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Balances at January 1, 2017
|
28,000
|
|
|
$
|
10.10
|
|
Forfeitures
|
(28,000
|
)
|
|
|
|
Balances at December 31, 2017
|
—
|
|
|
$
|
10.10
|
|
At
December 31, 2017
, there was
no
unrecognized compensation expense related to non-vested restricted stock award shares.
Options
Prior to the 2011 Plan, the Company had previously issued options under prior programs. At
December 31, 2017
, the Company had
10,000
outstanding and fully vested employee and director options to acquire shares of common stock. The options outstanding at
December 31, 2017
, have a weighted average remaining contractual life of
0.75
years and a weighted average exercise price of
$20.00
per share. During
2017
, there were no options granted, exercised, or forfeited.
There was
no
compensation expense recognized for the remaining outstanding options during the year ended December 31,
2017
. However, in
2016
and
2015
we recognized
$0.02 million
and
$0.44 million
, respectively.
At December 31,2017, there was
no
unrecognized compensation expense related to non-vested options.
15. Income Taxes
The provision (benefit) for income taxes from continuing operations for the years ended
December 31, 2017
,
2016
and
2015
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Income taxes provision
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Federal statutory rate
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
Change in valuation allowance
|
(224.0
|
)%
|
|
34.0
|
%
|
|
33.8
|
%
|
Change in rate
|
258.0
|
%
|
|
—
|
%
|
|
—
|
%
|
Other
|
—
|
%
|
|
—
|
%
|
|
0.2
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Deferred income taxes at
December 31, 2017
and
2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Asset retirement obligation
|
$
|
1,498,336
|
|
|
$
|
2,290,315
|
|
Mineral rights and properties, plant, and equipment
|
891,413
|
|
|
839,360
|
|
Mining exploration, development, claims, and permit costs
|
6,247,638
|
|
|
10,705,987
|
|
Net operating loss carryforward
|
35,205,356
|
|
|
53,021,957
|
|
Other
|
196,041
|
|
|
869,666
|
|
Valuation allowance
|
(44,038,784
|
)
|
|
(67,727,285
|
)
|
Total net deferred tax assets
|
$
|
—
|
|
|
$
|
—
|
|
At
December 31, 2017
, the Company had federal net operating losses of approximately
$167.6 million
that will begin to expire in
2023
and could be subject to certain limitations under section 382 of the Internal Revenue Code.
The Company has provided a valuation allowance at
December 31, 2017
and
2016
of
$44.0 million
and
$67.7 million
, respectively, for its net deferred tax assets as it cannot conclude it is more likely than not that they will be realized. The valuation allowance changed by
$(23.7) million
,
$4.4 million
, and
$3.5 million
in
2017
,
2016
, and
2015
, respectively.
On December 22, 2017, the President signed into law Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), following its passage by the United States Congress. The TCJA makes significant changes to the U.S. federal income tax laws including among other changes a federal corporate tax rate reduction from 35% to 21% for tax years beginning after December 31, 2017, repeal of the corporate AMT tax system, and immediate expensing of certain types of business assets placed in service after September 27, 2017. Due to the impact of the Company’s full valuation allowance on net deferred tax assets, the TCJA has minimal impact on the Company’s provision for income taxes. Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. As of the date of this filing, we have not completed our accounting for the tax effects of the TCJA. In accordance with SAB 118, we have calculated our best estimate of the impact of the TCJA in our year end income tax provision in accordance with our understanding of the law and guidance available as of the date of this filing and as a result have recorded a provisional amount of
$27.3 million
as additional income tax expense in the fourth quarter of 2017. The provisional amount related to the remeasurement of certain deferred tax assets and liabilities, based on the rates at which they
are expected to reverse in the future, was
$27.3 million
. The provisional amounts are subject to revisions as we complete our analysis of the TCJA, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, Internal Revenue Service (“IRS”), FASB, and other standard-setting and regulatory bodies. Any subsequent adjustment to these amounts will be recorded to tax expense in the quarter when the analysis is complete. Our accounting for the tax effects of the TCJA will be completed during the measurement period, which should not extend beyond one year from the enactment date.
As of
December 31, 2017
and
2016
, the Company did not have any unrecognized tax benefits. The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company currently has no federal or state tax examinations in progress nor has it had any federal or state tax examinations since its inception. The Company is subject to U.S. federal and state income tax examination for tax years 2014 and forward.
16. Related Party Transactions
Northern Comstock LLC
The Company has an operating agreement with Northern Comstock LLC, an entity controlled by a related party. As part of the operating agreement, the Company obtained the exclusive rights of production and exploration on certain parcels in Storey County, Nevada. The terms of this agreement were amended on August 27, 2015, and September 28, 2015 (the “Amendments”), with the other members of its Northern Comstock LLC joint venture. The Amendments resulted in reduced capital contribution obligations of the Company from
$31.05 million
down to
$9.75 million
. The terms of the Amendments provide that the Company will make monthly cash capital contributions of
$30,000
and annual capital contributions in the amount of
$482,500
payable in stock or cash, at the Company's option, unless the Company has cash or cash equivalents in excess of
$10,500,000
on the date of such payments, wherein the Company would then be required to pay in cash or in certain circumstances, the Company’s common stock. The number of shares to be delivered is calculated by dividing the amount of the capital contribution by the volume-weighted average closing price of the Company’s common stock on its primary trading market for the previous
20
consecutive trading days prior to such capital contribution. The Operating Agreement also provides for a one-time acceleration of
$812,500
of the capital contributions payable when the Company receives net cash proceeds from sources other than operations that exceed
$6,250,000
. The agreement also includes an ongoing acceleration of the Company’s capital contribution obligations equal to
3%
of the net smelter returns generated by the properties subject to the Northern Comstock LLC joint venture. The Operating Agreement also provides that if the Company defaults in its obligation to make the scheduled capital contributions, then the remaining capital contribution obligations may be converted into the principal amount of a
6%
per annum promissory note payable by the Company on the same schedule as the capital contributions, secured by a mortgage on the properties subject to the Northern Comstock LLC joint venture. The operating agreement requires that these capital contributions commence in October 2015, and end in September 2027, unless prepaid by the Company.
The Company made a payment in stock in the amount of
$482,500
with the number of shares being
502,604
and
243,025
under the Northern Comstock Joint Venture agreement during the years ended
December 31, 2017
and 2016, respectively. During the year ended December 31,
2017
,
2016
and
2015
, the Company recognized expense of
$0.8 million
,
$0.8
million and
$0.8
million, respectively.
17. Commitments and Contingencies
The Company leases certain properties under operating leases expiring at various dates through 2023. Future minimum annual lease payments under these existing lease agreements are as follows as of
December 31, 2017
:
|
|
|
|
|
Year Ended December 31,
|
Leases
|
2018
|
$
|
26,400
|
|
2019
|
28,800
|
|
2020
|
28,880
|
|
2021
|
30,000
|
|
2022
|
30,000
|
|
Thereafter
|
54,000
|
|
|
$
|
198,080
|
|
Expense under operating leases for the years ended
December 31, 2017
,
2016
and
2015
was
$0.1
million,
$0.1
million and
$0.1
million, respectively.
The Company has minimum royalty obligations with certain of its mineral properties and leases. Minimum royalty payments were
$55,800
in
2017
. For most of the mineral properties and leases, the Company is subject to a range of royalty obligations once production commences. These royalties range from
0.5%
to
5%
of net smelter revenues (NSR) from minerals produced on the properties with the majority being under
3%
. Some of the factors that will influence the amount of the royalties include ounces extracted and prices of gold. Royalty expense, including both NSR and minimum royalty obligations, was
$55,800
,
$0.1
million, and
$0.2
million for the years ended
2017
,
2016
, and
2015
, respectively.
The Company’s mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company believes its operations are in compliance with applicable laws and regulations in all material respects. The Company has made, and expects to make in the future, expenditures to comply with such laws and regulations, but cannot predict the full amount of such future expenditures.
On January 31, 2014, the Comstock Residents Association (the “CRA”) and two of its members filed a civil action in the Third Judicial District Court of the State of Nevada in and for Lyon County (the “District Court”) against the Lyon County Board of Commissioners (the “Commissioners”) and the Company, asking the District Court to reverse the Commissioners’ decision to grant an application for master plan amendment and zone change submitted and approved by the Commissioners on January 2, 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, Lyon County. In April 2015, the District Court ruled in favor 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. An oral argument before a three-judge panel of the Nevada Supreme Court took place on September 14, 2016.
On December 2, 2016, the Nevada Supreme Court entered an order affirming all three of the District Court’s decisions associated with 1) the Commissioners’ discretion and authority for changing master plans and zoning, 2) their compliance with Nevada’s Open Meeting Law and 3) their compliance with Nevada statutory provisions. Specifically, the Supreme Court affirmed the District Court’s conclusions that Lyon County did not abuse its discretion and that it acted with substantial evidence in support of their decision, that the County did not violate Nevada’s Open Meeting Law and that the County did not violate statutory provisions regarding master plans.
The Supreme Court did reverse 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 Company and the Commissioners filed a motion for summary judgment with the District Court bases on the evidence in the record and the District Court held a hearing on December 11, 2017. The District Court concluded that the Supreme Court's reversal of CRA's due process claim required that CRA be afforded the opportunity to conduct discovery. Therefore, the District Court has allowed a limited time for CRA to conduct discovery on its due process claim and indicated that it would set the matter for a final hearing in mid-March 2018. To date, CRA has not conducted any discovery. The Company and the Lyon County District Attorney look forward to positive resolution of CRA's lone remaining claim.
From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
18. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
Revenues
|
$
|
19,294
|
|
|
$
|
27,370
|
|
|
$
|
26,960
|
|
|
$
|
30,705
|
|
Gross loss
(1)
|
(900,243
|
)
|
|
(909,784
|
)
|
|
(838,879
|
)
|
|
(712,596
|
)
|
Loss from operations
|
(2,444,659
|
)
|
|
(2,551,677
|
)
|
|
(2,038,440
|
)
|
|
(1,843,190
|
)
|
Net loss
|
(2,774,180
|
)
|
|
(2,932,722
|
)
|
|
(2,497,011
|
)
|
|
(2,372,265
|
)
|
Basic loss per common share
|
(0.07
|
)
|
|
(0.08
|
)
|
|
(0.06
|
)
|
|
(0.05
|
)
|
Diluted loss per common share
|
(0.07
|
)
|
|
(0.08
|
)
|
|
(0.06
|
)
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
Revenues
|
$
|
2,020,521
|
|
|
$
|
1,491,276
|
|
|
$
|
1,134,795
|
|
|
$
|
423,625
|
|
Gross profit/(loss)
(1)
|
552,171
|
|
|
136,636
|
|
|
273,870
|
|
|
(580,694
|
)
|
Loss from operations
|
(3,829,658
|
)
|
|
(2,268,327
|
)
|
|
(1,667,446
|
)
|
|
(2,447,913
|
)
|
Net loss
|
(4,051,395
|
)
|
|
(2,854,784
|
)
|
|
(2,193,201
|
)
|
|
(3,865,324
|
)
|
Basic loss per common share
|
(0.12
|
)
|
|
(0.08
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
Diluted loss per common share
|
(0.12
|
)
|
|
(0.08
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
(1)
Total revenues less costs applicable to mining revenue and real estate operating costs.
19. Subsequent Events
In January of 2018, we issued
1,475,410
of restricted common shares in the amount of
$585,000
to a member of Pelen, LLC towards the purchase of
100%
of the member's membership interest in Pelen, LLC. The Company will not become a member of Pelen, LLC until the member has sold the shares for proceeds of at least
$585,000
. Upon the member's receipt of
$585,000
of total proceeds, the Company would obtain a
25%
membership interest in Pelen, LLC.